IMF Executive Board Concludes 2017 Article IV Consultation with Dominica
IMF News, December 20, 2017
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- Published: December 20, 2017
Economic outlook and growth projections
- Recovery from Tropical Storm Erika (August 2015) slower than anticipated; output growth of 1 percent in 2016, dragged down by a storm-related decline in manufacturing.
- Growth projections:
- 2017: 3.6 percent (projected)
- 2018: 3.3 percent (projected)
- 2019: 2.2 percent (projected)
- Medium-term potential rate: 1.5 percent
- Sectoral outlook: tourism, agriculture, and construction on a recovery path; public investment pickup and several large-scale private projects (with CBI and grant financing) boost near-term demand.
- Risks to outlook: recurrent natural disasters, delays in reconstruction and public investment due to capacity constraints, uncertain sources of grant and CBI financing, and financial sector weaknesses.
Fiscal outlook, CBI revenues, and policy recommendations
- Fiscal deterioration drivers: lower projected grant revenues; downward revision in projected yields of fiscal consolidation measures; increase in social transfers; reduction of the corporate income tax rate in January 2016.
- Despite high CBI revenues, reaching regional debt target of 60 percent of GDP by 2030 without increasing fiscal consolidation above commitments in the RCF disbursement would require the use of government deposits for debt reduction.
- Recommended fiscal measures and priorities:
- Continue implementing the fiscal consolidation plan committed at time of the RCF disbursement aimed at reducing debt to 60 percent of GDP by 2030 (adjustment of over 6 percent of GDP).
- Consolidation measures include: public wage restraint, reduction of tax incentives, and gradual unwinding of storm-related spending on reconstruction, goods and services, and social assistance.
- Target reductions in the underlying primary balance (excluding CBI revenues, grants, and storm-related spending).
- Avoid allocating CBI flows to recurrent spending; broaden the VF for natural disasters to include a saving sub-fund of CBI resources earmarked for debt reduction and public investment.
- Consider contingent fiscal measures to create fiscal space for reconstruction.
- Strengthen fiscal institutions: make the budget process the key instrument for medium-term planning; introduce fiscal rules within a formal fiscal responsibility legal framework; establish a formal framework to set a limit on tax incentives and limit discretional tax concessions.
- Early preparation is crucial given complexity of reforms.
Central government fiscal and debt indicators (selected)
- Central Government Balances (in percent of GDP):
- Revenue: 2016: 37.5; 2017: 36.9; 2018: 34.0; 2019: 33.0
- Expenditure: 2016: 38.8; 2017: 36.6; 2018: 32.9
- Primary balance: 2016: 2.3; 2017: 2.0; 2018: 2.1
- Primary balance excluding CBI Program: 2016: -8.6; 2017: -6.6; 2018: -3.6; 2019: -2.2
- Central government debt (including guaranteed) (percent of GDP):
- 2013: 80.1; 2014: 82.2; 2015: 82.9; 2016: 82.7; 2017: 77.8; 2018: 75.7
- External component: 2013: 61.6; 2016: 63.6; 2017: 58.8; 2018: 56.8
- Domestic component: 2013: 18.5; 2016: 19.0; 2017: 18.9
External sector and balance of payments
- Current account balance (percent of GDP):
- 2013: -9.7; 2014: -9.5; 2015: -8.0; 2016: -11.8; 2017: -12.1; 2018: -16.6; 2019: -16.0
- Exports of goods and services (percent of GDP): 2016: 42.4; 2017: 45.7; 2018: 43.9; 2019: 41.9
- Imports of goods and services (percent of GDP): 2016: 54.3; 2017: 58.1; 2018: 60.6
- External debt (gross) (percent of GDP): 2013: 83.3; 2016: 104.1; 2017: 101.1; 2018: 99.5; 2019: 97.5
- Net imputed international reserves (Millions of U.S. dollar): 2013: 85.4; 2016: 220.9; 2017: 223.3; 2018: 225.7; 2019: 227.8
- Months of imports of goods and services: 2013: 4.4; 2016: 8.5; 2017: 7.8; 2018: 8.0; 2019: 8.0
- Savings-Investment Balance (percent of GDP): Savings 2016: 4.3; 2017: 3.2; Investment 2016: 18.6; 2017: 20.6; 2018: 20.8; 2019: 19.2
Financial sector vulnerabilities and reforms
- Financial sector weaknesses: weak bank credit to private sector despite ample liquidity; high NPLs; low bank profitability; vulnerabilities in the systemically important credit union sector (high NPLs and low capitalization).
- Recommended actions:
- Clean up bank balance sheets by reducing NPLs and increasing bank capital.
- Make the ECAMC operational as soon as possible to facilitate removal of NPLs from bank balance sheets.
- Seek elimination of the ECCB’s MSR, which reduces banks’ profitability and delays NPL reduction.
- Strengthen supervision and regulatory powers of the FSU; advance regional credit union legislation.
- Ensure credit by public financial institutions is better targeted to address missing or incomplete credit markets.
- Establish a credit bureau (initiative supported).
- Review legislation to strengthen enforcement of loan contracts.
- Reduce the risk of withdrawal of CBRs by improving AML/CFT enforcement and encouraging respondent and correspondent banks to improve communication and information sharing; remove obstacles for bank consolidation; encourage bundling of financial services.
Structural reforms and resilience to natural disasters
- Strengthen resilience of public infrastructure; sustain efforts to improve business environment.
- Develop geothermal energy capacity to lower electricity costs and improve competitiveness.
- Labor market reforms: update labor market legislation to remove rigidities in working hours and align severance payments with needs of a more dynamic labor market.
- Incentivize educational attainment, including skills with excess demand, to facilitate labor adaptation and increase employment.
- Public wage negotiations should consider impacts on private sector wages, production costs, investment, employment, and external competitiveness.
Data and statistical capacity
- Data provision shortcomings due to capacity constraints in the statistical agency: weaknesses in coverage, accuracy, frequency, and timeliness.
- Surveillance would benefit from more timely and improved data on national and fiscal accounts, labor market, balance of payments, and credit unions.
Source: IMF Communications Department press release, December 20, 2017.
