Press Release No. 19/90

IMF Staff Completes 2019 Article IV Mission to Dominican Republic

March 25, 2019

An International Monetary Fund (IMF) team led by Ms. Aliona Cebotari visited the Dominican Republic from March 12 to 21, 2019, to conduct the discussions for the 2019 Article IV Consultation.

At the conclusion of the visit, Ms. Cebotari issued the following statement:

“The Dominican economy continues to perform very well, and substantial progress was made in improving social outcomes. Growth regained momentum in 2018 with recovering real income and, at 7 percent, growth was the highest in the hemisphere. The expansion brought many discouraged workers into the labor force, increased employment, and helped reduce inequality and poverty. Despite rapid growth supported by monetary policy early in the year, inflation remains contained at 1.2 percent as of December 2018 and the external position is strong. The robust economic performance benefitted from strengthened policy frameworks, competitiveness, and banking system over the past decade. To sustain this performance, however, reforms need a fresh push to address the remaining structural bottlenecks and propel the country towards faster income convergence to advanced country levels.

“The outlook for the economy is favorable, with risks broadly balanced. We expect growth to moderate to around 5½ percent in 2019, consistent with potential output growth, inflation to rise to the central bank’s target range as food and oil price shocks fade, and the external position to remain in line with fundamentals. The economy may be facing headwinds from a slowing global economy, but domestic demand can be stronger than expected, supported by solid income and credit growth. In light of developments and outlook to date, monetary policy can remain neutral, while being vigilant to signs of inflationary pressures.

“The mission welcomes recent reforms to strengthen the monetary and financial policy frameworks. These include the implementation of an electronic foreign exchange trading platform, the development of the foreign exchange derivatives markets, forward guidance in monetary policy communication, and a plan to recapitalize the central bank. These will help to reinforce the inflation targeting regime and move towards more efficient foreign exchange markets. Recent reforms to strengthen cyber security, the AML/CFT framework, and the micro and macroprudential frameworks will further increase the resilience of the financial system. Remaining challenges include strengthening the oversight of the financial cooperatives on a par with the banking system, and continuing the transition to international regulatory and accounting standards in the banking system.

“The authorities have also made important inroads in tackling tax evasion and improving the business environment. Strong efforts over the past two years to combat tax fraud and evasion are paying off, gradually broadening the tax base and creating a more level and equitable playing field. Policy bottlenecks in trade and doing business are also being removed by the strong collaboration between the government and the private sector under the auspices of the National Competitiveness Council.

“The current growth momentum provides a window of opportunity to undertake reforms critical to achieving a more sustained and inclusive growth. Priorities include:

• Fiscal consolidation , to create space for needed social and infrastructure spending and reduce vulnerability to shocks. Despite several years of robust growth and commendable results in curbing tax fraud and evasion, debt continues to grow due to large structural deficits fueled by a narrow tax base, a high interest bill, and long-standing losses in the electricity sector. In the absence of reforms to further widen the tax base (including by reducing tax incentives and exemptions), strengthen the electricity sector and improve spending efficiency, debt will continue to increase gradually over the medium-term.

• A framework for fiscal responsibility , to remove uncertainty about policy sustainability. Anchoring fiscal policies in a medium-term target would clarify the government’s objectives, guide policies towards this anchor and ensure the durability of a strengthened fiscal position. The framework could also help to improve management of fiscal risks, including from private-public partnerships and natural disasters.

• A sustainable solution for the electricity sector, which will boost overall productivity, improve the fiscal position and make space available for higher social and infrastructure spending.

• Ambitious structural reforms, to shift the economy towards a more sustained inclusive growth and a faster income convergence. The authorities rightly focused the policy effort on improving the business climate, facilitating trade, and investing in infrastructure and human capital, especially with reforms in education and health. Other reforms that would increase productivity and growth include simplifying the tax system, moving towards more efficient, flexible and formal labor markets, and reducing logistics costs. This year’s policy shift towards innovation—if focused appropriately on enhancing technological sophistication, export orientation and competition—can provide the necessary gear-shift.

• Strengthening the social safety nets, to promote more inclusive growth. To further reduce inequality and poverty, the authorities have focused on job creation, increasing the minimum wage, and strengthening the performance of the social security system; these reforms will continue to improve social outcomes. Further progress would be achieved through deeper reforms of the social security framework to allow broader access to social security, ensure an adequate retirement income, as well as modernizing labor market institutions.

“The mission would like to thank the authorities for their generous hospitality, and all those we met for frank and open discussions.”