## _cr1171 ## Source details **Canonical URL:** [_cr1171](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1171.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1171.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1171.pdf.json) --- ### Developments and program strategy - Main objective: limit the procyclicality of policies in the short-run while strengthening medium-term sustainability and growth prospects through fiscal consolidation and a focused structural reform agenda. - Program phases: - First phase (through mid-2010): contain the procyclical bias and provide a modest fiscal impulse. - Second phase (through early-2012): strengthen fiscal sustainability through gradual consolidation and structural reform. - Implementation notes: - Electricity reform produced disappointing financial results. - Efforts to strengthen tax collections faced strong private sector opposition. - Authorities limited expenditures (mostly capital) to meet program targets for the second half of 2010. - Authorities plan a 2011 budget aligned with original program objectives (October 2009 staff report, EBS/09/165), with conservative assumptions about recently adopted tax measures and a modest capital expenditure increase; a supplementary budget will be sent as additional revenues materialize. - Authorities remain committed to reduce the electricity subsidy and to continue strengthening tax administration efforts and rationalizing tax exemptions. - Program reviews: - The first SBA review was completed on April 7, 2010; the second review was delayed because the authorities needed more time to articulate policies for the second half of 2010. - Staff supports completion of the second and third SBA reviews and the targets proposed for 2011 in view of the positive macroeconomic performance. ### Macroeconomic developments (activity, inflation, external access) - Real activity and demand: - Real GDP expanded 7½ percent in the first half of 2010 (yoy). - Activity drivers in 2010H1 (percent contributions): Total 7.5, Manuf. 1.9, Commun. 1.4, Commer. 1.3, Agric. 0.6, Constr. 0.5. - Exports (excluding free trade zones) increased close to 40 percent (yoy) in the first half of 2010. - Non-oil imports grew over 20 percent (yoy) in the first half of 2010. - Commercial bank credit advanced by over 15 percent (yoy) in the first half of 2010. - Inflation: - Headline inflation was 5 percent (yoy) in August 2010 (against a target of 6–7 percent for the year). - Core inflation remained at about 3½ percent (yoy) in August 2010. - Transportation contributed about 3¼ percentage points to headline inflation in 2010 so far. - External access: - Central bank regained access to international capital markets by issuing a bond for US$750 million at favorable terms in April 2010. ### Fiscal outcomes and public sector balances - First half 2010 fiscal outcomes: - Tax collections for H1 2010 remained 0.4 percent of GDP below program projections. - Overruns in the electricity transfer of close to 0.1 percent of GDP were compensated by lower capital spending. - Quasi-fiscal deficit of the central bank was 0.6 percent of GDP in H1 2010. - Consolidated public sector deficit was 2.3 percent of GDP in H1 2010, 0.1 percent of GDP below program projections. - Fiscal impulse: 1.2 percent of GDP to the economy in 2009; planned gradual removal during 2010. - End-quarter fiscal specifics: - Consolidated public sector deficit amounted to 0.9 percent of GDP in Q1 2010 (about 0.4 percent of GDP lower than envisioned). - Central administration overall deficit was 0.6 percent of GDP in Q1 2010 (0.2 percent of GDP below program projections); revenue shortfall in Q1: 0.3 percent of GDP. - Electricity transfers at 0.4 percent of GDP were twice the programmed level in Q1. - For end-June 2010, Central Administration overall deficit reached 1.6 percent of GDP, slightly below program target. ### Performance under the 2010 program and reviews - Compliance: - All performance criteria and structural benchmarks for end-March and end-June 2010 were observed. - All structural benchmarks for March and June 2010 (and one for December 2010) were observed. - Areas of disappointment: - Progress on electricity reform and efforts to strengthen tax collections continued to disappoint. - Specifics: - Floor on net international reserves (NIR) of the monetary authority met at end-March and end-June 2010 by over US$200 million: NIR amounted to US$2.0 billion at end-March and US$2.1 billion at end-June. - Performance criterion on zero arrears to electricity generators (definition: no more than 45 days of unpaid balances) was met at end-March and end-June 2010; some arrears occurred between end-quarter test dates but were cleared. - All quantitative and structural benchmarks for the second and third reviews were met (per Board decision). ### 2011 program projections and targets - Real economic activity: projected to grow 5½-6 percent in 2011. - Inflation: projected at 5-6 percent in 2011. - Fiscal targets: - Consolidated public sector deficit expected to fall by 1 percent of GDP to 3 percent of GDP in 2011. - Central administration deficit: 1.6 percent of GDP in 2011. - Quasi-fiscal deficit of the central bank: 1.4 percent of GDP in 2011. - Primary balance (consolidated public sector): projected primary surplus of 1.2 percent of GDP in 2011 (table shows consolidated primary balance 1.2 for 2011 and 2.0 for 2012). - External: - External current account deficit expected to narrow to about 6½ percent of GDP in 2011. - Export growth likely about 15 percent in 2011 with gold exports and reopening of ferro-nickel mine coming on stream. - Financing: - 2011 financing package highlights include US$500 million budget support from World Bank, IDB and Petrocaribe; planned US$500 million external bond issuance; additional US$250 million of Fund disbursements proposed; net domestic bond financing at US$500 - US$600 million. - Monetary assumptions for 2011: - Demand for base money increase of some 7 percent. - NDA constant at end-2010 programmed level. - NIR expected to increase by at least US$300 million in 2011. ### Monetary stance, aggregates, and financial soundness - Policy stance: - BCRD maintained policy rate at 4 percent through end-August 2010; COMA increased policy rate by 75 basis points to 4.75 percent (COMA decision noted later). - Earlier in 2009 policy rate reduced from 9½ percent to 4 percent; reserve requirement lowered from 20 to 17.5 percent. - Monetary aggregates: - M1 grew about 15 percent (yoy) in August 2010. - Credit to the private sector exceeded 15 percent (yoy) in July 2010. - Net international reserves (NIR) stood at US$2.1 billion at end-August 2010 after exceeding program levels in end-June. - Financial soundness indicators through June 2010: - Capital adequacy: 14 percent of assets. - Profitability: ROA about 2½ percent. - Non-performing loans: 3½ percent of total loans. - Banks reducing high liquidity positions to finance private credit rebound. ### External developments and regional impact - Trade and tourism: - Total imports expanded by over 25 percent (yoy) in H1 2010. - Strong export growth of over 40 percent in H1 2010 (excluding FTZs). - Travel receipts stable in high season. - Current account: - Current account deficit widened to almost 8 percent of GDP in H1 2010; expected to improve in H2 2010 due to import moderation. - Sovereign bond issuance: - Moody’s upgrade from B2 to B1; 11-year sovereign bond US$750 million issued in late April 2010 at 7.5 percent (about 375 basis points over US Treasuries); amount raised US$150 million higher than envisaged. - Regional (Haiti) impact: - Haiti earthquake disturbed trade routes initially; exports to Haiti resumed with higher demand for food and building materials. - Haitian reconstruction expected to mobilize about US$ 1 billion per year on average, possibly creating inflationary pressures. ### Electricity sector: finances, reforms, and targets - 2010 outcomes and overruns: - Pace of reform slower than programmed; transfers to CDEEE increased due to higher generation costs and reduced hydro output. - Authorities estimate indiscriminate subsidies in 2010 could reach about US$600 million (about 0.4 percent of GDP higher than programmed). - EDEs regularized about 70 percent of users in old PRA zones; BONOLUZ coverage exceeded targets (100,000 clients by June 2010). - 2011 objectives: - Limit current deficit of electricity sector to US$350 million in 2011 (about 0.6 percent of GDP), including US$150 million for distribution companies and US$200 million for CDEEE. - Increase number of regulated clients by 250,000 to 2.15 million in September 2011. - Reduce arrears to private generators to zero days (no delays). - Arrears and program treatment: - Definition of arrears to private generators: balances unpaid within 45 days of contractual due date. - Program floors on cumulative arrears presented (e.g., End-December 2010 projection -604 in millions of US$; End-December 2011 performance criterion -350 in millions of US$). - Payments by Ministry of Finance within 45 days will be treated as net transfers and not as current deficit of electricity sector. ### Tax policy, revenue strategy, and structural benchmarks - Tax pressure objective: - Program objective to increase tax pressure from 13.1 percent in 2009 to 15 percent in 2012 (original); implementation delays imply 15 percent target will only be achieved by 2013. - Required average increase: 0.5 percent of GDP per year on average to reach revised timing. - Program assumptions to reach 15 percent by 2013 (changes in tax pressure ∆T): - 2010: increase of 0.1 percent of GDP - 2011: increase of 0.1 percent of GDP - 2012: increase of 1.2 percent of GDP - 2013: increase of 0.5 percent of GDP - Measures and approximate contributions (as specified): - Indexation of specific taxes under Ley 112-00: 0.4-0.5 percent of GDP - VAT at customs for some enterprises under “Proindustria” and stronger control: 0.1-0.2 percent of GDP - Advances of income tax for winners of prizes in casinos and lotteries: 0.1-0.2 percent of GDP - Improvements in tax administration: 0.3-0.04 percent of GDP (text shows “0.3-04 percent of GDP”) - Rationalization of tax exemptions: 0.5-0.6 percent of GDP - Structural benchmarks (selected, status): - Design a strategy to rationalize and limit tax exemptions, strengthen tax administration, and modernize customs — Mar 2010 — Fully met. - Design a plan to achieve compliance with all Basel core principles for effective bank supervision by 2012 — Mar 2010 — Fully met. - Design a plan to formally adopt a full-fledged inflation targeting framework by early-2012 — Jun 2010 — Fully met. - Increase the coverage of the BONOLUZ program to 50,000 clients — Dec 2010 — Fully met (more than 100,000 clients in July 2010). - New benchmarks (Dec 2010–Mar 2011) include issuing a decree to centralize exemption authority in Ministry of Finance; create evaluation unit; prepare list of revenue administration measures to yield 0.5 percent of GDP in 2011; dematerialize BCRD securities (Dec 2010); send to Congress amendments to MFL and a new law on consolidated supervision (Mar 2011); publish first monetary policy report under IT (Jun 2011); publish 2012 monetary program under IT (Dec 2011). ### Financial sector reforms and Basel core principles - Plan to achieve Basel core principles by end-2012; FSAP update assessment: 18 principles “broadly adequate”, 10 “completely adequate”. - Main plan elements include amendments to Monetary and Financial Law and introduction of risk-based supervision guidelines, law for financial groups, and supporting regulations. ### Social policies and safety nets - Poverty and social measures: - Poverty rate fell by about 3 percentage points to 34½ percent in 2009 and is expected to have fallen further in 2010. - Government announced post-May elections increase public health sector wages by 30 percent in 3 installments through mid-2011. - CCT program “Solidaridad”: - Expansion in December 2009; plan for 2011 to increase permanent coverage by 60,000 families to 590,000 families (structural benchmark for Dec 2011). - Targeted subsidies: - BONOLUZ expanded to over 50,000 clients; authorities intend to increase coverage to 250,000 families (structural benchmark for Dec 2011). - BONOGAS subsidy provided to 800,000 families. ### Conditionality, safeguards, and information requirements - Letter of Intent and TMU: - Attached LOI reiterates authorities’ commitment and introduces new structural benchmarks and a quantitative target for 2011 on the current balance of the public electricity company (CDEEE). - Authorities requested waivers of applicability of all relevant end-September 2010 performance criteria because the Board meeting for the second and third SBA review will take place in mid-October and some end-September performance criteria would not be known. Staff supports waivers; status to be reported at Board meeting. - Safeguards assessment of BCRD: - Update completed June 1, 2010. Implemented improvements: external and internal audit mechanisms, internal control framework, periodic internal audit reviews of NIR and NDA reporting. - Remaining weaknesses: shortcomings in Monetary and Financial Law related to central bank autonomy; financial statements not prepared under IFRS; lack of methodology to separate realized and unrealized FX gains/losses. Authorities committed to address weaknesses. - Information and reporting requirements: - Daily, monthly, and quarterly reporting items specified in TMU (e.g., Consolidated NIR, monetary base, tax collections, electricity sector collections, arrears, CDEEE monthly arrears with generators, etc.) with explicit maximum lags. ### Quantitative performance criteria, targets, and TMU floors (selected exact values) - Consolidated public sector: - Consolidated public sector overall balance targets and projections (selected table entries): Consolidated Public Sector Overall balance: -4.4, -3.9, -3.9, -3.0, -2.0 (series presented). - Net international reserves (floor) — (In millions of US$) selected floor values: - End-September 2010 (performance criterion): 1865 - End-October 2010 (program projection): 1915 - End-November 2010 (program projection): 1965 - End-December 2010 (performance criterion): 2015 - End-March 2011 (performance criterion): 1665 - End-June 2011 (performance criterion): 1765 - End-December 2011 (performance criterion): 2315 - Net domestic assets (NDA) ceiling — (In billions of RD$) selected ceiling values: - End-September 2010 (performance criterion): 65 - End-December 2010 (performance criterion): 80 - End-March 2011 (performance criterion): 80 - End-June 2011 (performance criterion): 80 - End-December 2011 (performance criterion): 80 - Electricity sector arrears floors (cumulative balance, In millions of US$): - End-December 2010 (program projection): -604 - End-March 2011 (performance criterion): -77 - End-June 2011 (performance criterion): -145 - End-September 2011 (performance criterion): -242 - End-December 2011 (performance criterion): -350 - Central government overall balance (floor, cumulative balances in RD$ billions) selected program values: - End-September 2010 (performance criterion): -95.8 - End-December 2010 (performance criterion): -102.3 - End-March 2011 (performance criterion): -14.9 - End-June 2011 (performance criterion): -21.3 - End-September 2011 (performance criterion): -27.9 - End-December 2011 (performance criterion): -33.5 ### Recent performance and September 2010 assessment - Recent indicators: - Monthly index of economic activity (IMAE): increased 7.4 percent (yoy) in August 2010. - Headline monthly inflation: 0.8 percent in September 2010; 12-month rate 5.7 percent. - Core monthly inflation: 1.0 percent in September 2010; 12-month rate 3.9 percent. - COMA decision: increase policy rate by 75 basis points to 4.75 percent. - End-September 2010 performance criteria: - Information available for four of six quantitative targets; one target missed and waiver requested. - The end-September 2010 performance criterion on zero ceiling on arrears to private electricity generators was not observed (miss by US$91.2 million); delay short (4 business days), arrears cleared by October 6, 2010; waiver of non-observance requested and supported by staff. - Two fiscal targets (overall balance of central administration and of consolidated public sector) lacked final information and waivers of applicability were requested and supported by staff; final information per TMU expected by November 5, 2010. ### Staff appraisal, risks, and recommendations - Staff appraisal: - Performance under the program uneven but a remarkable economic recovery