## Risk Assessment Matrix (Dominica) — _cr16244

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### Macroeconomic and disaster impact overview
- Tropical storm Erika (August 2015) caused large disruption; reconstruction expenditure estimated at 65 percent of GDP.
- Output contracted by 3.9 percent in 2015.
- Output growth projections:
  - 2016: 1.3 percent (conditional on donor grants and reconstruction investment).
  - Medium-term: stabilizes at 1.7 percent per year.
- Current account:
  - 2015 current account deficit estimated at 9.4 percent of GDP.
- Inflation: remained subdued, within a slightly negative year-on-year range, mainly due to falling fuel prices.
- Damage estimate: Tropical storm Erika damage estimated at 96 percent of GDP, with two thirds of that cost borne by government.

### Fiscal position, measures, and consolidation path
- H1-FY2015/16 central government balance: surplus of about 3percent of GDP (first half).
- Fiscal outturn for FY2015/16 (staff estimate): overall fiscal balance estimated at a surplus of 0.9 percent of GDP.
- Estimated yield of measures already approved: 0.7 percent of GDP (above the RCF target of 0.5 percent of GDP).
- H1-FY fiscal aggregates (selected, percent of GDP):
  - Revenue and Grants: 17.4
  - Tax Revenue: 12.1
  - Non Tax Revenue: 4.5 (of which: ECP 4.1)
  - Grants: 0.8
  - Total Expenditure: 14.7
  - Capital Expenditure: 1.8
  - Overall balance: 2.7 (surplus)
  - Primary balance: 3.7
  - Primary balance (Excl. ECP): -0.4
- Fiscal consolidation path and yields (cumulative; in percent of GDP):
  - FY2015/16 (Est.): 0.7
  - FY2016/17: 2.0
  - FY2017/18: 2.7
  - FY2018/19: 4.0
  - FY2019/20: 5.2
  - FY2020/21: 6.7
- Target primary surplus by FY2020/21: 3.5 percent of GDP.
- Underlying primary surplus target by FY2020/21: 1.7 percent of GDP (underlying = excluding ECP revenues, one-off tax arrears, temporary storm-related reconstruction and social assistance spending, and transitory excess grants).
- Budget risks and FY2016/17 draft budget:
  - Overall deficit in the FY2016/17 draft budget projected at -4.3 percent of GDP (EC$ -60.4 million).
  - ECP revenues projected at 11.9 percent of GDP (EC$ 166.0 million) in the draft budget.
  - Grants projected at 7.4 percent of GDP (EC$ 103.2 million) in the draft budget.
  - Total expenditure (FY2016 Draft Budget): EC$ 694.8 million (49.8 percent of GDP).
  - Capital Expenditure (FY2016 Draft Budget): EC$ 309.8 million (22.2 percent of GDP).
  - Staff expectation: lower capital expenditures than projected due to execution and financing constraints.

### Public debt, grants, reconstruction financing, and DSA conclusions
- Donor grants committed (FY 2015-16, selected):
  - Total: US$98.9 million (19.0 percent of GDP).
  - Bilateral: US$98.6 million (18.9 percent of GDP).
  - UK US$35.6 million (6.8 percent of GDP), Venezuela US$32.0 million (6.1 percent of GDP), India US$15.0 million (2.9 percent of GDP).
- Assumed grant financing for reconstruction in baseline: 5-6 percent of GDP per year during reconstruction, tapering to historical levels of about 3 percent of GDP.
- Sensitivity: should grants be 30 percent lower than projected, public debt would stabilize at around the current level under projected fiscal consolidation and public investment plans.
- Public sector debt: SOE debt contributes 12 percent of GDP to public sector debt.
- Key DSA outcomes and assumptions:
  - Dominica continues to be at high risk of debt distress.
  - Active policies scenario: public debt assessed sustainable but remains above ECCU regional debt target.
  - No adjustment (customized) scenario: public debt would reach 130 percent of GDP by 2030.
  - Active scenario includes provision of 1.5 percent of GDP per year for reconstruction buffers; annual average reconstruction cost included in projections: 1.5 percentage point of GDP.
  - Petrocaribe debt incorporated for FY 2015/16: 9 percent of GDP.
  - Public sector debt (end-FY 2014/15): around 84 percent of GDP; rest of public sector debt (SOEs and Petrocaribe): about 21 percent of GDP.
  - Average annual external debt service under no adjustment for FY2015-17: US$39.3 million (7.3 percent of GDP).

### External sector assessment and reserve adequacy
- External position assessed as weaker than level consistent with medium-term fundamentals and desirable policies.
- EBA-Lite and ES approaches (selected):
  - CA Actual (2015): -9.4 percent of GDP.
  - Cyclically-adjusted CA: -7.8 percent of GDP (CA Model).
  - Cyclically-adjusted CA Norm: -3.4 percent of GDP (CA Model).
  - Current account gap (CA Model): -4.4 percent of GDP.
  - REER adjustment implied: 17.3 percent (CA Model) and 13.2 percent (ES Approach); I-REER Model indicates REER gap -1.6 percent (undervalued).
- Imputed reserves (end-2015): US$125 million
  - Coverage: 5.6 months of imports (forward cover).
  - Coverage: 26 percent of broad money.
  - Benchmarks cited: 3 months of imports and 20 percent of broad money.
- Active scenario projection through 2021: reserves marginally decline to 4.9 months of imports but remain adequate under assessment (excludes additional buffers for significant natural disasters).

### Financial sector vulnerabilities and contingent fiscal costs
- Banks:
  - Non-performing loans (NPLs): more than 15 percent of total loans.
  - ECCB AQR (2015) indicates elevated recapitalization needs for the National Bank of Dominica (NBD) of around 3 percent of GDP.
  - Protracted decline in time deposits in favor of demand and savings deposits increases liquidity risk.
- Credit unions:
  - Total assets approaching 50 percent of GDP.
  - Credit unions account for over 50 percent of total lending in the financial system and about one-third of the stock of banks’ deposits.
  - Growing share of domestic financial business; subject to weaker regulatory and supervisory standards.
  - Failure in the credit union sector could prompt a government bailout of depositors even without explicit legal requirements.
- AID Bank:
  - AID Bank loans government-guaranteed equivalent to 8.7 percent of GDP.
  - AID Bank NPLs equivalent to 17 percent of total loans.
- Correspondent banking:
  - De-risking could result in loss of correspondent banking relations (CBRs), affecting international transactions and possibly ECP revenue prospects.
- Financial sector recommendations (selected):
  - Implement a time-bound NPL reduction strategy; prioritize AQR recommendations.
  - Consider recapitalization of NBD as needed; explore private shareholding participation to minimize fiscal impact.
  - Strengthen regulation and supervision of credit unions; amend legislation for automatic regulatory responses and increase FSU powers.
  - Use government representation at the ECCB to consider eliminating the deposit rate floor to strengthen banks’ profitability and facilitate NPL provisioning.
  - Monitor for CBR termination/cost increases; strengthen AML/CFT legislation and implementation; encourage bank consolidation/mergers where appropriate.

### State-owned enterprises (SOEs) and contingent risks
- SOEs generally operationally balanced but lack resources for capital replacement.
- SOE sector debt significant and concentrated in financial public entities.
- Recommended: create framework for oversight and monitoring of SOEs’ fiscal risk; require audited annual financial statements and annual risk statements.

### Scenarios and sensitivity analyses
- Active policies scenario: assumes staggered implementation of fiscal measures in line with RCF commitments and assumed grant financing; results in smoother improvement of underlying fiscal and current account balances.
- Grant shock scenario: grants 30 percent lower than projected leads to public debt stabilizing around current levels under planned consolidation and investment; customized shocks (low grants, low ECP, hurricane) breach debt thresholds and render debt dynamics unsustainable.
- Notable bound-test: One-time 30 percent nominal depreciation in 2016 materially raises PV of debt-to-GDP and other indicators.

### Growth, competitiveness, and structural reform priorities
- Medium-term potential growth: around 1.7 percent per year (1¾ percent noted in several places).
- Key structural priorities:
  - Diversify from traditional agriculture into non-traditional crops and exports.
  - Invest in public infrastructure and increase resilience of public infrastructure (World Bank “build back better”).
  - Reduce electricity costs; pursue geothermal, hydro, wind, solar; geothermal project noted as upside risk.
  - Improve business climate: resolve insolvency, register property, obtain credit, streamline construction permits, expedite contract dispute resolution.
  - Improve access and lower cost of finance: consider creation of a credit registry; review loan enforcement legislation and administrative procedures.
  - Increase labor productivity: workfare programs, on-the-job training, update labor market legislation, enhance statistical capacity (labor force survey).
  - Adopt measures on wage setting (e.g., cap triennial back-pay compensation) and undertake a strategic review of public service.
- Upside project prospects:
  - Geothermal electricity project (revised smaller scale) could boost investment and output through lower electricity costs.
  - Two large hotel projects planned; potential boost to construction and employment if financed.
  - Persistently low oil prices supportive of lower electricity costs.

### Fiscal policy recommendations and operational guidance (selected)
- Ensure timely disbursement and effective absorption of donor grants for reconstruction while preserving fiscal sustainability.
- Finalize and implement fiscal measures committed under RCF; strengthen tax administration and revenue mobilization (including collection of tax arrears).
- Sequence and stagger fiscal consolidation to smooth adjustment while protecting priority reconstruction investment.
- Create a savings fund financed with ECP receipts; until created, use ECP revenues to reduce public debt. Design fund with clear rules, triggers, and disclosure.
- Staff simulations indicate:
  - Budget savings of about 1.5 percent of GDP per year and a saving fund of about 8-10 percent of GDP are appropriate to ensure the financial sustainability of the savings fund with a low probability of depletion.
- Continue strategy to seek debt relief from bilateral creditors, including Paris Club meetings and bilateral negotiations on Petrocaribe debt service.
- Adopt structural fiscal reforms: fiscal responsibility legislation, medium-term fiscal framework, restrict contingency warrants, improve capital budgeting, modernize debt legislation, finalize TSA, strategic public service review, program and performance budgeting.

### Financial sector policy recommendations (selected)
- Promptly implement elements of regional strategy to strengthen indigenous banks in the ECCU; implement ECAMC and Banking Act provisions (higher capital requirements, stronger resolution framework).
- Time-bound regulatory actions and capitalization requirements to credibly reduce NPLs.
- Strengthen AML/CFT and customer due diligence in line with FATF; monitor and mitigate de-risking risks.
- Encourage consolidation among banks and strengthen supervision of credit unions; expedite Offshore Banking Act revisions per CARTAC.

