Dominican Republic: Staff Concluding Statement of the 2018 Article IV Mission

February 14, 2018

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The Dominican economy continues to perform well. The above-potential growth of 2014-16 has been slowed down by a cyclical deceleration in domestic demand, weather phenomena and other factors during 2017. The growth momentum nevertheless picked up following the mid-year monetary easing, allowing the economy to grow 4.6 percent in 2017. Growth is expected to accelerate to 5.5 percent in 2018, supported by reinvigorated credit growth and benign external conditions, and to remain around its potential of around 5 percent over the medium-term. Employment and real wages continue to recover, while the unemployment rate fell to 5.1 percent, near historical lows. Inflation recovered to the central bank’s target range, where it is projected to remain over the forecast horizon.

Risks around this economic outlook persist. The main downside risks for the economy stem from higher world oil prices, tighter-than-anticipated global financial conditions, and weaker-than-projected external demand. While ongoing reforms continue to strengthen the policy framework, preexisting structural vulnerabilities are weakening policy buffers and increasing vulnerability to these external risks. The key challenge ahead is to reinvigorate the reform momentum to build resilience to these risks, increase potential growth and further reduce poverty and inequality.

The efforts made by the government to strengthen the fiscal position are welcome, but more meaningful consolidation measures are needed to address structural fiscal weaknesses. Recent measures to strengthen tax and customs administration are helping boost tax receipts, but would be insufficient to reverse upward debt dynamics in the face of tightening global financing conditions, increasing oil prices and a growing debt service burden. In this context, stronger efforts will be needed to rebuild fiscal buffers, with the composition of the necessary fiscal adjustment mindful of its growth and social impact. This would mean focusing the adjustment on broadening the tax base, including by streamlining tax incentives and exemptions, and simplifying the tax system, while protecting the most vulnerable. The resulting savings from a lower interest bill could then be used to increase social and productive public investment spending.

A stronger fiscal policy framework would support efforts to improve the fiscal position. A medium-term fiscal framework, anchored in longer-term debt sustainability objectives, would reduce policy uncertainty and further strengthen its credibility with the markets. This should be supplemented by widening the coverage and timeliness of fiscal statistics. Ongoing efforts to advance in these areas, including to align public statistics with international norms and develop a medium-term policy framework, along with recent reforms to improve public financial management and strengthen transparency in the public procurement processes, are welcome.

The central bank’s inflation-targeting framework is delivering good results, and the neutral monetary policy stance is appropriate. With the economy growing close to its potential and inflation within the target band, near-term risks to the inflation outlook are broadly balanced, with still moderate core inflation but increasing commodity and imported prices. The neutral policy bias is therefore consistent with current economic conditions, but a tighter monetary stance may be required if internal or external inflationary pressures pick up. Ongoing reforms to continue the move towards a more flexible exchange rate, including the planned introduction of market infrastructure, should support the economy’s ability to absorb external shocks. The mission welcomes recent progress to build reserve buffers, with the current strength of the external position (reaching the lowest current account deficit in over a decade) providing an important opportunity to continue these efforts.

Sound regulatory and supervisory reforms adopted since the banking crisis 15 years ago have strengthened the financial sector. Ongoing efforts to continue improving prudential supervision and regulation, and to address weaknesses in the oversight of the largest nonbank institutions, will further strengthen the system . These efforts will need to be complemented by reforms to fully align the supervisory and regulatory framework with international best practices and to strengthen bank risk management. Finally, the recent introduction of the law on capital markets and the strengthening of the anti-money laundering framework is welcome, with the ongoing focus on the latter’s effective implementation further boosting transparency in the financial system.

Increasing the economy’s growth potential is important to support faster income growth and address remaining social challenges. Government’s efforts to improve outcomes in education, health and infrastructure, advance the reform agenda for the electricity sector, as well as strengthen the doing-business environment and climate change preparedness, are welcome. They will help boost productivity, investment and potential growth, and would need to be supplemented by more ambitious efforts to sustainably address the economic drag from the electricity sector, high transportation costs, and a complex tax system. Social outcomes would also be strengthened by reforms to widen the coverage of social security, ensure adequate retirement income, and refocusing fiscal resources towards social and infrastructure spending.

Table 1. Dominican Republic Selected Economic Indicators

Population (millions, 2016 estimate) 10.08

GDP per capita 2016 (U.S. dollars)

7,114

Quota 218.9 millions SDRs / 0.09% of total

Poverty (2016, share of population)

30.5

Main export product tourism, textiles, gold

Extreme poverty (2016, % of pop.)

