## EXECUTIVE SUMMARY

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---

### Context and immediate impact
- Event: Tropical Storm Erika on August 27, 2015.
- Population and human impact:
  - Total population: 72,340
  - Confirmed dead: 11
  - Missing: 22
  - Displaced: 713
  - Homeless: 514
- Infrastructure and sectoral impacts:
  - Main airport badly damaged; operations heavily limited.
  - Several roads and bridges unusable; water and sewage network below full operational capacity.
  - Flooding and landslides severely damaged transport infrastructure and substantially diminished productive capacity of agriculture and tourism.
- Total damage and loss estimate: US$483 million, equivalent to 96 percent of GDP.

### Request for Fund support
- Instrument requested: Rapid Credit Facility (RCF).
- Requested disbursement: SDR 6.15 million (US$8.7 million), equivalent to 75 percent of quota; full amount to become available upon Board approval.
- Staff stance: staff supports the request.
- Authorities also seeking grants and additional concessional financing from multilateral and bilateral donors.

### Pre-storm macroeconomic conditions (selected indicators)
- 2014 real GDP growth: 3.9 percent.
- 2015 early indicators: weakening in agriculture and manufacturing; mixed tourism performance.
- Nonperforming loans: 14.9 percent in 2015Q2.
- Private credit: decline of 2.7 percent in April (year/year).
- Deposit growth: 1.2 percent.
- Twelve-month inflation: -0.9 percent in June 2015.
- FY2014/15 fiscal deficit: 4.4 percent of GDP.
- Public debt: about 80 percent of GDP.

### Damage assessment and reconstruction financing (sectoral estimates as presented)
- Agriculture: 479.4 Million U.S. dollars
- Tourism: 316.2 Million U.S. dollars
- Industry and commerce: 101.9 Million U.S. dollars
- Water and sanitation: 203.9 Million U.S. dollars
- Air and sea ports: 153.0 Million U.S. dollars
- Roads and bridges: 28857.1 Million U.S. dollars
- Electricity: 30.5 Million U.S. dollars
- Telecommunications: 102.0 Million U.S. dollars
- Housing: 5410.8 Million U.S. dollars
- Education: 40.8 Million U.S. dollars
- Health: 20.4 Million U.S. dollars
- Total: 48396.0 Million U.S. dollars
- 1/ 2014 nominal GDP, US$524 million.
- Public sector reconstruction costs: estimated at about 65 percent of GDP.
- Identified reconstruction projects' investment: 34365.5 US$ mn.
  - Roads and bridges: 29355.9
  - Airport & Ports: 152.8
  - Water and sanitation: 203.8
  - Housing: 101.8
  - Public buildings: 40.8
  - Tourism sites: 20.3
  - Other projects 3/: 8215.7
- Identified financing: 21440.9
  - Grants 1/: 15229.0
  - Official loans: 6211.9
    - World Bank: 387.3
    - CDB: 203.9
    - ECCB: 40.7
- Financing yet to be identified: 21140.3
- Notes:
  - 1/ Includes grants from bilateral donors and the Caribbean Development Bank.
  - 2/ As a percent of 2014 GDP.
  - 3/ Includes projects in the Public Sector Investment Program that remain in the budget after reprioritization.

### Short-term macroeconomic outlook and balance sheet effects
- Real GDP:
  - Projected decline in 2015: -3.0 percent.
  - Projected rebound in 2016: 3.9 percent (driven by reconstruction and recovery in tourism and other sectors).
- Inflation:
  - Expected December/December in 2015: -0.2 percent.
- Fiscal outlook:
  - FY2015/16 fiscal deficit projected at about 2.4 percent of GDP.
  - Total public debt projected to reach 83 percent of GDP.
  - Public external debt projected to rise to 60 percent of GDP.
- External sector:
  - Current account deficit projected around 15 percent of GDP in 2015.
  - External financing gap in 2015 driven by imported reconstruction materials, lower exports and tourism receipts; remittances and grants partially offset.
- Financial sector risks:
  - NPLs may increase from already elevated levels.
  - Financial institutions offering deferments, interest waivers, or other relief; earnings likely impacted by lower interest income and higher provisioning expenses.
  - Reduction in the minimum deposit rate earlier in the year may partially offset pressures.

### Medium-term recovery assumptions and risks
- Reconstruction profile:
  - Capital spending of some 65 percent of GDP over ten years, assumed to peak during FY2016/17-FY2018/19.
  - Majority of initial spending assumed financed by grants; later years rely more on concessional borrowing.
- Growth and external deficits:
  - Medium-term growth projected to settle at potential of around 2 percent per year.
  - Current account deficit expected to narrow below pre-storm levels as reconstruction winds down and fiscal adjustment takes hold.
- Fiscal consolidation and debt dynamics:
  - Fiscal savings through measures amounting to cumulative 6.2 percent of GDP by FY2019/20.
  - Primary balance projected to shift to a surplus of 2⅓ percent by FY2020/21.
  - Public debt projected to decline to 76 percent of GDP over the medium term.

### Risks to the projection
- Upside factors (not factored into projections):
  - A major hotel project financed under the real estate arm of the ECP.
  - Potential for lower electricity prices from geothermal energy development.
  - Prior Article IV assumption: hotel project would add 0.4 and 1.2 percentage points to real GDP growth in 2015 and 2016, respectively.
- Main downside risks:
  - Weak policy implementation, especially fiscal consolidation.
  - Inability to mobilize financing for reconstruction, especially grants.
  - Under a customized scenario without fiscal consolidation:
    - Primary deficit would remain at around 4 percent of GDP over the medium term.
    - Public debt would reach about 95 percent of GDP in FY 2020/21 and be unsustainable.
  - If grants proportion reduced to 3 percent of GDP:
    - Public debt would increase to around 90 percent of GDP by 2020, then decline thereafter.
  - Other downside risks: technical delays in rebuilding, larger-than-expected NPL increases, uncertainty about sustainability of ECP flows, future storm events, U.S. monetary policy tightening, disruptions to correspondent banking relations.
- Upside external risks:
  - Greater-than-expected benefits from low oil prices.
  - Higher-than-expected growth in major tourist-source markets.

### Risk Assessment Matrix (selected entries)
- Persistently low energy prices (↑): Likelihood: Medium; Impact: Medium; Policy response: Begin fiscal adjustment when reconstruction needs permit.
- Citizenship program demand (↑/↓): Likelihood: Medium; Impact: Medium to High; Policy response: Direct receipts towards debt reduction and high-impact infrastructure; maintain strict governance.
- Poor fiscal policy implementation (↓): Likelihood: High; Impact: High; Policy response: Implement credible multi-year fiscal adjustment.
- Decompression of credit spreads/higher public sector borrowing costs (↓): Likelihood: High; Impact: Low; Policy response: Prioritize grant financing and high share concessional borrowing.
- Persistent U.S. dollar strength (↓): Likelihood: High; Impact: Medium; Policy response: Public sector wage restraint; energy reforms; mitigate bottlenecks.
- Financial sector instability (↓): Likelihood: Medium; Impact: High; Policy response: Implement regional strategy to strengthen indigenous banks in the ECCU.
- Natural disasters (↓): Likelihood: High; Impact: High; Policy response: Build buffers and optimize insurance policies, with World Bank assistance.

