Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with the Dominican Republic

IMF News, February 19, 2008

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Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with the Dominican Republic

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• Published: February 19, 2008

Background

• Prudent macroeconomic policies since the 2002-04 financial/economic crisis, supported by a Fund arrangement, allowed a strong and rapid recovery.
• Real growth averaged near double digits since the crisis and was among the highest in the region.
• Inflation contained to single digits.
• Fiscal consolidation: shift from primary deficits to primary surpluses and declining public debt ratios.
• Banking system fundamentals strengthened significantly.
• Gross international reserves of the central bank reached record levels and now exceed three times short-term external debt coming due.
• Structural steps taken:
  • New legal framework for fiscal management.
  • Bolstered bank supervision moving toward risk-based consolidated supervision.
  • Recapitalization plan for the central bank approved by congress to be implemented over the next ten years.
  • Electricity theft and fraud criminalized to improve sector financial performance.
• Remaining challenges:
  • Output gap has closed; aggregate demand and oil price shocks widened the external current account deficit significantly in 2007.
  • Despite strong reserve accumulation, the Dominican Republic still has one of the lowest reserve adequacy indicators among emerging market economies.
  • Public debt ratios remain substantially above pre-crisis levels; significant amount of peso-denominated debt needs short-run rollover.
  • Financial sector vulnerabilities reduced but persistent until full implementation of risk-based consolidated supervision and further institutional capacity strengthening.
  • Fiscal balance improvement reflected substantial revenue increases (partly due to higher nickel-related revenue in 2007) while primary spending kept broadly constant (in terms of GDP) since 2004; subsidy programs for electricity and liquefied gas remained large and poorly targeted.

Executive Board Assessment

• Commendations and overall view:
  • Directors commended authorities for the country's impressive recovery from the 2002-04 financial crisis.
  • Prudent macroeconomic policies in a favorable external environment restored confidence, delivering rapid growth, single-digit inflation, declining debt ratios, a robust external position, and a strengthened financial system.
  • Medium-term economic outlook generally positive if remaining vulnerabilities are managed carefully.
• External position and exchange rate:
  • Although the external current account deficit widened over the last two years, Directors judged it to remain in line with economic fundamentals.
  • The managed float exchange rate regime has served the country well; staff assessment that the peso appears broadly in equilibrium was noted.
  • Support for central bank policy of building up international reserves as insurance against shocks; level of reserves remains low compared with similar economies.
• Monetary policy:
  • Commended central bank's skillful monetary management and appropriate use of intermediate base money targets to meet inflation reduction goal.
  • Directors concurred on the importance of readiness to tighten monetary policy if needed to forestall incipient inflation pressures; welcomed the central bank's commitment.
• Fiscal policy:
  • Main medium-term challenge: increase and better target social spending while generating primary surpluses to lower consolidated public debt burden to pre-crisis levels.
  • Many Directors recommended aiming for primary surpluses averaging 2.5 percent of GDP over the medium term, although some Directors favored a somewhat slower pace of adjustment.
  • Encouraged reforms to widen the tax base, mainly by rationalizing tax exemptions, and to limit poorly-designed energy subsidies.
  • Called for firm control of public spending during the upcoming electoral period.
  • Encouraged continued improvements in debt management given significant short-term peso-denominated debt.
• Structural and financial sector reforms:
  • Noted key structural reforms significantly strengthened the policy framework; Directors look forward to making these reforms fully operational.
  • Welcomed reorganization of fiscal management institutions and improved procedures for better fiscal and public debt management.
  • Commended criminalization of electricity theft to reduce budgetary support to the electricity sector.
  • Welcomed legislation to recapitalize the central bank to strengthen accountability and financial independence.
  • Commended progress in prudential regulation and financial supervision, including establishment of a macro-financial stress-testing framework.
  • Advised continued vigilance regarding growth of mortgage and consumer lending.
  • Encouraged completion of fully risk-based consolidated supervision and further strengthening of institutional capacity, requiring approval of amendments to the Monetary and Financial law.
  • Cautioned that the legal framework for creating an international financial center should not undermine consolidated supervision efforts.
  • Looked forward to the Financial Sector Assessment Program update in 2008.
• Data reporting:
  • Encouraged authorities to continue efforts to ensure accuracy of key information, particularly on the current account.