and significant improvement in most macro indicators. - Short-term objective achieved: supporting demand, strengthening confidence, and preventing deeper recession in early 2009. - Policy coordination issues remain, notably electricity reform implementation and tax administration progress. - Opening of a resident representative office in Santo Domingo expected to improve policy coordination. - Key recommendations: - Improve expenditure control, especially electricity subsidy. - Adhere to electricity reform plan: implement new tariff structure and better management of state-run distribution companies to reduce sector burden. - Improve tax administration and evaluate/limit tax exemptions; tax expenditures amount to close to 6 percent of GDP. - Maintain flexible exchange rate policy to facilitate inflation targeting and de-dollarization. - Continue recapitalization of the central bank per current legislation. - Risks: - Downside: weakening world economy (European sovereign stress, less robust US recovery) affecting tourism and FDI; limited policy space for shocks. - Policy risk: accommodating electricity deviations with lower public investment could harm long-run growth. - Upside: Haiti reconstruction and stronger FDI could boost activity and create inflationary pressures. - Review recommendation: - Despite setbacks in electricity reform and tax collection, staff supports completion of second and third SBA reviews and waivers of applicability for end-September 2010 performance criteria given positive macro results and offsetting measures. ### Key tables and selected indicators (exact values as presented) - Fiscal projections and composition (selected): - Revenue projection for 2011: 13.3 percent of GDP in 2011 (0.1 percent of GDP more than in 2010), for overall revenues of 14 percent of GDP. - Consolidated public sector overall balance: -3.9 (2010 Prog.), -3.0 (2011), -2.0 (2012). - Central Government Revenues (percent of GDP): 2009 13.7; 2010 Prog. 14.3; 2010 Proj. 14.0; 2011 14.0; 2012 15.1. - Expenditures (percent of GDP): 17.2; 16.7; 16.3; 15.6; 15.7. - Balance of payments table (selected series in percent of GDP): - Current account: -4.6; -6.1; -7.0; -6.4; -4.2 (series as presented). - Exports: 11.8; 11.0; 12.4; 13.2; 15.6. - Imports: -26.3; -26.2; -28.8; -28.6; -29.1. - External and public debt indicators (selected): - Baseline public sector debt trajectory (percent of GDP): 33.7 (2008), 36.9 (2009), 35.7 (2010), 35.3 (2011), 33.8 (2012). - Gross financing need (percent of GDP): 8.8 (2008), 10.4 (2009), 11.9 (2010), 9.2 (2011), 7.3 (2012). *Source: _cr1171 — International Monetary Fund staff report and Technical Memorandum of Understanding (excerpt).* ### 2009. The first SBA review was completed on April 7, 2010. The second review was delayed ### 2009. The first SBA review was completed on April 7, 2010. The second review was delayed ### Developments and program strategy - Main objective of the authorities’ program: limit the procyclicality of policies in the short-run while strengthening medium-term sustainability and growth prospects through a combination of fiscal consolidation and a focused structural reform agenda. - First phase (through mid-2010): contain the procyclical bias and provide a modest fiscal impulse; second phase (through early-2012): strengthen fiscal sustainability through gradual consolidation and structural reform. - The electricity reform produced disappointing financial results and efforts to strengthen tax collections faced strong private sector opposition; authorities limited expenditures (mostly capital) to meet program targets for the second half of 2010. - Authorities plan to present to Congress a 2011 budget aligned with the fiscal objectives under the original program (October 2009 staff report, EBS/09/165), but with conservative assumptions about the impact of recently adopted tax measures and a modest capital expenditure increase; a supplementary budget will be sent as additional revenues materialize. - Authorities remain committed to reduce the electricity subsidy and to continue strengthening tax administration efforts and rationalizing tax exemptions. ### Macroeconomic developments (activity, inflation, external access) - Real GDP expanded 7½ percent in the first half of 2010 (yoy) after being (almost) stagnant in mid-2009. - Activity drivers in 2010H1: contributions to growth by sector—Total 7.5, Manuf. 1.9, Commun. 1.4, Commer. 1.3, Agric. 0.6, Constr. 0.5 (percent). - Exports (excluding free trade zones) increased close to 40 percent year-on-year (yoy) in the first half of 2010. - Non-oil imports grew over 20 percent (yoy) in the first half of 2010. - Tax collections expanded at over 12 percent (yoy) in the first half of 2010. - Commercial bank credit advanced by over 15 percent (yoy) in the first half of 2010. - Headline inflation was 5 percent (yoy) in August 2010 (against a target of 6–7 percent for the year). - Core inflation remained at about 3½ percent (yoy) in August 2010. - Transportation contributed about 3¼ percentage points to headline inflation in 2010 so far. - Central bank regained access to international capital markets by issuing a bond for US$750 million at favorable terms in April 2010. ### Fiscal outcomes and public sector balances - Tax collections for the first half of 2010 remained 0.4 percent of GDP below program projections, with income tax revenues weak due to 2009 income levels. - Overruns in the electricity transfer of close to 0.1 percent of GDP were compensated by lower capital spending to meet central administration program targets. - Quasi-fiscal deficit of the central bank was lower than expected at 0.6 percent of GDP in the first half of 2010. - Consolidated public sector deficit was 2.3 percent of GDP in the first half of 2010, 0.1 percent of GDP below program projections. - Fiscal policy: fiscal impulse of 1.2 percent of GDP to the economy in 2009; planned gradual removal during 2010. ### Performance under the 2010 program and reviews - All performance criteria and structural benchmarks for end-March and end-June 2010 were observed. - Progress on electricity reform and efforts to strengthen tax collections continued to disappoint. - The first SBA review was completed on April 7, 2010; the second review was delayed because the authorities needed more time to articulate policies for the second half of 2010. - With the first part of the program completed, authorities are implementing the second part: strengthening the fiscal position to reinforce debt sustainability and continuing with structural reforms. - Staff supports completion of the second and third SBA reviews and the targets proposed for 2011 in view of the positive macroeconomic performance. ### 2011 program projections and targets - Real economic activity is projected to grow 5½-6 percent in 2011. - Inflation is projected at 5-6 percent in 2011. - Consolidated public sector deficit expected to fall by 1 percent of GDP to 3 percent of GDP in 2011. - External current account deficit expected to narrow to about 6½ percent of GDP in 2011. - Authorities remain committed to the fiscal consolidation originally envisaged in the program and aim for policies that support continued high growth. ### Structural and policy implementation issues - Electricity sector: disappointing financial results from reform; authorities committed to reduce the electricity subsidy (BONOLUZ/PR A context appears in acronyms). - Tax policy: strengthening tax collections was partially derailed by private sector opposition; large tax exemptions contribute to low tax effort ranking among peers. - Quality of adjustment: initial deterioration due to constrained capital spending in favor of untargeted electricity subsidies and tax exemptions; supplementary budget envisioned to authorize additional capital expenditures as revenues materialize. - Institutional engagements: missions and discussions occurred May 18–28, June 14-15, August 3-19, 2010 in Santo Domingo, and August 30-September 2 in Washington; meetings with President Fernández, Central Bank Governor Valdez, Finance Minister Bengoa, Economy Minister Montás, senior government officials, and private sector representatives; participating staff listed in the report. *2009. The first SBA review was completed on April 7, 2010. The second review was delayed* ### 6. Monetary. The central bank has maintained its accommodative stance for almost a ### 6. Monetary. The central bank has maintained its accommodative stance for almost a year. ### Monetary stance and aggregates - The BCRD maintained the policy rate at 4 percent during the monetary policy meeting of the Open Market Committee (COMA) of end-August 2010 for the eleventh consecutive month. - Earlier in 2009 the policy rate was reduced from 9½ percent to 4 percent and the reserve requirement rate was lowered from 20 to 17.5 percent. - Recent COMA communications emphasize commitment to the inflation target and readiness to take necessary measures to achieve that objective. - Monetary aggregates: - M1 grew about 15 percent (yoy) in August 2010. - Credit to the private sector exceeded 15 percent (yoy) in July 2010. - Net international reserves (NIR) stood at US$2.1 billion at end-August 2010 after exceeding program levels in end-June. ### Financial sector soundness - No signs of stress in the banking system through June 2010. - Banking soundness indicators through June 2010: - Capital adequacy: 14 percent of assets. - Profitability: Return on average assets (ROA) of about 2½ percent. - Non-performing loans: 3½ percent of total loans. - Banks have been reducing high liquidity positions to finance the rebound in private credit. ### External developments - Trade and external flows: - Total imports expanded by over 25 percent (yoy) in the first half of 2010. - Strong export growth of over 40 percent in the first half of 2010 (excluding free trade zones). - Stable travel receipts in the high season. - Current account deficit widened to almost 8 percent of GDP in the first half of 2010, driven by imports and declining remittances. - Current account expected to improve in the second half of the year due to a moderation in import growth. - Sovereign bond issuance: - Following a Moody’s sovereign credit rating upgrade (from B2 to B1), the authorities issued an 11-year sovereign bond for US$750 million (1½ percent of GDP) at an interest rate of 7.5 percent in late April 2010 (some 375 basis points over US Treasury bond rates). - Amount raised by the bond issuance was US$150 million higher than envisaged in the program, helping reduce the dependence on local financing. ### Regional impact (Haiti) - Haiti earthquake initially disturbed trade routes with the Dominican Republic but exports to Haiti have resumed. - Main impacts: - Higher demand for fresh and processed food products exported to Haiti. - Increased demand for building materials in anticipation of reconstruction needs. - Additional demand for goods and services during reconstruction expected to further expand exports. - Cooperation: - Dominican authorities cooperating with the Haitian government on several fronts, including a university project funded by the Dominican government. - The Mixed Bilateral Dominican-Haitian Commission (Comisión Mixta Bilateral Dominico-Haitiana (CMBDH)) was reactivated. ### Politics - Mid-May 2010 legislative and municipal elections: the ruling Dominican Liberation Party (PLD) achieved an overwhelming victory. - With all but one of the 32 senatorial seats, and a majority in the chamber of deputies and municipalities, the PLD will be able to continue supporting President Fernández’s economic program. - Next political cycle expected to begin in the second half of 2011 in advance of presidential elections in May 2012. ### Social developments - Poverty rate fell by about 3 percentage points to 34½ percent in 2009 and is expected to have fallen further in 2010. - Expansive fiscal policy and strengthening of the social safety net have eased some past social tensions, especially with public workers in health and education. - Government announced post-May elections that it would increase public health sector wages by 30 percent in 3 installments through mid-2011 (after a 3 year wage freeze). - Protests over poor social services, especially electricity, have lessened as blackouts have decreased. - Increased influx of Haitian immigrants following the January 2010 earthquake has recently raised social tensions. ### Outlook and risks - Outlook for the rest of the year is positive and risks appear roughly balanced. - Factors supporting expansion: - Broad-based expansion dynamics, ample global liquidity, and effects of Haiti reconstruction. - Haitian reconstruction expected to begin in the last quarter of 2010, mobilizing resources for an average of about US$ 1 billion per year, with a significant portion possibly oriented to purchases in the Dominican Republic and potentially creating some inflationary pressures. - Downside risks: - Uncertainties in the international economy could affect tourism and foreign direct investment. - Deterioration of sovereign debt problems in Europe could restrict external financing. - Limited policy space: Should another external shock hit the economy, limited room for expansionary fiscal and monetary policies to soften the blow. ### II. Performance under the 2010 program — Quantitative targets and outcomes - General: All performance criteria for end-March and end-June 2010 were met. - Consolidated fiscal balance: - The consolidated public sector deficit amounted to 0.9 percent of GDP in the first quarter of 2010 (about 0.4 percent of GDP lower than envisioned). - For end-June 2010, the consolidated fiscal target deficit was observed with a much smaller margin (0.1 percent of GDP) as the deficit for the central government increased with higher investment spending and higher transfers to the electricity sector. - Central administration fiscal balance: - Overall deficit of the central government was 0.6 percent of GDP in the first quarter of 2010 (0.2 percent of GDP below program projections). - Revenue shortfall in Q1: 0.3 percent of GDP, mainly from lower receipts from taxes on income and international trade. - Electricity transfers at 0.4 percent of GDP were twice the programmed level. - For end-June 2010, the overall deficit of the Central Administration reached 1.6 percent of GDP, or slightly below the program target, as a shortfall in tax revenues (0.4 percent of GDP) and excess electricity subsidies (0.1 percent of GDP) were offset by lower investment spending. - International reserves position: - The floor on net international reserves (NIR) of the monetary authority was met at end-March and end-June 2010 by over US$200 million. - NIR amounted to US$2.0 billion at end-March and US$2.1 billion at end-June (also above the end-September and end-December 2010 targets). - Arrears to electricity generators: - Performance criterion on zero arrears to electricity generators (under the program definition of no more than 45 days of unpaid balances) was met at end-March and end-June 2010. - Some arrears occurred between end-quarter test dates but were cleared. - External arrears: - Performance criterion on the non-accumulation of external arrears (on a continuous basis) was observed. *Source: _cr1171 - 6. Monetary. The central bank has maintained its accommodative stance for almost a year.* ### 14. Structural benchmarks. All structural benchmarks for March and June 2010 (and ### 14. Structural benchmarks. All structural benchmarks for March and June 2010 (and ### Structural benchmarks: status and main deliverables - All structural benchmarks for March and June 2010 (and one for December 2010) were observed. - Tax collections - The authorities presented a plan to rationalize and limit tax exemptions, strengthen tax administration and continue modernizing customs to achieve the tax revenue objectives under the program. - The authorities’ plan benefitted from a Fund technical assistance mission (from FAD) in February 2010. - In implementation some measures faced strong opposition from the private sector and some measures were diluted or postponed (see Box 2 and Section III.B). - Prudential regulations - The authorities presented a plan to achieve compliance with Basel core principles for effective banking supervision. - The plan benefitted from assistance of the Canadian Office of the Superintendent of Financial Institutions (OSFI), as well as from the Fund (MCM) (see Box 3). - Inflation targeting - The authorities presented a plan to formally adopt a full-fledged inflation targeting framework by early 2012, with a clear outline of monthly steps to be taken (see Box 4). - Targeted electricity subsidy - Objective to increase BONOLUZ coverage to 50,000 clients by December 2010 was achieved. - By June 2010 there were 100,000 clients under the program. ### Dominican Republic: Structural Benchmarks (policy actions, timing, status) - 1. Design a strategy to rationalize and limit tax exemptions, strengthen tax administration, and modernize customs — Mar 2010 — Fully met. Satisfactory strategy provided in March 2010 - 2. Design a plan to achieve compliance with all Basel core principles for effective bank supervision by 2012 — Mar 2010 — Fully met. Satisfactory plan provided in March 2010 - 3. Design a plan to formally adopt a full-fledged inflation targeting framework by early-2012 — Jun 2010 — Fully met. Satisfactory plan provided in June 2010 - 4. Increase the coverage of the BONOLUZ program to 50,000 clients — Dec 2010 — Fully met. More than 100,000 clients in July 2010 *Source: Dominican authorities and Fund staff estimates.