IMF Executive Board Concludes 2021 Article IV Consultation with the Dominican Republic

IMF News, July 1, 2021

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IMF Executive Board Concludes 2021 Article IV Consultation with the Dominican Republic

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• Published: July 1, 2021

Economic impact of COVID-19 and 2020 performance

• The pandemic led to a sharp economic contraction in the second quarter of 2020 due to global spillovers on tourism and exports and the lockdown’s impact on other sectors.
• Policy response elements that cushioned the impact:
  • increased social transfers and health spending
  • tax deferrals and targeted tax relief
  • monetary policy easing
  • liquidity support and prudential flexibility
• 2020 outcome:
  • Real GDP: -6.7
  • Inflation: increased in the second half of 2020 (largely supply shocks) but expectations remained well-anchored
  • Continued strong access to global markets financed the higher fiscal deficit
  • Financial sector remained resilient
  • Current account deficit remained more than fully financed by FDI, strengthening international reserves

Outlook, growth prospects, and risks

• Recovery expectations:
  • A significant recovery is expected starting in 2021, aided by US spillovers and the swift vaccination campaign.
  • Growth is expected to converge to potential over the medium term, progressively closing the output gap.
  • Tourism recovery expected to be gradual; manufacturing exports, investment, consumption supported by global growth, resilient FDI, and buoyant remittances.
  • Inflation is expected to converge to the target over the policy horizon given a remaining output gap, anchored inflation expectations, and the temporary nature of supply shocks.
  • Public debt projected to follow a downward path with a gradual return to pre-pandemic primary balances.
  • The current account is expected to remain more than fully financed by FDI.
• Risks (broadly balanced but COVID-dominated):
  • Downside: Longer-than-expected vaccine deployment or prolonged pandemic could deter growth.
  • Upside: Faster global containment could yield positive spillovers.
  • Other risks: tighter global financial conditions and extreme weather events.

Executive Board assessment and policy guidance

• Directors commended the authorities’ decisive policy response, including health expenditures, social transfers, targeted tax relief, and supportive monetary and prudential policies.
• Fiscal policy:
  • Directors agreed policies appropriately balance recovery support with securing debt sustainability.
  • Envisaged fiscal consolidation protects critical social assistance and health spending through:
  • strict controls of non-priority expenditures
  • improved targeting of social and employment programs
  • Emphasized need for medium-term revenue mobilization via broadening the tax base and revision of tax exemptions.
  • Further electricity sector reforms recommended to create fiscal space to reduce debt sustainability risks while protecting investment and social spending.
  • Welcomed progress and urged further improvements in fiscal governance and transparency, including:
  • enhancing public financial management
  • introducing fiscal responsibility legislation
• Monetary and financial sector policy:
  • Monetary policy support remains appropriate as long as inflation expectations remain well-anchored.
  • Exchange rate flexibility recommended to provide a buffer against shocks.
  • Financial system: resilient and well-monitored, but would benefit from:
  • moving closer to international standards for supervision and regulation
  • enhancing the macroprudential and crisis management toolkit
  • recapitalizing the central bank to enhance its financial and institutional independence
• Structural reforms and social policy:
  • Importance of structural reforms to improve social outcomes and increase productivity:
  • make social programs more effective and focused on increasing labor market participation and education support
  • modernize the labor code to allow more flexible and formal work arrangements
  • narrow labor market skills gaps
  • address rural poverty and gender inequality
  • enhance competitiveness and reduce the regulatory burden
  • Adapting to and mitigating climate change risks remains a priority

Key statistics and projections (selected)

• Real GDP (annual percentage change):
  • 2017: 4.7
  • 2018: 7.0
  • 2019: 5.1
  • 2020: -6.7
  • 2021 (Projection): 5.5
  • 2022 (Projection): 5.0
• Contributions to growth (selected):
  • Consumption: 2019: 3.7; 2020: -1.9; 2021: 1.3; 2022: 2.9
  • Investment: 2019: 1.1; 2020: -4.3; 2021: 1.5
  • Net exports: 2019: -3.2; 2020: -0.4; 2021: 0.0
• Nominal GDP:
  • (RD$ billion) 2019: 4,562; 2020: 4,457; 2021 (Projection): 4,911; 2022 (Projection): 5,362
  • (US$ billion) 2019: 89.0; 2020: 78.9
• Output gap (in percent of potential output):
  • 2019: -4.6; 2020: -2.3; 2021 (Projection): -1.0
• Consumer price inflation (end of period):
  • 2019: 5.6; 2020: 4.5; 2021 (Projection): 4.0
• Government finances (In percent of GDP):
  • Consolidated public sector debt 2/: 2019: 53.2; 2020: 71.1; 2021 (Projection): 67.9; 2022 (Projection): 66.9
  • Consolidated public sector overall balance 2/: 2019: -3.3; 2020: -9.0; 2021 (Projection): -4.9
  • Consolidated public sector primary balance: 2019: 0.9; 2020: -0.1; 2021 (Projection): 0.7
  • Central government balance: 2019: -7.9; 2020: -3.5
  • Revenues and grants: 2019: 14.4; 2020: 14.9; 2021 (Projection): 14.1
  • Primary spending: 2019: 13.8; 2020: 18.9; 2021 (Projection): 14.8
  • Interest expenditure: 2019: 2.7; 2020: 3.6; 2021 (Projection): 3.4
• Financial sector:
  • Broad money (M3): 2019: 20.8; 2020: 11.6; 2021 (Projection): 9.5
  • Credit to the private sector: 2019: 11.8; 2020: 5.3; 2021 (Projection): 10.2; 2022 (Projection): 9.2
  • Policy interest rate 1/: 2020: 3.0 (Latest available)
• Balance of payments:
  • Current account: 2019: -1.3; 2020: -2.0; 2021 (Projection): -1.6
  • Goods, net: 2019: -10.2; 2020: -8.6; 2021 (Projection): -10.1
  • Services, net: 2019: 5.7; 2020: - (shown) 5.7
  • Income, net: 2019: 2.4; 2020: 4.9
  • Change in reserves (- increase): 2020: -2.5
  • NIR (in millions of U.S. dollars): 2017: 6,780; 2018: 7,627; 2019: 8,781; 2020: 10,752; 2021 (Projection): 11,602; 2022 (Projection): 12,484
  • Total external debt (in percent of GDP): 2017: 41.9; 2018: 40.2; 2019: 56.4; 2020: 55.3; 2021 (Projection): 53.7
  • Of which: Public sector: 2017: 24.2; 2018: 25.8; 2019: 27.3; 2020: 40.3; 2021 (Projection): 38.8; 2022 (Projection): 38.2

IMF Communications Department; July 1, 2021.

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• IMF COVID-19 Hub
• Policy Tracker
• Financial Assistance
• Questions & Answers
• Dominican Republic and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home