### Policy issues and discussions — A. Assuring Fiscal Sustainability
- Strategic objective: Accommodate reconstruction expenditure within a sustainable macroeconomic framework anchored on phased adjustment of the primary fiscal balance.
- Authorities’ commitments and targets:
  - Convergence towards ECCU debt target of 60 percent of GDP by 2030 at the latest.
  - Need for cumulative fiscal measures of 6.2 percent of GDP over the next 5 years (staff’s baseline).
  - Reach a primary surplus of 2⅓ percent of GDP by FY2020/21 (equivalent to underlying primary surplus of 1.8 percent of GDP).
- Agreed progressive fiscal measures:
  - FY2015/16 revenue measures equivalent to 0.5 percent of GDP (delayed by storm; to be effective before end of 2015).
  - Capital expenditures reprioritized: suspended projects equivalent to 5 percent of GDP from FY2015/16 budget.
  - Public sector wage freeze for FY2016/17 accepted; authorities target freeze extension of at least two additional years; plan to keep wage bill growing below the rate of inflation for five years.
  - Increase fuel-related taxes and import charges; consider additional increases if oil prices decline and change to an ad-valorem rate.
  - Consider introducing a sanitation fee and a temporary reconstruction tax.
  - Intensify tax arrears collection; stock of arrears is 1.2 percent of GDP.
  - Reinforce expense monitoring and SOE controls; Ministry of Public Works subject to periodic audits.
- Structural fiscal measures agreed:
  - Reduce tax exemptions estimated at 4.3 percent of GDP.
  - Reform property tax regime: move to recurrent property tax based on valuations; centralize revenue collection.
  - Increase efficiency and cost-recovery in health and education; consolidate schools; monitor teacher hiring.
  - Investigate creation of a savings fund using a portion of ECP revenues for public investment, debt reduction, and reconstruction.
- Fiscal adjustment numeric profile (percent of GDP):
  - Adjustment measures required (cumulative): FY2014/15 0.0; FY2015/16 -0.5; FY2016/17 -1.1; FY2017/18 -2.2; FY2018/19 -3.5; FY2019/20 -4.9; FY2020/21 -6.2.
  - Cushion (of which): FY2016/17 -1.5; FY2017/18 -1.5; FY2018/19 -1.5.
  - Primary balance after adjustment: FY2014/15 -2.9; FY2015/16 -0.1; FY2016/17 -0.2; FY2017/18 2.4; FY2018/19 0.7; FY2019/20 0.9; FY2020/21 2.3.
  - Public sector debt (percent of GDP): FY2014/15 80.6; FY2015/16 82.7; FY2016/17 82.7; FY2017/18 80.5; FY2018/19 79.7; FY2019/20 78.8; FY2020/21 76.3.
- Potential contributors to cumulative adjustment (selected percent of GDP):
  - Expenditure items total by FY2020/21: -4.4
  - Wage bill restraint by FY2020/21: -1.0
  - Non-reconstruction capital expenditure prioritization by FY2020/21: -2.0
  - Social benefits unwinding by FY2020/21: -1.4
  - Revenue items total by FY2020/21: -1.7
  - Streamlining tax exemptions by FY2020/21: -0.8
  - Update excise tax rates (cumulative entries include FY2014/15 -0.1; FY2015/16 -0.2; FY2016/17 -0.2; FY2017/18 -0.2; FY2018/19 -0.2; FY2019/20 -0.2)
  - Departure tax (multiple years): -0.3 per listed year.
  - Highway maintenance fee (multiple years): -0.1 per listed year.
  - Tax arrears collection enforcement: FY2016/17 -0.1; FY2017/18 -0.2; FY2018/19 -0.1.
- Baseline scenario prepared with authorities:
  - Cumulative adjustment of 6¼ percent of GDP spread over five consecutive budget periods starting in the current year.
  - Of this, 1½ percent of GDP corresponds to additional balance buffer to cushion future reconstruction expenditures.

### Policy issues and discussions — B. Boosting Economic Dynamism and Resilience
- Principal guidance: Recovery should not interrupt growth-enhancing structural reforms; public sector to lead infrastructure rebuilding while incorporating private sector development measures.
- Key recommendations:
  - Strengthen tourism connectivity.
  - Explore energy options to lower electricity costs.
  - Prioritize public investment in physical infrastructure and skills attainment programs.
  - Catalyze private sector involvement and boost FDI by developing property markets and reviewing taxation of property transactions in a revenue-neutral fashion.
  - Recent policy changes to the real estate option in the ECP expected to help boost FDI in tourism.
  - Cooperate with the European Union to enhance agriculture productivity and export potential.
- Reconstruction as opportunity to enhance resilience (recommendations from Rapid Damage and Impact Assessment Report):
  - (i) Strengthen identification of risks and hazards through improved data collection and analysis.
  - (ii) Bolster building codes, revise zoning procedures, and incorporate resilience in reconstruction strategies.
  - (iii) Secure disaster risk preparedness: pre-position materials, improve communications, develop early warning systems, urge private sector to strengthen response capacity.
  - (iv) Develop and implement risk-financing strategies so key assets are insured against lower-frequency, high-damage disasters.
- Estimation basis for reconstruction cushion:
  - Assumes shocks inflicting total loss of 5 percent of GDP occur every 4 years, and very severe shocks with a loss of 80 percent of GDP occur every 40 years; assumes government reconstruction expenditures equivalent to about ½ of the total loss; expenditures distributed evenly over 40 year period to obtain annual estimated surplus needed to cover reconstruction expenditures.

### Financial-sector vulnerabilities and immediate priorities
- NPLs: 14.9 percent pre-storm; expected to rise post-storm.
- Credit unions: aggregate assets equal 44 percent of GDP; some institutions reported capitalization below regulatory minimum prior to storm.
- Recommended actions:
  - Push for prompt implementation of regional strategy to strengthen indigenous banks.
  - Give Financial Services Unit (FSU) adequate powers to enforce regulations, including capitalization requirements for credit unions.
  - Streamline foreclosure processes.
  - Advocate removal of the ECCU-wide deposit rate floor in the Monetary Council context.
  - Implement strict and transparent governance standards on the Economic Citizenship Program (ECP).
  - Strengthen AML/CFT framework in line with the 2012 FATF standard to reduce risk to correspondent banking relations.

### Rationale for RCF, access, and repayment ability
- RCF purpose: bridge financing while donor assistance and official loans are mobilized; provide time to develop a detailed medium-term plan.
- Authorities’ commitments:
  - Broad agreement with baseline fiscal adjustment targets consistent with public debt sustainability required to access RCF financing.
  - Begun reallocating expenditures to recovery needs; envisage a supplementary budget after donor meeting.
  - Aim to deliver detailed medium-term policy needs in FY2016/17 budget (to be approved mid-2016).
- Staff recommendation on longer-term engagement:
  - Consider a long-term Fund arrangement to support medium-term fiscal consolidation and structural reform once immediate response permits.
- Past Fund support and current proposed access:
  - Cumulative outstanding emergency lending amounted to SDR4.67 million (57 percent of quota) at end-August, relative to a limit of 150 percent.
  - Staff considers access of 75 percent of quota under the RCF appropriate.
  - Proposed RCF disbursement: SDR 6.15 million (US$8.7 million; 75 percent of quota).
  - With this disbursement, total outstanding PRGT credit under emergency assistance instruments would be 132 percent of quota.
  - If approved, Fund exposure to Dominica would amount to about 3.2 percent of GDP or about 16 percent of net imputed international reserves.
  - Dominica is expected to be able to repay obligations to the Fund, risks mitigated by highly concessional nature of public debt.

### Staff appraisal: economic impact, outlook, and risks
- Economic impact summary:
  - Total damage and loss is estimated at 96 percent of GDP.
  - Real GDP projected to decline by 3 percent in 2015.
  - Reconstruction pressures on fiscal and external accounts; current account could deteriorate to about a 15 percent of GDP deficit.
  - 2015 budget deficit expected to be contained to 2.4 percent of GDP reflecting strong grants.
  - Output expected to recover starting in 2016 as crops are replanted and infrastructure restored; reconstruction will boost near-term growth but imply protracted deterioration of government finances and further accumulation of debt.
- Pre-storm fiscal vulnerabilities increase the challenge; without consolidation public debt could rise to more than 95 percent of GDP by 2020.
- Authorities committed to developing a detailed medium-term plan and generating primary surpluses in the range of 2⅓ percent of GDP in five years.
- Prospective measures to be specified and implemented beginning in FY2016/17 include:
  - Streamline tax expenditures; restrain wage bill; rationalize social benefits; prioritize public investment; normalize air embarkation tax revenues; consider property tax reform; consider reconstruction levy; update excise tax rates.
  - Structural reforms: enhance budget control with PFM reform; adopt medium-term budget framework; institutionalize allocation of ECP revenues to a saving fund; improve SOE performance and monitoring.
- Staff supports RCF disbursement of SDR 6.15 million (US$8.7 million; 75 percent of quota) based on severity of damages, urgent balance of payments need, and authorities’ policies and commitments.