* ### Tax collection strategy (Box 2): objectives, historic context, and projections - Program objective: increase tax pressure from 13.1 percent in 2009 to 15 percent in 2012 (original program). - Implementation outcome: delays and opposition imply the 15 percent target will only be achieved by 2013; this is a deterioration compared to the original program. - Required average increase: an increase in tax pressure of 0.5 percent of GDP per year on average to reach revised timing. - Staff view: measures proposed are broadly adequate to achieve medium-term tax collection objectives. - Program assumptions to reach tax pressure of 15 percent of GDP by 2013: - 2010: increase of 0.1 percent of GDP - 2011: increase of 0.1 percent of GDP - 2012: increase of 1.2 percent of GDP - 2013: increase of 0.5 percent of GDP - Measures and approximate contributions (as specified): - Indexation of specific taxes under Ley 112-00: 0.4-0.5 percent of GDP - Payment of VAT at customs for some enterprises under “Proindustria” and stronger control: 0.1-0.2 percent of GDP - Advances of income tax for winners of prizes in casinos and lotteries: 0.1-0.2 percent of GDP - Improvements in tax administration: 0.3-0.04 percent of GDP (text shows “0.3-04 percent of GDP”) - Rationalization of tax exemptions: 0.5-0.6 percent of GDP - Program scenario autonomous increases (from cycle and compliance): - 2012: 0.5 percent of GDP - 2013: 0.2 percent of GDP - Historical tax pressure table (Projection series as given): - Projection table header: Projection - Tax Pressure (T): 2007 16.0 2008 15.0 2009 13.1 2010 13.2 2011 13.3 2012 14.5 2013 15.0 - Change in tax pressure (∆T): 2007 1.0 2008 -1.0 2009 -1.9 2010 0.1 2011 0.1 2012 1.2 2013 0.5 - Decomposition rows and notes (as given in source): - 1. One-off revenue measures 1/ 0.6 0.3 -0.3 -------- - 2. Previous tax measures -0.3 -1.2 -0.7 -------- - Tax amnesty (Law 183/07) 0.2 0.1 ---------- - New fiscal code -0.2 -0.7 -0.1 -------- - Free trade agreements -0.2 -0.3 -0.3 -------- - Proindustria exemptions -0.1 -0.3 -0.3 -------- - 3. Program tax measures ------0.3 0.1 0.7 0.3 - Hydrocarbons tax indexation ------0.2 0.1 0.1 -- - Proindustria VAT modification ------0.1 2/ 2/ -- - Income tax on casino prizes ------2/2/0.1 -- - Improvements in tax administration --------2/0.2 0.1 - Rationalization of tax exemptions --------2/0.3 0.2 - 4. Business cycle 0.3 --- 0.4 -0.2 -- 0.3 0.1 - 5. Tax compliance 3/ 0.4 -0.1 -0.5 ---- 0.2 0.1 - Footnotes (as in source): - 1/ Includes presumptive taxes on extraordinary capital gains from private enterprises (Verizon/Brugal/Claro), dividends, and the loss of income taxes from the closure of mining operations. - 2/ Amounts to less than 0.1 percent of GDP. - 3/ Includes tax evasion and other unidentified factors; estimated as a residual for 2007-09. ### Policy discussions and 2011 program (Section III highlights) - Focus of discussions: implementation of second phase of program (starting mid-2010) to achieve orderly and gradual fiscal consolidation, strengthen debt sustainability fundamentals, and implement focused structural reforms. - Key discussion items and actions: - Reinstate momentum on tax administration reform after strong private sector opposition — consensus reached with private sector on tax issues. - Revitalize electricity reform following large deviations from program — changed management of electricity distribution companies (EDEs). - Design effective expenditure restraint (mostly on capital spending) to offset tax shortfalls and electricity subsidy overruns — supplementary budget sent to Congress in July and approved in September to secure end-2010 fiscal targets. - Fiscal policy actions for 2011: - 2011 budget envisages fiscal adjustment of 1 percent of GDP. - Real primary spending would fall by about 2 percent in 2011. - Monetary policy note: - Central bank aware that output gap is closing and a tightening phase needs to start soon. - Currently no inflationary pressures or signs of overheating; planned fiscal consolidation in second half of year is first defense. ### Macroeconomic framework (A) - Revised real GDP growth projection: - 2010: 5½-6 percent (up from 3-4 percent previously) - 2011: similar range (5½-6 percent) - Output gap: estimated to remain slightly negative but considerably narrower than initially envisaged; real GDP would remain around potential in outer years. - Staff noted upside risks from renewed FDI inflows and recovery in imports, tax receipts and domestic credit; downside risks from slower recovery in tourism and remittances. - Macroeconomic table (Prog./Proj. series as given) - Real GDP: 2009 3.5 2010 3-4 2010 proj 5½-6 2011 proj 5½-6 2012 6.0 - Output gap (% of potential): -0.6 -5.1 -0.6 -0.7 -0.4 - Headline inflation (e.o.p): 5.8 6-7 6-7 5-6 4-5 - Core inflation (e.o.p.): 3.2 ... 3.5 5.5 4.5 - External current account (In percent of GDP): -4.6 -6.1 -7.0 -6.4 -4.2 - Primary fiscal balance 1/: -0.5 0.0 0.2 1.2 2.0 - Fiscal deficit 1/: -4.4 -3.9 -3.9 -3.0 -2.0 - Fiscal impulse 2/: 1.2 -0.8 -0.7 -0.6 -0.4 - Public debt 1/ 3/: 36.9 37.2 35.7 35.3 33.8 - Source note: Consolidated public sector; fiscal impulse refers to non-financial public sector. Excludes BCRD recapitalization bonds. ### Fiscal policy: overruns, 2010 measures, and 2011 budget - Potential fiscal overruns (paragraph 17): - Implementation shifted from expansionary in first half to consolidation in second half. - Shortfall in revenues relative to program: about 0.6 percent of GDP for the year (due partly to lagged effect of 2009 recession on income tax receipts and delayed administrative tax measures). - Overrun in transfers to electricity sector: originally programmed at 0.8 percent of GDP (about $380 million), expected transfer rose to 1.2 percent of GDP ($604 million). - Total adjustment need: about 1 percent of GDP. - 2010 fiscal measures (paragraph 18): - Authorities introduced additional measures to increase tax revenues and hold down expenditures. - Revenue measures implemented in September estimated to increase revenues by 0.3 percent of GDP in remainder of 2010: - Tax revenues: about 0.1 percent of GDP - Non-tax revenues: 0.2 percent of GDP - Specific revenue measures: - Reinstituting indexation of specific tax on hydrocarbons to inflation and implementing retroactive indexation from 2007 to present. - Collecting VAT on imports from some companies previously exempt under Proindustria and crediting VAT when items sold domestically. - Collecting advances on income tax on casino and lottery prize gains. - Resulting tax-to-GDP ratio in 2010 projected to rise to 13.2 percent. - Expenditure measures (paragraph 18 continued and 19): - Supplementary budget in July 2010 authorized reallocation away from investment to pay for increased electricity transfers; supplementary budget reduced public investment by 0.4 percent of GDP. - Additional administrative measures in last quarter of 2010 likely to reduce public investment by additional 0.3 percent of GDP. - These measures leave investment at about same level in GDP terms in 2010 as in 2009: 3.7 percent. - 2011 budget objectives (paragraph 19): - Fiscal consolidation of about 1 percent of GDP relative to 2010. - Combined public sector deficit of 3 percent of GDP (primary surplus of 1.2 percent of GDP), consisting of: - Central administration deficit: 1.6 percent of GDP - Quasi-fiscal deficit of the central bank: 1.4 percent of GDP - Authorities project a conservative increase of tax revenues of about 6 percent in real terms. - Fiscal program table (central government and consolidated, as given) - Central Government Revenues (In percent of GDP): 2009 13.7 2010 Prog. 14.3 2010 Proj. 14.0 2011 14.0 2012 15.1 - o/w taxes: 13.1 13.8 13.2 13.3 14.5 - Expenditures: 17.2 16.7 16.3 15.6 15.7 - Current: 13.6 12.3 12.6 11.8 11.0 - Capital: 3.6 4.4 3.7 3.8 4.7 - Overall balance (central government): -3.5 -2.4 -2.3 -1.6 -0.6 - Primary balance (central government): -1.6 -0.2 -0.2 0.8 1.6 - Rest of NFPS: 0.4 -0.1 -0.2 0.0 0.0 - BCRD quasi-fiscal: -1.3 -1.4 -1.4 -1.4 -1.4 - Consolidated Public Sector Overall balance: -4.4 -3.9 -3.9 -3.0 -2.0 - Consolidated Primary balance: -0.5 0.0 0.2 1.2 2.0 - Memorandum item: Fiscal impulse 1/ : 1.2 -0.8 -0.7 -0.6 -0.4 ### Benchmark on implementing Basel Core Principles (Box 3) - Authorities prepared a plan to achieve Basel core principles for effective banking supervision. - FSAP update assessment: 18 principles “broadly adequate”, 10 “completely adequate”; strict execution of plan would result in full compliance with all 25 Basel core principles by end-2012. - Main plan elements: - Modify the Monetary and Financial Law to strengthen or achieve Basel Core Principles 1, 2, 4, 6, and 23. Proposed modifications include: - Granting full autonomy to supervisor in resources and responsibilities. - Defining permissible activities of the supervisor. - Granting supervisor right to demand additional capital above minimum based on risk profile. - Establishing proportional deduction rules in primary and secondary capital. - Prepare and implement guidelines for risk-based supervision to achieve or strengthen Basel Core Principles 7, 8, 9, 10, 12, 13, 14, 15, 16, 17, 20, 21, 22, and 24. - Prepare other supporting regulations and guidelines, including a law for financial groups for effective consolidated supervision and various regulations and instruction documents. - Chart summary (as in source): Number of completely adequate principles in place shown across 2010–2012 with categories “Need risk-based supervision and other”, “Need change in law”, “Already in place”. ### Benchmark on inflation targeting plan (Box 4) - Authorities designed a plan to adopt an Inflation Targeting (IT) framework for monetary policy by early 2012 (structural benchmark for June 2010). - Rationale: - Relationship between monetary base and inflation strengthened during crisis (2002-03) but weakened post-crisis; exchange rate also served as anchor. - An explicit inflation anchor would improve monetary control, allow exchange rate to fluctuate more, and increase transparency and credibility. - Existing strengths facilitating transition: - Legal mandate of central bank to maintain price stability and discretion to choose targets and instruments. - Use of overnight (policy) rate and open market operations; established monetary policy committee (COMA) with regular meetings; annual monetary programs and monthly COMA communications; improved technical forecasting capacity. - Additional measures envisaged by 2012: - Adopt additional policy instruments: reduce Lombard facility rates gradually and develop a repo market to complement Lombard facility. - Increase transparency: - BCRD to issue a monetary policy report by June 2011. - Publicly announce COMA meeting schedule months in advance. - Adapt COMA monthly communications for IT regime to include justifications for deviations and explanations of decisions. - Schedule data releases including monthly index of economic activity, monthly headline and core inflation figures, and detailed survey of economic agents’ expectations. - Enhance modeling capacity: continue learning from other countries and devote staff to improve forecasting models. - Monetary base and inflation trends (as presented): - Volatility, Monetary Base (period ratios): 1996-2002 0.82 2003-2004 0.86 2005-2009 1.62 - Volatility, Inflation: 1996-2002 0.39 2003-2004 0.80 2005-2009 0.73 - Correlation, Monetary Base and Inflation: -0.21 0.63 0.05 (by subperiods as shown) *Source: Dominican authorities and Fund staff estimates.* ### 13.3 percent of GDP in 2011 (0.1 percent of GDP more than in 2010), for overall revenues of ### _cr1171 - 13.3 percent of GDP in 2011 (0.1 percent of GDP more than in 2010), for overall revenues of ### Fiscal projections and composition (2010–2011) - Revenue projection: 13.3 percent of GDP in 2011 (0.1 percent of GDP more than in 2010), for overall revenues of 14 percent of GDP. - Expenditure composition and changes: - Wages and salaries: will grow slightly above inflation, mainly due to the increase in compensation of public health workers agreed in June 2010. - Transfers to the electricity sector: expected to fall to 0.6 percent of GDP. - Expenditure on goods and services: expected to decline by 0.2 percent of GDP. - Capital expenditures: projected at 3.7 percent of GDP, the same ratio as in 2010. - Policy stance: Staff considers the conservative approach to projecting tax revenues appropriate; authorities indicate that any revenue excess would be used to increase investment spending (but not current spending) (LOI ¶7b1). ### Financing for 2010–2011 - 2010 financing package highlights: - US$750 million budget support from the World Bank, the IDB and Petrocaribe. - Proceeds from issuance of US$750 million in external sovereign bonds in April. - US$150 million of budget support from the Fund to cover external payments. - Additional Fund provision of US$250 million to finance interest payments from the treasury to the central bank on recapitalization bonds. - Domestic finance: US$700 million, mostly in the form of bonds. - 2011 financing package highlights: - Budget support from the World Bank and IDB and Petrocaribe: US$500 million. - Authorities plan to issue US$500 million in external bonds. - Additional US$250 million of Fund disbursements proposed to cover transfers of interest from the treasury to the central bank. - Net financing from domestic bonds: at US$500 - US$600 million. ### Monetary policy (2010–2011) - 2010 monetary response: - Monetary program remained appropriate; no need to modify monetary targets. - Output gap closing; central bank aware a tightening phase will be needed. - No evidence of inflationary pressures; core inflation at a historical low and below program objectives. - Central bank confident in observing monetary targets and did not see risks in observing performance criteria on NDA and NIR for September and December 2010 (LOI ¶6b3). - 2011 monetary program: - Policy focus shifting from credit expansion in 2010 to reserve accumulation in 2011. - No need for central bank to actively expand net domestic assets (NDA) in 2011. - Program assumes an increase in demand for base money of some 7 percent and a level of NDA constant at the level programmed for end-2010. - With focus on reserve accumulation, NIR is expected to increase by at least US$300 million in 2011 (LOI ¶7b3). ### External policy and balance of payments - Export and current account outlook: - Export growth likely to increase to about 15 percent in 2011 with gold exports coming on stream and re-opening of the ferro-nickel mine. - Current account deficit narrowing from about 7 percent of GDP in 2010 to some 6½ percent of GDP in 2011. - Over the medium term, current account deficit expected to narrow to below 4 percent of GDP as ferro-nickel and gold production significantly increase exports. - Sensitivities: a US$5 increase in oil prices would increase the current account deficit by 0.4 percent of GDP. - Financing and reserves: - Strong foreign direct investment, planned sovereign bond issuance and multilateral lending expected to finance the 2011 current account deficit while sustaining foreign reserves in line with the program. - Dominican Republic: Balance of Payments (In percent of GDP) — as presented - Current account: -4.6 -6.1 -7.0 -6.4 -4.2 - Exports: 11.8 11.0 12.4 13.2 15.6 - Imports: -26.3 -26.2 -28.8 -28.6 -29.1 - Other: 9.8 9.0 9.3 9.0 9.3 - Capital account: 5.5 5.1 6.0 6.9 5.3 - Public sector (net): 1.7 2.6 2.5 1.7 1.0 - Private sector (net) 1/: 3.8 2.5 3.5 5.3 4.3 - Overall balance: 0.9 -1.0 -1.1 0.6 1.1 - Source: Dominican authorities and Fund staff