### Data, statistical capacity, and surveillance
- Data provision has shortcomings due to capacity constraints in the statistical agency: weaknesses in coverage, accuracy, frequency, and timeliness.
- Priority data gaps: fiscal accounts, labor, agriculture, balance of payments; quarterly national accounts desirable.
- Monetary and external statistics:
  - BOP not produced according to BPM6; need improvements in merchandise export measurement, remittances statistics, quarterly BOP, and international investment position.
  - Lack of published credit union data is a serious shortcoming.
- Staff recommends improving statistical capacity; next Article IV Consultation to follow standard 12-month cycle.

### Key numeric projections and indicators (selected)
- Real GDP: 2014: 3.9; 2015: -3.9; 2016: 1.3; 2017: 2.8; 2018: 2.7; 2019: 2.5; 2020: 2.3; 2021: 1.7.
- Consumer prices (period average): 2015: -0.8; 2016: -0.2; 2017: 1.6.
- Current account balance (percent of GDP): 2015: -9.4; 2016: -12.6; 2017: -13.7; 2018: -14.1; 2019: -11.4; 2020: -9.6; 2021: -9.3.
- Exports of goods and services (percent of GDP): 2015: 41.9.
- Imports of goods and services (percent of GDP): 2015: 52.4.
- Central government debt (incl. guaranteed) (percent of GDP): 2015: 85.5; 2016: 87.7; 2017: 87.3; 2018: 85.4; 2019: 83.4; 2020: 81.0; 2021: 79.0.
- Public sector debt (gross) (percent of GDP, memorandum): 2015: 93.5; 2016: 91.6; 2017: 89.8; 2018: 88.1; 2019: 85.1; 2020: 80.9; 2021: 78.0.
- Gross financing needs (EC$ millions): 2015: 88.6; 2016: 162.3; 2017: 181.7; 2018: 157.1; 2019: 179.4; 2020: 178.6; 2021: 192.4.
- Net imputed international reserves (US$ millions): end-year 2015: 125.4; projected 2016: 116.6; 2017: 118.5; 2018: 120.4; 2019: 122.4; 2020: 124.6; 2021: 126.5.

### Authorities’ stance and implementation commitments
- Authorities broadly agreed with staff recommendations and confirmed commitment to the fiscal consolidation plan; requested technical assistance for second-generation fiscal reforms and for savings fund design.
- Government committed to creating a saving fund for natural disasters but prioritized immediate reconstruction after Tropical storm Erika.
- Authorities stated they would not pursue an IMF program at this stage.
- Authorities noted the importance of AID Bank and NBD lending to relieve credit constraints; differences with staff on AID Bank remit noted.

*Source: IMF staff report excerpts — "Risk Assessment Matrix" and related sections (Dominica), content unit _cr16244.*

### 1. Risk Assessment Matrix ________________________________________________________________________  10

### 1. Risk Assessment Matrix

### Macroeconomic and disaster impact overview
- Tropical storm Erika (August 2015) caused large disruption; reconstruction expenditure estimated at 65 percent of GDP.
- Output contracted by 3.9 percent in 2015.
- Output growth projections:
  - 2016: 1.3 percent (conditional on donor grants and reconstruction investment).
  - Medium-term: stabilizes at 1.7 percent per year.
- Current account:
  - 2015 current account deficit estimated at 9.4 percent of GDP.
- Inflation: remained subdued, within a slightly negative year-on-year range, mainly due to falling fuel prices.

### Fiscal position and recent performance
- H1-FY2015/16 central government balance: surplus of about 3percent of GDP (first half).
- Fiscal outturn for FY2015/16 (staff estimate): overall fiscal balance estimated at a surplus of 0.9 percent of GDP.
- Estimated yield of measures already approved: 0.7 percent of GDP (above the RCF target of 0.5 percent of GDP).
- H1-FY fiscal aggregates (selected, percent of GDP):
  - Revenue and Grants: 17.4
  - Tax Revenue: 12.1
  - Non Tax Revenue: 4.5 (of which: ECP 4.1)
  - Grants: 0.8
  - Total Expenditure: 14.7
  - Capital Expenditure: 1.8
  - Overall balance: 2.7 (surplus)
  - Primary balance: 3.7
  - Primary balance (Excl. ECP): -0.4
- Fiscal consolidation path:
  - Cumulative estimated fiscal consolidation of 6.7 percent of GDP by FY2020/21 (in line with RCF continuation).
  - Target primary surplus by FY2020/21: 3.5 percent of GDP.
  - Underlying primary surplus target by FY2020/21: 1.7 percent of GDP (underlying = excluding ECP revenues, one-off tax arrears, temporary storm-related reconstruction and social assistance spending, and transitory excess grants).

### Public debt, grants, and reconstruction financing
- Donor grants committed (FY 2015-16, selected):
  - Total: US$98.9 million (19.0 percent of GDP).
  - Bilateral: US$98.6 million (18.9 percent of GDP).
  - Major bilateral commitments listed include UK US$35.6 million (6.8 percent of GDP), Venezuela US$32.0 million (6.1 percent of GDP), India US$15.0 million (2.9 percent of GDP).
- Assumed grant financing for reconstruction in baseline: 5-6 percent of GDP per year during reconstruction, tapering to historical levels of about 3 percent of GDP.
- Sensitivity: should grants be 30 percent lower than projected, public debt would stabilize at around the current level under projected fiscal consolidation and public investment plans.
- Public sector debt: SOE debt contributes 12 percent of GDP to public sector debt.

### External sector assessment
- External position assessed as weaker than level consistent with medium-term fundamentals and desirable policies (Annex II).
- Imputed reserves assessed to be adequate and sufficient to absorb most shocks (assessment excludes additional buffers for significant natural disasters).

### Financial sector risks and contingent fiscal costs
- Banks:
  - Non-performing loans (NPLs): more than 15 percent of total loans.
  - ECCB asset quality review (2015) indicates elevated recapitalization needs for the National Bank of Dominica (NBD) of around 3 percent of GDP.
  - Protracted decline in time deposits in favor of demand and savings deposits increases liquidity risk.
- Credit unions:
  - Total assets approaching 50 percent of GDP.
  - Growing share of domestic financial business and subject to weaker regulatory and supervisory standards.
  - A failure in the credit union sector could prompt a government bailout of depositors even without explicit legal requirements; liquidity problems could spill over to banks and the real economy.
- Correspondent banking:
  - De-risking by banks operating in Dominica could result in the loss of correspondent banking relations (CBRs), affecting the ability to make international transactions.

### State-owned enterprises (SOEs)
- SOEs are generally operationally balanced but resources are insufficient to cover capital replacement.
- SOE sector debt significant and concentrated in financial public entities.

### Key contingent and structural risks
- Natural disasters remain a recurrent and significant risk.
- ECP (Economic Citizenship Program) revenues are volatile and subject to increasing scrutiny and regional competition; recent surge in demand could improve outlook but is uncertain.
- Administrative capacity constraints and political resistance could delay implementation of complex structural fiscal reforms (e.g., rationalization of tax expenditures, restraining wage bill).
- Appreciation of the US dollar could reduce competitiveness and slow tourism exports.
- Petrocaribe inflows could come to a halt; risks from Venezuela’s economic and political situation noted.
- Upside risks include:
  - Geothermal electricity project (revised smaller scale but more realistic) could boost near-term investment and potential output through lower electricity costs and additional export revenues.
  - Persistently low oil prices could lower costs (electricity) and support the outlook.
  - Two large hotel projects are planned and could boost construction and employment if financing is identified.

### Policy measures, commitments, and implementation
- Authorities developed a financially-sustainable macroeconomic plan accommodating reconstruction (as discussed in RCF approved October 2015).
- Measures implemented in line with RCF commitments; further measures for FY2016/17 are being finalized and included in the budget proposal under discussion.
- Fiscal measures under consideration/include:
  - Review of fuel excises.
  - A presumptive tax.
  - A departure tax.
  - A solid waste charge.
  - Continued efforts on tax compliance and revenue administration improvements.
- Estimated cumulative yields to FY2016/17 from measures could reach 2 percent of GDP (above RCF target of 1.1 percent of GDP).
- Authorities have formally requested technical assistance for second-generation reforms.
- Pension system: approval of parametric changes to strengthen sustainability (pension contingent liability noted).

### Medium-term fiscal and external dynamics (comparative current vs RCF projections)
- Selected fiscal aggregates (in percent of GDP) — comparison current vs RCF for 2015/16, 2016/17, 2017/18:
  - Revenue: 36.1 (current 2015/16) vs 33.0 (RCF); subsequent years show convergence and differences in composition (grants, tax revenue).
  - Grants: 4.2 (current 2015/16) vs 6.2 (RCF).
  - Total Expenditure and Capital: higher in RCF scenarios in reconstruction years (e.g., Capital 11.4 vs 8.2 in 2015/16 RCF vs current).
  - Overall balance and primary balance diverge across scenarios (RCF projecting larger initial deficits to accommodate reconstruction).

### Scenarios and sensitivity analyses
- Active policies scenario: assumes staggered implementation of fiscal measures in line with RCF commitments and the assumed level/timing of grant financing; results in smoother improvement of underlying fiscal and current account balances.
- Grant shock scenario: grants 30 percent lower than projected leads to public debt stabilizing around current levels under the planned consolidation and investment—illustrates high sensitivity of debt dynamics to grant flows.

### Recommended and ongoing policy priorities (as reflected in the document)
- Ensure timely disbursement and effective absorption of donor grants to support reconstruction while preserving fiscal sustainability.
- Finalize and implement fiscal measures committed under RCF; continue to strengthen tax administration and revenue mobilization (including collection of tax arrears).
- Sequence and stagger fiscal consolidation to smooth adjustment while protecting priority reconstruction investment.
- Advance second-generation structural fiscal reforms with technical assistance (tax-expenditure rationalization, wage bill restraint, pension system parametric changes).
- Strengthen financial sector resilience:
  - Address high NPLs and bank capitalization needs (including potential recapitalization of NBD).
  - Monitor and strengthen oversight of the growing credit union sector to limit systemic risks.
  - Mitigate liquidity risks stemming from deposit mix shifts and potential loss of correspondent banking relations.
- Prioritize administrative capacity building for reconstruction planning (topographic and hydrologic studies, hiring specialized consultants) to avoid delays.
- Assess and plan for natural disaster contingency buffers beyond standard reserve assessments.