### Key macroeconomic projections — Baseline Scenario (selected figures)
- Real GDP (annual percent change): 2014: 0.6; 2015: 3.9; 2016: -3.0; 2017: 3.9; 2018–2020: 1.9, 1.9, 1.9.
- Nominal GDP (EC$ millions): 2014: 1,415; 2015: 1,359; 2016: 1,416; 2017: 1,465; 2018: 1,519; 2019: 1,579; 2020: 1,643.
- Consumer prices (period average, percent): 2014: 0.0; 2015: 0.8; 2016: -1.0; 2017: 0.3; 2018: 1.5; 2019: 1.9; 2020: 2.0.
- Output gap (percent of potential GDP): 2014: -1.8; 2015: 0.7; 2016: -3.5; 2017: -1.1; 2018: -0.7; 2019: -0.4; 2020: -0.2.
- Central government revenue (EC$ millions): 2014: 388.8; 2015: 458.1; 2016: 514.1; 2017: 563.3; 2018: 529.7; 2019: 526.2; 2020: 530.3.
- Central government expenditure (EC$ millions): 2014: 449.7; 2015: 491.6; 2016: 550.9; 2017: 565.0; 2018: 555.7; 2019: 551.4; 2020: 532.5.
- Overall balance (EC$ millions): 2014: -61.0; 2015: -33.5; 2016: -36.9; 2017: -1.8; 2018: -25.9; 2019: -25.2; 2020: -2.2.
- Overall balance (percent of GDP): 2015: -4.4; 2016: -5.4; 2017: -3.0; 2018: -4.4; 2019: -2.4; 2020: -2.6.
- Primary balance (percent of GDP): 2015: -2.9; 2016: -3.4; 2017: -1.0; 2018: -2.9; 2019: -0.1; 2020: -0.2.
- Central government debt (incl. guaranteed, percent of GDP): 2014: 79.8; 2015: 82.7; 2016: 82.7; 2017: 80.5; 2018: 79.7; 2019: 78.7; 2020: 76.3.
- Gross financing needs (EC$ millions): 2015: 134.8; 2016: 149.1; 2017: 147.9; 2018: 164.9; 2019: 195.1; 2020: 189.5.
- Financing gap (EC$ millions): 2015: 23.5; 2016–2020: 0.0.
- Financing gap (percent of GDP, fiscal entries): 2015: 8.7 percent.
- Current account balance (US$ millions): 2014: -68.4; 2015: -74.9; 2016: -87.5; 2017: -92.0; 2018: -80.4; 2019: -74.5; 2020: -66.6.
- Current account balance (percent of GDP): 2014: -13.1; 2015: -14.9; 2016: -16.7; 2017: -17.0; 2018: -14.3; 2019: -12.7; 2020: -10.9.
- Net imputed international reserves (millions of U.S. dollars, end-year): 2014: 74.5; 2015: 91.8; 2016: 85.4; 2017: 99.9; 2018: 96.4; 2019: 88.6; 2020: 90.0.
- Gross external debt (percent of GDP): 2014: 93.5; 2015: 96.0; 2016: 95.7; 2017: 93.8; 2018: 92.4; 2019: 90.4; 2020: 90.4.

### Debt Sustainability Analysis — key messages (Annex I)
- Dominica assessed at high risk of debt distress; public debt around 80 percent of GDP at end-FY 2014/15.
- Over 70 percent of debt is external; guaranteed debt of SOEs about 4 percent of GDP.
- Baseline scenario (with authorities’ committed consolidation) assessed sustainable; baseline envisages primary surplus of around 4 percent of GDP over the medium-term and debt on a gradually declining path to meet target by FY 2025/26.
- Authorities agreed to build fiscal buffer of about 1.5 percent of GDP every year beginning in FY 2018/19 for disaster resilience.
- Customized scenario (no additional fiscal measures) leads to increasing debt path and breach of solvency thresholds.
- Historical scenario yields similar adverse outcomes as customized scenario.
- Policy-relevant observation: implementation of planned fiscal consolidation is central to returning public debt trajectories to sustainability and could allow for future upgrade of risk rating.

### Annex II — Long-Term Projection Assumptions (selected)
- Real GDP growth rates: 3.9 percent in 2016; 1.9 percent in 2021; remain at 1.9 percent thereafter.
- Inflation long-run assumption: 2 percent.
- Nominal GDP growth assumed to grow 3.9 percent in the long run.
- Current account balances: expected to rise to 14.9 percent of GDP in 2015; wider in 2016 and 2017.
- Capital spending: projected to rise up to 12¼ percent of GDP before falling back to normal levels during the medium-term.
- Baseline fiscal adjustment: fiscal adjustment of 6.2 percentage points of GDP over five years beginning in FY2015/16 to achieve ECCU debt target by 2030.

*Source: EXECUTIVE SUMMARY, _cr15316.*

### EXECUTIVE SUMMARY

### _cr15316 - EXECUTIVE SUMMARY

### Context and immediate impact
- On August 27, 2015, Dominica was hit by Tropical Storm Erika, resulting in loss of life and substantial damage to crops and physical infrastructure.
- Population and human impact:
  - Total population: 72,340
  - Confirmed dead: 11
  - Missing: 22
  - Displaced: 713
  - Homeless: 514
- Infrastructure and sectoral impacts:
  - Main airport badly damaged; operations heavily limited.
  - Several roads and bridges unusable; water and sewage network below full operational capacity.
  - Flooding and landslides severely damaged transport infrastructure and substantially diminished productive capacity of agriculture and tourism.
- Total damage and loss estimate: US$483 million, equivalent to 96 percent of GDP.

### Request for Fund support
- Authorities request emergency financial assistance under the Fund’s Rapid Credit Facility (RCF).
- Requested disbursement: SDR 6.15 million (US$8.7 million), equivalent to 75 percent of quota, with the full amount to become available upon Board approval.
- Staff supports the request.
- Authorities are also seeking grants and additional concessional financing from multilateral and bilateral donors to cover remaining financing needs.

### Pre-storm macroeconomic conditions (selected indicators)
- 2014 real GDP growth: 3.9 percent.
- 2015 early indicators showed weakening in agriculture and manufacturing; mixed tourism performance.
- Nonperforming loans: 14.9 percent in 2015Q2.
- Private credit: decline of 2.7 percent in April (year/year).
- Deposit growth: 1.2 percent.
- Twelve-month inflation: -0.9 percent in June 2015.
- FY2014/15 fiscal deficit: 4.4 percent of GDP.
- Public debt: about 80 percent of GDP.

### Damage assessment and reconstruction financing
- Infrastructure damage specifics:
  - Approximately 17 percent of roads fully damaged; 6 percent of bridges fully damaged.
  - 24 percent of roads partially damaged; 44 percent of bridges partially damaged.
- Agriculture sector: accounts for 10 percent of GDP; affected by crop loss, inaccessibility of farmlands, soil nutrient depletion; destruction of two rum factories, partial damage to a third, and destruction of the bay oil distillery.
- Tourism: out of 95 hotels, more than 30 affected; ten hotels closed, two completely destroyed; room capacity declined by 8 percent; cancellation of the Creole Festival.
- Summary of damage and loss, by sector (as presented):
  - Agriculture: 479.4 Million U.S. dollars
  - Tourism: 316.2 Million U.S. dollars
  - Industry and commerce: 101.9 Million U.S. dollars
  - Water and sanitation: 203.9 Million U.S. dollars
  - Air and sea ports: 153.0 Million U.S. dollars
  - Roads and bridges: 28857.1 Million U.S. dollars
  - Electricity: 30.5 Million U.S. dollars
  - Telecommunications: 102.0 Million U.S. dollars
  - Housing: 5410.8 Million U.S. dollars
  - Education: 40.8 Million U.S. dollars
  - Health: 20.4 Million U.S. dollars
  - Total: 48396.0 Million U.S. dollars
  - 1/ 2014 nominal GDP, US$524 million.
- Public sector reconstruction costs: estimated at about 65 percent of GDP.
- Identified financing and reconstruction investment (as presented):
  - Reconstruction projects' investment: 34365.5 US$ mn.  Percent of GDP 2/
  - Roads and bridges: 29355.9
  - Airport & Ports: 152.8
  - Water and sanitation: 203.8
  - Housing: 101.8
  - Public buildings: 40.8
  - Tourism sites: 20.3
  - Other projects 3/: 8215.7
  - Identified financing: 21440.9
  - Grants 1/: 15229.0
  - Official loans: 6211.9
  - World Bank: 387.3
  - CDB: 203.9
  - ECCB: 40.7
  - Financing yet to be identified: 21140.3
  - 1/ Includes grants from bilateral donors and the Caribbean Development Bank.
  - 2/ As a percent of 2014 GDP.
  - 3/ Includes projects in the Public Sector Investment Program that remain in the budget after reprioritization.

### Short-term macroeconomic outlook and balance sheet effects
- Real GDP:
  - Projected decline in 2015: -3.0 percent.
  - Projected rebound in 2016: 3.9 percent, driven by reconstruction and recovery in tourism and other sectors.
- Inflation:
  - Expected slight deflation of -0.2 percent (December/December) in 2015, reflecting low world fuel prices and benign core inflation.
- Fiscal outlook:
  - FY2015/16 fiscal deficit projected at about 2.4 percent of GDP (about 2 percent of GDP narrower than FY2014/15 but 0.8 percent of GDP wider than budgeted).
  - Total public debt projected to reach 83 percent of GDP; public external debt projected to rise to 60 percent of GDP.
- External sector:
  - Current account deficit projected around 15 percent of GDP in 2015 (worsening by about 2 percent of GDP relative to the previous year).
  - External financing gap in 2015 due to imported reconstruction materials, lower exports and tourism receipts; remittances and grants provide partial offset.
- Financial sector risks:
  - Damages and losses may increase NPLs from already elevated levels as households and businesses lose income.
  - Financial institutions responding with deferments, interest waivers, or other relief; earnings likely impacted by lower interest income and higher provisioning expenses.
  - Reduction in the minimum deposit rate earlier in the year may partially offset pressures on financial institutions.