estimates. - Note: 1/ Includes errors and omissions. - Dominican Republic: Monetary Program (12-month changes in percent of base money the previous period) — as presented - Base money: 3.2 11.2 11.2 7.1 13.9 - Net domestic assets: -9.0 25.0 25.0 0.0 0.0 - Public sector (net): -2.9 2.4 2.0 0.0 0.0 - Banks (net): -15.2 -11.0 -19.4 -36.4 -32.3 - Private sector (non-bank): -1.0 26.6 20.3 27.0 21.1 - Other items (net): 10.1 7.0 22.0 9.4 11.2 - Net international reserves: 12.2 -13.8 -13.8 7.1 13.9 - Source: Dominican authorities and Fund staff estimates. ### Exchange rate policy - Nominal exchange rate: depreciated by about 2½ percent against the US dollar in the first half of 2010; central bank intervened by purchasing foreign exchange to meet the NIR target. - Real effective terms: exchange rate depreciated by about 3 percent in the first half of 2010. - Policy commitment: central bank committed to increase exchange rate flexibility within its managed floating regime as preparatory work toward the introduction of a full-fledged inflation targeting regime in 2012. ### Structural policies — tax administration and exemptions - Program benchmarks (2010–2011): - Tax exemption framework: Reform to centralize power to grant and monitor tax exemptions in the Ministry of Finance by issuing a decree (structural benchmark for December 2010) (LOI¶6b5). - Evaluation unit: Create a unit at the Ministry of Finance to evaluate economic and administrative costs and benefits of current and proposed exemptions (structural benchmark for December 2010) (LOI¶6b5). - Revenue administration measures: Prepare a list of measures to yield 0.5 percent of GDP in 2011 with a timetable for implementation (structural benchmark for December 2010) (LOI¶6b5). - Removal of exemptions: Prepare a report on costs and benefits of current exemption regime and a timetable for rationalization and reduction of exemptions to reach government revenue goals (structural benchmark for March 2011). This timetable will form basis for further structural benchmarks in 2011 (LOI¶7b5). ### Structural policies — inflation targeting and monetary framework - Inflation-targeting transition: - Authorities presented a plan to transition to inflation-targeting by 2012 (observed structural benchmark for June 2010). - Program benchmarks: - Dematerialization of BCRD securities: all new securities issued by the central bank will be dematerialized (structural benchmark for December 2010) (LOI¶6b5). - Monetary policy report: BCRD to publish the first monetary policy report under inflation targeting (structural benchmark for June 2011). Informational purposes; new regime starts in early 2012 (LOI¶7b5). - Monetary program: BCRD to publish a monetary program for 2012 emphasizing the inflation target as the new nominal anchor (structural benchmark for December 2011) (LOI¶7b5). - Preconditions noted for inflation targeting include: (i) high credibility of the central bank; (ii) de facto independence of the central bank; (iii) monthly Monetary Board decisions published with forward looking explanations; (iv) timely publication of monetary and other economic indicators; and (v) central role of BCRD as guarantor of price stability. ### Structural policies — prudential regulations - Benchmarks to adopt Basel core principles and strengthen supervision: - Monetary and financial law: send to Congress amendments eliminating legal impediments to change from compliance-based to risk-based supervision (structural benchmark for March 2011) (LOI¶7b5). - Financial and industrial conglomerates law: send to Congress a new law on consolidated supervision of financial and industrial groups (structural benchmark for March 2011) (LOI¶7b5). ### Electricity sector reform - Progress and challenges: - Pace slower than programmed; transfers to CDEEE increased due to higher generation costs (partly higher fuel prices) and reduced hydroelectric generation from lower than normal rainfall in first half of 2010. - EDEs converted about 70 percent of users in old PRA zones into regularized clients, advancing toward the September 2010 structural benchmark of 1.9 million new clients. - Authorities estimate indiscriminate subsidies in 2010 could reach about US$600 million, about 0.4 percent of GDP higher than originally programmed for 2010. - Measures and benchmarks: - Change in management of all EDEs announced in early September 2010. - Increase number of new regulated clients by 250,000 to 2.15 million in September 2011 (structural benchmark for September 2011) (LOI¶7b5). - Expected outcome: reform efforts to lead to significant savings and reduction in current deficit of the sector to US$350 million in 2011 (about 0.6 percent of GDP). - Additional consideration: authorities considering reducing unpaid balances to private electricity generators; under program definition unpaid balances cannot exceed 45 days, and authorities intend to reduce these amounts. ### Central bank recapitalization and proposed financing reallocation - Government remains current on transfers to recapitalize the central bank in accordance with current legislation; no longer considering planned modification to lengthen recapitalization period. - Proposal: use part of Fund disbursements to the BCRD (some US$250 million a year) to finance interest payments for recapitalization bonds by transferring liabilities corresponding to Fund purchases from the BCRD to the Ministry of Finance (Table 15). - Under this scheme, accumulation of reserves at BCRD and fiscal deficit agreed under the program will not change, but financing mix for Ministry of Finance obligations would shift from domestic market to international (IMF) financing (Box 5). - Staff proposed revising the memorandum of understanding delineating responsibilities of Ministry of Finance and BCRD to cover obligations to the Fund. - Box 5 illustrative scenarios for 2010 recapitalization (figures in millions of US$): - Total financing needs: 1,070 for all scenarios. - International reserves target: 370 for all scenarios. - Current Legislation Scenario: - IMF: 370 - Ministry of Finance transfers: 380 - Domestic Markets borrowing: 320 - Central Bank borrowing requirements: 690 - Modified Law Scenario: - IMF: 370 - Ministry of Finance transfers: 130 - Domestic Markets borrowing: 570 - Central Bank borrowing requirements: 940 - New Authorities’ Proposal: - IMF: 120 assigned to BCRD; additional 250 disbursed to Ministry of Finance - Ministry of Finance transfers to BCRD: 250 - Domestic Markets borrowing: 570 - Central Bank borrowing requirements: 690 - Table summary (In millions of US$) presented in Box 5. ### Poverty alleviation and social policy - Conditional cash transfer (CCT) program “Solidaridad”: - Program being successfully implemented. - Expansion in December 2009 created strain on health and education public services; government increasing spending on construction and rehabilitation of public schools and medical services in poor areas, and on nutritional supplements for poor children. - Authorities plan for 2011: - Increase permanent coverage by 60,000 additional families to 590,000 families (structural benchmark for December 2011) (LOI¶7b5). - Targeted subsidy programs: - BONOLUZ: expansion completed to cover over 50,000 clients (exceeding a December 2010 structural benchmark); authorities intend to increase coverage to 250,000 families (structural benchmark for December 2011) (LOI¶7b5). - BONOGAS: subsidy on natural gas provided to 800,000 families. ### Program issues and risks - Reserve coverage and balance of payments need: - NIR targets observed for end-March and end-June 2010 at US$2.0 billion and US$2.10 billion respectively, but NIR remains low at less than 2.5 months of imports. - Current account deficit in 2011 expected to remain high, putting further pressure on the balance of payments. - Low reserve coverage and high current account deficit justify access under the program. *Source: Dominican authorities and Fund staff estimates, as presented in the document.* ### 32. Conditionality. The attached letter of intent reiterates the authorities’ commitment to ### Conditionality ### Conditionality and program commitments - The attached letter of intent reiterates the authorities’ commitment to the program and details an economic program for 2011. - Introduces new structural benchmarks based on the strategies and plans designed by the authorities. - Introduces a quantitative target for 2011 on the current balance of the public electricity company (CDEEE). - The CCT program provides a modest amount of financial assistance to families with children in extreme poverty in exchange for meeting certain conditions including school attendance, vaccinations, visits to public clinics and basic sanitation. ### Waiver of applicability - Authorities request waivers of applicability of all relevant end-September 2010 performance criteria because the Board meeting for the second and third SBA review will take place in mid-October and some end-September performance criteria would not be known. - Staff will report on the status of these performance criteria at the time of the Board meeting and a revised proposed decision will be issued accordingly. ### Safeguards assessment of the BCRD - An update of the previous safeguards assessment of the BCRD (completed in April 2005) was conducted in the context of the new SBA; the assessment was completed on June 1, 2010. - Implemented improvements: external and internal audit mechanisms, and the internal control framework. - Instituted periodic reviews by the Internal Audit Division of the compilation, reconciliation, and reporting of net international reserves and net domestic assets at each test date under the SBA program, against definitions agreed under the Technical Memorandum of Understanding. - Remaining weaknesses: - Shortcomings with the Monetary and Financial Law (MFL), particularly related to the autonomy of the central bank. - The BCRD continues to prepare its financial statements in accordance with accounting policies that do not represent an internationally recognized financial reporting framework, such as International Financial Reporting Standards (IFRS). - Lack of a methodology for separately calculating realized and unrealized foreign currency gains/losses. - The authorities have undertaken to address the remaining weaknesses. ### Staff appraisal — Overall assessment - Performance under the program has been uneven but there is a remarkable economic recovery, and a significant improvement of most macroeconomic indicators. - Short-term objective achieved: supporting demand, strengthening confidence, and preventing a deepening of the recessionary environment of the first half of 2009. - Policy coordination remains an issue, highlighted by difficulties in implementing the electricity reform and delays in completing this review. - The opening of a resident representative office in Santo Domingo, expected for this fall, will help in improving policy coordination. ### Fiscal policy (2010) — findings and recommendations - Staff commends the authorities for meeting the fiscal targets for the first half of the year, and for designing a credible plan to close the fiscal gap to reach the 2010 end-year targets. - Needed improvements: - Expenditure control, especially in the electricity subsidy. - Adhere to plan for electricity reform, including implementation of a new tariff structure and better management of the state-run electricity distribution companies, to reduce the burden of the electricity sector on the public finances. - Improvements in tax administration; evaluate and limit tax exemptions (may require additional technical assistance from the Fund). - Tax expenditures in the Dominican Republic amount to close to 6 percent of GDP, which is high by regional standards, and above the level compatible with a tax system collecting around 14 percent of GDP. - Policy implication: reduction of untargeted exemptions and better control of remaining exemptions will be a significant improvement of the tax system. ### 2011 Budget - Approving a budget for 2011 in line with the program will be important to maintain the momentum of fiscal consolidation, and move towards reaching the target of a primary surplus of 2 percent of GDP for the consolidated public sector in 2012. - Rationale: expansionary policies in 2009 and first half of 2010 raised the debt to GDP ratio and reduced fiscal space; need to begin stabilizing and lowering public debt to safeguard debt sustainability and enhance credibility of fiscal policy. ### Monetary policy - The central bank has maintained an accommodative monetary policy stance to support domestic demand; by and large, this policy has been successful. - Central bank has a good track record of adjusting monetary policy flexibly and stands ready to tighten as soon as risks of inflationary pressures become evident. - As credit growth has picked up, the central bank should be mindful of its performance criterion on NDA. - Dollarization is mild by Latin American standards but remains a challenge; authorities advised to strengthen policy framework to gradually reduce dollarization further. - Government and central bank efforts to transfer resources in support of the recapitalization of the central bank according to current legislation (avoiding a weakening of the law), including using part of the SBA purchases for this purpose, are commended. ### Exchange rate - Essential to pursue a flexible exchange rate policy in the short-term given external uncertainties. - Benefits: facilitates switch to inflation targeting (even if only formally adopted in 2012), fosters de-dollarization, and strengthens effectiveness and credibility of monetary policy. ### Structural reform priorities - Commendation: authorities observed the structural benchmarks; three strategies on tax collections, prudential regulations and inflation targeting were designed in the first half of 2010. - Two main structural pillars needing focus: - (i) Reinforcing tax administration to enhance collections by rationalizing exemptions. - (ii) Eliminating indiscriminate electricity subsidies. - Authorities should implement both reforms vigorously to compensate for early difficulties. - Adopt policies aimed at reducing the deficit of the electricity sector to prevent undue contraction in public investment. ### Risks - Overall risks remain balanced. - Short-run downside risks: weakening world economy (financial instability in parts of Europe, less robust US recovery) leading to lower growth and more difficult program implementation. - Policy risk: accommodating electricity sector deviations with lower public investment could be counter-productive long-run by reducing growth prospects. - Upside risks: brisker activity due to reconstruction of Haiti or stronger FDI, which would require a more active monetary policy. - Two significant risks eliminated in 2010: political risk of higher non-programmed spending associated with the elections; risk of not having access to international capital markets to finance the budget. - For 2011 the risk of policy implementation remains, particularly for electricity and tax administration reforms; conservative budget crafting partially alleviates the risk if tax collection progress is slow. ### Review recommendation - Despite disappointing electricity reform results and setbacks to tax collection efforts, staff supports completion of the second and third SBA reviews, and supports the authorities’ request for waivers of applicability of end-September 2010 performance criteria, given very positive macroeconomic results and appropriate offsetting measures. ### Quantitative performance criteria (selected figures from Table 1: Dominican Republic: Quantitative Performance Criteria 2009-11) - Overall balance of the central administration (floor): -51.5, -58.0, -6.5, X, -73.7, -69.3, 4.4, -88.4, -87.5, 0.9, -95.8, -102.3, -14.9, -21.3, -27.9, -33.5 - Overall balance of the consolidated public sector (floor): -74.5, -74.2, 0.3, -97.5, -91.3, 6.2, -119.5, -118.4, 1.1, -133.0, -147.0, -21.5, -3, 5.6, -49.5, -63.8 - Electricity — Overall current balance of the public electricity sector (floor): ... , -744.3, ... , ... , -201.4, ... , ... , -279.6, ... , ... , ... , -77.0, -145.2, -241.6, -350.0 - Monetary — Net international reserves (floor) (in millions of U.S. dollars): 1,815, 2,464, 649, 1,730, 2,025, 296, 1,888, 2,128, 240, 1,865, 2,015, 1,665, 1,765, 1,865, 2,315 - Monetary — Net domestic assets (ceiling) (in billions of Dominican Republic pesos): ... , 45.4, ... , ... , ... , 57.5, ... , ... , 50.9, ... , 65.0, 80.0, 80.0, 80.0, 80.0, 80.0 - Debt — Accumulation of public arrears with electricity generators (ceiling): 0.0, 100.5, 100.5, X, 0.00.00.0, 0.00.00.0, 0.00.0, 0.00.00.00.0 - Accumulation of external public debt arrears (continuous target): 0.0 across listed observations ### Structural benchmarks (selected entries) - Design a strategy to rationalize and limit tax exemptions, strengthen tax administration, and continue modernizing customs to achieve the medium-term revenue objectives of the program. Timing: Mar 2010. Status: ☼ Done. Note: Strategy provided on time. - Issue a decree to centralize the power to grant tax exemptions in the Ministry of Finance. Timing: Dec 2010. Status: ☼ New benchmark. - Create a unit at the Ministry of Finance to conduct cost-benefit analyses of current and future exemptions and make recommendations to the Minister of Finance on granting and rationalizing exemptions. Timing: Dec 2010. Status: ☼ New benchmark. - Prepare a list of additional revenue administration measures to yield. Timing: Dec 2010. Status: ☼ New benchmark. *Table 1. Dominican Republic: Quantitative Performance Criteria 2009-11 (excerpt).