*Source: IMF staff report excerpt — "Risk Assessment Matrix" and related sections (Dominica).*

### Box 1. Risk Assessment Matrix

### Box 1. Risk Assessment Matrix

### Risk assessment matrix: sources, likelihood, impact, and policy responses
- Poor fiscal policy implementation (↓)  
  - Likelihood: High  
  - Impact: High  
  - Policy response: Implement credible multi-year fiscal adjustment strategy in line with the active policies scenario.
- Natural disasters (↓)  
  - Likelihood: High  
  - Impact: High  
  - Policy response: Build buffers and optimize insurance policies, with the assistance of the World Bank.
- Petrocaribe financing (↓)  
  - Likelihood: High  
  - Impact: High  
  - Policy response: Identify alternative sources of financing while maintaining fiscal consolidation momentum.
- Persistently lower energy prices (↑)  
  - Likelihood: High  
  - Impact: Medium  
  - Policy response: Take advantage of favorable conditions to begin fiscal adjustment when reconstruction needs permit.
- Surge in US dollar (↓)  
  - Likelihood: High  
  - Impact: Medium  
  - Policy response: Improve competitiveness with public sector wage restraint, which may signal to the private sector; reduce energy prices; improve access to finance of small firms; improve labor productivity and the functioning of labor markets.
- Financial sector instability (↓)  
  - Likelihood: Medium  
  - Impact: High  
  - Policy response: Promptly implement remaining elements of regional strategy to strengthen indigenous banks in the ECCU. Strengthen regulation and supervision of credit unions.
- Large-scale hotel constructions (↑)  
  - Likelihood: Medium  
  - Impact: High  
  - Policy response: Continue improving the business environment.
- Citizenship program demand (↑/↓)  
  - Likelihood: Medium  
  - Impact: Medium to High  
  - Policy response: Create a government fund to direct receipts towards debt reduction, infrastructure investment, and reconstruction after natural disasters. Reduce sudden stop risks by maintaining strict governance standards and further strengthening its integrity.
- Bank’s de-risking (↓)  
  - Likelihood: Medium  
  - Impact: Medium  
  - Policy response: Strengthen the implementation of customer due diligence requirements in line with the FATF standard.
- Sharp asset price decline and decompression of credit spreads (↓)  
  - Likelihood: Medium  
  - Impact: Low  
  - Policy response: Implement credible fiscal adjustment; prioritize grant financing; and seek to lower borrowing costs by maintaining a high the share concessional borrowing in public debt.

- Note on probabilities: “low” indicates a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more.

### Fiscal policy: substantive findings and recommendations
- Key findings:
  - The fiscal consolidation measures identified since the RCF amount to 6.7 percent of GDP, sufficient to reduce public debt to 67 percent of GDP by 2030. This debt trajectory is higher than in the RCF mainly because it now includes the stock of Petrocaribe obligations which are guaranteed by the government (estimated at 9 percent of GDP).
  - This consolidation includes a provision of 1.5 percent of GDP per year to build fiscal buffers to address future natural disasters, which are also accounted as a fiscal cost in the active scenario.
  - New measures with a total yield of 0.7 percent of GDP have already been passed in FY2015/16. Measures planned for FY2016/17 would yield an additional 1.3 percent of GDP. The remaining measures amounting to 4.7 percent of GDP have been identified.
  - Reducing public debt to the regional target of 60 percent of GDP by 2030 (including Petrocaribe) would require additional fiscal consolidation of 0.8 percent of GDP.
  - Introducing additional measures before 2021 could be counterproductive given weaker recovery prospects; staff recommends gradual adoption within the next five-year period.
  - The outlook assumes gradual adoption of remaining measures including unwinding storm-related reconstruction investment and social assistance, capital projects re-prioritization, wage restraint, and an update of off-shore bank licenses.
  - The medium term fiscal outlook benefits from a new ECP investment option and approval of parametric changes to strengthen pension sustainability.

- Fiscal measures and expected yields (cumulative; in percent of GDP) — totals by year:
  - FY2015/16 (Est.): 0.7  
  - FY2016/17: 2.0  
  - FY2017/18: 2.7  
  - FY2018/19: 4.0  
  - FY2019/20: 5.2  
  - FY2020/21: 6.7

- Selected specific measures (status and yields as presented):
  - Increase in specific excises on alcohol, and tobacco by 10%: yields 0.0, 0.1, 0.1, 0.1, 0.1, 0.1 — Status: Done.
  - Introduction of a highway maintenance levy: yields 0.0, 0.0, 0.0, 0.1, 0.1, 0.1 — Status: Done.
  - Reinstatement of the import duty on meat imports at the 2008 level: yields 0.1, 0.1, 0.1, 0.2, 0.2, 0.3 — Status: Done.
  - Increase in tax base due to better auditing and enforcement to collect tax arrears: yields 0.5, 0.6, 0.7, 0.7, 0.7, 0.7 — Status: Ongoing.
  - Departure tax: yields 0.0, 0.1, 0.1, 0.1, 0.1, 0.1 — Status: Done.
  - Reduction in discretionary concessions by rationalizing tax incentives: yields 0.0, 0.0, 0.0, 0.2, 0.4, 0.5 — Status: Ongoing.
  - Solid Waste charge: yields 0.0, 0.1, 0.1, 0.1, 0.1, 0.1 — Status: Budget 2016/17.
  - Review of health care fees to improve cost-recovery: yields 0.0, 0.1, 0.1, 0.1, 0.1, 0.1 — Status: Budget 2016/18.
  - Introduction of a presumptive tax: yields 0.0, 0.1, 0.1, 0.1, 0.1, 0.1 — Status: Budget 2016/19.
  - Wage restraint FY2016/17 (expenditure yields): 0.0, 0.3, 0.5, 0.7, 0.9, 1.0 — Status: Ongoing.
  - Unwinding of reconstruction projects and investment re-prioritization (expenditure yields): 0.0, 0.5, 0.5, 0.8, 1.5, 2.0 — Status: Ongoing.
  - Unwinding of Erika storm-related social transfers: yields 0.0, 0.0, 0.3, 0.8, 0.8, 1.4 — Status: Begins in 2017/18.
  - Increase the excise tax on sugar confectionary, soft drinks and chocolates (additional measures not in the RCF): yields 0.0, 0.0, 0.0, 0.0, 0.1, 0.1 — Status: Done.

- Policy recommendations and operational guidance:
  - Focus on full implementation of fiscal measures already identified; consider additional measures once recovery is on solid footing.
  - Continue strategy to seek debt relief from bilateral creditors, including at Paris Club meetings and bilateral negotiations on Petrocaribe debt service.
  - Measure fiscal consolidation progress in terms of the central government primary balance excluding ECP revenues and transitory factors.
  - Increase transparency of the ECP: ensure effectiveness of background checks; publish periodic reports of financial flows and balances; elevate risk profile of economic citizens through enhanced due diligence, particularly for politically exposed persons.
  - Create a savings fund financed with ECP revenues; until created, use ECP revenues to reduce public debt. Design the fund with unambiguous budget contribution and disbursement rules, triggers based on verifiable criteria, a clearly-stated objective, and strict information disclosure requirements.
  - Staff simulations indicate:
    - Budget savings of about 1.5 percent of GDP per year and a saving fund of about 8-10 percent of GDP are appropriate to ensure the financial sustainability of the savings fund with a low probability of depletion, while supporting public debt sustainability.
  - Adopt structural fiscal reforms to make consolidation gains durable, including:
    - Adopt fiscal responsibility legislation establishing principles of responsible fiscal management and transparency, with explicit links between concurrent deficits and long-term debt targets; consider a fiscal rule.
    - Develop a medium-term fiscal framework; include a fiscal strategy statement in the annual budget.
    - Restrict the use of contingency warrants; include a contingency reserve in the budget.
    - Create a framework for oversight and monitoring of SOEs’ fiscal risk; require audited annual financial statements and annual risk statements.
    - Improve capital budgeting; undertake a PEFA as soon as feasible.
    - Modernize debt legislation to strengthen issuance and management of debt.
    - Finalize adoption of a treasury single account (TSA) and reconcile, close, or write-off outstanding advances and below-the-line accounts.
    - Undertake a strategic review of the public service covering functions, hiring, size, composition, and remuneration.
    - Adopt program and performance budgeting across government and enact results-based budgeting.

### Financial sector: findings and recommendations
- Key findings:
  - A strategic plan should be devised to achieve a gradual reduction of NPLs and implemented without delay.
  - Recent passing of the new Banking Act and Eastern Caribbean Asset Management Company (ECAMC) are important steps: Banking Act includes higher capital requirements, a more effective bank resolution framework, and stronger protection for small depositors. The ECAMC Act will provide extraordinary powers to resolve NPLs.
  - Financial institutions are using bilateral workouts and provisioning, but bilateral workouts can delay appropriate resolution via rescheduling/restructuring.
  - More decisive regulatory action with time-bound measures and capitalization requirements is important for a credible NPL reduction strategy.
  - The government could use its representation power at the ECCB to eliminate the deposit rate floor to strengthen banks’ profitability and facilitate NPL provisioning; this would also reduce incentives for higher risk-taking.
- De-risking and correspondent banking relations (CBRs):
  - Loss of CBRs affects international transactions and could affect ECP revenue prospects.
  - Recommendations to reduce de-risking risk:
    - Monitor for possible termination or increase in cost of correspondent banking transactions.
    - Continue strengthening AML/CFT legislation and remove constraints for effective implementation.
    - Encourage banks to explore opportunities for mergers due to relatively small business volumes for international banks.

_International Monetary Fund — Box 1. Risk Assessment Matrix (excerpts and recommendations)._

### 21. In light of the high NPLs, the lending

### _cr16244 - 21. In light of the high NPLs, the lending

### Financial sector vulnerabilities and key statistics
- National Bank of Dominica (NBD) has shown an erosion of its capital base and a significant increase in NPLs (chart referenced).
- AID Bank loans are government-guaranteed equivalent to 8.7 percent of GDP.
- AID Bank NPLs are equivalent to 17 percent of total loans.
- Credit unions account for over 50 percent of total lending in the financial system.
- Credit unions account for about one-third of the stock of banks’ deposits.
- Recommended regulatory capital to RWA = 8% (chart note).
- Output decline in 2015 following Tropical storm Erika: 3.9 percent.
- 2016 growth projection: 1.3 percent.
- Medium-term growth projection: 1.7 percent per year.
- 2015 current account deficit (estimate): 9.4 percent of GDP.
- Fiscal outturn for FY 2015/16: surplus of 0.9 percent of GDP.
- Primary and secondary school enrollment rates in 2014: 100 and 97 percent, respectively.
- Dominica’s electricity costs: about twice the regional average.
- More than ½ of Dominicans are currently living abroad (phrase preserved).
- Staff notes risk of loss of CBRs and high NPLs and low capitalization across the financial industry.