### Medium-term recovery assumptions and risks
- Reconstruction profile:
  - Capital spending of some 65 percent of GDP over ten years, assumed to peak during FY2016/17-FY2018/19.
  - Majority of initial spending assumed financed by grants; later years rely more on concessional borrowing.
- Growth and external deficits:
  - Medium-term growth projected to settle at potential of around 2 percent per year.
  - Current account deficit expected to narrow below pre-storm levels as reconstruction winds down and fiscal adjustment takes hold.
- Fiscal consolidation and debt dynamics:
  - Fiscal savings through measures amounting to cumulative 6.2 percent of GDP by FY2019/20.
  - Primary balance projected to shift to a surplus of 2⅓ percent by FY2020/21.
  - Public debt projected to decline to 76 percent of GDP over the medium term, placing debt on a sustainable declining path.

*Source: EXECUTIVE SUMMARY, _cr15316.*

### 13.      There are important upside and downside risks to the projection (Box 1). A major hotel

### _cr15316 - 13.      There are important upside and downside risks to the projection (Box 1). A major hotel

### Risks to the projection
- Upside factors noted (not factored into projections):
  - A major hotel project financed under the real estate arm of the ECP.
  - Potential for lower electricity prices from geothermal energy development.
  - In the 2015 Article IV Staff Report, the construction of the hotel project was assumed to add 0.4 and 1.2 percentage points to real GDP growth in 2015 and 2016, respectively.
- Main downside risks:
  - Weak policy implementation, particularly with respect to fiscal consolidation.
  - Inability to mobilize financing for reconstruction, especially grants.
  - Delays or failure to identify sufficient financing for full reconstruction needs could postpone recovery and reduce growth.
  - Under a customized scenario, without fiscal consolidation:
    - The primary deficit would remain at around 4 percent of GDP over the medium term.
    - The debt sustainability analysis (DSA) indicates public debt would reach about 95 percent of GDP in FY 2020/21 and would be unsustainable.
  - If the proportion of grants in total funding were reduced to 3 percent of GDP:
    - Over the medium-term, public debt would increase to around 90 percent of GDP by 2020, and decline thereafter as reconstruction expenditures taper off and fiscal consolidation measures take hold.
- Other downside risks beyond reconstruction:
  - Technical delays in key rebuilding projects owing to limited capacity.
  - Larger-than-expected drag from financial institutions, particularly if NPLs rise markedly from their already high levels.
  - Uncertainty surrounding the sustainability of ECP flows; projections assume ECP income substantially below current levels and declining over time.
  - Potential damages from future storm events (e.g., Tropical Storm Erika) could severely damage growth prospects.
  - U.S. monetary policy tightening could weigh on competitiveness if the U.S. dollar appreciates further (the Eastern Caribbean dollar is pegged to the U.S. dollar).
  - Potential disruptions to correspondent banking relations from global banks’ de-risking activities.
- Upside external risks:
  - Greater-than-expected impacts from low oil prices.
  - Higher-than-expected growth in major tourist-source markets in advanced economies.

### Box 1 — Risk Assessment Matrix (selected entries)
- Persistently low energy prices (↑)
  - Likelihood: Medium
  - Impact: Medium
  - Policy response: Take advantage of favorable conditions to begin fiscal adjustment when reconstruction needs permit.
- Citizenship program demand (↑/↓)
  - Likelihood: Medium
  - Impact: Medium to High
  - Policy response: Reduce fiscal dependence risks by directing receipts towards debt reduction, and high-impact infrastructure investment. Reduce sudden stop risks by maintaining strict governance standards.
- Poor fiscal policy implementation (↓)
  - Likelihood: High
  - Impact: High
  - Policy response: Implement credible multi-year fiscal adjustment strategy in line with the baseline scenario.
- Decompression of credit spreads/higher public sector borrowing costs (↓)
  - Likelihood: High
  - Impact: Low
  - Policy response: In addition to implementing credible fiscal adjustment, prioritize grant financing and seek to lower borrowing costs by maintaining a high the share concessional borrowing in public debt.
- Persistent U.S. dollar strength (↓)
  - Likelihood: High
  - Impact: Medium
  - Policy response: Address cost competitiveness issues by public sector wage restraint; continue reforms to lower energy prices, including through renewable energy; and mitigate other bottlenecks.
- Financial sector instability (↓)
  - Likelihood: Medium
  - Impact: High
  - Policy response: Promptly implement remaining elements of regional strategy to strengthen indigenous banks in the ECCU.
- Natural disasters (↓)
  - Likelihood: High
  - Impact: High
  - Policy response: Build buffers and optimize insurance policies, with the assistance of the World Bank.

### Policy issues and discussions — A. Assuring Fiscal Sustainability
- Strategic objective:
  - Accommodate reconstruction expenditure within a sustainable macroeconomic framework.
  - Plan anchored on a phased adjustment of the primary fiscal balance consistent with a declining public debt trajectory that is resilient to shocks.
  - Adjustment smoothed over the medium term and somewhat back loaded to moderate drag on activity; early announcement and commitment needed to facilitate access to financing.
- Authorities’ commitments and targets:
  - Convergence towards the ECCU debt target of 60 percent of GDP by 2030 at the latest.
  - Primary surplus targeted for the medium term should include a buffer for future disaster-related expenses.
  - Need for cumulative fiscal measures of 6.2 percent of GDP over the next 5 years (staff’s baseline scenario).
  - Reach a primary surplus of 2⅓ percent of GDP by FY2020/21, equivalent to an underlying primary surplus of 1.8 percent of GDP.
- Agreed progressive fiscal measures to begin consolidation:
  - FY2015/16 revenue measures equivalent to 0.5 percent of GDP (implementation delayed by storm, to be effective before end of 2015), including increases in specific excises on liquefied natural gas and kerosene, alcohol, and tobacco; new levies (highway maintenance fee, villa owners’ levy); new airport security levy pending agreement with IATA.
  - Capital expenditures reprioritized: suspended projects equivalent to 5 percent of GDP from FY2015/16 budget; exploring further elimination/re-programming of non-reconstruction capital projects not financed with grants; re-programming grant allocations into critical projects.
  - Public sector wage freeze negotiations: freeze for FY2016/17 accepted by main union; authorities targeting freeze extension of at least two additional years; plan to keep wage bill growing below the rate of inflation for five years.
    - Note: wage bill restraint includes increase in wage bill at the rate of inflation for 5 years.
  - Increase fuel-related taxes and import charges not updated since 2006; consider additional increases if oil prices decline and change to an ad-valorem rate.
  - Consider introduction of a sanitation fee to enable cost recovery for sanitation and solid waste collection services.
  - Intensify tax arrears collection; stock of arrears is 1.2 percent of GDP; contract signed with foreign firm to review major taxpayers.
  - Reinforce expense monitoring and controls in several dependencies of the public sector; SOE contracts require Ministry of Finance approval; Ministry of Public Works subject to periodic audits.
  - Consider introducing a temporary reconstruction tax.
- Structural fiscal measures agreed:
  - Reduce tax exemptions estimated at 4.3 percent of GDP, including overly generous tax holiday periods; scope includes VAT (especially non-food and non-medicine items), corporate taxes, and import duties; request Fund technical assistance to streamline regime and possibly introduce an annual cap reported in the budget.
  - Reform property tax regime: move from transaction tax appropriated by town councils to a recurrent property tax system based on property valuations, centralize revenue collection, include revenue-sharing for town councils; will need Fund technical assistance.
  - Increase efficiency and cost-recovery in health and education to reduce grants and social transfers; consolidate schools; introduce monitoring and control of teacher hiring; consider PAHO-supported proposal for contributory health care system.
  - Investigate creation of a savings fund using a portion of ECP revenues to build resilience; require strong institutional framework and governance; clear mandate and operational rules to allocate to public investment, public debt reduction, and saving for possible reconstruction expenditures; prevent financing current expenditures with ECP revenues.
- Fiscal adjustment numeric profile (selected figures, in percent of GDP):
  - Adjustment measures required (cumulative): FY2014/15 0.0; FY2015/16 -0.5; FY2016/17 -1.1; FY2017/18 -2.2; FY2018/19 -3.5; FY2019/20 -4.9; FY2020/21 -6.2.
  - Cushion (of which): FY2016/17 -1.5; FY2017/18 -1.5; FY2018/19 -1.5.
  - Primary balance after adjustment: FY2014/15 -2.9; FY2015/16 -0.1; FY2016/17 -0.2; FY2017/18 2.4; FY2018/19 0.7; FY2019/20 0.9; FY2020/21 2.3.
  - Public sector debt: FY2014/15 80.6; FY2015/16 82.7; FY2016/17 82.7; FY2017/18 80.5; FY2018/19 79.7; FY2019/20 78.8; FY2020/21 76.3.
- Potential options and contributions to cumulative adjustment (percent of GDP, selected):
  - Expenditure items total: FY2015/16 0.0; FY2016/17 -0.3; FY2017/18 -1.3; FY2018/19 -2.5; FY2019/20 -3.6; FY2020/21 -4.4.
  - Wage bill restraint: FY2015/16 0.0; FY2016/17 -0.3; FY2017/18 -0.5; FY2018/19 -0.7; FY2019/20 -0.9; FY2020/21 -1.0.
  - Non-reconstruction capital expenditure prioritization: FY2016/17 0.0; FY2017/18 -0.8; FY2018/19 -1.4; FY2019/20 -2.0; FY2020/21 -2.0.
  - Social benefits, including unwinding of storm-related transfers: FY2018/19 -0.5; FY2019/20 -0.7; FY2020/21 -1.4.
  - Revenue items total: FY2015/16 -0.5; FY2016/17 -0.8; FY2017/18 -0.9; FY2018/19 -0.9; FY2019/20 -1.4; FY2020/21 -1.7.
  - Streamlining of tax exemptions: FY2017/18 0.0; FY2018/19 -0.2; FY2019/20 -0.6; FY2020/21 -0.8.
  - Update excise tax rates: FY2014/15 -0.1; FY2015/16 -0.2; FY2016/17 -0.2; FY2017/18 -0.2; FY2018/19 -0.2; FY2019/20 -0.2.
  - Departure tax: FY2014/15 -0.3; FY2015/16 -0.3; FY2016/17 -0.3; FY2017/18 -0.3; FY2018/19 -0.3; FY2019/20 -0.3.
  - Highway maintenance fee: FY2014/15 -0.1; FY2015/16 -0.1; FY2016/17 -0.1; FY2017/18 -0.1; FY2018/19 -0.1; FY2019/20 -0.1.
  - Tax arrears collection enforcement: FY2015/16 0.0; FY2016/17 -0.1; FY2017/18 -0.2; FY2018/19 -0.1.
- Baseline scenario prepared with authorities:
  - Cumulative adjustment of 6¼ percent of GDP spread over five consecutive budget periods starting in the current year.
  - Of this, 1½ percent of GDP corresponds to additional balance buffer to cushion future reconstruction expenditures.
  - This scenario is the basis for preparation of the FY2016/17 budget.