6.5

Key export markets U.S. and Canada

Adult literacy rate (percent, 2014)

91

Projection

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

(Annual percentage change, unless otherwise stated)

Output

Real GDP

7.6

7.0

6.6

4.6

5.5

5.0

5.0

5.0

5.0

5.0

Contributions to growth

Consumption

3.2

4.2

3.7

3.3

3.4

3.3

3.4

3.6

3.7

3.7

Investment

3.8

5.6

2.7

-0.7

2.4

2.0

1.8

1.9

2.0

2.0

Net exports

0.6

-2.7

0.2

1.9

-0.3

-0.3

-0.3

-0.6

-0.7

-0.7

Nominal GDP (RD$ billion)

2,841

3,068

3,298

3,562

3,943

4,283

4,675

5,103

5,569

6,081

Nominal GDP (US$ billion)

65.3

68.2

71.7

74.4

Gross national saving (percent of GDP)

20.6

21.6

21.9

22.6

23.3

23.3

23.4

23.4

23.5

23.6

Output gap (in percent of potential output)

-0.4

0.6

1.4

0.4

0.7

0.5

0.3

0.2

0.1

0.0

Unemployment

Unemployment rate (in percent; period average)

6.4

5.9

5.5

5.4

5.1

5.1

5.1

5.1

5.1

5.1

Prices

Consumer price inflation (end of period)

1.6

2.3

1.7

4.2

4.0

3.7

4.0

4.0

4.0

4.0

Consumer price inflation (period average)

3.0

0.8

1.6

3.3

4.9

3.5

4.0

4.0

4.0

4.0

Exchange rate

Exchange rate (RD$/US$ - period average) 1/

43.5

45.0

46.0

47.9

Exchange rate (RD$/US$ - eop) 1/

44.3

45.5

46.7

48.0

Real effective exchange rate (eop, - depreciation) 1/

0.0

2.8

-1.5

-2.3

Government finances

(in percent of GDP)

Consolidated public sector debt

47.2

47.3

50.0

51.4

51.4

52.6

53.4

54.4

55.5

56.7

Consolidated public sector balance 2/

-4.4

-1.6

-4.3

-4.5

-4.3

-4.4

-4.4

-4.5

-4.8

-4.9

Consolidated primary public sector balance

-0.7

2.2

-0.2

-0.2

0.2

0.3

0.4

0.4

0.4

0.4

Central government balance

-2.6

0.1

-2.8

-3.2

-2.8

-2.9

-3.0

-3.2

-3.5

-3.6

Revenues and grants

14.8

17.5

14.8

15.1

15.1

15.1

15.1

15.1

15.0

15.0

Primary spending, o.w.:

14.9

14.8

14.7

15.3

14.5

14.5

14.4

14.4

14.4

14.4

Transfers to electricity sector

1.4

0.8

0.6

0.5

0.6

0.5

0.4

0.4

0.4

0.4

Interest expenditure

2.5

2.6

2.9

3.1

3.4

3.5

3.7

3.9

4.1

4.2

Rest of NFPS

-0.4

-0.3

-0.2

-0.1

-0.2

-0.2

-0.2

-0.2

-0.2

-0.2

Financial sector

(Annual percentage change; unless otherwise stated)

Broad money (M3)

9.3

12.1

9.8

9.7

10.6

8.6

9.1

9.1

9.1

9.1

Credit to the private sector

19.5

12.7

12.1

10.1

12.1

9.6

9.1

9.1

9.1

9.1

Policy interest rate 1/

6.3

5.0

5.5

5.3

Average deposit rate (1-year; in percent) 1/

6.4

6.4

6.7

5.2

Average lending rate (1-year; in percent) 1/

13.9

14.9

15.1

12.9

Balance of payments

(in percent of GDP)

Current account

-3.3

-1.9

-1.1

-0.2

-1.4

-1.7

-1.9

-2.3

-2.7

-3.0

Goods, net

-11.3

-10.9

-10.5

-10.1

-11.0

-10.9

-10.8

-10.9

-11.2

-11.4

Services, net

6.3

6.4

6.9

7.0

7.0

7.2

7.3

7.3

7.3

7.3

Income, net

1.7

2.7

2.5

2.8

2.6

1.9

1.6

1.4

1.2

1.2

Capital account 3/

0.0

3.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Financial account

-4.8

-1.1

-2.2

-1.2

-1.4

-1.7

-1.9

-2.3

-2.7

-3.0

Foreign direct investment, net

-3.4

-3.2

-3.4

-4.8

-3.3

-3.3

-3.3

-3.3

-3.3

-3.3

Portfolio investment, net

-2.3

-5.1

-2.4

-2.3

-2.5

-1.9

-1.7

-1.7

-1.3

-1.4

Financial derivatives, net

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other investment, net

0.6

6.6

2.5

4.9

3.6

2.7

2.5

2.1

1.4

1.2

Reserves,net

1.8

0.3

0.6

1.1

1.0

0.8

0.7

0.6

0.6

0.6

NIR (in millions of U.S. dollars)

4,361

5,152

6,047

6,780

7,428

8,028

8,578

9,128

9,678

10,178

NIR in months of imports

2.6

3.0

3.4

3.5

3.6

3.7

3.7

3.7

3.7

3.7

NIR in months of imports (excluding free trade zone imports)

3.2

3.6

4.1

4.0

Total external debt (in percent of GDP)

40.0

37.3

37.9

36.8

36.6

37.1

37.3

37.6

37.9

38.4

of which: Public sector

26.6

24.9

25.8

25.9

26.3

27.2

27.9

28.7

29.5

30.4

Sources: Country authorities; World Bank; and Fund staff calculations and estimates.

1/ Latest available.

2/ The consolidated public sector includes the central government, some decentralized entities, the electricity holding company, and the central bank.

3/ For 2015 includes the grant-element of a debt buyback operation with PDVSA of 3.1 percent of GDP.

4/ In relation to imports of goods and nonfactor services of the following year, excluding maquila.

* Change between 2007 H1 relative to 2006 H1.



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