### Recommendations for the National Bank of Dominica (NBD) and AID Bank
- Strengthen NBD lending criteria in light of high NPLs.
- Prioritize implementation of Asset Quality Review (AQR) recommendations by the ECCB to limit financial stability risks.
- Consider recapitalization of the NBD as needed to set it on a solid footing; explore private shareholding participation to minimize fiscal impact.
- Narrow AID Bank focus to lending activities affected by missing or incomplete credit markets and align with national development strategies.
- Apply a strategic plan for NPL reduction to the AID Bank.
- Consider consolidation with the NBD of productive and commercial lending portfolios that cannot be justified by market failures or credit constraints; alternatively seek divestment of that share of the lending portfolio.
- Narrow the scope of AID Bank lending programs to ensure targeting of specific development objectives in line with national strategies.

### Regulation and supervision of non-bank financial institutions
- Strengthen regulation and supervision of credit unions given their growing size and share of financial intermediation.
- Amend regulatory legislation to allow for automatic, nondiscretionary, and effective regulatory responses to financial distress in non-bank institutions.
- Increase powers of the Financial Services Unit (FSU) to enforce timely and automatic issuance of penalties for non-compliance.
- Develop a framework within the FSU to monitor and manage macro-financial spillovers from credit unions to banks and the broader economy, explicitly including liquidity and solvency problems, in coordination with the ECCB.
- Expedite approval of revisions to the Offshore Banking Act as recommended by CARTAC, including a rise of capital requirements, a reform application process, and the enactment of regulations to moderate the risk of loss of CBRs.

### Growth and competitiveness — policy priorities and structural reforms
- Support and deepen the government’s 2014-18 Growth and Social Protection Strategy, reaffirming the private sector as the main driver.
- Key areas of focus (as identified by the strategy and staff):
  - Diversification from traditional agriculture into non-traditional crops, promotion of exports, and increase in value added.
  - Investment in public infrastructure.
  - Increase labor productivity with workfare programs that address skill mismatches through on-the-job training.
  - Reduction of energy costs to achieve a reduction of electricity tariffs.
- Additional staff suggestions to deepen reform and incentivize private investment:
  - Enhance the business climate: address resolving insolvency; registering property; obtaining credit; construction permits; paying taxes; expedite contract dispute resolution; reduce procedures, time, and cost of registering property.
  - Devise a strategy for diversification into broader areas with competitive advantage, including expansion of tourism beyond the English-speaking Caribbean and strengthening backward linkages for exports.
  - Improve access and lower the cost of finance for businesses: consider creation of a credit registry; review legislation affecting loan contracts enforcement; review administrative procedures for loan application and approval, including at the NBD.
  - Increase resilience of public infrastructure to natural disasters: bolster construction codes and revise zoning procedures in line with World Bank recommendations and the “build back better” approach from the World Bank damage assessment.
  - Reduce energy costs: pursue geothermal development; explore hydro, wind and solar; consider voluntary energy efficiency standards for lighting; upgrade building codes for energy efficiency.
  - Increase labor productivity and labor market functioning: facilitate remittance transactions and lower their costs; develop plans to improve educational attainment to mitigate skill mismatches; increase labor mobility across sectors; update labor market legislation to remove rigidities and review severance payments; adopt periodic updating of the labor force survey with additional resources and training for the Central Statistics Office.
  - On wage setting: consider adopting measures to remove or cap the triennial back-pay compensation of public workers, for example by way of fiscal responsibility legislation.

### Authorities’ views and staff appraisal — fiscal and financial management
- Authorities broadly agreed with policy recommendations, confirmed commitment to the fiscal consolidation plan, and requested technical assistance for second-generation fiscal reforms; stated they would not pursue an IMF program at this stage.
- Government committed to creating a saving fund for natural disasters but prioritized immediate reconstruction after Tropical storm Erika.
- Government underscored the importance of AID Bank and NBD lending activities to relieve credit constraints and provide low-cost financing to targeted sectors.
- Staff appraisal highlights:
  - Post-storm recovery: tourism largely normalized; agriculture and manufacturing more affected and slower to recover.
  - Protracted decline of banks’ credit to the private sector remains a drag on activity, driven by high NPLs.
  - Inflation subdued, slightly negative year-on-year, mainly due to falling fuel prices.
  - Financing of reconstruction expected to rely primarily on external capital grants and official concessional loans.
  - Fiscal measures passed are appropriate and consistent with commitments in the RCF; improvements in tax administration are providing additional resources but reform momentum must be maintained.
  - Second-generation fiscal measures to specify include rationalization of tax expenditures, a property tax reform, introduction of cost-recovery charges in health services, and measures to increase efficiency of public education services.
  - Any unanticipated revenue windfalls (e.g., ECP revenues or tax arrears) should be allocated to public debt reduction as first priority, not to recurrent spending.
  - Complement fiscal measures with structural fiscal reforms: strengthen budget process and execution, improve public financial management systems, improve transparency of the ECP, and develop medium-term macro-framework and fiscal projections.
  - Given recurring natural disasters, expedite plans to build sufficient fiscal space and consider creation of a saving fund using some ECP revenues.
  - Financial sector progress: new Banking Act and Eastern Caribbean Asset Management Company Act are important; credit union consolidation and AML/CFT legislative progress noted; nevertheless, high NPLs, low capitalization, and risk of losing CBRs require decisive action (improve information, monitor CBR termination/cost increases, strengthen AML/CFT, explore mergers).
  - Review lending policies of the NBD and AID Bank to minimize credit allocation distortions and better support developmental needs.
- A safeguards assessment of the ECCB (completed April 2016) found continued independent oversight and maintained transparency in financial reporting and external audit; internal audit involvement in operational activities remains a safeguards concern and only partially conforms to international standards.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 36. Data provision has shortcomings due to capacity constraints in the statistical agency,

### _cr16244 - 36. Data provision has shortcomings due to capacity constraints in the statistical agency,

### Assessment of data quality and coverage
- Data provision has shortcomings due to capacity constraints in the statistical agency, including weaknesses in coverage, accuracy, frequency, and timeliness of data.
- Although it is broadly adequate for surveillance, these limitations constrain economic analysis and policy formulation.

### Priority data gaps and needs
- Staff’s analysis would benefit from more timely and improved data pertaining to the fiscal accounts, labor, agriculture, and the balance of payments.
- Efforts to prepare national accounts at a quarterly frequency would also be welcome.

### Implications for analysis and policy
- Current shortcomings in coverage, accuracy, frequency, and timeliness limit the depth and responsiveness of economic analysis.
- Constraints on data quality impede robust policy formulation despite surveillance adequacy.

*Source: _cr16244 - 36. Data provision has shortcomings due to capacity constraints in the statistical agency,*

### 37. Staff recommends that the next Article IV Consultation for Dominica take place on the

### _cr16244 - 37. Staff recommends that the next Article IV Consultation for Dominica take place on the

### Economic performance and output
- 2015 Real GDP Projection: -3.9 percent.
- Contributions to Percent Change in 2015 Real GDP show large negative contributions from:
  - Agriculture, livestock, forestry and fishing: (chart indicates negative contribution).
  - Manufacturing: (chart indicates negative contribution).
  - Construction and related sectors also contributed negatively.
- Manufacturing output indicators (in millions of EC$) show declines in:
  - Beverage Production, Soap Production, Other manufacturing production (2010–2015 trend shows drops in 2014–2015).
- Tourism:
  - “Tourism is holding... despite the cancelation of the Creole Festival in 2015.”
  - Total Visitor Arrivals: Dominica vs. ECCU (Seasonally Adjusted, 12 MMA, Index, 2001M01 = 100) — Dominica lags the rest of ECCU through 2015.
- Credit and inflation:
  - Credit to the private sector and Deposits (indexes, Jan 2014 = 100) show private credit drag.
  - CPI Inflation, by Major Component (percent change, yr/yr): Total CPI, Food, Core, Fuel (rhs) — inflation remains subdued, largely due to lower oil prices.

### External sector developments
- Competitiveness worsened on the back of US$ appreciation.
- External balance and trade:
  - Current account balance (percent of GDP): 2015: -9.4; projected 2016: -12.6; 2017: -13.7; 2018: -14.1; 2019: -11.4; 2020: -9.6; 2021: -9.3.
  - Exports of goods and services (percent of GDP): 2015: 41.9; 2016: 41.0; 2017: 40.1; 2018: 39.8; 2019: 39.7; 2020: 39.5; 2021: 39.5.
  - Imports of goods and services (percent of GDP): 2015: 52.4; 2016: 53.6; 2017: 53.7; 2018: 53.8; 2019: 50.8; 2020: 48.9; 2021: 48.5.
  - Trade balance (percent of GDP) (Memorandum): 2015: -32.6; 2016: -35.8; 2017: -35.8; 2018: -35.9; 2019: -33.2; 2020: -31.5; 2021: -31.1.
- Components of exports and imports (percent of GDP):
  - Tourism (percent of GDP): 2015: 25.1; 2016: 25.1; 2017: 25.0; 2018: 24.8; 2019: 24.6; 2020: 24.4; 2021: 24.4.
  - Goods exports (percent of GDP) declined sharply after the storm (2015 goods exports: 32.3 percent of GDP in levels table; goods down in composition).
  - Imports: Fuel (percent of GDP) 2015: 4.1 (levels) / 5.9 (percent of GDP table shows fuel 5.9 in 2015 for percent series), Food and Other goods increased as well.
- External financing and debt:
  - Remittances, FDI, and Grants financed part of the trade deficit; capital grants rose in projections.
  - External debt (gross) (percent of GDP): 2015: 93.5 (levels table); current-account-based gross external debt series: 2015: 93.5 (millions US$ table), projected 2016: 91.6; 2017: 89.8; 2018: 88.1; 2019: 85.1; 2020: 80.9; 2021: 78.0.
  - Private external debt increased underpinned by reconstruction financing and new private investments.