* ### 0.5 percent of GDP in 2011 with a timetable for their implementation. ### _cr1171 - 0.5 percent of GDP in 2011 with a timetable for their implementation. ### Structural benchmarks and timetable - Prepare a report on the costs and benefits of the current exemption — Mar 2011. - New benchmark: regime and a timetable for the rationalization and reduction of exemptions to help achieve the government’s tax revenue target of 15 percent of GDP. - New Central Bank securities will be dematerialized — Dec 2010. - Send to congress amendments to the Monetary and Financial Law to eliminate legal impediments to introduce the Basel core principles and risk based supervision — Mar 2011. - Send to congress a new law on consolidated supervision of financial and industrial groups with a view to facilitate risk based supervision — Mar 2011. - Publish the first monetary policy report under inflation target for informational purposes only — Jun 2011. - Publish a monetary program for 2012 (as established by law) within the new inflation target framework — Dec 2011. ### Financial sector reform (benchmarks, status, timing) - Design a plan to achieve compliance with all Basel core principles for effective bank supervision by 2012. Plan designed by Superintendency of Banks by March 2010 — Mar 2010. Status: Done. - Design a plan to formally adopt a full-fledged inflation targeting framework by early 2012. Plan designed by BCRD by June 2010 — Jun 2010. Status: Done. - New Central Bank securities will be dematerialized — Dec 2010. Status: New benchmark. - Publish amendments and new law items to facilitate risk-based supervision and consolidated supervision — Mar 2011. Status: New benchmark. ### Recovery and growth enhancement (benchmarks, targets, status) - Design a strategy to reform the electricity sector, including by eliminating indiscriminate electricity subsidies to achieve the medium-term budgetary expenditure objectives of the program — Dec 2009. Status: Done. Note: "Satisfactory action plan provided to Staff in December 2009." - Increase the number of regulated clients of the distribution companies (EDES) to 1.9 million — Sep 2010. Status: In progress. Note: "The number of regulated clients as of end-August 2010 was close to 1.9 million." - Design a strategy to develop domestic capital markets and debt management including by lowering the country risk and the borrowing costs for the economy — Sep 2010. Status: In progress. - Design of a new tariff structure is underway — Dec 2010. Status: In progress. - Increase the number of regulated clients of the electricity companies (EDEs) to 2.15 million — Jun 2011. Status: New benchmark. ### Social safety net (benchmarks, outcomes, targets) - Increase the permanent coverage of the conditional cash transfer program by 70,000 families living in extreme poverty — Dec 2009. Status: Done. Note: "More than 70,000 families were incorporated into the Solidaridad program." - Increase the coverage of the BONOLUZ program to 50 thousand clients — Dec 2010. Status: Done. Note: "More than 100 thousand clients benefit from Bonoluz in July 2010." - Increase the coverage of the Bonoluz program from the 50,000 target of December 2010 to 250,000 clients — Dec 2011. Status: New benchmark. - Increase the permanent coverage of the conditional cash transfer program (Solidaridad) by 60,000 additional families to 590,000 families — Dec 2011. Status: New benchmark. - Adopt a flexible pricing mechanism for electricity tariffs with a view to eliminate the gap between current tariffs and the "indexed" tariff as defined by the Superintendency of Electricity. Note: "The BCRD and the Ministery of Finance are working on this issue." ### Selected economic indicators and projections (as presented) - Main export products: tourism, textiles, nickel. - GDP per capita (U.S. dollars, 2009 PPP): 4,500.2 - Income share of highest 10 percent (percent, 2006): 39.0 - Population (millions, 2009 estimate): 10.1 - Poverty (headcount index, 2008): 37.8 - Life expectancy at birth (years, 2008): 73.3 - Extreme poverty (headcount index, 2008): 11.7 - Under 5 mortality rate (per thousand, 2008): 31.0 - Adult literacy rate (percent, 2007): 95.1 - Nominal GDP (RD$ billion): 1,576; 1,679; 1,857; 1,884; 2,095; 2,332 (presented across columns). - Dollar GDP (US$ billion): 45.5; 46.7; 50.1; 49.7; 53.7; 57.9. - Real GDP (percent changes shown in sequence): 5.3; 3.5; 3.0-4.0; 5.5-6.0; 5.5-6.0; 6.0. - Consumer price index (period average): 10.6; 1.4; 6-7; 6.4; 5.4; 4.5. - Consumer price index (eop): 4.5; 5.8; 6-7; 6.0-7.0; 5.0-6.0; 4.0-5.0. - Exchange rate (RD$/US$ - period average): 34.6; 35.9. - Exchange rate (RD$/US$ - eop): 35.5; 36.1. - Unemployment rate (in percent): 14.2; 14.9. - Central government primary balance (percent of GDP): -1.4; -1.6; -0.2; -0.2; 0.8; 1.6. - Total revenues (including grants, percent of GDP): 15.8; 13.7; 14.3; 14.0; 14.0; 15.1. - Primary spending (percent of GDP): 17.2; 15.2; 14.5; 14.2; 13.2; 13.5. - Interest expenditure (percent of GDP): 1.7; 1.9; 2.2; 2.1; 2.4; 2.2. - Nonfinancial public sector overall balance (percent of GDP): -3.1; -3.1; -2.5; -2.5; -1.6; -0.6. - Quasi-fiscal balance of the central bank (percent of GDP): -1.3; -1.3; -1.4; -1.4; -1.4; -1.4. - Consolidated public sector balance (percent of GDP): -4.4; -4.4; -3.9; -3.9; -3.0; -2.0. - Consolidated primary balance (percent of GDP): -0.9; -0.5; 0.0; 0.2; 1.2; 2.2. - Total public debt (percent of GDP): 38.1; 41.8; 42.2; 41.3; 42.0; 41.2. - Of which: foreign currency denominated (percent of GDP): 17.8; 19.4; 21.6; 21.2; 21.6; 21.0. - M3 (in percent of GDP): 35.3; 36.8; 36.3; 37.9; 38.0; 38.7. - Current account (in millions of US$): -4,529; -2,159; -3,071; -3,493; -3,421; -2,445. - Merchandise trade balance (millions of US$): -9,245; -6,741; -7,583; -8,140; -8,278; -7,801. - Exports (millions of US$): 6,748; 5,519; 5,534; 6,152; 7,100; 9,046. - Imports (millions of US$): -15,993; -12,260; -13,117; -14,291; -15,378; -16,848. - Services and transfers (net, millions of US$): 4,717; 4,582; 4,512; 4,646; 4,857; 5,356. - Capital and financial account (millions of US$): 4,384; 2,655; 2,548; 2,967; 3,721; 3,072. - Gross official reserves (millions of US$): 2,662; 3,303; 3,164.1; 3,154; 3,943; 4,623. - Net international reserves (millions of US$): 2,165; 2,535; 2,015; 2,015; 2,315; 2,942. - Outstanding external public debt (percent of GDP): 18.3; 20.0; 18.1; 21.6; 19.5; 16.5. ### Fiscal accounts (selected values presented in percent of GDP and in pesos) - Total revenue and grants (percent of GDP across columns): 15.8; 13.7; 7.0; 6.7; 14.3; 14.0; 3.3; 6.9; 10.3; 14.0; 15.1; 15.6. - Total revenue (percent of GDP across columns): 15.7; 13.5; 6.9; 6.7; 14.1; 13.7; 3.2; 6.8; 10.2; 13.8; 14.9; 15.4. - Tax revenues (percent of GDP across columns): 15.0; 13.1; 6.8; 6.4; 13.8; 13.2; 3.1; 6.6; 9.9; 13.3; 14.5; 15.0. - VAT (percent of GDP across columns): 4.7; 4.2; 2.0; 2.1; 4.2; 4.3; 1.1; 2.2; 3.3; 4.3; 4.4; 4.5. - Primary expenditures (percent of GDP across columns): 17.2; 15.2; 8.1; 7.4; 14.5; 14.2; 3.4; 6.8; 9.9; 13.2; 13.5; 14.1. - Primary balance (percent of GDP across columns): -1.4; -1.6; -1.1; -0.7; -0.2; -0.2; -0.1; 0.2; 0.4; 0.8; 1.6; 1.5. - Interest (percent of GDP across columns): 1.7; 1.9; 0.6; 0.9; 2.2; 2.1; 0.6; 1.2; 1.8; 2.4; 2.2; 2.1. - Overall balance (percent of GDP across columns): -3.0; -3.5; -1.6; -1.6; -2.4; -2.3; -0.7; -1.0; -1.3; -1.6; -0.6; -0.6. - Consolidated public sector balance (percent of GDP across columns): -4.4; -4.4; -2.4; -2.3; -3.9; -3.9; -1.0; -1.7; -2.4; -3.0; -2.0; -2.0. - Nominal GDP (DR$ billion) (selected presented sequence): 1576; 1678; 1857; 1884; 1857; 1884; 2095; 2095; 2095; 2095; 2322; 2607. - Primary spending excl. electricity and gas (percent of GDP): 14.1; 13.9; 7.7; 6.9; 13.7; 13.0; 3.2; 6.3; 9.3; 12.6; 13.2; 14.0. - Overall spending by central government (percent of GDP): 18.9; 17.1; 8.7; 8.3; 16.7; 16.3; 4.0; 7.9; 11.6; 15.6; 15.7; 16.2. ### Quasi-fiscal balance of the central bank (selected figures) - Quasi-fiscal balance (percent of GDP): -20.7; -22.4; -12.2; -25.4; -6.6; -14.3; -21.6; -30.3. - Quasi-fiscal balance (percent of GDP, alternative presentation): -1.3; -1.3; -0.6; -1.4; -0.3; -0.7; -1.0; -1.4. - Quasi-fiscal primary balance (in percent of GDP): 0.6; 0.7; 0.2; 0.5; 0.2; 0.3; 0.5; 0.4. - Securities (eop, in percent of GDP): 12.2; 12.0; 11.0; 10.3; 9.5; 9.2; 9.9; 10.4. ### Electricity sector finances (EDEs and CDEEE, selected figures in pesos) - Revenue (A) total: 1,348.8; 1,533.4; 428.6; 905.0; 1,390.2; 1,867.1. - Electricity Distribution Companies (EDE's) revenue: 1,146.9; 1,312.9; 371.4; 780.0; 1,196.1; 1,601.6. - Regular Clients revenue: 1,007.8; 1,154.4; 325.5; 682.7; 1,047.3; 1,399.8. - Priority Clients revenue: 85.6; 117.6; 32.4; 68.0; 104.3; 139.4. - CDEEE and Others revenue: 201.9; 220.5; 57.3; 125.0; 194.1; 265.5. - Energy Sales (CDEEE and Others): 199.5; 220.0; 56.8; 124.0; 192.6; 263.5. - Current Expenditure (B) total: 2,093.1; 2,137.4; 505.6; 1,050.3; 1,631.8; 2,217.1. - Electricity distribution Companies (EDE's) current expenditure: 1,574.2; 1,665.6; 405.0; 834.6; 1,310.4; 1,781.9. - Energy Purchases (EDE's): 1,311.5; 1,454.9; 356.3; 741.2; 1,168.1; 1,595.9. - CDEEE and Others current expenditure: 518.9; 471.8; 100.6; 215.7; 321.4; 435.2. - Current Balance (C=A-B): -744.3; -604.0; -77.0; -145.2; -241.6; -350.0. - Capital Expenditure (D): 248.5; 112.0; 25.0; 60.0; 90.0; 119.0. - Overall Balance (E=C-D): -992.8; -716.0; -102.0; -205.2; -331.6; -469.0. - Financing (total): 992.8; 716.0; 102.0; 205.2; 331.6; 469.0. - Government Transfers (component of financing): 606.0; 706.0; 72.0; 135.2; 224.7; 330.0. - Bonoluz transfers: 28.5; 0.0; 5.0; 10.0; 16.9; 20.0. - Externally Financed capital (CDEEE and Others): 170.3; 69.0; 10.0; 25.0; 40.0; 49.0. - Domestically Financed capital (CDEEE and Others): 78.2; 43.0; 15.0; 35.0; 50.0; 70.0. *Source: _cr1171 - 0.5 percent of GDP in 2011 with a timetable for their implementation.* ### 3. Under the definition of zero days of arrears to private electricity generators. ### _cr1171 - 3. Under the definition of zero days of arrears to private electricity generators. ### Consolidated accounts of the public electricity sector and monetary aggregates - Monetary base (series of levels in billions or millions as presented): - Monetary base: 133.8; 138.1; 133.3; 130.4; 153.5; 153.6; 140.8; 144.4; 148.1; 164.5; 187.4 - Currency issue: 62.5; 70.2; 61.6; 63.1; 77.9; 77.7; 69.7; 72.7; 73.0; 85.5; 97.5 - Reserve requirements (peso deposits): 71.3; 67.9; 71.8; 67.3; 75.6; 75.9; 71.1; 71.7; 75.1; 79.0; 89.9 - Net international reserves (millions of U.S. dollars): 76.3; 92.6; 64.4; 79.5; 73.6; 73.6; 60.8; 64.4; 68.1; 84.5; 107.4 - Net domestic assets (levels shown): 57.5; 45.4; 68.9; 50.9; 80.0; 80.0; 80.0; 80.0; 80.0; 80.0; 80.0 - Selected components (levels shown): - Nonfinancial public sector (net): 4.6; 0.7; 4.0; -2.8; 4.0; 3.5; 3.5; 3.5; 3.5; 3.5; 3.5 - Central government: 1.6; -2.3; 1.0; -5.9; 1.0; -0.4; -0.4; -0.4; -0.4; -0.4; -0.4 - Commercial banks (net): -51.2; -78.0; -83.4; -97.7; -85.8; -100.8; -118.8; -129.4; -140.3; -156.7; -210.0 - Monetary control notes and bills: -25.6; -36.7; -44.0; -57.2; -43.7; -58.3; -75.4; -84.1; -94.1; -108.9; -155.3 - Nonfinancial private sector (certificates): -160.9; -162.2; -135.8; -152.6; -125.5; -134.1; -120.4; -114.1; -107.5; -92.6; -57.9 - Other items (net): 264.4; 284.9; 315.0; 304.0; 309.4; 311.4; 315.6; 320.0; 324.4; 325.9; 344.4 - Memorandum items (percent changes or ratios shown): - Monetary base (percent change): 11.4; 3.2; 9.7; 7.3; 11.2; 11.2; 8.1; 10.7; 11.5; 7.1; 13.9 - Currency issue (percent change): 0.3; 12.3; 11.4; 14.2; 11.0; 10.7; 9.4; 15.2; 16.1; 10.1; 13.9 - Quasi-fiscal balance (in percent of GDP): -1.3; -1.3; -0.6; -0.6; -1.4; -1.4; -0.3; -0.7; -1.0; -1.4; -1.4 ### Summary accounts of the monetary authority and banking system indicators - Net foreign assets (levels shown): - Net foreign assets: 101.9; 117.5; 89.4; 101.0; 98.5; 94.9; 82.1; 85.8; 89.4; 105.9; 128.7 - (In millions of U.S. dollars): 2,886.1; 3,226.7; 2,448.9; 2,763.6; 2,698.9; 2,600.4; 2,250.4; 2,350.4; 2,450.4; 2,900.4; 3,527.2 - Net domestic assets (levels shown): 454.5; 500.4; 540.3; 558.5; 602.8; 619.9; 659.9; 673.0; 673.1; 690.2; 772.9 - Net credit to the nonfinancial public sector: 30.8; 53.1; 58.8; 50.0; 60.0; 52.4; 62.0; 66.5; 71.1; 55.9; 42.2 - Credit to the private sector (levels and growth): - Levels: 277.3; 297.2; 320.2; 320.1; 341.5; 334.3; 336.9; 352.7; 368.5; 377.6; 423.0 - Memorandum: Credit to the private sector (percent change, y-o-y): 7.0; 7.2; 15.5; 15.4; 14.9; 12.5; 9.9; 10.2; 11.9; 13.0; 12.0 - Liquidity and deposit aggregates: - M3 levels (M3556.4; 617.9; 629.6; 659.5; 675.0; 714.9; 742.0; 758.8; 762.5; 796.0; 901.6) - Currency in circulation: 51.7; 56.3; 49.5; 51.5; 60.5; 62.4; 57.1; 59.8; 60.3; 68.7; 77.9 - Deposits: 330.4; 379.0; 405.8; 406.7; 430.7; 435.1; 434.4; 451.4; 467.0; 483.8; 548.6 - Financial soundness indicators (selected ratios, in percent): - Net worth to total assets: 9.5; 9.7; 9.1; 8.9 - Regulatory capital to risk-weighted assets: 13.0; 13.4; 14.5; 13.7 - Loan growth: 27.1; 15.3; 12.4; 20.0 - NPLs to total loans: 4.0; 3.5; 4.0; 3.3 - Loan provisions to NPLs: 134.5; 133.1; 115.0; 123.0 - Return on average assets: 2.0; 2.1; 1.9; 2.3 - Return on average equity: 21.3; 21.4; 19.9; 35.8 - Liquid funds to deposits: 32.3; 33.1; 28.1; 25.7 - Liquid funds to total assets: 27.2; 28.4; 23.9; 22.0 ### Balance of payments, external financing, and reserves - Current account and trade (In millions of U.S. dollars): - Current account: -4,529; -2,159; -3,071; -3,493; -422; -1,517; -2,478; -3,421; -2,445 - Trade balance: -9,245; -6,741; -7,583; -8,140; -1,874; -3,963; -6,201; -8,278; -7,801 - Exports f.o.b.: 6,748; 5,519; 5,534; 6,152; 1,563; 3,246; 5,122; 7,100; 9,046 - Imports f.o.b.: -15,993; -12,260; -13,117; -14,291; -3,437; -7,209; -11,323; -15,378; -16,848 - Of which: oil and gas: -4,241; -2,641; -3,307; -3,384; -875; -1,825; -2,709; -3,544; -3,702 - Nonfactor services: 2,962; 3,046; 3,171; 3,113; 1,140; 1,911; 2,700; 3,329; 3,732 - Travel receipts: 4,166; 4,051; 4,126; 4,259; 1,426; 2,515; 3,627; 4,540; 5,046 - Transfers: 3,513; 3,305; 3,409; 3,421; 830; 1,629; 2,609; 3,613; 3,819 - Capital and financial account (In millions of U.S. dollars): - Capital and financial account: 4,384; 2,655; 2,548; 2,967; 720; 1,887; 2,849; 3,721; 3,072 - Financial account: 4,249; 2,548; 2,416; 2,880; 695; 1,838; 2,765; 3,615; 2,835 - Direct investment, net: 2,900; 2,067; 1,863; 1,354; 471; 1,047; 1,538; 1,990; 2,228 - Public sector MLT, net disbursements/amortization: Disbursements 1,367; 1,417; 1,385; 1,148; 176; 475; 770; 1,016; 1,272; Amortization -607; -623; -676; -648; -116; -307; -438; -624; -705 - Overall balance and financing: - Overall balance: -326; 406; -523; -526; -350; -250; -150; 300; 627 - Change in NIR (increase, - ): 230; -363; 523; 523; 350; 250; 150; -300; -627 - Change in GIR (increase, - ): 284; -638; 139; 145; 226; 16; -211; -789; -680 - Net Fund purchases: -422; 753; 843; 781; 242; 343; 614; 895; 3 ### External financing requirements and sources (summary) - Financing requirement (In millions of U.S. dollars): 4,842; 3,419; 3,995; 4,834; 3,830 - Current account deficit: 4,519; 2,159; 3,493; 3,421; 2,445 - Amortization of public sector medium- and long-term: 607; 623; 648; 624; 705 - Change in gross reserves (increase =+): -284; 638; -145; 789; 680 - Financing sources (In millions of U.S. dollars): - Capital transfer: 135; 107; 87; 107; 237 - Foreign Direct Investment, net: 