### Policy issues and discussions — B. Boosting Economic Dynamism and Resilience
- Principal guidance:
  - Recovery should not interrupt progress on growth-enhancing structural reforms recommended in the 2015 Article IV consultation.
  - Public sector to play major role in rebuilding infrastructure while incorporating private sector development measures.
- Key recommendations to boost long-run prospects:
  - Strengthen tourism connectivity.
  - Explore energy options to lower electricity costs.
  - Prioritize public investment in physical infrastructure and skills attainment programs in rebuilding plans.
  - Catalyze private sector involvement and boost FDI by developing property markets further, including reviewing and reforming taxation of property transactions in a revenue-neutral fashion.
  - Recent policy changes to the real estate option in the ECP would help boost FDI in the tourism sector.
  - Cooperate with the European Union on projects to enhance productivity and export potential of the agriculture sector.
- Reconstruction as opportunity to enhance resilience:
  - Incorporate recommendations from the Rapid Damage and Impact Assessment Report:
    - (i) Strengthen identification of risks and hazards through improved collection and analysis of key data.
    - (ii) Bolster building codes, revise zoning procedures, and incorporate resilience in reconstruction and recovery strategies for housing, agriculture, and transportation.
    - (iii) Secure disaster risk preparedness through pre-positioning of essential materials, improved communications, developing early warning systems, and urging private sector to strengthen response capacity.
    - (iv) Develop and implement adequate risk-financing strategies in both public and private sectors so key assets are insured against lower-frequency, high-damage disasters.
- Estimation basis for reconstruction cushion:
  - Calculated based on frequency and damage estimates of Dominica’s last four natural disasters: assumes shocks inflicting total loss of 5 percent of GDP occur every 4 years, and very severe shocks with a loss of 80 percent of GDP occur every 40 years; assumes government reconstruction expenditures equivalent to about ½ of the total loss; expenditures distributed evenly over 40 year period to obtain annual estimated surplus needed to cover reconstruction expenditures.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15316.pdf*

### 22.      Continuing to adopt measures to strengthen the resilience of the financial sector

### Continuing to adopt measures to strengthen the resilience of the financial sector

### Financial-sector vulnerabilities and immediate priorities
- Nonperforming loans (NPLs) were already high at 14.9 percent and are expected to be boosted by loss of property and income from the storm, requiring close monitoring.
- The commercial banks: authorities should push for prompt implementation of the remaining elements of the regional strategy to strengthen the indigenous banks.
- The credit union sector:
  - Aggregate assets equal 44 percent of GDP.
  - A number of institutions had reported capitalization below the regulatory minimum prior to the storm.
  - The Financial Services Unit (FSU) should be given adequate powers to enforce existing regulations, including those with respect to capitalization, where needed.
- Measures to facilitate balance-sheet cleanup for banks and credit unions:
  - Streamline foreclosure processes.
  - Advocate removal of the ECCU-wide deposit rate floor in the context of the Monetary Council.12
- Governance, AML/CFT, and correspondent banking:
  - Implement strict and transparent governance standards on the Economic Citizenship Program (ECP).
  - Strengthen the AML/CFT framework in line with the 2012 FATF standard to reduce the risk of disruptions in correspondent banking relations.
- Authorities’ actions and assurances:
  - Approved all regional banking reform legislation.
  - Committed to provide the FSU with necessary power to ensure compliance by credit unions with prudential financial management requirements.
  - Reported that due diligence processes for screening ECP applicants had been positively assessed by national security agencies in key advanced countries.
  - Intend to strengthen the AML/CFT framework and recently completed the Phase 1 peer review of the Global Forum’s standards on transparency and exchange of information on tax matters.

12 The deposit rate floor is only mandatory for banks, but impacts credit unions through their competition with banks for deposits.

### Rationale for Rapid Credit Facility (RCF), access, and repayment ability
- An RCF is the most appropriate instrument at this juncture to support immediate needs due to the urgent balance-of-payments need created by the storm.
- The RCF would:
  - Provide bridge financing while donor assistance and official loans are mobilized.
  - Give time to develop a detailed medium-term plan.
- Authorities’ stance and commitments:
  - Broad agreement with and commitment to the parameters proposed in the baseline scenario and the fiscal adjustment targets, consistent with public debt sustainability required to access RCF financing.
  - Begun reallocating expenditures in the budget to immediate recovery needs and envision a supplementary budget soon after the donor meeting.
  - Committed to work with Fund staff in the donor meeting, in preparation of the supplementary budget, and in a full mission to discuss the design of the plan and underlying policies.
  - Aim to provide a full rendering of the detailed medium-term policy needs in the FY2016/17 budget (to be approved in mid-2016).
- Staff recommendation on longer-term Fund engagement:
  - Mission encouraged authorities to consider a long-term Fund arrangement to support medium-term fiscal consolidation and structural reform once immediate response efforts permit.
  - A long-term arrangement would support medium-term fiscal consolidation, unlock additional financing on better terms, and prioritize technical assistance.
  - Authorities were not in position to engage in a Fund arrangement at this stage but wished to continue close engagement and seek Fund technical assistance for structural reforms.
- Past Fund support and current proposed access:
  - The Fund provided natural disaster assistance in 2008, 2009, and 2012. Cumulative outstanding emergency lending amounted to SDR4.67 million (57 percent of quota) at end-August, relative to a limit of 150 percent.
  - Staff considers access of 75 percent of quota under the RCF to be appropriate.
  - Proposed RCF disbursement: SDR 6.15 million (US$8.7 million; 75 percent of quota).
  - With this disbursement, total outstanding PRGT credit under emergency assistance instruments would be 132 percent of quota.
  - If approved, the Fund’s exposure to Dominica would amount to about 3.2 percent of GDP or about 16 percent of net imputed international reserves.
  - Risks mitigated by the highly concessional nature of Dominica’s public debt; Dominica is expected to be able to repay its obligations to the Fund.