### Fiscal developments and sustainability
- A process of fiscal consolidation is underway, but reconstruction expenditures rose slowly as grants remained below expectations.
- Central government balances (percent of GDP, fiscal year basis):
  - Revenue (2015): 36.1 percent of GDP; projected 2016: 35.8; 2017: 34.6; 2018: 33.8; 2019: 33.2; 2020: 32.6; 2021: 32.5.
  - Expenditure (2015): 35.1 percent of GDP; projected 2016: 38.2; 2017: 35.7; 2018: 33.6; 2019: 32.7; 2020: 31.4; 2021: 31.3.
  - Primary balance (percent of GDP): 2015: 3.3; projected 2016: -0.1; 2017: 1.3; 2018: 2.6; 2019: 2.9; 2020: 3.5; 2021: 3.5.
  - Overall balance (Incl. ND cost buffers) (percent of GDP): 2015: 0.9; projected 2016: -3.9; 2017: -2.6; 2018: -1.3; 2019: -1.0; 2020: -0.3; 2021: -0.3.
- Grants and ECP:
  - Grants (percent of GDP, fiscal year): 2015: 4.2; 2016: 6.1; 2017: 5.7; 2018: 5.2; 2019: 4.5; 2020: 3.9; 2021: 3.9.
  - Economic Citizenship Program (ECP) revenues provide notable relief: ECP (RHS) figures shown; ECP included as Other nontax revenue and specified as 50.0 (EC$ millions) recurring in projections (Table 5a: “Of which : ECP 50.0” for 2016–2021).
- Public debt and composition:
  - Central government debt (incl. guaranteed) (percent of GDP): 2015: 85.5; projected 2016: 87.7; 2017: 87.3; 2018: 85.4; 2019: 83.4; 2020: 81.0; 2021: 79.0.
  - External debt share of public debt (percent): 2015: 56.6 percent of total central government debt (levels table).
  - Composition of Public Sector Debt, 2014: CDB 25%; Other IFI 13%; Bilateral 25%; Banks and others 8%; T-Bills 5%; T-Bonds 9%; Others 15%.
- Fiscal risks and reconstruction financing:
  - Reconstruction financing will largely depend on external debt flows, putting pressure on debt sustainability in the near term, including in the broader public sector.
  - Memo: cumulative fiscal adjustment measures (percent of GDP): 2015: 0.7; projected increases to 6.7 by 2021 (Table 2 cumulative fiscal adjustment measures show progression: 0.0 (2012–2014), 0.7 (2015), 1.4 (2016), 2.3 (2017), 3.5 (2018), 4.9 (2019), 6.7 (2020–2021)).

### Monetary and financial sector developments
- Broad money and deposits:
  - Broad money (M2) growth (annual percent change): 2015: 4.0; projected 2016: 1.1; 2017: 4.7; 2018: 4.5; 2019: 4.6; 2020: 4.7; 2021: 4.0.
  - Money and quasi-money (M2) end-period (EC$ millions): 2015: 1,296.6; projected 2016: 1,311.1; 2017: 1,372.9; 2018: 1,434.9; 2019: 1,500.3; 2020: 1,570.3; 2021: 1,632.6.
- Private credit and bank behavior:
  - Real credit to the private sector (annual percent change): 2015: 0.4; projected 2016: -3.5; 2017: -2.6; 2018: -1.9; 2019: -1.2; 2020: -0.4; 2021: -0.5.
  - Banks are allocating more assets abroad, increasing liquid assets holdings, and reducing credit to the private sector.
  - Cash reserves/total deposits and contributions to real private credit growth indicate rising liquidity buffers.
- Interest rates and liquidity risk:
  - Nominal interest rates (selected): ECCB policy rate: 6.5 (historical 2010–2014 values given as 6.5, 6.5, 6.5, 6.5); U.S. policy rate historical values 0.1, 0.1, 0.1, 0.4 for 2012–2015.
  - Deposit Rate, Interbank market rate, ECCB's discount rate, Weighted Average Lending Rate series shown (charts); ECCB deposit rate floor incentivizes higher risk taking and might work against the objective of reducing NPLs.
  - Financial Soundness Indicators (percent): Provisioning ratio, NPL ratio net of provisioning, Capital adequacy ratio, Return on assets (RHS) show growing liquidity risk and NPL dynamics.
- Banking system summary (end-period EC$ millions):
  - Net foreign assets (2015): 755.5; projected 2016: 728.2; 2017: 743.7; 2018: 759.8; 2019: 765.2; 2020: 771.1; 2021: 776.2.
  - Money (end-period) 2015: 258.9; 2016: 261.8; 2017: 274.1; 2018: 286.5; 2019: 297.2; 2020: 313.4; 2021: 323.5.
  - Private sector credit (real terms) (EC$ millions): 2015: 758.2; projected 2016: 731.6; 2017: 712.9; 2018: 699.7; 2019: 691.1; 2020: 688.6; 2021: 685.1.

### Key projections and macro balances (selected)
- Output and prices (annual percent change):
  - Real GDP: 2014: 3.9; 2015: -3.9; projected 2016: 1.3; 2017: 2.8; 2018: 2.7; 2019: 2.5; 2020: 2.3; 2021: 1.7.
  - Nominal GDP (annual percent change): 2014: 3.5; 2015: -4.7; projected 2016: 1.1; 2017: 4.4; 2018: 4.5; 2019: 4.6; 2020: 4.5; 2021: 3.9.
  - Consumer prices (period average): 2015: -0.8; projected 2016: -0.2; 2017: 1.6; 2018: 1.8; 2019: 2.1; 2020: 2.2; 2021: 2.2.
- Balance of payments (millions of U.S. dollars):
  - Current account balance (levels): 2015: -46.9; projected 2016: -63.7; 2017: -72.0; 2018: -77.9; 2019: -65.5; 2020: -58.1; 2021: -58.2.
  - Capital and financial account balance (levels): 2015: 50.2; projected 2016: 59.5; 2017: 73.9; 2018: 79.8; 2019: 67.8; 2020: 60.1; 2021: 60.2.
  - Net imputed international reserves (millions of U.S. dollars): end-year 2015: 125.4; projected 2016: 116.6; 2017: 118.5; 2018: 120.4; 2019: 122.4; 2020: 124.6; 2021: 126.5.
- Public sector debt (gross) (percent of GDP, memorandum):
  - 2015: 93.5; projected 2016: 91.6; 2017: 89.8; 2018: 88.1; 2019: 85.1; 2020: 80.9; 2021: 78.0.

### Fiscal financing needs and debt service (central government)
- Gross financing needs (EC$ millions): 2015: 88.6; 2016: 162.3; 2017: 181.7; 2018: 157.1; 2019: 179.4; 2020: 178.6; 2021: 192.4.
- Debt repayments (EC$ millions): 2015: 101.3; 2016: 108.2; 2017: 143.2; 2018: 137.2; 2019: 163.9; 2020: 173.8; 2021: 187.0.
- Gross financing sources (EC$ millions) equal debt issuance totals for projection years: 2016: 162.3; 2017: 181.7; 2018: 157.1; 2019: 179.4; 2020: 178.6; 2021: 192.4.
- Financing gap (EC$ millions): 2015: 23.5; projected 2016–2021: 0.0 (Rapid Credit Facility financed 2015 gap: 23.5).

### Policy implications and staff recommendations (implied from content)
- Maintain the standard 12-month cycle for the next Article IV Consultation (staff recommendation noted at the top of the content unit).
- Fiscal policy:
  - Continue fiscal consolidation while securing timely grant and concessional financing to support reconstruction and limit pressure on public debt.
  - Reliance on ECP revenues in projections underscores the importance of transparent and sustainable design of nonrecurring revenue sources.
- Debt and financing:
  - Prioritize concessional external financing and grant support to mitigate near-term increases in public and public-sector debt.
  - Manage central government gross financing needs and rollover risks, noting sizeable external and short-term domestic components (short-term domestic = 20.0 in projections).
- Monetary and financial sector:
  - Monitor bank liquidity risk and the effects of the ECCB deposit rate floor on bank risk-taking and NPL dynamics.
  - Strengthen measures to support private credit recovery while maintaining financial stability.

*Source: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections as presented in the provided content.*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Debt outlook and scenarios
- Dominica continues to be at high risk of debt distress.
- Under the active policies scenario (assumes full implementation of the authorities’ fiscal consolidation plan), public debt is assessed to be sustainable but would remain above the ECCU regional debt target.
- Under the no adjustment (customized) scenario (assumes no additional fiscal consolidation), public debt would reach 130 percent of GDP by 2030.
- The active policies scenario includes a provision of 1.5 percent of GDP per year to lower debt and to build buffers for future natural disasters.

### Key assumptions and revisions relative to the RCF DSA
- Growth projections for 2015 have been revised downwards to reflect a more protracted negative impact of the storm on growth.
- Debt projections now include expected fiscal costs of future natural disasters: an annual average reconstruction cost of 1.5 percentage point of GDP is included as an expenditure.
  - This contrasts with the RCF, where an additional primary surplus of 1.5 percentage point of GDP was considered to build a cushion, but the cost of natural disasters was not included in deficit and debt projections.
- Public debt for FY 2015/16 now incorporates Petrocaribe debt estimated at 9 percent of GDP (estimation based on the Petrocaribe loan agreement).
  - Note: Petrocaribe debt service payments have been cancelled or rescheduled in the last three years, a pattern that may continue, but the DSA includes these obligations for prudence.
- The authorities’ fiscal program is over-performing slightly by 0.7 percent of GDP based on measures undertaken in FY 2015/16 and those proposed in the budget for FY 2016/17.
- Recent parametric reforms in the Dominica Social Security program (higher employee contributions and increase in retirement age) improve public debt dynamics.

### Current public debt structure and levels
- As of end-FY 2014/15, the stock of public sector debt (central government and rest of the public sector) is estimated to be around 84 percent of GDP.
- Over 70 percent of public debt is external, owed mainly to multilateral creditors; the remaining is held domestically, mostly by commercial banks and other financial institutions.
- Debt of the rest of the public sector (state owned enterprises and Petrocaribe) is about 21 percent of GDP.

### Risks and customized shock scenarios
- Even under the active scenario, the large number and potential size of risks justify the “high risk of debt distress” classification.
- Under customized scenarios several debt thresholds are breached. Examples of customized scenarios considered:
  - No adjustment (passive continuation of current policies; no additional fiscal measures).
  - Reduction of grants to 50 percent of the active scenario.
  - Lower ECP revenues to 50 percent of the active scenario.
  - A hurricane shock occurring in 2018.
- Under the customized (no adjustment) scenario:
  - Average annual external debt service obligations are estimated around US$39.3 million (7.3 percent of GDP) during FY2015-17.
  - Debt path takes an increasing trajectory and breaches two solvency thresholds.
- Staff simulations indicate that the materialization of other risks (reduced grants, lower ECP revenues, natural disaster) would breach debt thresholds and render debt dynamics unsustainable.
- These adverse events are largely or completely outside government control.

### Fiscal implications and financing risks
- If risks materialize, there would be no realistic amount of fiscal consolidation that could cover the resulting financing gap.
- Insufficient revenues would force compression of government spending, most likely affecting capital expenditures and reducing growth prospects.

### Policy actions and authorities’ stance
- The authorities have committed to a gradual fiscal consolidation over the next five years, supported by reforms to improve revenue collection, broaden the tax base, and contain current expenditures.
- The authorities adopted initial fiscal measures in the RCF and have undertaken new measures to strengthen the fiscal position.
- Given the precarious debt sustainability prospects and large fiscal costs from storm-related reconstruction, the government has formally requested debt relief from bilateral creditors (including from the Paris Club and on Petrocaribe debt service flows) as part of its fiscal consolidation strategy.
- The authorities concurred with staff that Dominica remains at high risk of debt distress and remain fully committed to fiscal sustainability and pursuing debt relief.