The Dominican Republic: Selected Economic Indicators

• National accounts and prices (Annual percentage change, unless otherwise indicated):
  • Real GDP: 2.0 (2004), 9.3 (2005), 10.7 (2006), 8.0 (2007)
  • Consumer price index (eop): 28.7 (2004), 7.4 (2005), 5.0 (2006), 6.5 (2007)
• Social Indicators:
  • Unemployment rate (in percent): 19.7 (2004), 17.5 (2005), 16.0 (2006), 15.6 (2007)
• Public finances 1/ (In percent of GDP):
  • Central government primary balance: -1.5 (2004), 0.9 (2005), 0.2 (2006), 1.7 (2007)
  • Total revenues (including grants): 16.4 (2004), 17.9 (2005), 18.2 (2006), 19.9 (2007)
  • Primary spending: 17.0 (2004), 18.0 (2005), 18.1 (2006), 1.7? (note: source shows primary spending as 17.0, 18.0, 18.1, — original table lists primary spending and central government primary balance; preserve table values as presented)
  • Interest expenditure: 2.1 (2004), 1.5 (2005), 1.6 (2006), 1.4 (2007)
  • Nonfinancial public sector overall balance: -2.4 (2004), -0.2 (2005), -1.0 (2006), 0.3 (2007)
  • Quasi-fiscal balance of the central bank: -4.0 (2004), -2.9 (2005), -2.5 (2006), -2.1 (2007)
  • Consolidated public sector balance: -6.4 (2004), -3.1 (2005), -3.5 (2006), -1.3 (2007)
  • Of which: primary balance: -0.1 (2004), 0.4 (2005), 1.9 (2006), (no 2007 entry in table)
  • Total public debt: 53.1 (2004), 46.9 (2005), 44.0 (2006), 39.0 (2007)
  • Of which: FX currency share (in percent): 69.8 (2004), 57.9 (2005), 54.8 (2006), 53.3 (2007)
• Money and credit (12-month percentage changes, unless otherwise indicated):
  • Liabilities to private sector (M3): 22.8 (2004), 13.5 (2005), 14.2 (2006), (no 2007 entry)
  • Currency in circulation: 9.8 (2004), 17.8 (2005), 14.7 (2006), 14.0 (2007)
  • Deposits: 11.2 (2004), 11.4 (2005), 5.7 (2006), 15.7 (2007)
  • Net domestic assets of the banking system: 11.5 (2004), 6.7 (2005), 11.8 (2006), 10.9 (2007)
  • Of which: Credit to the private sector: 9.6 (2004), 14.3 (2005), 24.5 (2006), (no 2007 entry)
  • M3, in percent of GDP: 42.7 (2004), 44.2 (2005), 42.0 (2006), (no 2007 entry)
• Balance of payments (In millions of U.S. dollar, unless otherwise indicated):
  • Current account: 1,116 (2004), -400 (2005), -1,122 (2006), -2,040 (2007), -1,761 (Auth Est.)
  • Merchandise trade balance: -1,954 (2004), -3,725 (2005), -5,500 (2006), -6,567 (2007), -6,275 (Auth Est.)
  • Exports: 5,936 (2004), 6,145 (2005), 6,581 (2006), 6,873 (2007), 7,016 (Auth Est.)
  • Imports: -7,890 (2004), -9,869 (2005), -12,081 (2006), -13,440 (2007), -13,291 (Auth Est.)
  • Of which: oil and gas: -1,668 (2004), -2,451 (2005), -2,788 (2006), -3,297 (2007), -3,178 (Auth Est.)
  • Services and transfers (net): 3,069 (2004), 3,324 (2005), 4,378 (2006), 4,527 (2007), 4,513 (Auth Est.)
  • Capital and financial account: 199 (2004), 1,317 (2005), 1,489 (2006), 2,477 (2007), 2,286 (Auth Est.)
  • Of which: foreign direct investment: 758 (2004), 1,123 (2005), 1,288 (2006), 1,528 (2007), 1,555 (Auth Est.)
  • Overall balance: 417 (2004), 691 (2005), 201 (2006), 645 (2007), 693 (Auth Est.)
  • Of which: change in NIR (increase -): -479 (2004), -898 (2005), -283 (2006), -645 (2007), -693 (Auth Est.)
  • Current account (in percent of GDP): 6.1 (2004), -1.4 (2005), -5.6 (2006), -4.9 (2007), (no Auth Est. entry)
  • Exports of goods (in US$, annual percentage chg): 8.5 (2004), 3.5 (2005), 7.1 (2006), 4.4 (2007), 4.5 (Auth Est.)
  • Imports of goods (in US$, annual percentage chg): 3.4 (2004), 25.1 (2005), 22.4 (2006), 11.3 (2007), (no Auth Est. entry)
• International reserve position and external debt:
  • Gross official reserves: 825 (2004), 1,929 (2005), 2,251 (2006), 2,891 (2007)
  • (In months of imports of goods) 2/: 1.3 (2004), 2.3 (2005), 2.2 (2006), 2.6 (2007)
  • (In terms of short-term debt, percent) 3/: 3.2 (2004), 3.7 (2005), (no 2006/2007 entries)
  • Net international reserves: 602 (2004), 1,520 (2005), 1,788 (2006), 2,278 (2007)
  • NIR, program definition 4/: 192 (2004), 859 (2005), 1,128 (2006), 1,500 (2007)
  • Outstanding external public debt, in percent of GDP: 34.7 (2004), 23.7 (2005), 23.9 (2006), 21.5 (2007)

Public Information Notice (PIN) No. 08/22 — January 14, 2008; Executive Board conclusion announced February 19, 2008. Sources: Central Bank of the Dominican Republic; World Bank; and IMF staff estimates and projections.

References

• Dominican Republic and the IMF
• Public Information Notices
• https://www.imf.org/en/home