### Staff appraisal: economic impact, outlook, and risks
- Economic impact of Tropical Storm Erika:
  - Total damage and loss is estimated at 96 percent of GDP).
  - Real GDP is projected to decline by 3 percent in 2015.
  - Reconstruction expenditures and impacts on agriculture and tourism put pressure on fiscal and external accounts.
  - Despite high capital expenditures, the 2015 budget deficit will be contained to 2.4 percent of GDP reflecting strong grants.
  - The current account balance could deteriorate to a deficit of about 15 percent of GDP.
  - Starting in 2016, output is expected to recover as crops are replanted, transport infrastructure is restored, and normal activities resume.
  - Reconstruction will boost near-term growth but imply a protracted deterioration of government finances and further accumulation of debt, as full public infrastructure restoration could take years.
- Pre-storm fiscal vulnerabilities:
  - Unsustainable public finances prior to the storm increase the challenge.
  - In a customized scenario without fiscal consolidation, staff estimates public debt would increase to more than 95 percent of GDP by 2020, up from 80 percent at end-2014.
- Authorities’ fiscal and structural commitments:
  - Agreed to develop with staff a detailed medium-term plan starting with the FY2016/17 budget.
  - Expressed commitment to generating primary surpluses in the range of 2⅓ percent of GDP in five years to put public debt-to-GDP on a sustainable, declining path.
  - Plan to implement fiscal consolidation measures of about 6 percent of GDP in several areas broadly identified below.
- Prospective fiscal and structural measures (to be specified and implemented beginning in FY2016/17):
  - Streamline tax expenditures.
  - Restrain the wage bill.
  - Rationalize social benefits.
  - Prioritize public investment.
  - Normalize air embarkation tax revenues.
  - Consider a property tax reform.
  - Consider a reconstruction levy.
  - Update excise tax rates.
  - Structural reforms including:
    - Enhance budget control with a PFM reform.
    - Adopt a medium-term budget framework.
    - Institutionalize allocation of ECP revenues to a saving fund for public investment, future reconstruction and debt reduction.
    - Improve financial performance and monitoring of state-owned enterprises.
  - Measures to improve private sector competitiveness and to improve the resilience of the financial sector are important and should be adopted in the near term.
- Staff support for RCF disbursement:
  - Staff supports the authorities’ request for a disbursement under the RCF in the amount of SDR 6.15 million (US$8.7 million; 75 percent of quota).
  - Support is based on the severity of the damages, the urgent balance of payments need, and the strength of the authorities’ existing and prospective policies to address the shock, including commitment to seek grants and concessional resources to finance flood-related capital expenditures and implement offsetting measures if such assistance is not forthcoming.
  - Downside risks remain given high public debt and vulnerability to exogenous shocks, but the authorities’ track record and commitment to fiscal prudence are mitigating factors.
  - Authorities plan to enhance resilience against future adverse weather events by improving emergency response capabilities and enhancing the robustness of physical infrastructure.

*Source: DOMINICA — INTERNATIONAL MONETARY FUND*

### 3.9 percent

### _cr15316 - 3.9 percent

### Impacts of storms on economic performance and near-term outlook
- Real GDP is expected to fall following the disaster, consistent with previous large disaster events (Figure 2 description).
- Current account will likely widen to reflect rebuilding needs.
- Revenues may rise, "as often occurs," including from an uptick in grants.
- Expenditures will jump as repairs to infrastructure fuel public capital expenditures.
- Financing for the reconstruction "may be financed largely by official development assistance."
- External debt may be boosted; inflation is expected to remain moderate.

### Key macroeconomic projections — Baseline Scenario (selected)
- Real GDP (annual percent change): 2014: 0.6; 2015: 3.9; 2016: -3.0; 2017: 3.9; 2018–2020: 1.9, 1.9, 1.9 (Table 1).
- Nominal GDP (EC$ millions): 2014: 1,415; 2015: 1,359; 2016: 1,416; 2017: 1,465; 2018: 1,519; 2019: 1,579; 2020: 1,643 (Table 1, Memorandum).
- Consumer prices (period average, percent): 2014: 0.0; 2015: 0.8; 2016: -1.0; 2017: 0.3; 2018: 1.5; 2019: 1.9; 2020: 2.0 (Table 1).
- Output gap (percent of potential GDP): 2014: -1.8; 2015: 0.7; 2016: -3.5; 2017: -1.1; 2018: -0.7; 2019: -0.4; 2020: -0.2 (Table 1).
- Real effective exchange rate (period average, depreciation -): 2014: -0.6; 2015: -0.7 (Table 1).

### Fiscal position — Baseline Scenario (selected)
- Central government revenue (EC$ millions): 2014: 388.8; 2015: 458.1; 2016: 514.1; 2017: 563.3; 2018: 529.7; 2019: 526.2; 2020: 530.3 (Table 2a).
- Central government expenditure (EC$ millions): 2014: 449.7; 2015: 491.6; 2016: 550.9; 2017: 565.0; 2018: 555.7; 2019: 551.4; 2020: 532.5 (Table 2a).
- Overall balance (EC$ millions): 2014: -61.0; 2015: -33.5; 2016: -36.9; 2017: -1.8; 2018: -25.9; 2019: -25.2; 2020: -2.2 (Net lending/borrowing, Table 2a).
- Overall balance (percent of GDP): 2015: -4.4; 2016: -5.4; 2017: -3.0; 2018: -4.4; 2019: -2.4; 2020: -2.6 (Table 2b).
- Primary balance (percent of GDP): 2015: -2.9; 2016: -3.4; 2017: -1.0; 2018: -2.9; 2019: -0.1; 2020: -0.2 (Table 2b).
- Central government debt (incl. guaranteed, percent of GDP): 2014: 79.8; 2015: 82.7; 2016: 82.7; 2017: 80.5; 2018: 79.7; 2019: 78.7; 2020: 76.3 (Table 1).

### Financing needs and sources — Baseline Scenario
- Gross financing needs (EC$ millions): 2015: 134.8; 2016: 149.1; 2017: 147.9; 2018: 164.9; 2019: 195.1; 2020: 189.5 (Table 3).
- Debt repayments (EC$ millions): 2015: 101.3; 2016: 112.3; 2017: 146.2; 2018: 139.0; 2019: 169.9; 2020: 187.3 (Table 3).
- Gross financing sources (EC$ millions): equal to gross financing needs each year (Table 3).
- Financing gap (EC$ millions): 2015: 23.5; 2016–2020: 0.0 (Table 3).
- Financing gap (percent of GDP, fiscal entries): 2015: 8.7 percent (in one presentation), with a memo showing Rapid Credit Facility of 23.5 (EC$ millions) and 8.7 (percent/GDP presentations, Table 3, Table 4/5 references).
- Memo: central government deposits reported as 69.0 (EC$ millions) (Table 3).

### External sector — Baseline Scenario (selected)
- Current account balance (US$ millions): 2014: -68.4; 2015: -74.9; 2016: -87.5; 2017: -92.0; 2018: -80.4; 2019: -74.5; 2020: -66.6 (Table 4).
- Current account balance (percent of GDP): 2014: -13.1; 2015: -14.9; 2016: -16.7; 2017: -17.0; 2018: -14.3; 2019: -12.7; 2020: -10.9 (Table 4).
- Exports of goods and services (US$ millions): 2014: 178.7; 2015: 153.8; 2016: 170.3; 2017: 177.8; 2018: 185.7; 2019: 194.8; 2020: 204.6 (Table 4).
- Imports of goods and services (US$ millions): 2014: 248.6; 2015: 230.4; 2016: 258.5; 2017: 271.1; 2018: 267.7; 2019: 270.3; 2020: 271.4 (Table 4).
- Net imputed international reserves (millions of U.S. dollars, end-year): 2014: 74.5; 2015: 91.8; 2016: 85.4; 2017: 99.9; 2018: 96.4; 2019: 88.6; 2020: 90.0 (Table 1 and Table 4 memo).
- Gross external debt (percent of GDP): 2014: 93.5; 2015: 96.0; 2016: 95.7; 2017: 93.8; 2018: 92.4; 2019: 90.4; 2020: 90.4 (Table 4 memo).