### Key statistics (as presented)
- Public sector debt (end-FY 2014/15): around 84 percent of GDP.
- Rest of public sector debt (state owned enterprises and Petrocaribe): about 21 percent of GDP.
- Provision included in active scenario to lower debt/build buffers: 1.5 percent of GDP per year.
- Annual average reconstruction cost included in projections: 1.5 percentage point of GDP.
- Petrocaribe debt incorporated for FY 2015/16: 9 percent of GDP.
- Fiscal program over-performance: 0.7 percent of GDP.
- Average annual external debt service under no adjustment for FY2015-17: US$39.3 million (7.3 percent of GDP).
- No-adjustment scenario projected public debt: 130 percent of GDP by 2030.

*Annex I. Debt Sustainability Analysis (content unit: _cr16244)*

### 7.      The risk rating assigned to PPG external debt is high. Under a customized scenario

### _cr16244 - 7.      The risk rating assigned to PPG external debt is high. Under a customized scenario

### Risk assessment and scenario summary
- The risk rating assigned to PPG external debt is high.
- Under a customized scenario (without further fiscal adjustment), debt would exceed two solvency thresholds in the medium term.
- Other customized scenarios (with lower grants, lower ECP and hurricane shock) show breaches of debt service thresholds.
- Given the challenges associated with fiscal consolidation in the wake of storm Erika, the customized scenarios are attached significant weight in the risk assessment.
- Authorities have expressed commitment to the fiscal adjustment program (active scenario) that would put public debt on a sustainable trajectory.
- If the planned fiscal consolidation takes hold and confidence in the active policies scenario increases, an upgrade of the risk rating could be considered in a future assessment.

### DSA (Active Scenario) — key public and PPG external debt indicators (selected figures as presented)
- External debt (nominal) and PPG share (percent of GDP):
  - External debt (nominal): 74.7, 77.7, 85.8, 92.6, 91.0, 90.2, 87.2, 83.7, 80.1, 69.1, 53.5
  - Of which: public and publicly guaranteed (PPG): 52.6, 52.6, 53.4, 56.6, 56.4, 55.8, 53.2, 51.8, 50.3, 45.8, 37.5
- Change in external debt: 1.9, 3.0, 8.1, 6.8, -1.6, -0.8, -3.0, -3.5, -3.6, -1.8, -3.4
- Identified net debt-creating flows: 7.6, 7.1, 3.3, 9.2, 2.1, 2.9, 3.3, 5.8, 4.7, 3.8, 3.0
- Non-interest current account deficit: 11.7, 13.8, 6.6, 13.7, 5.2, 8.5, 6.5, 9.3, 10.3, 11.0, 8.5, 7.2, 8.6, 7.5
- PV of external debt (selected entries): 70.9, 77.8, 75.8, 75.4, 73.0, 71.5, 67.5, 53.2, 41.0
- PV of PPG external debt (selected entries): 38.4, 41.8, 41.2, 41.0, 38.9, 39.5, 37.7, 29.8, 25.1
- PV of PPG external debt (in percent of exports, selected entries): 92.2, 100.9, 101.6, 102.5, 98.0, 99.9, 95.4, 75.5, 67.1
- PV of PPG external debt (in percent of government revenues, selected entries): 109.9, 103.0, 107.6, 109.2, 104.5, 105.7, 100.9, 81.1, 71.2
- Debt service-to-exports ratio (in percent, overall): 16.5, 13.0, 16.6, 19.7, 16.9, 17.4, 16.9, 16.7, 16.7, 15.0, 7.7
- PPG debt service-to-exports ratio (in percent): 11.6, 8.5, 12.5, 15.4, 12.5, 13.0, 12.5, 12.5, 12.5, 11.3, 6.7
- PPG debt service-to-revenue ratio (in percent): 11.2, 9.5, 14.9, 15.8, 13.3, 13.9, 13.4, 13.3, 13.3, 12.2, 7.1
- Total gross financing need (Billions of U.S. dollars): 0.1, 0.1, 0.0, 0.1, 0.0, 0.1, 0.1, 0.1, 0.1, 0.1, 0.1

### Key macroeconomic assumptions (as presented)
- Real GDP growth (in percent): -1.3, 0.6, 3.9, 2.1, 3.1, -3.9, 1.3, 2.8, 2.7, 2.5, 2.3, 1.3, 1.7, 0.0, 1.6
- GDP deflator in US dollar terms (change in percent): 1.8, 3.3, -4.4, 1.3, 2.6, 2.1, 1.5, 1.6, 1.8, 2.0, 1.9, 1.8, 2.0, 3.7, 2.1
- Effective interest rate (percent): 3.5, 3.6, 3.9, 4.5, 0.9, 3.7, 2.9, 2.9, 2.8, 2.7, 2.7, 2.9, 3.5, 1.6, 2.9
- Growth of exports of G&S (US dollar terms, in percent): 1.5, 16.7, 3.9, 5.2, 6.1, -2.4, 0.5, 3.0, 3.9, 4.1, 4.0, 2.2, 3.7, 0.0, 3.3
- Growth of imports of G&S (US dollar terms, in percent): -4.1, 6.5, 3.4, 4.2, 7.6, -2.0, 4.1, 4.7, 1.7, -0.4, 1.8, 1.6, 3.5, 0.2, 3.4
- Grant element of new public sector borrowing (in percent, selected entries): 16.9, 38.3, 30.7, 35.3, 31.6, 46.4, 33.2, 37.7, 30.6, 36.0
- Government revenues (excluding grants, in percent of GDP): 36.8, 35.7, 35.0, 40.6, 38.3, 37.5, 37.3, 37.4, 37.3, 36.7, 35.2, 36.4
- Grant-equivalent financing (in percent of GDP, selected entries): 5.4, 8.3, 7.8, 6.7, 6.9, 6.3, 5.5, 4.0, 4.8
- Nominal GDP (Billions of US dollars): 0.5, 0.5, 0.5, 0.5, 0.5, 0.6, 0.6, 0.6, 0.7, 1.1

### Public sector debt (Active Scenario) — selected figures
- Public sector debt (percent of GDP series): 72.6, 74.7, 83.9, 85.5, 87.7, 87.3, 85.4, 83.4, 81.0, 72.3, 59.1
- Of which: foreign-currency denominated (percent of GDP series): 52.6, 52.6, 53.4, 56.6, 56.4, 55.8, 53.2, 51.8, 50.3, 45.8, 37.5
- Change in public sector debt: 2.8, 2.2, 9.2, 1.6, 2.2, -0.4, -1.8, -2.1, -2.4, -1.6, -3.4
- Primary deficit (percent of GDP series and averages as presented): 3.7, 0.5, 1.6, -2.6, 5.7, -4.4, 1.9, 0.6, -0.6, -0.8, -1.3, -0.8, -2.0, -1.7, -1.1
- Revenue and grants (percent of GDP series): 39.5, 38.9, 37.0, 44.8, 44.4, 43.2, 42.5, 41.9, 41.2, 40.6, 38.2
- Primary (noninterest) expenditure (percent of GDP series): 43.1, 39.4, 38.7, 40.4, 46.3, 43.8, 41.8, 41.1, 39.9, 38.6, 36.5
- Automatic debt dynamics contribution (selected): 1.4, -0.8, 2.7, 4.5, 0.0, -1.4, -1.5, -1.5, -1.2, -0.3, -1.9
- PV of public sector debt (selected entries): 68.9, 70.7, 72.5, 72.5, 71.2, 71.1, 68.4, 56.3, 46.6
- Gross financing need: 11.0, 6.6, 9.2, 5.4, 9.7, 10.6, 7.7, 8.6, 8.2, 8.0, 3.2
- PV of public sector debt-to-revenue and grants ratio (in percent, selected entries): 186.1, 157.8, 163.1, 167.8, 167.7, 169.9, 166.0, 138.7, 122.0
- Debt service-to-revenue and grants ratio (in percent, selected entries): 18.6, 15.7, 20.4, 21.8, 17.5, 23.1, 19.6, 22.3, 23.0, 24.8, 12.9

### Sensitivity analysis and stress tests (selected outcomes)
- Baseline PV of debt-to-exports ratio (table A2, selected entries): 42, 41, 41, 39, 40, 38, 30, 25
- Baseline PV of debt-to-GDP ratio (table A2, selected entries): 101, 102, 102, 98, 100, 95, 75, 67
- Baseline PV of debt-to-revenue ratio (table A2, selected entries): 103, 108, 109, 104, 106, 101, 81, 71
- Baseline debt service-to-revenue ratio (table A2, selected entries): 15, 13, 13, 13, 13, 13, 11, 7
- Notable bound-test outcome: B6 (One-time 30 percent nominal depreciation relative to the baseline in 2016) raises PV of debt-to-GDP and other indicators materially (e.g., PV of debt-to-GDP shows spike entries such as 153, 155, 148, 150, 143, 115, 101 in one series).
- Sensitivity tables show alternative scenarios A1 and A2 and several bound tests (B1–B6) with values reported for PV indicators and debt service ratios across projection years.

### Policy implications and conditionality
- The customized no-adjustment scenarios and shocks (including hurricane in 2018, low ECP, low grants) materially worsen debt and debt-service indicators and lead to breaches of solvency and debt service thresholds.
- The active fiscal adjustment scenario is presented as the path to restore sustainability; authorities' commitment to this program is highlighted.
- The DSA indicates that an upgrade of the risk rating could be considered in a future assessment if planned fiscal consolidation takes hold and confidence in the active policies scenario increases.

*Source: IMF staff estimates and projections as presented in the DSA tables and figures in the source content.*

### Annex II. External Sector Assessment

### Annex II. External Sector Assessment

### Key findings
- Dominica’s external position in 2015 is assessed to be weaker than the level consistent with medium-term fundamentals and desirable policy settings.
- Achieving a strong and sustainable external sector requires policies and structural reforms over the medium term particularly geared at increasing external competitiveness.
- Reserves are assessed to be adequate and sufficient to absorb most shocks.

### Current account developments
- The decline in oil prices, higher than expected tourism receipts and increased inflows of private remittances offset the decline in exports and the increase in imports for reconstruction material following the damages caused by Tropical Storm Erika last August.
- These developments improved Dominica’s current account to a deficit of 9.4 percent of GDP in 2015 from an 11.2 percent of GDP deficit the previous year.
- Given the forecast for higher imports for reconstruction activity, the REER appreciation and a no-policy change scenario, the current account would worsen in the medium term.

