Press Release No.

IMF Staff Completes 2017 Article IV Visit to Dominica

March 22, 2017

• Authorities have continued to focus on infrastructure rehabilitation and social relief, while addressing fiscal sustainability since Tropical Storm Erika
• Economic activity in 2016 remained weak, but growth is projected to accelerate to above 3% in 2017-18
• Timely implementation of measures and use of deposits for debt reduction are needed to reach the RCF fiscal consolidation targets

An International Monetary Fund staff team, led by Mr. Alejandro Guerson, visited Dominica from March 7-20 to conduct the 2017 Article IV consultation. The team met with Prime Minister Roosevelt Skerrit, senior government officials, labor unions, and private sector representatives.

Mr. Guerson issued the following statement at the conclusion of the visit.

“Since tropical storm Erika in August 2015, government efforts continued to focus on infrastructure rehabilitation and social relief, while addressing fiscal sustainability. Significant effort and resources were allocated to the reconstruction of public infrastructure and support to the affected population, while the first-generation of fiscal measures committed in the Rapid Credit Facility disbursement, and some additional measures, have been passed.

“Economic activity in 2016 remained weak as capacity constraints and unfavorable weather conditions slowed public investment more than anticipated. Growth is projected to accelerate to above 3 percent in 2017-18 on the back of a pickup in public investment and several large-scale projects, and to stabilize at a potential rate of 1.5 percent over the medium term. The external current account deficit is projected to widen due to the increase in imports of goods and services during the execution of reconstruction investment and the large investment projects. In the medium term, the external balance is projected to gradually improve as agriculture, tourism, and manufacturing recover, and geothermal electricity generation reduces oil imports.

“Despite high Citizenship-By-Investment (CBI) revenues, the fiscal outlook has deteriorated largely due to lower projected grant revenues; a downward revision in the projected yields of the fiscal consolidation measures; the increase in social transfers; and the reduction of the corporate income tax rate in January 2017. As a result, the use of government deposits to cover financing needs would be necessary to reach the regional debt target of 60 percent of GDP by 2030 without increasing the fiscal consolidation effort above the commitments in the RCF disbursement.

“The fiscal outlook underscores the importance of a timely implementation of the fiscal consolidation package. The efforts to improve tax administration should be maintained to make the gains in compliance durable. On the expenditure side, the government should limit the increase in the wage bill and prepare specific plans for the gradual unwinding of the expenditures related to recovery and reconstruction in the aftermath of Erika. Fiscal consolidation should focus on reducing the underlying primary balance, that is, the primary balance excluding unpredictable revenues, such as CBI flows, and transitory factors. Given the risks to the fiscal outlook, the authorities should also explore contingent fiscal consolidation measures such as developing a formal tax incentives policy for private investment, preparing a revenue enhancing tax reform, and improving spending efficiency through better targeting and means testing of social programs. In addition, strengthening fiscal management is critical for the durability of the fiscal consolidation gains, including through enhancing budget preparation and execution processes, further improving the integrity of the CBI program, and considering the adoption of fiscal responsibility legislation.

“Despite ample liquidity, banks’ credit to the private sector remains weak as a result of insufficient bankable projects, persisting low profitability, and high non-performing loans (NPLs). The authorities took steps to increase the capital of the National Bank of Dominica, but persistent actions are needed to improve the soundness of financial institutions and to reduce NPLs, including though the operationalization of the Eastern Caribbean Asset Management Company.

Moreover, the significant government involvement with credit programs through public financial institutions reduces the scope for efficient financial intermediation. The credit union sector is increasing its share in financial intermediation, relieving some financing constraints, but also adding risk to financial stability given their high NPLs and low capital buffers. The regulation and supervision of credit unions should thus be revamped with a stronger enforcement framework, in coordination with the regional initiative. The global tightening of the requirements for correspondent banking relationships (CBRs) confronts Dominica with important challenges. Significant progress has been made to strengthen AML/CFT legislation closer to international standards in recent years, but enforcement remains a challenge given capacity constraints. Lowering the risk of withdrawal of CBRs would require improving information sharing agreements between respondent and correspondent banks, as well as encouraging bank mergers.

“Improving the conditions for private investment, especially for export activities, is the key to accelerating growth. Efforts should therefore focus on the removal of costs and barriers that affect investment decisions and profitability. Specifically, the government should enhance labor market legislation and better target education programs in order to improve labor productivity and mobility across sectors; reduce the cost of doing business, especially in terms of resolving insolvency, registering property, paying taxes, and obtaining construction permits; explore the potential for expansion and further diversification of tourism markets; enhance the resilience of public infrastructure to natural disasters; and advance on the development of geothermal generation of electricity.

“The IMF will continue to have a close dialogue with the authorities as they address these challenges. The team would like to express its gratitude to the authorities, labor unions, and private sector representatives for the close and constructive dialogue.”