2,870; 2,067; 1,354; 1,990; 2,228 - Portfolio investment, net: -376; -450; 523; 765; -103 - Public sector medium- and long-term loans: 1,367; 1,417; 1,148; 1,016; 1,272 - Net Fund purchases: -422; 753; 784; 895; 3 - Other: 887; 450; 546; 81; 42 ### Indicators of external vulnerability and reserves - Selected vulnerability indicators: - Current account (percent of GDP): -5.3; -9.9; -4.6; -8.1 - External debt (percent of GDP): 25.5; 23.0; 24.0; 27.8 - Debt service (in percent of exports of GNFS): 14.0; 17.1; 18.9; 20.6 - Gross reserves (millions of U.S. dollars): 2,946; 2,662; 3,307; 2,979 - Gross reserves (in months of imports of GNFS): 2.0; 2.3; 2.4; 2.0 ### Medium-term scenario (2008–14) — macro framework and projections - Growth and prices (percent unless specified): - Real GDP growth: 5.3; 3.5; 5.5; -6.0; 5.5; -6.0; 6.0; 6.0; 6.0; 6.0 - CPI inflation, end of period: 4.5; 5.8; 6.0; -7.0; 5.0; -6.0; 4.0; -5.0; 4.0; 4.0 - CPI inflation, average: 10.6; 1.4; 6.4; 5.4; 4.5; 4.0; 4.0 - Nominal GDP (billions of U.S. dollars): 45.5; 46.7; 49.7; 53.7; 57.9; 62.3; 67.3 - Public sector (percent of GDP): - Revenue: 15.8; 13.7; 14.0; 14.0; 15.1; 15.6; 15.6 - Expenditure: 20.5; 18.1; 17.9; 17.0; 17.1; 17.6; 17.6 - Overall balance: -4.6; -4.4; -3.9; -3.0; -2.0; -2.0; -2.0 - Primary balance: -1.1; -0.5; 0.1; 1.2; 2.0; 1.9; 1.9 - Balance of payments and external debt: - External current account (millions of U.S. dollars): -4,529; -2,159; -3,493; -3,421; -2,445; -2,447; -2,467 - Official reserves (millions of U.S. dollars): 266; 2330; 3315; 4394; 346; 2347; 964; 927 - In months of imports goods and non-factor services: 2.3; 2.4; 2.2; 2.5; 2.7; 2.7; 2.9 - Public external debt: 18.3; 20.0; 21.6; 19.5; 16.5; 15.9; 14.7 ### Debt sustainability assessments — external and public debt - External debt outlook: - Baseline external debt-to-GDP path (percent): 25.4 (2008); 27.2 (2009); 29.6 (2010); 31.5 (2011); 30.8 (2012); 28.9 (2013); 26.4 (2014); 23.4 (2015) - Change in external debt: -0.9; 1.8; 2.3; 1.9; -0.7; -1.9; -2.4; -3.1 - Identified external debt-creating flows (sum): 1.0; -0.7; 2.9; 1.2; -1.4; -1.7; -2.1; -2.6 - Current account deficit, excluding interest payments: 8.3; 3.3; 5.6; 4.9; 2.9; 2.2; 1.8; 1.3 - Net non-debt creating capital inflows (negative): -6.3; -4.4; -2.7; -3.7; -3.9; -3.9; -3.9; -3.9 - Automatic debt dynamics components (contributions shown): contribution from nominal interest rate: 1.7; 1.3; 1.4; 1.5; 1.3; 1.6; 1.6; 1.4; contribution from real GDP growth: -1.2; -0.9; -1.4; -1.5; -1.8; -1.7; -1.6; -1.5 - External debt-to-exports ratio (percent): 99.2; 121.8; 129.7; 134.3; 118.2; 108.8; 99.7; 87.8 - Gross external financing need (in billions of U.S. dollars): 8.2; 5.5; 7.0; 7.2; 6.6; 7.4; 7.9; 7.0 - Scenario with key variables at historical averages: 22.9; 20.4; 17.6; 14.2; 10.7; 7.1; -4.7 - Public debt outlook: - Public debt-to-GDP (discussion in text): would rise to 35 percent of GDP by 2011 (excluding BCRD recapitalization bonds), fall to 29 percent of GDP by 2015, and with a maintained primary surplus of 1¼ percent of GDP and assumptions of average real GDP growth of 6 percent and inflation of 4 percent would bring public debt to 24 percent of GDP by 2020. - Bound tests (shock results summarized in text): - Shocks to the current account and to the exchange rate would bring external debt to around 40 percent of GDP by 2012. - Exchange rate shocks would have the largest effect on public debt, bringing it to 43 percent of GDP in 2012. - A combined shock to interest rates, real GDP growth and the external current account deficit of ¼ of a standard deviation around historical averages would bring external debt to peak at 35 percent in 2012, with external debt declining from 2013 onwards. - A similar combined shock to public debt (interest rates, real GDP and the primary deficit at ¼ of a standard deviation around historical averages) would raise public debt to 39.5 percent of GDP in 2015. ### Fund financing, purchases, and program schedule (summary) - Schedule of reviews and purchases (In millions of SDRs unless specified): - Purchases already made: November 9, 2009 — 0.00; 200.00; 0.00; 0.00; 200.00; 200.00; 91.4 (percent) - April 7, 2010 (First review and end-December 2009 performance criteria): 54.27; 25.00; 54.27; 25.00; 0.00; 25.00; 79.27; 36.2 (percent) - Subsequent dated purchases and reviews listed through February 28, 2012 with amounts such as 54.26; 84.45; 109.45; 794.50 total; revised totals and memorandum items for 2009–2012 presented. - Total program purchases (summed line in table): 794.50; 300.00; 461.07; 300.00; 333.43; 633.43; 1,094.50; 500.0 (percent) - Memorandum items (annual totals): - 2010: 247.25; 100.00; 80.58; 100.00; 166.67; 266.67; 347.25; 158.63 - 2011: 437.80; 0.00; 271.13; 0.00; 166.67; 166.67; 437.80; 200.00 - 2012: 109.45; 0.00; 109.45; 0.00; 0.00; 0.00; 109.45; 50.00 *Sources: Dominican authorities; and Fund staff estimates.* ### Appendix Table 1. Dominican Republic: External Debt Sustainability Framework, 2007-2015 ### Appendix Table 1. Dominican Republic: External Debt Sustainability Framework, 2007-2015 ### Baseline public sector debt trajectory (percent of GDP) - Baseline: Public sector debt 1/: 33.7 (2008), 36.9 (2009), 35.7 (2010), 35.3 (2011), 33.8 (2012), 32.4 (2013), 30.5 (2014), 28.7 (2015) - o/w foreign-currency denominated: 16.5 (2008), 16.9 (2009), 17.6 (2010), 17.1 (2011), 16.2 (2012), 15.1 (2013), 13.9 (2014), 12.8 (2015) - Debt-stabilizing primary balance 9/: 1.3 (value shown in table header area) ### Changes and identified debt-creating flows (percent of GDP) - Change in public sector debt (line 2): 0.5 (2008), 3.2 (2009), -1.2 (2010), -0.4 (2011), -1.5 (2012), -1.4 (2013), -1.9 (2014), -1.8 (2015) - Identified debt-creating flows (line 3 = 4+7+12): 0.7 (2008), 3.1 (2009), -0.4 (2010), -0.6 (2011), -1.4 (2012), -1.2 (2013), -1.1 (2014), -0.9 (2015) - Primary deficit (line 4): 1.3 (2008), 0.7 (2009), -0.1 (2010), -1.2 (2011), -2.0 (2012), -1.9 (2013), -2.0 (2014), -2.0 (2015) - Revenue and grants (line 5): 15.8 (2008), 13.7 (2009), 14.0 (2010), 14.0 (2011), 15.1 (2012), 15.6 (2013), 15.7 (2014), 15.7 (2015) - Primary (noninterest) expenditure (line 6): 17.1 (2008), 14.4 (2009), 13.9 (2010), 12.8 (2011), 13.1 (2012), 13.7 (2013), 13.7 (2014), 13.7 (2015) - Automatic debt dynamics (line 7): -0.6 (2008), 2.4 (2009), 0.0 (2010), 0.6 (2011), 0.6 (2012), 0.7 (2013), 0.9 (2014), 1.1 (2015) - Contribution from interest rate/growth differential (line 8): -1.2 (2008), 1.8 (2009), 0.0 (2010), 0.6 (2011), 0.6 (2012), 0.7 (2013), 0.9 (2014), 1.1 (2015) - Of which contribution from real interest rate (line 9): 0.3 (2008), 2.9 (2009), 1.8 (2010), 2.4 (2011), 2.5 (2012), 2.6 (2013), 2.7 (2014), 2.7 (2015) - Of which contribution from real GDP growth (line 10): -1.5 (2008), -1.1 (2009), -1.8 (2010), -1.8 (2011), -1.9 (2012), -1.8 (2013), -1.8 (2014), -1.7 (2015) - Contribution from exchange rate depreciation 4/ (line 11): 0.6 (2008), 0.6 (2009), ... (ellipsis in source) - Other identified debt-creating flows (line 12): 0.0 (2008), 0.0 (2009), -0.2 (2010), 0.0 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014), 0.0 (2015) - Privatization receipts (negative) (line 13): 0.0 (2008), 0.0 (2009), -0.2 (2010), 0.0 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014), 0.0 (2015) - Recognition of implicit or contingent liabilities (line 14): 0.0 (2008), 0.0 (2009), 0.0 (2010), 0.0 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014), 0.0 (2015) - Other (specify, e.g. bank recapitalization) (line 15): 0.0 (2008), 0.0 (2009), 0.0 (2010), 0.0 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014), 0.0 (2015) - Residual, including asset changes (2-3) 5/ (line 16): -0.2 (2008), 0.1 (2009), -0.8 (2010), 0.2 (2011), -0.1 (2012), -0.2 (2013), -0.8 (2014), -0.8 (2015) ### Ratios, financing need, and scenarios - Public sector debt-to-revenue ratio 1/: 212.9 (2008), 269.3 (2009), 255.0 (2010), 252.1 (2011), 223.8 (2012), 207.9 (2013), 194.3 (2014), 183.0 (2015) - Gross financing need 6/ (percent of GDP): 8.8 (2008), 10.4 (2009), 11.9 (2010), 9.2 (2011), 7.3 (2012), 7.0 (2013), 6.9 (2014), 6.9 (2015) - Gross financing need in billions of U.S. dollars: 4.0 (2008), 4.9 (2009), 5.9 (2010), 5.0 (2011), 4.2 (2012), 4.4 (2013), 4.6 (2014), 5.0 (2015) - Scenario with key variables at their historical averages 7/: 35.7 (value column start), 34.2, 32.4, 30.7, 28.5, 26.5, -1.7 (ellipsis and alignment in source) - Scenario with no policy change (constant primary balance) in 2010-2015: 35.7, 38.1, 39.4, 40.8, 41.8, 43.3, 1.9 (values listed in source table area) ### Key macroeconomic and fiscal assumptions underlying baseline (selected) - Real GDP growth (in percent): 5.3 (2008), 3.5 (2009), 5.5 (2010), 5.5 (2011), 6.0 (2012), 6.0 (2013), 6.0 (2014), 6.0 (2015) - Average nominal interest rate on public debt (in percent) 8/: 11.5 (2008), 12.0 (2009), 12.2 (2010), 13.1 (2011), 12.6 (2012), 12.7 (2013), 13.3 (2014), 14.1 (2015) - Average real interest rate (nominal rate minus change in GDP deflator, in p): 1.7 (2008), 9.2 (2009), 5.7 (2010), 7.7 (2011), 8.1 (2012), 8.7 (2013), 9.3 (2014), 10.1 (2015) - Nominal appreciation (increase in US dollar value of local currency, in perc): -3.3 (2008), -3.6 (2009), ... (ellipsis in source) - Inflation rate (GDP deflator, in percent): 9.8 (2008), 2.8 (2009), 6.4 (2010), 5.4 (2011), 4.5 (2012), 4.0 (2013), 4.0 (2014), 4.0 (2015) - Growth of real primary spending (deflated by GDP deflator, in percent): 13.9 (2008), -12.8 (2009), 1.5 (2010), -2.6 (2011), 9.0 (2012), 10.3 (2013), 6.0 (2014), 6.0 (2015) - Primary deficit (repeated): 1.3 (2008), 0.7 (2009), -0.1 (2010), -1.2 (2011), -2.0 (2012), -1.9 (2013), -2.0 (2014), -2.0 (2015) ### Notes and definitions (as presented) - 1/ Consolidated public sector (includes quasi-fiscal losses of Central Bank). The levels of consolidated public debt exclude recapitalization bonds given to the Central Bank. - 2/ Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). - 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π(1+g) and the real growth contribution as -g. - 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r). - 5/ For projections, this line includes exchange rate changes. - 6/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. - 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. - 8/ Derived as nominal interest expenditure divided by previous period debt stock. - 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. *Source: Appendix Table 1. Dominican Republic: External Debt Sustainability Framework, 2007-2015.* ### 2007. The government has taken up the indexation and, to compensate for past ### _cr1171 - 2007. The government has taken up the indexation and, to compensate for past ### Fiscal measures and revenue administration - Collection of VAT on imports under the framework of the Proindustria law: the government agreed with a critical mass of firms that during the life of the program they will pay the value added tax on imports at customs to improve cash flow and enhance customs control. - Advances on income tax on casino gains and lottery prizes: the government will withhold 15 percent of the winnings from lotteries and casinos. - Indexation: the government has taken up the indexation and, to compensate for past inflation, which will gradually increase the specific tax during the rest of 2010. - Measures to rationalize tax exemptions (to help achieve a tax pressure of 15 percent of GDP by 2013): - Issue a decree to centralize the power to grant tax exemptions in the Ministry of Finance (December 2010). - Create a unit at the Ministry of Finance to conduct cost-benefit analyses of current and future exemptions and make recommendations to the Minister of Finance on granting and rationalizing exemptions (December 2010). - Measures to improve tax collections: - Prepare a list of revenue administration measures to yield 0.5 percent of GDP in 2011 with a timetable for implementation (December 2010). ### Electricity sector - Commitment to reform and eliminate indiscriminate electricity subsidies as outlined in the December 2009 strategy and structural benchmarks. - 2010 commitment: limit the current deficit of the electricity sector (including consolidated accounts of the CDEEE, EDEs, EGEHID, ETED, and UERS, but excluding investment) to about US$600 million (1.2 percent of GDP) in accordance with the supplementary budget presented to congress in June. - Operational measures and commitments: - CDEEE administration reduced administrative costs significantly in the year and appointed three new chief executive officers to manage the EDEs. - Subject to availability of suitable financing, the government will eliminate all accounts payable to private electricity generators (previously kept at 45 days) and thereafter limit accounts payable to a level that does not require the payment of interest (effectively maintaining zero days of arrears). Performance criterion on arrears to private electricity generators will remain at zero under a definition of no delays in payments (rather than tolerating the current 45 days). - 2011 plans: - Limit the current deficit of the electricity sector to US$350 million (0.6 percent of GDP), including US$150 for the electricity distribution companies and US$200 for the CDEEE (from about US$600 million estimated for 2010), conditional on budget payment of electricity consumed by priority government agencies and the Bonoluz subsidy at ongoing tariff. - New quantitative performance criterion proposed for the current deficit of the electricity sector. - Achieve deficit reduction through improvements in collections, reductions in theft, and flexible tariffs structure. - Reduce all accounts payable to electricity generators to a level that does not require payment of interest (effectively zero days of arrears). - Recovery and Growth Enhancement: increase the number of regulated clients of the electricity distribution companies (EDEs) to 2.15 million (June 2011). - Social Safety Net related to electricity: increase the coverage of the BONOLUZ program to 250,000 clients (September 2011). ### Monetary policy and central bank recapitalization - Monetary policy stance: - The accommodative monetary policy under the program supported the economic recovery; the central bank sees no inflationary pressures at the moment but remains vigilant and will act decisively if inflationary risks arise. - Ongoing fiscal consolidation gives room for gradual monetary normalization. - Central Bank recapitalization and use of Fund resources: - Government has remained current on transfers necessary to recapitalize the central bank (BCRD) in accordance with the law and has not moved to reform the law to lengthen the recapitalization period. - Authorities propose keeping current legislation to maintain the original schedule of recapitalization of the central bank (10 years). - Authorities reallocated part of the SBA resources to finance the budget, allowing the government to use these resources (US$400 million) as part of its financing policy, of which US$250 million will be used to cover interest on the bonds for the BCRD recapitalization. - Under this scheme, accumulation of reserves at the BCRD under the program and the fiscal deficit agreed remain unchanged. - 2011 monetary program assumptions: - Growth in the demand for money of 7 percent. - Net domestic assets (NDA) constant in nominal terms at their end-2010 programmed level. - Focus on accumulation of net international reserves expected to rise by at least US$300 million during the year. - 2011 continued support: - Continue the reallocation of SBA resources to finance the budget, increasing Fund support to the budget for US$250 million to cover interest on the bonds for the BCRD recapitalization. ### Structural reforms and financial sector measures - Strengthening monetary control infrastructure: - Central bank will begin to issue dematerialized securities (December 2010). - Expected that all central bank securities will be dematerialized by end-2015. - Structural benchmarks and additional 2011 measures: - Tax administration and exemptions: prepare a report on costs and benefits of the current exemption regime and a timetable for rationalization and reduction of exemptions to help achieve tax revenue target of 15 percent of GDP (March 2011). - Strengthening banking supervision: - Send to Congress amendments to the Monetary and Financial Law (March 2011). - Send to Congress a new law on consolidated supervision of financial and industrial groups (March 2011). - Inflation targeting (IT) preparation: - Publish a report on monetary policy under IT (June 2011). - Publish