Santo Domingo:
An International Monetary Fund (IMF) team led by Mr. Esteban Vesperoni
visited the Dominican Republic from April 29 to May 13 to hold the 2022
Article IV Consultation discussions.
At the conclusion of the mission, Mr. Vesperoni issued the following
statement:
“The Dominican Republic’s dynamic economy continued to show remarkable
resilience to global shocks. This was supported by sound policies, monetary
policy support, a nimble COVID vaccination campaign and a well-attuned
reopening that allowed the economy to make the most of the global rebound
last year. This resilience and strong signals of policy sustainability are
placing the Dominican economy in a good position to face emerging global
challenges going forward.
“The economy recovered strongly from the pandemic, despite global factors
that created challenges in terms of inflation. Real GDP increased by 12.3
percent in 2021, amid broad sectoral growth—including a notable recovery in
construction and tourism, with arrivals exceeding 2019 levels since last
fall. By end-2021, output was 5 percent above pre-pandemic levels, pointing
to a recovery beyond a statistical rebound and consistent with strong
employment growth. Inflation convergence is taking longer than envisaged.
At about 9 percent last March, it continued to exceed the target range due
primarily to high inflation in the United States, higher global energy and
food prices, and supply chain disruptions. The external position was
robust, with the current account financed by FDI and a significant
accumulation of reserves. The financial system remains resilient and
continues to support the economy despite the unwinding of pandemic-related
regulatory flexibility.
“The outlook points to a continued recovery, though global developments
pose risks. GDP growth would converge to 5 percent—around its potential—and
inflation would return to the target range by next year as the impact of
global shocks recedes, in the context of financial stability and a sound
external position. As for risks, the war in Ukraine may have a
stronger-than-expected effect on global growth and inflation. The pandemic,
while well-contained in the Dominican Republic, may downgrade growth in
other regions. And monetary policy tightening in the United States may have
a stronger-than-expected impact on capital flows. These shocks are creating
fiscal and monetary policy challenges. The authorities have appropriately
responded with temporary measures while maintaining budget discipline
through expenditure control and executing proactive debt-management that
reduced financing risks. The central bank has begun a warranted
normalization of monetary policy, absorbing liquidity and increasing the
monetary policy rate.
“In the short term, policy priorities should aim at securing the return of
inflation to the target range and keeping the downward trajectory in public
debt, while supporting the vulnerable population from the impact of global
shocks. The pace of the ongoing monetary policy tightening cycle should be
data dependent, keeping inflation expectations well-anchored and
safeguarding the hard-won credibility of the inflation targeting regime.
The response of fiscal policy to the impact of global shocks on inflation
should continue to be based on temporary budgeted measures while improving
their targeting where feasible. An inclusive fiscal consolidation can
secure the current downward path in public debt.
“The team welcomes reforms in the electricity sector, which can ensure
reliable provision of electricity, reduce fiscal transfers to the sector
and enhance the quality of public spending. The electricity sector has been
a burden to public finances in the past and the Electricity Sector Pact has
given the authorities a mandate to enhance governance in the sector, create
conditions to foster investment, and implement reforms in the tariff and
subsidy system, which can achieve sustainability in the sector.
“We also commend the authorities for the reforms to improve policy
frameworks that aim at fostering their vision of a more effective public
administration. The authorities are fully committed to implement a fiscal
responsibility law. In pursuing this objective, they are assessing plans to
strengthen public financial management and the medium-term fiscal framework
while working on increasing transparency and governance, including in
public procurement. The authorities continue to align the banking
regulatory and supervision framework to international standards.
“Over the medium term, well-sequenced reforms—some of which are
ongoing—would foster inclusive growth:
-
Strengthening policy and regulatory frameworks
. The monetary policy framework would benefit from the recapitalization
of the central bank to strengthen its institutional and financial
independence. Sustained work on financial supervision and regulation,
the macroprudential and crisis management frameworks, and the
regulatory framework for financial cooperatives will be important.
-
Revenue mobilization
. There is scope to mobilize more revenue by broadening the tax base
and streamlining exemptions while calibrating the distributional
impact. This would aid medium-term inclusive fiscal consolidation,
while maintaining policy space for critical spending.
-
Reforms to support growth
. Improvements in the business climate—such as the zero-bureaucracy initiative and the new customs law—can foster
investment. Infrastructure and human capital investment, more flexible
and formal labor markets, educational quality and labor market
participation of women, and climate change policies can further unlock
growth potential.
-
Improvements in social outcomes
. There is ongoing work to improve the targeting of social programs
while strengthening their focus on facilitating labor market insertion,
as well as to reinforce the application of the social security law in
the context of ongoing discussions in the social pact.
The mission met with President Luis Abinader, Central Bank Governor Héctor
Valdez Albizu, Minister of Finance José Manuel Vicente Dubocq, other senior
officials, and representatives of the civil society and the private sector.
The team would like to thank the authorities for exceptional hospitality
and open and productive discussions.”