### Nominal and real effective exchange rate assessment
- Dominica’s nominal effect exchange rate (NEER) appreciated by 7.6 percent on average in 2015 mainly because of the strengthening of the U.S. dollar to which the EC dollar, the regional currency, is pegged.
- Further appreciation could continue in the near future should relatively stronger growth and higher interest rates in the United States cause the U.S. dollar to strengthen.
- In comparison the CPI based real effective exchange rate (REER) appreciated.

*Annex II. External Sector Assessment — _cr16244.*

### 4.8 percent during the same period and its end-December 2015 index was 99.2 relative to the

### _cr16244 - 4.8 percent during the same period and its end-December 2015 index was 99.2 relative to the

### External Stability Assessments
- Two quantitative estimates suggest Dominica’s external position in 2015 is weaker than consistent with medium-term fundamentals and desirable policy settings.
- EBA-Lite (adjusted for Dominica-specific factors) staff estimates for 2015:
  - Cyclically-adjusted current account balance: -7.8 percent of GDP
  - Cyclically-adjusted current account norm: -3.4 percent of GDP
  - Current account gap: -4.4 percent of GDP
  - Contribution to the gap:
    - Macroeconomic policies: -0.2 percent of GDP
    - Fiscal policy gaps in other countries: -0.9 percent of GDP
    - Reserve adequacy and private credit gaps (joint): 0.8 percent of GDP
  - Remaining gap to be closed by structural policies to improve competitiveness over the medium term.
- EBA-Lite REER gap estimates (range across methods):
  - Current Account regression implies a required REER adjustment of 17.3 percent to close the -4.4 percent of GDP current account gap (using a standard elasticity).
  - Index REER regression (INS database, includes policy and fundamental variables) indicates:
    - REER gap: -1.6 percent (undervalued)
    - REER broadly in line with its estimated current account norm.
- External sustainability (net foreign assets-to-GDP to zero by end-2025) approach:
  - Medium-term current account norm: deficit of 6.3 percent of GDP
  - Underlying current account forecast over the 10-year period: deficit of 8.5 percent of GDP
  - REER adjustment needed to close the current account gap: 13.2 percent

- Table of selected model results (percent of GDP) as presented:
  - CA Actual: -9.4
  - Cyclically Adjusted CA: -7.8 (CA Model), -9.7 (ES Approach)
  - Cyclically Adjusted CA Norm: -3.4 (CA Model), -6.3 (ES Approach)
  - CA Gap: -4.4 (CA Model), -3.4 (ES Approach)
  - Of which: Policy Gap
    - Fiscal Policy: -0.9
    - Private Credit: 0.3
    - Change in Reserves: 0.5
    - Capital Controls: -0.1
    - Residual: -4.2
  - Real Exchange Rate Gap (data reflect percentage over or under valuation; positive = overvalued; negative = undervalued):
    - CA Model: 17.3
    - ES Approach: 13.2
    - I-REER Model: -1.6

### Reserve Adequacy
- Dominica is an ECCU member; ECCB foreign assets and liabilities cannot be directly assigned to individual countries. The imputed reserves method is used as a proxy for net foreign assets held with the ECCB.
- Imputed reserves at end-2015: US$125 million
  - Coverage: 5.6 months of imports (forward cover)
  - Coverage: 26 percent of broad money
  - Benchmarks cited: 3 months of imports and 20 percent of broad money
- Active scenario projection through 2021:
  - Reserve levels marginally decline to 4.9 months of imports but remain adequate to cushion external shocks and prevent disorderly market conditions.
- Notes and limitations:
  - Computation of imputed reserves: difference between assets held by member countries with the ECCB and liabilities of member countries to the ECCB.
  - Information on short term debt and other liabilities is unavailable; IMF composite Assessment Reserve Adequacy (ARA) metric cannot be computed.
  - Assessment does not consider the need for additional buffers to deal with significant natural disasters.

- Net Imputed International Reserves and Reserve Metrics (US$ millions): historical series plotted against "3 months Imports" and "20% of Broad Money" benchmarks (chart sources: Eastern Caribbean Central Bank and IMF staff calculation).

### Conclusion and Policy Recommendations
- Assessment: Dominica’s external position in 2015 is weaker than levels consistent with medium-term fundamentals and desirable policy settings.
- Short- to medium-term risks:
  - External position would weaken over the medium term and growth would remain sub-optimal absent policy adjustments.
- Recommended policy mix:
  - Fiscal: Consolidation aiming for a small primary surplus over the medium term while providing space for infrastructure spending to ease supply bottlenecks — would improve the current account position and help stabilize reserves.
  - Structural reforms to boost productivity and competitiveness:
    - Improve labor productivity
    - Reduce electricity costs
    - Increase access to finance
    - Promote improvements to the business environment
  - These structural reforms are needed to improve competitiveness and prospects for export diversification.

### Fund Relations (as of March 31, 2016)
- Membership: Joined 12/12/78; Article VIII
- General Resources Account:
  - Quota: 11.5 SDR Million (100.00 percent of Quota)
  - Fund holdings of currency: 11.49 SDR Million (99.93 percent)
  - Reserve Tranche Position: 0.01 SDR Million (0.08 percent)
- SDR Department:
  - Net cumulative allocation: 7.84 SDR Million (100.00 percent)
  - Holdings: 0.62 SDR Million (7.91 percent)
- Outstanding Purchases and Loans (SDR Million; Percent of Quota):
  - RCF Loans: 8.20 (71.30)
  - ESF RAC Loan: 2.30 (19.97)
  - ECF Arrangements: 0.35 (3.03)
- Latest Financial Arrangements (type, approval date, expiration date, amount approved, amount drawn):
  - ECF 12/29/03 – 12/28/06: 7.69 approved, 7.69 drawn
  - Stand-By 08/28/02 – 01/02/04: 3.28 approved, 2.97 drawn
  - SAF 11/26/86 – 11/25/89: 2.80 approved, 2.80 drawn
- Projected Payments to the Fund (SDR Million) — Forthcoming years:
  - 2016 Principal: 0.68; Charges/Interest: 0.00; Total: 0.68
  - 2017 Principal: 0.86; Charges/Interest: 0.01; Total: 0.87
  - 2018 Principal: 1.07; Charges/Interest: 0.01; Total: 1.07
  - 2019 Principal: 1.07; Charges/Interest: 0.01; Total: 1.07
  - 2020 Principal: 0.41; Charges/Interest: 0.00; Total: 0.41

- Exchange Rate Arrangement:
  - Member of Eastern Caribbean Currency Union; EC$ pegged to U.S. dollar at EC$2.70 per U.S. dollar since July 1976.
  - Dominica has accepted obligations of Article VIII, Sections 2, 3, and 4.

- Safeguards Assessment (ECCB):
  - Update assessment completed April 2016: ECCB maintains generally strong controls; external audit and financial reporting practices sound; financial statements compliant with IFRS and published timely.
  - Recommendations: reform internal audit function to align with leading practices; enhance financial expertise of audit committee.

- Technical Assistance: Significant TA from CARTAC and IMF on tax reform, revenue administration, expenditure rationalization, financial sector, and Public Financial Management (PFM); multiple missions listed across 2013–2015 in PFM, Revenue Administration, Financial Sector Supervision, Economic and Financial Statistics, and Macroeconomics and Programming Analysis.

### Relations with the World Bank Group (as of May 2016)
- OECS Regional Partnership Strategy (FY15-19) objectives: support competitiveness, public sector modernization (PFM, institutional capacity, PPPs), and resilience (social vulnerabilities and natural disasters).
- Indicative IBRD lending program for six OECS countries: US$120 million (up to US$20 million per OECS country) for FY15-19, subject to conditions.
- IDA-17 allocation for OECS: SDR61.3 million; Dominica’s indicative IDA-17 country allocation: SDR14.1 million.
- Active Bank-financed lending operation for Dominica:
  - Regional Disaster Vulnerability Reduction Project: total USD 38 million (17 million IDA credit; USD 12 million Grant; USD 9 million concessional loan from Strategic Climate Fund); approved May 1, 2014; effective September 8, 2014.
  - Development objective: reduce vulnerability to natural hazards and climate change impacts through resilient infrastructure investments and improved hazard data/monitoring systems.
- World Bank/IFC engagement on geothermal advisory services.

### Caribbean Growth Forum (CGF) — key outcomes
- Multi-stakeholder platform; engaged more than 2,500 representatives regionally.
- Twelve countries established national CGF chapters and completed first phase of national dialogue with draft action plans (accountabilities, milestones, timeline, funding).
- National dialogues presented at regional forums in The Bahamas (June 2013) and St. Kitts and Nevis (2014). Next forum expected mid-June 2015 in St. Lucia.
- Governments committed to periodic reporting on reform implementation (every 4-5 months) and independent monitoring.

### Relations with the Caribbean Development Bank (CDB) (as of May 4, 2016)
- Total loans and grants approved 1970–2015: USD272 million (Dominica the eighth largest beneficiary among 19 borrowing members).
- At April 2016, CDB loan exposure to Dominica: approximately USD90.5 million (5.6 percent of CDB’s total disbursed debt outstanding).
- Resource flows:
  - Net resource flows negative 2006–2009.
  - Net resource flows positive 2010–2012.
  - Since 2013 resource flows negative as projects neared completion.
  - With new post-Tropical Storm Erika loans agreed in 2015, resource flow likely to turn positive from 2016.
- Dominica: Financial Relations (USD millions) — Operation:
  - Disaster Vulnerability Reduction Project: Original 38; Principal Available 1.58; Disbursed 0.73
  - Total: Original 38; Principal Available 36.7; Disbursed 0.76

- Disbursements and Debt Service (Fiscal Year) — selected annual figures:
  - Total disbursements (series across years displayed in source)
  - Repayments example: 2003: 0.3; 2004: 0.6; 2005: 0.7; ... 2015: 0.5
  - Net disbursements example: 2003: 2.5; 2004: 3.4; 2005: 0.9; ... 2015: 0.1
  - Interest and fees example: 2003: 0.3; 2004: 0.4; ... 2015: 0.1

