IMF Executive Board Concludes 2019 Article IV Consultation with the Dominican Republic

June 11, 2019

On June 5,2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Dominican Republic.

The economy rebounded to a record high growth of 7 percent in 2018, with the positive momentum carrying into early 2019. The return to above potential growth in 2018 reflected a strong private investment and consumption response to a timely monetary impulse after the slowdown in 2017, favorable external conditions and a continued strengthening of labor markets. The very strong economic performance over the past several years, aided by the authorities’ policies, led to substantial reduction in poverty, inequality and continued income convergence to advanced economy levels. The acceleration in activity has not put pressures on either internal or external balances: inflation remained subdued and the external position strong. This allowed monetary and fiscal policies to switch to neutral-to-tightening gear in 2018, guiding activity towards potential levels.

The outlook is favorable, with moderate and balanced risks to growth. Growth is expected to moderate to around 5½ percent in 2019 and 5 percent over the medium-term, both within the estimated potential range. The moderation will be driven by a slowdown in credit expansion, a less supportive external environment, and higher oil prices. Inflation is expected to rise gradually to the central bank’s target range of 4±1 percent with the pickup in food and oil prices. The external position is projected to remain broadly consistent with fundamentals and more than adequately financed by FDI. Main downside risks to the outlook are weaker-than-expected external demand and higher energy prices. On the upside, the domestic demand momentum in the near term could be stronger than anticipated, reflecting the solid income growth.

Executive Board Assessment [2]

Executive Directors commended the authorities for the strong economic performance, including dynamic growth, low inflation, stable external position, and improved social outcomes. Directors noted that while the outlook remains favorable, it is subject to risks. They encouraged the authorities to take advantage of the current favorable environment to further increase the economy’s resilience to shocks by building fiscal and reserve buffers, while strengthening long‑term growth and social outcomes through reforms to address structural bottlenecks.

Directors welcomed the authorities’ commitment to improve the fiscal position, including through ambitious tax administration reforms to curb evasion, mobilize revenues, and improve governance. Nonetheless, given that public debt is trending up despite strong growth, Directors called for further efforts to improve debt sustainability. They underscored the need for a front‑loaded fiscal adjustment aimed at widening the tax base and curtailing the electricity sector’s drag on the budget, while safeguarding fiscal space for growth‑enhancing public investment and social spending. Directors also supported adoption of a medium‑term fiscal framework, with a clear policy anchor and fiscal responsibility elements, to ensure policy credibility and limit fiscal risks.

Given subdued inflation, Directors supported maintaining the current neutral monetary policy stance, while remaining data dependent should pressures emerge. They welcomed the continued efforts to strengthen the monetary policy framework, highlighting the dividend from anchoring inflation expectations, and supported plans to recapitalize the central bank and introduce the foreign exchange trading platform to increase transparency and efficiency of foreign exchange markets and policies. In light of the favorable external position, Directors encouraged the continued accumulation of international reserves.

Directors welcomed financial system stability and wide–ranging reforms to further enhance financial resilience. They supported the ongoing modernization of the institutional framework for systemic risk oversight, strengthening of banking regulation and supervision, and cybersecurity reforms. They encouraged the authorities to take further action, including to strengthen the supervisory oversight of non‑bank financial institutions. Directors welcomed recent progress in updating the AML/CFT legal framework and encouraged the authorities to enhance the effectiveness of the regime.

Directors emphasized the importance of continued structural reforms to address impediments to higher productivity, income convergence, and social inclusion. Building on recent gains, they encouraged further measures to improve the business environment, remove trade and investment barriers, and continue reforms to education, health, and the pension system. Directors reiterated the need to decisively address the long–standing structural weaknesses that continue to weigh on potential growth, particularly losses in the electricity sector and inefficiencies in the product and labor markets. They also noted the need to broaden and strengthen the social security system, which will require additional fiscal space.

Table 1. Dominican Republic: Selected Economic Indicators

Projection

2016

2017

2018

2019

2020

Output

(Annual percentage change, unless otherwise stated)

Real GDP

6.6

4.6

7.0

5.5

5.2

Contributions to growth

Consumption

3.8

3.6

3.8

4.0

3.9

Investment

3.9

-0.6

3.7

1.3

1.3

Net exports

0.2

2.0

-0.7

-1.1

-0.4

Output gap (in percent of potential output)

1.0

-0.3

0.9

0.8

0.6

Unemployment and Prices

(In percent)

Unemployment rate (period average)

7.1

5.5

5.7

5.5

5.5

Consumer price inflation (end of period)

1.7

4.2

1.2

4.2

4.0

Consumer price inflation (period average)

1.6

3.3

3.6

2.1

4.1

Consolidated public sector 1/

(In percent of GDP)

Debt

48.7

51.5

53.1

54.3

54.9

Primary balance

-0.4

-0.6

0.1

0.0

-0.3

Overall balance

-4.2

-4.5

-3.8

-4.2

-4.6

Central government balance

-3.2

-3.4

-2.4

-3.3

-3.3

Revenues and grants

14.5

14.7

14.9

15.0

15.1

Primary spending

15.1

15.5

14.6

15.3

15.2

Interest expenditure

2.6

2.7

2.7

3.1

3.1

Central bank quasi-fiscal balance

-1.3

-1.2

-1.2

-1.1

-1.1

Rest of NFPS

0.3

0.2

-0.3

0.2

-0.3

Financial sector

(Annual percentage change, unless otherwise stated)

Broad money (M3)

9.8

11.2

7.0

7.6

10.9

Credit to the private sector

12.1

10.1

11.1

8.2

9.8

Policy interest rate 2/

5.5

5.3

5.5

5.5

…

Balance of payments

(In percent of GDP)

Current account, of which:

-1.1

-0.2

-1.4

-1.5

-1.7

Trade balance

-3.6

-2.7

-4.2

-4.0

-4.0

Financial account, of which:

-2.2

-1.8

-2.3

-1.5

-1.7

Foreign direct investment, net

-3.3

-4.7

-3.1

-3.1

-3.1

NIR (in millions of U.S. dollars)

6,047

6,780

7,627

8,016

8,622

NIR in months of imports

3.4

3.4

3.7

3.7

3.7

Total external debt (in percent of GDP)

40.7

43.2

41.5

41.6

40.1

of which: Public sector

26.9

29.2

28.7

29.5

29.2

Sources: National authorities and IMF staff calculations.

1/ The consolidated public sector covers the central government, decentralized non-financial institutions, municipalities, social security, non-financial public institutions, the electricity holding company, and the central bank.

2/ Latest available.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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