### External financing and financing gap (Baseline)
- Total financing requirement (US$ millions): 2014: -107.8; 2015: -99.3; 2016: -112.7; 2017: -128.7; 2018: -120.8; 2019: -119.6; 2020: -116.2 (Table 5 I.).
- Total available financing (US$ millions): 2014: 80.6; 2015: 90.6; 2016: 112.7; 2017: 128.7; 2018: 120.8; 2019: 119.6; 2020: 116.2 (Table 5 II.).
- Financing gap (US$ millions): 2014: -27.2; 2015: -8.7; 2016–2020: 0.0 (Table 5 III.).
- Of which: Possible IMF-RCF: 2015: 8.7 (US$ millions) (Table 5 III., note).

### Banking system and financial indicators (selected)
- Money and quasi-money (M2, end of period, EC$ millions): 2011: 1,031.4; 2012: 1,131.8; 2013: 1,156.3; 2014: 1,246.7; 2015: 1,260.7; 2016: 1,312.0 (Table 6).
- Net foreign assets (EC$ millions): 2011: 456.7; 2012: 545.0; 2013: 527.9; 2014: 611.9; 2015: 591.9; 2016: 578.5 (Table 6).
- Private sector credit (EC$ millions): 2011: 763.4; 2012: 796.5; 2013: 790.9; 2014: 773.2; 2015: 742.5; 2016: 772.7 (Table 6).
- Broad money (annual percent change): 2011: 0.3; 2012: 9.7; 2013: 2.2; 2014: 7.8; 2015: 1.1; 2016: 4.1 (Table 1 / Table 6 summary).
- ECCB policy rate (percent per year): 6.5 (2011–2014 reported); U.S. policy rate: 0.1 (2011–2014) (Table 6).

### Indicators of capacity to repay the Fund (selected)
- Debt service under existing drawings (SDR million): 2015: 1.5; 2016: 1.1; 2017: 0.9; 2018: 1.1; 2019: 1.1; 2020: 0.4 (Table 7).
- Debt service under existing and prospective drawings (SDR million): 2015: 1.5; 2016: 1.1; 2017: 0.9; 2018: 1.1; 2019: 1.1; 2020: 0.4; 2021: 1.6; 2022: 1.4; 2023: 1.2; 2024: 1.2; 2025: 1.2; 2026: 0.0 (Table 7).
- Fund credit outstanding (millions of SDRs): 2015: 11.3; 2016: 10.2; 2017: 9.3; 2018: 8.2; 2019: 7.2; 2020: 6.8 (Table 7).
- Net use of Fund credit (SDR million): 2015: 4.7; 2016: -1.1; 2017: -0.9; 2018: -1.1; 2019: -1.1; 2020: -0.4 (Table 7).
- Disbursements recorded as 6.200000000000 (SDR million) in Table 7 disbursement line.

### External borrowing program and use of new debt (2015)
- Volume of new debt (US$ million): 34.7 (Table 8).
- Present value of new debt (US$ million): 20.8 (Table 8).
- Sources: Concessional debt: 34.7 (US$ million); Multilateral debt: 34.7 (US$ million) (Table 8).
- Use of debt financing: Infrastructure: 34.7 (US$ million); Budget financing: 0.00 (US$ million) (Table 8).
- Indicative projections: Year 2 present value 38.0 / 22.8; Year 3 present value 30.9 / 18.6 (Table 8 memos).

### Customized scenario — key differences from baseline
- Real GDP (annual percent change) under Customized Scenario: 2015: 3.9; 2016: -3.0; 2017: 4.0; 2018–2020: 2.0, 2.0, 2.0 (Table 9).
- Central government revenue (percent of GDP) changes: e.g., 2015: 28.0 (baseline) vs. Customized scenario 2015: 28.0; 2016: 32.5 (Customized) vs. 33.0 (Baseline) — Table 9 and Table 10 comparisons.
- Customized Scenario shows larger gross financing needs and debt issuance from 2018 onward (Table 10a): Gross financing needs (EC$ millions) in Customized Scenario include 2018: 228.9; 2019: 292.8; 2020: 320.5 (Table 10a).
- Under the Customized Scenario, central government debt (incl. guaranteed, EC$ millions) rises to 1,472 (2018), 1,596 (2019), 1,715? (2020 reported as 1,596 in Table 10a; Table 10a shows 2019: 1,472, 2020: 1,596 — follow table exact entries).
- Customized Scenario shows a substantially larger deterioration in the overall balance and cumulative financing needs in 2018–2020 (Table 10a).

*Source: IMF staff estimates and projections as presented in the PDF content unit _cr15316 - 3.9 percent.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Overview and current debt position
- Dominica continues to be at high risk of debt distress.
- As of end-FY 2014/15, the stock of central government’s direct and guaranteed debt (henceforth public debt) is estimated to be around 80 percent of GDP.
- Over 70 percent of the debt is external, owed mainly to multilateral creditors; the remaining is held domestically, mostly by commercial banks and other financial institutions.
- The guaranteed debt of state owned enterprises is about 4 percent of GDP.
- The composition of debt has increasingly shifted towards bilateral lenders (mostly concessional), due to the growing importance of China and Venezuela, who together hold more than 11 percent of the total public debt.
- Rehabilitation and reconstruction activities in the wake of tropical storm Erika will entail significant fiscal costs in the short term, which would worsen the debt outlook in the absence of significant consolidation.

### Baseline scenario and sustainability
- The baseline scenario assumes the authorities’ commitment in the LOI and a gradual fiscal consolidation over the next five years.
- Key measures underpinning the baseline:
  - Comprehensive reforms to improve revenue collection.
  - Broadening the tax base.
  - Containing current expenditures.
- Under the baseline scenario debt is assessed to be sustainable.
- The baseline would set debt on a gradually declining path and allow the authorities to meet the public debt target by FY 2025/26.
- The baseline envisages a primary surplus of around 4 percent of GDP over the medium-term; this includes a planned fiscal buffer (see below).

### Fiscal buffers and disaster resilience
- The authorities agreed to build fiscal buffers in light of frequent natural disasters.
- The authorities have decided to build a fiscal cushion of about 1.5 percent of GDP every year beginning in FY 2018/19, to serve as a contingency fund to provide resilience to fiscal sustainability.
- The baseline scenario includes the buffer to cover future disaster related expenses.

### Risks and alternative scenarios
- Significant risks of debt distress remain.
- Sources of risk identified:
  - Failure to implement the necessary fiscal measures.
  - Lower-than expected donor grants, including to finance reconstruction needs.
  - Future recurrence of natural disasters.
- Reconstruction and rehabilitation costs related to tropical storm Erika amount to 96 percent of GDP for the country as a whole, of which about 2/3 would be covered by the public sector.
- Customized scenario (assumes no additional fiscal measures):
  - Illustrates impact of insufficient fiscal consolidation.
  - Under this scenario the debt path takes an increasing trajectory and eventually breaches one solvency threshold.
- Historical scenario (reflecting a weak fiscal track record):
  - Assumes growth, the primary deficit, and nominal interest rates remain at historical averages.
  - Leads to similar results as the customized scenario, with all indicators on an increasing trajectory and two of them breaching their respective thresholds.
- Note: The customized scenario used here is slightly more favorable than the passive scenario considered in the last Article IV Consultation because of data updates and because it assumes larger grants in the medium term, which helps to partly offset the negative impact of storm Erika.

### External debt risk rating and conclusion
- The public and publicly guaranteed (PPG) external debt risk rating remains high.
- The assessment is based on risks reflected in both the customized and historical scenarios.
- Given the challenges associated with the required fiscal adjustment, the customized scenario (which assumes no fiscal consolidation) is assigned significant weight in the assessment.
- If the planned fiscal consolidation takes hold and the debt outlook moves firmly along the sustainable path projected under the baseline scenario, an improvement of the risk rating could be considered in a future assessment.

*Annex I. Debt Sustainability Analysis — Dominica (excerpt).*

### 6.      The risk rating assigned to PPG external debt is high. Under a scenario without fiscal

### 6. The risk rating assigned to PPG external debt is high

### Risk assessment and scenarios
- The risk rating assigned to public and publicly guaranteed (PPG) external debt is high.
- Under a scenario without fiscal consolidation (customized scenario) debt would exceed a solvency threshold in the medium term.
- Given the challenges associated to fiscal consolidation in the wake of storm Erika, this scenario is attached significant weight in the risk assessment.
- The authorities have expressed commitment to a strong fiscal adjustment that would put public debt on a sustainable trajectory.
- As the planned fiscal consolidation takes hold, further increasing confidence in the baseline scenario, an upgrade of the risk rating could be considered in a future assessment.