a monetary program for 2012 within the new IT framework (December 2011). - Social policy targets: - Increase permanent coverage of the conditional cash transfer program (Solidaridad) by 60,000 additional families to 590,000 families (December 2011). ### Policies and fiscal projections for 2011 - Revenue and tax pressure: - Project tax pressure conservatively at 13.3 percent of GDP (0.1 percent above the level in 2010) yielding overall revenue (including non-tax revenue and grants) of 14 percent of GDP. - Expenditure and deficits: - Wages and salaries projected to grow slightly above inflation due to negotiated compensation increases with public sector health workers in June. - Expenditure on goods and services expected to decline as a percent of GDP. - Transfers reduced in line with lower electricity sector deficit (expected to fall from 1.2 percent of GDP in 2010 to 0.6 percent of GDP in 2011). - Capital expenditure projected at 3.7 percent of GDP, roughly equal to 2010. - Deficit outcomes: - Deficit of 1.6 percent of GDP at the level of the central administration. - Deficit of 3 percent at the level of the consolidated public sector (including a quasi-fiscal deficit of the central bank of 1.4 percent of GDP). - Primary surplus for the consolidated public sector of about 1 percent of GDP. - If revenue measures yield results beyond projections, a supplementary budget will be submitted to Congress to allocate additional resources in full to public investment, without increasing current spending. ### Assurances and transparency - Government asserts policies set forth in the MEFP attached to LOIs of October 6, 2009 and March 19, 2010 and the modifications are adequate to achieve program objectives; will take further measures if appropriate and refrain from measures contrary to the program. - Government will consult with the Fund on adoption of these measures and provide Fund staff with relevant information to complete program reviews and monitor performance. - Publication commitments: - Already published staff report for the 2009 Article IV Consultation (October, 2009). - Intend to publish subsequent staff reports with program reviews once translated. - Intend to publish this letter on websites of the Central Bank, the Ministry of Finance, and the Ministry of the Economy, Planning and Development. - Authorize the Fund to publish this letter. ### Technical Memorandum of Understanding (TMU): Quantitative performance criteria — Selected fiscal and reserve targets (exact floors) - Targets on the Overall Balance of the Central Government (Floor, in billions of RD$; cumulative balance from December 31, 2008 and December 31, 2010 as indicated): - End-September 2010 (performance criterion): -95.8 - End-October 2010 (program projection): -96.5 - End-November 2010 (program projection): -98.6 - End-December 2010 (performance criterion): -102.3 - End-January 2011 (program projection): -5.0 - End-February 2011 (program projection): -9.9 - End-March 2011 (performance criterion): -14.9 - End-April 2011 (program projection): -17.0 - End-May 2011 (program projection): -19.2 - End-June 2011 (performance criterion): -21.3 - End-July 2011 (program projection): -23.5 - End-August 2011 (program projection): -25.7 - End-September 2011 (performance criterion): -27.9 - End-October 2011 (program projection): -29.7 - End-November 2011 (program projection): -31.6 - End-December 2011 (performance criterion): -33.5 - Floor on Central Bank Consolidated Net International Reserves (NIR) (Floor, in billions of RD$; cumulative balance from December 31, 2008 and December 31, 2010 as indicated): - End-September 2010 (performance criterion): -133.0 - End-October 2010 (program projection): -135.9 - End-November 2010 (program projection): -140.1 - End-December 2010 (performance criterion): -147.0 - End-January 2011 (program projection): -7.2 - End-February 2011 (program projection): -14.3 - End-March 2011 (performance criterion): -21.5 - End-April 2011 (program projection): -26.2 - End-May 2011 (program projection): -30.9 - End-June 2011 (performance criterion): -35.6 - End-July 2011 (program projection): -40.2 - End-August 2011 (program projection): -44.8 - End-September 2011 (performance criterion): -49.5 - End-October 2011 (program projection): -54.2 - End-November 2011 (program projection): -59.0 - End-December 2011 (performance criterion): -63.8 *Document: Letter of Intent and Technical Memorandum of Understanding as provided in the source content.* ### 2. Targets on the Overall Balance of the Consolidated Public Sector ### 2. Targets on the Overall Balance of the Consolidated Public Sector ### Definitions and scope: Consolidated Net International Reserves (NIR) - Consolidated NIR includes assets readily available for foreign exchange market intervention: gold (valued in dollars at end-2008 prices), cash, deposits abroad (excluding funds used as collateral for central bank or other nonfinancial public sector liabilities), holdings of SDRs, and the IMF reserve position. - Reserve liabilities include: debt with the IMF (including that of the Ministry of Finance), short-term (up to one year) foreign-currency-denominated liabilities, commitments to sell foreign exchange from derivatives or other contracts, and other guarantees or contingent liabilities. - The consolidated NIR definition does not modify central bank balance sheet accounting rules. - The consolidated NIR as defined differs from the NIR definition included in the previous 2005 Stand-By Arrangement that excluded reserve requirements on foreign currency deposits, and government and bank deposits in foreign currency as they were considered part of the reserve liabilities. ### Performance criterion: Consolidated NIR floors (outstanding stock) - To meet the performance criterion at each relevant date, the 5-day average of daily consolidated NIR values must be above the floor. The 5-day average will be calculated on the basis of the last five working days of each relevant month. - Consolidated NIR targets will be adjusted upward (downward) by the surplus (shortfall) in program disbursements up to US$300 million. Program disbursements are defined as uncommitted external disbursements, and external sovereign bond issuance, that are usable for the financing of the overall central government budget (this includes the World Bank, IDB, CAF and external sovereign bond placements). For the purpose of adjusting the NIR in 2011, the values of the program disbursements will be measured as cumulative flows from December 2010. - Floors (Outstanding Stock) (In millions of US$): - End-September 2010 (performance criterion)1865 - End-October 2010 (program projection)1915 - End-November 2010 (program projection)1965 - End-December 2010 (performance criterion)2015 - End-January 2011 (program projection)1899 - End-February 2011 (program projection)1782 - End-March 2011 (performance criterion)1665 - End-April 2011 (program projection)1699 - End-May 2011 (program projection)1732 - End-June 2011 (performance criterion)1765 - End-July 2011 (program projection)1915 - End-August 2011 (program projection)2065 - End-September 2011 (performance criterion)1865 - End-October 2011 (program projection)2015 - End-November 2011 (program projection)2165 - End-December 2011 (performance criterion)2315 ### Program disbursements used for NIR adjustment - Cumulative Flows (from December 2008) (In millions of US$): - End-September 20101793 - End-October 20101793 - End-November 20101819 - End-December 20101819 - Cumulative Flows (from December 2010) (In millions of US$): - End-January 20110 - End-February 20110 - End-March 20110 - End-April 20110 - End-May 20110 - End-June 2011500 - End-July 2011500 - End-August 2011500 - End-September 2011535 - End-October 2011535 - End-November 2011535 - End-December 2011698 ### Central Bank net domestic assets (NDA) ceiling - Definition: NDA = monetary base minus Consolidated NIR (as defined above). For program purposes, the monetary base is equivalent to emisión monetaria: currency issue (currency in circulation plus cash in vault) plus peso reserve requirements held by financial institutions at the central bank. - To meet the performance criterion at each relevant date, the 5-day average of daily NDA values must be below the ceiling. The 5-day average will be calculated on the basis of the last five working days of each relevant month. - For accounting purposes, dollar accounts will be converted to pesos at the accounting exchange rate of RD$36.5 per dollar. - Ceiling (Outstanding Stock) (In billions of RD$): - End-September 2010 (performance criterion)65 - End-October 2010 (program projection)70 - End-November 2010 (program projection)75 - End-December 2010 (performance criterion)80 - End-January 2011 (program projection)80 - End-February 2011 (program projection)80 - End-March 2011 (performance criterion)80 - End-April 2011 (program projection)80 - End-May 2011 (program projection)80 - End-June 2011 (performance criterion)80 - End-July 2011 (program projection)80 - End-August 2011 (program projection)80 - End-September 2011 (performance criterion)80 - End-October 2011 (program projection)80 - End-November 2011 (program projection)80 - End-December 2011 (performance criterion)80 - NDA targets adjustments: - 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$300 million. ### Public electricity sector: current balance and arrears management - Composition of the public electricity sector: - (i) Corporación Dominicana de Empresas Eléctricas Estatales (CDEEE) - (ii) Empresa de Generación Hidroeléctrica Dominicana (EGEHID) - (iii) Empresa de Transmisión Eléctrica Dominicana (ETED) - (iv) Unidad de Electrificación Rural y Suburbana (UERS) - (v) Empresas Distribuidoras de Electricidad del Norte (EDENORTE) - (vi) Empresas Distribuidoras de Electricidad del Sur (EDESUR) - (vii) Empresas Distribuidoras de Electricidad del Este (EDESTE) - Measurement: - Overall balance of the public electricity sector is measured from below-the-line as the change in the electricity sector’s net financial position (assets minus liabilities). - Net financial position includes: (a) transfers from the government to the electricity sector; (b) changes in arrears with electricity generators; (c) changes in the net credit of the banking system to the electricity sector companies; and (d) external disbursements to the electricity sector. - Current balance = overall balance + externally financed investment in the public electricity sector + programmed domestically financed investment in the public electricity sector. - Domestically financed investment cap: - For the purpose of the program, domestically financed investment in the public electricity sector for 2011 will be capped at US$ 60 million. - If domestically financed investment exceeds US$ 60 million, the excess will be considered additional current deficit of the electricity sector. - Treatment of arrears clearance by Ministry of Finance: - Payment of arrears does not constitute deficit of the public electricity sector. Clearance of arrears by the Ministry of Finance will be recorded as a net transfer from the Ministry of Finance and a corresponding reduction in arrears without any effect on the below-the-line deficit of the public electricity sector or the central administration. - Expectations on bill coverage: - Priority clients (no-cortables) and municipalities (ayuntamientos) are expected to cover their electricity bills through the budget, and all Bonoluz bills are expected to be paid by clients. ### Ceiling on accumulation of arrears of public electricity distributors with generators - The government will regularize outstanding domestic arrears (as defined in section I.A) with private electricity generators using available financial mechanisms and will remain current on its obligations. - 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. - Floor (Cumulative Balance from December 31, 2009) (In millions of US$): - End-September 2010 (program projection)-445 - End-October 2010 (program projection)-498 - End-November 2010 (program projection)-551 - End-December 2010 (program projection)-604 - Floor (Cumulative Balance from December 31, 2010) (In millions of US$): - End-January 2011 (program projection)-26 - End-February 2011 (program projection)-51 - End-March 2011 (performance criterion)-77 - End-April 2011 (program projection)-100 - End-May 2011 (program projection)-122 - End-June 2011 (performance criterion)-145 - End-July 2011 (program projection)-177 - End-August 2011 (program projection)-209 - End-September 2011 (performance criterion)-242 - End-October 2011 (program projection)-278 - End-November 2011 (program projection)-314 - End-December 2011 (performance criterion)-350 - Note: Value each flow monthly at the exchange rate of the corresponding month. ### Current-balance measurement nuance for arrears payments - If the Ministry of Finance covers payments of arrears which are within 45 days from the contractual due date, these payments will not constitute deficit of the electricity sector. The transaction will be recorded as a net transfer from the Ministry of Finance and as a corresponding reduction in arrears without any effect on the below-the-line deficit of the electricity sector or the central administration. - In this case the arrears performance criterion will be modified and measured with zero days (i.e., no delays). ### Continuous ceiling on gross accumulation of public sector external arrears - The central government and any other entity of the nonfinancial public sector, 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 for monitoring - Daily (provided with a lag of no more than 5 working days): - 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). - 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. These data, and all other data required to assess the performance criteria on the overall balance of the consolidated public sector as specified in Section I.B, will be provided with a lag of no more than five weeks. - 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, including the net domestic assets as specified in Section I.D, Banco de Reservas, and deposit money banks (cable file), will be provided with a lag of no more than two weeks. - 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, defined as: - Collection rate: ratio between electricity invoices effectively paid (collected) and electricity invoices issued by electricity distributors in any given period. - Loss rate: 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: 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 of the immediate past month that CDEEE and other distributors accumulate with the generation companies on energy purchases and transmission fees. - The CDEEE will provide current information on electricity tariffs at the beginning of each month (with a maximum 10-day lag) or at any moment the tariff changes, including 43 prices and fees related to different consumption brackets, of which 13 are fixed fees related to the types of client, 7 are fixed fees related to power and 23 are prices related to energy. - Monthly net credit of the banking system to the companies of the public electricity sector. - Monthly investment in the public electricity sector specifying total domestically financed investment and externally financed investment. - 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 distributors and CDEEE from each generator, including quantity purchased (in KWh) and the unit price of each fuel charged by type of fuel and the quantity used in electricity generation. Also report quantity and unit price of electricity purchased by each distributor and CDEEE in the spot market. - Quarterly (with specified maximum lags): - 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. ### Recent developments and performance against end-September 2010 targets - Recent indicators (excerpt): - Monthly index of economic activity (IMAE) increased 7.4 percent (yoy) in August 2010 following 5.2 percent (yoy) in July 2010. Real GDP increased by 7.5 percent (yoy) in the first half of 2010. - Headline monthly inflation: 0.8 percent in September 2010 (from 0.2 percent in August), taking the 12-month rate to 5.7 percent (from 5 percent in August). - Core monthly inflation: 1.0 percent in September 2010 (from 0.5 percent in August), taking the 12-month rate to 3.9 percent (from 3.5 percent in August). - COMA decision: increase policy rate by 75 basis points to 4.75 percent. - End-September 2010 performance criteria: information available for four of six quantitative targets; one target missed and waiver requested. - The end-September 2010 performance criterion on the zero ceiling on arrears to private electricity generators (program definition) was not observed. Authorities reported payments were delayed due to unexpected delays in enactment of the supplementary budget and in the related transfer to allow payments to electricity generators and difficulties in securing alternative financing solutions. Delay was short (4 business days, arrears cleared by October 6) and authorities are current on obligations. A waiver of non-observance was requested and staff supports it given the temporary nature of the deviation. - The other three end-September 2010 performance criteria for which information is available were observed: - floor on net international reserves of the Central Bank; - ceiling on net domestic assets of the Central Bank; - ceiling of zero on arrears to external creditors. - Table: Dominican Republic: Performance Criteria (Quantitative targets for end-September 2010) - Fiscal Targets (In percent of GDP): - Consolidated public sector deficit3.12.9 - Central administration deficit2.01.8 - Note: Estimates of fiscal targets for end-August 2010; data for end-September not available. - Monetary Targets (In percent of base money): - Net international reserves45.154.9 (status: observed) - Net domestic assets54.945.1 (status: observed) - Debt Targets (In percent of payments due): - External arrears0.00.0 (status: observed) - Arrears to electricity generators0.03.9 (status: not observed; waiver requested) *International Monetary Fund — Dominican Republic: Second and Third Reviews Under the Stand-By Arrangement — Supplementary Information (excerpt).