- CDB loan disbursement, service and resource flow (selected years, USD millions):
  - Net disbursement: 2005: 3.8; 2006: -0.5; 2007: -1.1; 2008: -1.5; 2009: 0.3; 2010: 3.0; 2011: 6.3; 2012: 4.6; 2013: 1.3; 2014: -1.0; 2015: -3.0
  - Disbursement: 2005: 6.2; 2006: 2.2; 2007: 2.4; 2008: 3.1; 2009: 4.2; 2010: 7.1; 2011: 10.6; 2012: 8.3; 2013: 5.0; 2014: 3.1; 2015: 3.3
  - Amortization: 2005: 2.4; 2006: 2.8; 2007: 3.4; 2008: 4.7; 2009: 3.9; 2010: 4.1; 2011: 4.3; 2012: 3.7; 2013: 3.6; 2014: 4.1; 2015: 6.2
  - Interest and charges: 2005: 2.4; 2006: 2.5; 2007: 2.5; 2008: 2.4; 2009: 2.3; 2010: 2.2; 2011: 2.3; 2012: 2.4; 2013: 2.5; 2014: 2.6; 2015: 2.5
  - Net resource flow: 2005: 1.4; 2006: -3.0; 2007: -3.6; 2008: -4.0; 2009: -1.9; 2010: 0.8; 2011: 4.1; 2012: 2.2; 2013: -1.2; 2014: -3.6; 2015: -5.4

### Statistical Issues (as of May 15, 2016)
- General: Data provision has shortcomings due to capacity constraints; weaknesses in coverage, accuracy, frequency, and timeliness. Data broadly adequate for surveillance but limit economic analysis and policy formulation.
- Data areas needing improvement: fiscal accounts, labor, agriculture, balance of payments; quarterly national accounts desirable.
- GDDS participation: Metadata last updated January 2006 (national accounts and external sector), December 2002 (government finance statistics).
- Real sector:
  - Nominal GDP: compiled annually using production and expenditure approaches.
  - Real GDP: compiled using production approach only; base year 2006 since 2011.
  - GDP estimates available about four months after year-end and usually finalized with a two-year lag.
  - CPI: compiled monthly; weights based on 2008/09 HIES with base period June 2010.
  - Program to develop export and import price indexes (XMPIs); staff shortage limits progress.
  - Employment data sparse; no official producer price data; census conducted in 2011.
- Government finance:
  - Monthly data available but with shortcomings; need reconciliation between Inland Revenue Department, Customs, and Treasury monthly.
  - Capital expenditure reporting and public sector investment program data fragmented and subject to revisions.
  - Consolidated nonfinancial public sector data not provided; data for Dominica Social Security and public enterprises are obtained separately with delays/omissions.
  - No government finance data reported to STA for IFS or GFS Yearbook.
- Monetary statistics:
  - Compiled and reported monthly to the Fund by ECCB based on standardized report (2006).
  - Institutional coverage needs improvement to include mortgage companies, building societies, credit unions, insurance companies.
  - Lack of published credit union data is a serious shortcoming; coordination between ECCB and Dominica’s Financial Services Unit suggested.
- External sector and BOP:
  - BOP data compiled by ECCB annually and published in IFS through 2012; not produced according to BPM6.
  - Improvements needed in merchandise export measurement, monthly publication, remittances statistics, quarterly BOP, and annual international investment position compilation.
  - CARTAC-appointed external statistics expert to assist ECCU members.
- External debt:
  - Ministry of Finance maintains database on public and publicly-guaranteed external loans; Treasury maintains bonds abroad data; databases not consolidated.
  - Private external debt stock data limited (commercial banks via monetary survey only).
- Table of Common Indicators Required for Surveillance (as of May 15, 2016) — selected entries with latest observation and frequency:
  - International Reserve Assets and Reserve liabilities of the Monetary Authorities: Latest observation 12/30/2015; Date received 2/20/2015; Frequency M (monthly)
  - Reserve/Base Money: Latest observation 2/28/2016; Date received 3/20/2016; Frequency M
  - Broad Money: Latest observation 2/28/2016; Date received 3/20/2016; Frequency M
  - Central Bank Balance Sheet: Latest observation 2/28/2016; Date received 3/20/2016; Frequency M
  - Consolidated Balance Sheet of the Banking System: Latest observation 2/28/2016; Date received 3/20/2016; Frequency M
  - Interest Rates: Latest observation 2/28/2016; Date received 3/20/2016; Frequency M
  - Consumer Price Index: Latest observation 2/28/2016; Date received 3/20/2016; Frequency M
  - Revenue, Expenditure, Balance, and Composition of Financing – Central Government: Latest observation 03/31/2016; Date received 4/20/2016; Frequency M reporting; Publication A
  - Stocks of Central Government and Central Government-Guaranteed Debt: Latest observation 12/31/2015; Date received 3/31/2016; Frequency M reporting; Publication A
  - External Current Account Balance: 2015; Date received 2/20/2016; Frequency A
  - Exports and Imports of Goods and Services: 2015; Date received 2/20/2016; Frequency M (data) and A (publication)
  - GDP/GNP: 2015; Date received 2/20/2016; Frequency A
  - Gross External Debt: 2015; Date received 2/20/2016; Frequency M reporting; Publication A
  - International Investment Position: NA (data not available)

*Staff Report for the 2016 Article IV Consultation — Informational Annex (prepared by Western Hemisphere Department, June 22, 2016).*

### 2.4 percent of GDP). The deficit is underpinned by an unprecedented increase in public

### _cr16244 - 2.4 percent of GDP). The deficit is underpinned by an unprecedented increase in public

### Fiscal outlook and budget projections
- Overall deficit in the FY2016/17 draft budget projected at -4.3 percent of GDP (EC$ -60.4 million).
- Budget projection of revenues is described as optimistic, underpinned by:
  - ECP (Economic Citizenship Program) revenues projected at 11.9 percent of GDP (EC$ 166.0 million), an historical record and an increase of 7 percent of GDP relative to FY2015/16.
  - Grants projected at 7.4 percent of GDP (EC$ 103.2 million), increased to support reconstruction after tropical storm Erika.
- Tax revenue projected at 24.5 percent of GDP (EC$ 341.7 million); non-tax revenue projected at 13.6 percent of GDP (EC$ 189.5 million).
- If the budget were executed as projected, public debt would increase to near 89.7 percent of GDP (EC$ 1,250 million), about 2 percent more than staff projection; this is conditional on availability of debt financing.

### Budget execution risks and capacity constraints
- Execution capacity and financing constraints make it unlikely the FY2016/17 budget is executed as projected.
- Key execution risk factors:
  - Historical execution rates of public investment around 70 percent of budget targets.
  - Highest recent investment rate 16 percent of GDP; recent average closer to 10 percent of GDP.
  - Proposed capital spending of 22.2 percent of GDP (EC$ 309.8 million) would be a record high and challenging to achieve.
  - Limited productive capacity in Dominica (specialized labor, machinery, raw materials) could cause inflation pressures and crowding out of private investment.
  - Financing constraints: Dominica has no access to international financial markets; limited space for domestic borrowing; dependence on ECP revenues, grants, and official loans which may not materialize as projected.
- Staff expectation: lower capital expenditures than projected in the budget.

### Revenue composition and risks (ECP and grants)
- ECP revenues in table: FY2015 EC$ 67.0 million (4.9 percent of GDP); FY2016 (Est.) EC$ 50.0 million (3.6 percent of GDP); FY2016 Draft Budget EC$ 166.0 million (11.9 percent of GDP).
- Grants composition: FY2015 EC$ 57.3 million (4.2 percent of GDP); FY2016 (Est.) EC$ 85.2 million (6.1 percent of GDP); FY2016 Draft Budget EC$ 103.2 million (7.4 percent of GDP).
- Staff notes processing of ECP applications requires significant background verification and due diligence; ECP inflows are unpredictable and processing capacity is constrained.
- Authorities increased staffing in the CBI Office and enhanced robustness of processes; authorities requested Fund Technical Assistance for a proposed savings fund and statistical capacity.

### Debt dynamics and scenarios
- Nominal GDP: EC$ 1,356 million (FY2015); EC$ 1,394 million (FY2016 est. and FY2016 draft budget).
- Total Public Debt: EC$ 1,159 million (FY2015, 85.5 percent of GDP); EC$ 1,222 million (FY2016 est., 87.7 percent of GDP); EC$ 1,250 million (FY2016 draft budget, 89.7 percent of GDP).
- Staff highlight sensitivity to grants: if grants are 30 percent lower than expected, debt will increase and remain above 90 percent of GDP through to 2030 versus an active policies scenario where debt falls towards 60 percent of GDP.

### Reconstruction, natural disasters, and policy responses
- Tropical storm Erika (2015) caused damage estimated at 96 percent of GDP, with two thirds of that cost borne by government.
- Economic growth contracted by nearly 4 percent in the year following Erika; recovery projected to be more gradual, with return to potential growth of around 1¾ percent over the medium term.
- Authorities acknowledge limited fiscal buffers for another natural disaster; proposal to establish a savings fund to provide for future reconstruction costs, potentially resourced from ECP revenues.
- Authorities requested Fund Technical Assistance to design the savings fund and to improve statistical data collection and analysis.

### Economic growth, private sector, and structural reforms
- Medium-term potential growth around 1¾ percent.
- Significant upside potential from tourism; developers representing Kempinski, Hilton and Marriott have discussed potential ventures.
- Growth and Social Protection Strategy 2014-2018 prioritizes private sector primacy, tourism, agriculture, and policy levers to improve business environment.
- Recent structural improvement: Online Business Registry upgraded as part of Business Entry Reform Project (first in the Caribbean), expected to make business registration more efficient and cheaper.
- Authorities broadly agree with staff policy proposals to enhance potential growth and will study Fund advice.

### Financial sector and financial intermediation
- Mixed outlook: regulatory reforms undertaken (including ECAMC Act) enhance stability and provide powers to resolve non-performing loans.
- Trade-offs noted between loan workouts, write downs, and potential bank recapitalization.
- Deposit floor noted by staff as a barrier to bank profitability; monetary policy stance decided by the Monetary Council of the ECCU.
- AIDB viewed by authorities as providing vital low-cost credit to targeted sectors; authorities differ somewhat from staff on AIDB remit.
- Credit Union sector growing in importance and is macrocritical due to interconnectedness with banking system; authorities enhancing FSU capacity to regulate and supervise.
- Concern over loss of correspondent banking relationships (CBRs); authorities requested technical assistance to strengthen AML/CFT legislation and asked IMF to research and help design solutions.

### Policy recommendations and authorities’ commitments
- Authorities committed to targeted fiscal consolidation: implemented measures delivering 0.7 percent of GDP (versus RCF agreed 0.5 percent of GDP) through excise tax increases, user fees, and enhanced collection of tax arrears.
- Authorities plan targeted initiatives in high value added sectors (tourism, agriculture) to support the denominator for debt and promote growth.
- Requested and received technical assistance for structural fiscal reforms, statistical capacity, savings fund design, and AML/CFT enhancements.
- Authorities welcome IMF advocacy for debt restructuring at the Paris Club and note the possibility that debt forgiveness/restructuring should be part of the toolkit for longer-term sustainability.

*Statement and staff findings as presented in the Dominica FY2016 draft budget materials and associated staff report (July 2016).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16244.pdf_