### Indicators and projections (selected figures from staff estimates and projections)
- External debt (nominal) series (as listed): 76.8, 82.7, 87.4, 94.0, 96.0, 95.8, 94.9, 93.6, 92.4, 78.3, 53.8.
- Of which: public and publicly guaranteed (PPG) (series as listed): 49.6, 52.6, 54.8, 58.2, 59.7, 59.4, 58.7, 57.9, 56.9, 42.9, 15.6.
- Identified net debt-creating flows (series as listed): 10.0, 12.6, 4.4, 4.4, 12.7, 7.9, 10.1, 7.5, 6.0, 3.8, 4.3.
- Non-interest current account deficit (series as listed): 12.3, 17.1, 11.8, 16.1, 4.7, 11.6, 12.7, 14.6, 14.6, 11.9, 10.5.
- PV of external debt (selected series as listed): 49.8, 55.3, 59.5, 61.1, 62.0, 62.3, 63.2, 61.6, 56.5.
- PV of external debt in percent of exports (selected series as listed): 145.1, 170.9, 188.8, 187.4, 188.5, 188.0, 189.0, 183.2, 171.1.
- PV of PPG external debt (series as listed): 17.2, 19.5, 23.2, 24.7, 25.8, 26.6, 27.7, 26.1, 18.3.
- PV of PPG external debt in percent of exports (series as listed): 50.1, 60.3, 73.6, 75.9, 78.5, 80.2, 82.9, 77.6, 55.3.
- PV of PPG external debt in percent of government revenues (series as listed): 48.2, 55.9, 66.4, 71.9, 71.9, 74.3, 77.8, 74.2, 53.2.
- Debt service-to-exports ratio (in percent) (series as listed): 12.0, 13.7, 11.5, 5.8, 8.3, 8.5, 10.1, 11.0, 11.1, 10.1, 6.1.
- PPG debt service-to-exports ratio (in percent) (series as listed): 10.4, 12.1, 9.9, 4.0, 6.5, 6.8, 8.4, 9.3, 9.5, 8.8, 5.2.
- PPG debt service-to-revenue ratio (in percent) (series as listed): 10.5, 11.2, 9.5, 3.7, 5.8, 6.5, 7.7, 8.7, 8.9, 8.5, 5.0.
- Total gross financing need (Billions of U.S. dollars) (series as listed): 0.1, 0.1, 0.1, 0.0, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1.

### Key macroeconomic assumptions (selected series)
- Real GDP growth (in percent) (series as listed): -0.1, -1.3, 0.6, 2.1, 3.1, 3.9, -3.0, 3.9, 1.9, 1.9, 1.9, 1.7, 1.9, 1.8, 1.9.
- GDP deflator in US dollar terms (change in percent) (series as listed): -0.8, 1.8, 3.3, 1.7, 1.7, -4.0, 3.1, -0.1, 1.7, 2.0, 2.0, 0.8, 2.0, 1.3, 1.8.
- Effective interest rate (percent) (series as listed): 2.0, 1.7, 1.7, 2.7, 0.9, 2.0, 2.0, 1.9, 2.2, 2.3, 2.2, 2.1, 1.7, 0.6, 1.8.
- Growth of exports of G&S (US dollar terms, in percent) (series as listed): -3.8, -4.4, 5.5, 3.7, 5.3, -6.1, -2.5, 7.4, 4.4, 4.7, 5.0, 2.1, 3.9, 1.6, 3.6.
- Growth of imports of G&S (US dollar terms, in percent) (series as listed): -2.8, -4.1, -0.3, 4.3, 8.1, -2.7, 2.1, 8.3, 1.8, -0.2, 0.7, 1.7, 3.9, 1.9, 3.4.
- Grant element of new public sector borrowing (in percent) (selected series as listed): 45.4, 33.5, 37.0, 35.5, 37.5, 38.0, 37.8, 39.5, 33.2, 38.8.
- Government revenues (excluding grants, in percent of GDP) (series as listed): 35.3, 36.8, 35.7, 34.9, 35.0, 34.4, 35.9, 35.8, 35.7, 35.1, 34.3, 34.9.
- Grant-equivalent financing (in percent of GDP) (selected series as listed): 4.2, 8.6, 11.2, 11.5, 8.2, 6.8, 4.6, 3.0, 4.2.
- Grant-equivalent financing (in percent of external financing) (selected series as listed): 61.9, 64.3, 76.2, 76.8, 69.7, 62.3, 65.5, 98.7, 73.9.

### Sensitivity analysis and stress tests (high-level)
- Figure A1 and Table A2 present indicators of PPG external debt under alternative scenarios and stress tests for 2014-34, including:
  - Baseline, Historical scenario, Most extreme shock, Threshold, Customized scenario.
  - The most extreme stress test is defined as the test that yields the highest ratio on or before 2024; for figures b–f the most extreme shocks correspond to Customized scenario shocks.
- Table A2 reports multiple alternative scenarios and bound tests (A1, A2, B1–B6) with resulting series for PV of debt-to-GDP ratio, PV of debt-to-exports ratio, and PV of debt-to-revenue ratio (values presented in the tables).
- Table A3 and Table A4 provide public sector debt sustainability indicators and sensitivity analyses for 2011–34 and 2014–34 respectively, including:
  - Public sector debt series (example series: 69.7, 72.6, 74.7, 79.8, 82.7, 82.7, 80.5, 79.7, 78.8, 59.8, 21.2).
  - PV of public sector debt (selected series): 37.2, 41.1, 46.2, 48.1, 47.6, 48.4, 49.6, 43.0, 23.9.
  - Gross financing need (series as listed): 10.1, 11.0, 6.6, 5.4, 4.5, 5.2, 4.9, 5.3, 6.5, 3.6, 0.3.
  - PV of public sector debt-to-revenue ratio (selected series as listed): 104.1, 118.1, 132.0, 139.7, 132.5, 135.3, 139.1, 122.5, 69.7.
  - Debt service-to-revenue and grants ratio (in percent) (selected series as listed): 17.8, 17.4, 14.1, 7.1, 10.5, 11.2, 16.2, 14.9, 18.8, 20.6, 9.8.

### Policy-relevant observation
- The balance between the high-risk assessment under a no-consolidation customized scenario and the authorities’ expressed commitment to a strong fiscal adjustment implies that implementation of the planned fiscal consolidation is central to returning public debt trajectories to sustainability and could allow for a future upgrade of the risk rating if confidence in the baseline scenario increases.

*Sources: Country authorities; and staff estimates and projections.*

### Annex II. Long-Term Projection Assumptions

### Annex II. Long-Term Projection Assumptions

### Real sector
- Real GDP growth rates:
  - 3.9 percent in 2016
  - 1.9 percent in 2021
  - remain at 1.9 percent thereafter
- Long-run growth assumption maintained from the 2015 Article IV Consultation and aligned with the average growth rate observed since the late 1990s.
- Inflation assumed to be 2 percent in the long-run, about equal to the average from the late 1990s until 2008.
- Nominal GDP growth assumed to grow 3.9 percent in the long run (reflecting both real growth and inflation).

### External sector
- Current account balances:
  - Expected to rise to 14.9 percent of GDP in 2015
  - Be wider in 2016 and 2017 (incorporates decline in exports of banana and other crops)
- Imports:
  - Expected to rise with increases in public spending related imports and other imports for rebuilding purposes, assuming reconstruction starts from 2015 and finishes in 2019.
- Service exports:
  - Declines in service exports reflect expected lower tourism in 2015 and recovery from 2016.
- Capital account:
  - Changes reflect higher capital grants in 2015 to 2017.
- Financial account:
  - Changes incorporate higher budgetary disbursements and assumption of lower FDI after the surge in 2014.
- Overall balances:
  - -1.3 percent of GDP in 2015
  - -1.5 percent of GDP in 2016
  - These reflect the assumption of decline in reserves in 2015 and 2016.

### Fiscal sector
- Passive scenario revenue dynamics:
  - Tax revenues expected to be lower in FY 2015/16 and FY2016/17 in line with the GDP compression observed during previous storms.
  - Import VAT taxes will provide a cushion due to a huge increase in construction-related imports.
- Capital spending:
  - Projected to rise up to 12¼ percent of GDP before falling back to normal levels during the medium-term.
  - High reconstruction investments partly offset by prioritization of ongoing capital projects.
  - Spending accounts for future disaster reconstruction-related spending.
- Baseline fiscal adjustment:
  - Incorporates a fiscal adjustment of 6.2 percentage points of GDP over five years beginning in FY2015/16 to achieve the ECCU debt target by 2030.
  - The primary balance improvement is somewhat back-loaded to accommodate reconstruction-related spending in the first two years.

*Source: Annex II. Long-Term Projection Assumptions, _cr15316 - Annex II. Long-Term Projection Assumptions*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15316.pdf_