* ### 3. There is no final information to assess two of the six targets for September 2010, ### _cr1171 - 3. There is no final information to assess two of the six targets for September 2010, ### Assessment of September 2010 performance criteria - Two performance criteria for end-September 2010 lacked final information and the authorities requested waivers of applicability: - (i) the overall balance of the central administration; - (ii) the overall balance of the combined public sector. - Preliminary information through end-August 2010 suggests there was room to run small deficits in September. - The cumulative fiscal deficit of the Central Administration and the consolidated public sector through August 2010 were equivalent to about 90 percent of the ceilings for end-September 2010 set under the program. - The authorities believe the end-September 2010 fiscal targets were observed; IMF staff has no clear evidence to suggest otherwise. - The authorities requested waivers of applicability of these performance criteria in the letter of intent, which staff supports. - According to the Technical Memorandum of Understanding (TMU) reporting schedule, final information on observance of these targets should be available by November 5, 2010. ### Structural benchmarks - The authorities prepared a strategy paper to develop domestic capital markets as a structural benchmark for end-September. - Objective: reducing domestic and external borrowing costs and improving the credit rating of the country. - IMF staff is evaluating the strategy and will report to the Board on the formal status of the benchmark at the time of the next review. ### Quantitative performance and program figures (selected exact values from the text) - Fiscal targets and margins (selected entries as reported in the source table): - Overall balance of the central administration (floor) examples: -73.7; -69.3; 4.4; -88.4; -87.5; 0.9; -95.8; -102.3; -14.9; -21.3; -27.9; -33.5. - Overall balance of the consolidated public sector (floor) examples: -97.5; -91.3; 6.2; -119.5; -118.4; 1.1; -133.0; -147.0; -21.5; -35.6; -49.5; -63.8. - Electricity sector balances (selected entries): - Overall current balance of the public electricity sector (floor) examples: -201.4; -279.6; -77.0; -145.2; -241.6; -350.0. - Monetary targets — Net international reserves (floor) (selected entries exactly as shown): - 1,730; 2,025; 296; 1,888; 2,128; 240; 1,643; 1,967; 324; 2,015; 1,665; 1,765; 1,865; 2,315. - Net domestic assets (ceiling) — selected entries: 57.5; 50.9; 73.2; 59.1; 14.1; 80.0; 80.0; 80.0; 80.0; 80.0. - Debt targets — accumulation of public arrears with electricity generators (ceiling) (in millions of U.S. dollars): - Reported missed end-September 2010 value: 91.2 (missed ceiling of 0.0). - Other reported entries: 0.0 (repeated across many rows). - Accumulation of external public debt arrears (continuous target): 0.0 (repeated). ### Waiver request and arrears clearance (official letter details) - Due to delays in approval of the Supplementary Budget for 2010 (authorizing transfers to the state electricity company CDEEE), the performance criterion on accumulation of public sector arrears with private electricity generators for end-September 2010 was missed by US$ 91.2 million. - The budgetary allocation was transferred to CDEEE on September 30, 2010; payments to generators took several days. - These arrears were cleared by October 6, 2010 and the ceiling of zero arrears has been observed since then. - Authorities requested a waiver of non-observance of the performance criterion on accumulation of public sector arrears with private electricity generators for end-September 2010. - Signatories of the October 19, 2010 letter: Héctor Manuel Valdez (Governor of the Central Bank), Vicente Bengoa (Minister of Finance), Temístocles Montás (Minister of Economy). ### Annex I — Relations with the Fund (selected facts and exact figures) - Membership: Joined on December 28, 1945; Article VIII. - Quota: 218.90 (SDR Million) — Percent of Quota: 100.00. - Fund holdings of currency: 729.32 — Percent of Quota: 333.17. - SDR department net cumulative allocation: 208.83 — Percent of Allocation: 100.00; Holdings: 114.85 — Percent of Allocation: 55.00. - Outstanding purchases and loans: Stand-By Arrangements (SBA) 510.42 — Percent of Quota: 233.17. - Latest SBA approved Nov 9, 2009 — Expiration Mar 8, 2012 — Amount Approved 1,094.50 (SDR Million) — Amount Drawn 279.27 (SDR Million). - Projected payments to Fund (SDR million) — Principal and Charges/Interest by year (as reported): - Principal forthcoming: 2010 38.53; 2011 110.76; 2012 72.23; 2013 129.45; 2014 139.64. - Charges/Interest forthcoming: 2010 1.74; 2011 5.92; 2012 4.62; 2013 3.43; 2014 1.68. - Total forthcoming: 40.26; 116.68; 76.85; 132.88; 141.31. - Safeguards assessment completed June 1, 2010: noted implementation of some prior safeguards recommendations; remaining weaknesses in Monetary and Financial Law (MFL) and accounting framework (not IFRS-compliant); lack of methodology to separately calculate realized from unrealized foreign currency gains/losses. Authorities have undertaken to address remaining weaknesses. - Article IV consultation concluded November 9, 2009. - FSAP update completed March 2009; FSAP report for 2001, FSSA issued May 20, 2002. - Resident Representative office closed July 2008 and scheduled to reopen in November 2010; Mr. Mario Dehesa selected as resident representative. - The Dominican Republic has not yet ratified the Fourth Amendment. ### Annex II — Joint Management Action Plan (JMAP) — coordination and priority areas - IMF and World Bank teams coordinated extensively in 2009-2010; meetings included Inter-American Development Bank staff. - Close cooperation focused on electricity sector reform, fiscal and tax administration reforms, poverty alleviation, and external financing. - Joint actions and priorities included: - Macroeconomic management (IMF): gradual fiscal consolidation through 2012; two pillars: improvements in tax administration and rationalization of exemptions; electricity sector reform to reduce budget transfers. - Institutional strengthening (IMF, World Bank, IADB): structural reforms supporting growth and fiscal consolidation. - Tax administration (IMF, World Bank, IADB): priorities identified in early 2010; support for medium-term fiscal analysis and budgeting framework and improved public expenditure quality and efficiency. - Prudential regulations (IMF and World Bank): introduce risk-based prudential regulation in line with Basel core principles. - Inflation targeting (IMF): plan to introduce full inflation targeting framework by early 2012. - Reforming the energy sector (IMF, World Bank, IADB): agreed path to improve sector functioning and reduce budgetary impact; WB and IDB focus on distribution company management; IMF on sector finances and macro implications. - Capital market development (IMF, World Bank): work to develop local government debt market and improve primary and secondary markets, including regulatory, tax, market-making, and clearing reforms. - Social safety net (World Bank, IADB): support for health, education, sanitation; IMF supported expansion of the Solidaridad conditional cash transfer program and widening coverage of the Bonoluz program as structural benchmarks under the SBA. - Coordination mechanisms: IMF and WB teams meet informally in Washington every fortnight, hold joint meetings in the Dominican Republic, and frequently overlap missions to meet government officials. ### Annex III — Relations with the World Bank Group (selected exact figures) - World Bank total loan commitments in the Dominican Republic: US$308.9 million; undisbursed US$223.0 million. - Portfolio: nine loans (seven investment, one Technical Assistance, one Emergency Recovery Loan). - Municipal Development Project: US20 million (approved by Lower Chamber; expected effective in first week of November). - Second programmatic DPL (Performance and Accountability in the Social Sectors series): US$150 million to be negotiated in October and disbursed in the last two months of the year. - Portfolio performance improvements (as reported): - Effectiveness delays: from 13.7 months (February 2009) to 8.9 months (March 2010). - Disbursement rates: from 4.9 percent (February 2009) to 19.3 percent (March 2010). - Comparative figures: DR effectiveness delays 8.9 months; LAC 13.7 months (reported). - Active projects (as of September 30, 2010) — aggregated totals: - Sector commitments total: 308.98; disbursements 85.9; undisbursed 223.0 (all figures in millions of U.S. dollars, as reported in the source table). *Prepared by Western Hemisphere Department; approved October 19, 2010.* ### Annex IV: Relations With the Inter-American Development Bank ### Annex IV: Relations With the Inter-American Development Bank (As of September 30, 2010) ### 2010 IDB Disbursements and Program Support - IDB estimates making disbursements for US$411 million in 2010. - Of the US$411 million, US$200.00 million correspond to the Fiscal Strengthening Program. - There will also be a $110.0 million disbursement from the Program to Support Competitiveness Policy–Phase II. ### Loan Transactions and Country Strategy - For 2010, the Bank prepared five loans: - Education: US$ 50 million - Agricultural innovation: US$ 30 million - Water and sanitation: US$ 35 million - Support competitiveness policy: US$ 120 million - Social protection: US$100 million - On September 27th, the Bank approved the Country Strategy for the period 2010–13. ### IDB Operations — Commitments, Disbursed, Undisbursed Amounts (In millions of U.S. dollars) - Agriculture: Commitments 55.0; Disbursed 55.0; Undisbursed Amounts 0.0 - Science and Technology: Commitments -; Disbursed -; Undisbursed Amounts - - Urban Dev. And Housing: Commitments 10.0; Disbursed 7.3; Undisbursed Amounts 2.7 - Education: Commitments 130.0; Disbursed 71.7; Undisbursed Amounts 58.3 - Labor Market, Training, and Transfers: Commitments -; Disbursed -; Undisbursed Amounts - - Sanitation: Commitments 31.3; Disbursed 8.5; Undisbursed Amounts 22.8 - State Modernization: Commitments 541.5; Disbursed 306.0; Undisbursed Amounts 235.5 - Health: Commitments -; Disbursed -; Undisbursed Amounts - - Transportation: Commitments 50.0; Disbursed 10.5; Undisbursed Amounts 39.5 - Private Sector Development: Commitments 11.0; Disbursed 10.2; Undisbursed Amounts 0.8 - Disaster Prevention: Commitments 5.0; Disbursed 0.6; Undisbursed Amounts 4.4 - Energy: Commitments 40.0; Disbursed 0.1; Undisbursed Amounts 39.9 - Social Investment: Commitments 80.0; Disbursed 74.3; Undisbursed Amounts 5.7 - Total: Commitments 953.8; Disbursed 544.3; Undisbursed Amounts 409.5 ### Historical IDB Financial Flows and Indicators (Selected annual values) - Disbursements by year (2001–2010): 142.4, 184.1, 155.1, 254.2, 135.7, 118.1, 109.5, 137.4, 485.0, 411.3 - Repayments by year (2001–2010): 45.5, 50.7, 118.8, 63.9, 67.0, 73.3, 173.6, 168.9, 134.2, 95.0 - Net Lending by year (2001–2010): 96.9, 133.4, 36.3, 190.3, 68.7, 42.8, -64.1, -31.5, 351.3, 316.3 - Interests and Charges by year (2001–2010): 36.0, 40.9, 48.0, 52.0, 56.0, 60.7, 64.3, 56.1, 53.1, 49.3 - Subscriptions and Contributions by year (2001–2010): 0.7, 0.5, 0.4, 4.0, 3.8, 2.1, 1.9, 0.0, 0.0, 0.0 - Net Transfer by year (2001–2010): 60.2, 92.0, -12.1, 134.3, 8.9, -17.9, -128.4, -87.6, 298.2, 267.0 ### IMF Executive Board — SBA Reviews and Policy Conclusions (Press Release No. 10/399; October 26, 2010) - The IMF Executive Board completed the second and third reviews under a 28-month Stand-By Arrangement (SBA) with the Dominican Republic, approving a disbursement equivalent to SDR 158.5 million (about US$249 million at current rates). - Total disbursements under the arrangement reached an amount equivalent to SDR 437.8 million (about US$687.6 million at current rates). - The SBA was approved on November 9, 2009, for an amount equivalent to SDR 1.1 billion (about US$1.72 billion at current rates), or 500 percent of the Dominican Republic’s IMF quota. - The first review was completed on April 7, 2010, for an amount equivalent to SDR 79.27 million (about US$124.5 million at current rates). - The Executive Board approved: - A waiver of non-observance for the end-September performance criterion for public sector arrears to electricity generators (which were subsequently corrected). - Waivers of applicability for two fiscal targets for which data on performance were not available at the time of the meeting. - Additional performance criteria for 2011 and structural benchmarks for 2010 and 2011. - All quantitative and structural benchmarks for the second and third reviews were met. ### IMF Assessment, Outlook, and Policy Recommendations (Statements by Mr. Murilo Portugal, Deputy Managing Director and Acting Chair) - Economic outlook and recent developments: - "Following near stagnation at the beginning of last year, the Dominican economy is rebounding strongly." - Real GDP is expected to increase more than previously projected in 2010 and 2011, with low inflation. - The positive economic activity was achieved thanks to stimulative monetary and fiscal policies through mid-2010 and less adverse external conditions. - "The financial system has weathered the global crisis well." - Fiscal policy and consolidation: - "Fiscal policy has entered now a new phase in the second half of 2010 and the process of fiscal consolidation has appropriately begun." - To ensure observance of the fiscal targets for 2010, the authorities are exercising strict control on current spending. - The 2011 budget envisages a consolidated fiscal deficit of 3 percent of GDP, which represents an adjustment of 1 percent of GDP. - The adjustment is to be achieved through a reduction in indiscriminate electricity subsidies and a strengthening of tax collections by rationalizing tax exemptions and improving tax administration. - Monetary policy and financial sector: - The central bank increased its policy rate to 4¾ percent after about a year of keeping it at 4 percent. - The stance remains "a still stimulative stance." - The central bank stands ready to undertake further tightening if needed to confront eventual inflationary pressures. - The authorities plan to adopt inflation targeting by 2012, aided by a more flexible exchange rate. - Continuing with the plan for recapitalization of the central bank is considered essential for monetary policy credibility. - The authorities also plan to implement risk-based consolidated supervision to further shield the banking system against financial shocks. - Risks and critical reforms: - "Risks to the outlook remain balanced and could be managed with continued structural reforms and flexible macroeconomic policy." - Reforms in the electricity sector, to lower its burden on public finances, and improvements in tax collections are identified as critical for fiscal sustainability. *Annex IV: Relations With the Inter-American Development Bank (As of September 30, 2010).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1171.pdf_