Dominica: Staff Concluding Statement of the 2025 Article IV Mission

Mission Concluding Statement

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Dominica: Staff Concluding Statement of the 2025 Article IV Mission

April 4, 2025

Washington, DC: An International Monetary Fund (IMF) staff team, led by Mr. Faircloth, visited Roseau and held discussions on the 2025 Article IV consultation with Dominica’s authorities during March 24–April 3. At the end of the consultation, the mission issued the following statement, which summarizes its main conclusions and recommendations.

Dominica’s economy has continued its expansion. Real GDP grew by 3.5 percent in 2024, supported by a recovery in tourism and targeted development investment to boost economic capacity and competitiveness. Inflation has eased from its 2023 peak of 7 percent, averaging 3.1 percent in 2024. Tourism arrivals have surpassed pre-pandemic levels by roughly 32 percent, but the composition has shifted towards cruise visitors over stayovers. The current account (CA) deficit narrowed by 2 percentage points to 32¼ percent of GDP in 2024, reflecting higher tourism receipts. The labor market recovery remains uneven, however, with formal employment lagging behind overall growth.
Fiscal imbalances have narrowed, but public debt remains high and above pre-pandemic levels. The primary deficit narrowed to 2 percent of GDP in FY2023/24 and is projected move into a modest surplus of 0.1 percent of GDP in FY2024/25. This improvement reflects the impact of recent tax measures—including higher excise duties on sugary drinks, alcohol, tobacco, and diesel—and an expected moderation in capital expenditures mainly related to slow implementation rates and capacity constraints. While public debt has fallen in recent years after peaking at 112½ percent of GDP in FY2020/21 following successive natural disaster events and the pandemic shock, it remains high relative to its ECCU peers at around 100 percent of GDP.
The financial system is stable and liquid, with a mixed credit picture and vulnerabilities that require careful monitoring. Bank credit has declined further since 2023 reflecting ongoing de-risking amid persistent balance sheet challenges. Despite adequate capitalization, bank sovereign and overseas exposures remain elevated, while improvements in non-performing loans (NPLs) have been slow with levels exceeding prudential guidelines alongside still fragile provisioning. Meanwhile, the credit union (CU) sector is expanding its lending portfolio rapidly, despite weak capitalization, high NPLs, and limited provisioning—all of which breach supervisory thresholds in aggregate. The growing systemic importance of CUs—which now account for 53 percent of total private sector credit—highlights a need to close supervisory gaps by modernizing regulatory frameworks to better safeguard financial sector stability.
Dominica’s economy is expected to continue expanding, underpinned by ongoing development investment. The economy is projected to grow by 4¼ percent in 2025, supported by ongoing strategic investment in flagship infrastructure projects to boost capacity in tourism and transition to lower-cost geothermal energy. Growth is expected to converge towards 2 percent over the longer term, as major capital projects wind down and fiscal consolidation intensifies. The CA balance is projected to improve steadily to its norm by 2028 on the back of increased tourism, a normalization of investment imports, and reduced fuel imports with the rollout of geothermal energy. The primary balance is projected to strengthen gradually to 2.0 percent of GDP by 2030 on current policies and as capital expenditures recede amid declining CBI inflows, falling short of fiscal rule obligations. Public debt is projected to decline to 69¾ percent of GDP by 2035 yet remains at high risk of debt distress and above the prudential currency union debt benchmark.
Risks to the outlook are elevated and tilted to the downside. Escalating trade tensions, policy uncertainty, and commodity price volatility pose external risks to tourism, trade, and foreign direct investment (FDI). Pressure on global interest rates may lead to market losses on overseas investments, with spillovers to domestic credit and FDI. Extreme natural disaster shocks pose additional risks to growth. Domestically, fiscal underperformance, rising arrears, and shortfalls to expected CBI inflows could weaken economic activity, jeopardize flagship projects, exacerbate imbalances, and potentially trigger debt distress. Weakness in the local financial system could amplify these shocks. At the same time, better than expected growth dividends from ongoing flagship projects pose an upside risk to the long-term outlook.
More ambitious fiscal consolidation is needed to reduce economic imbalances and debt vulnerabilities, mitigate disaster risks, and help reinforce prospects for resilient growth. The economic expansion presents an opportunity to rebuild critical fiscal buffers. These include: i) achieving fiscal rule targets by maintaining a primary surplus of at least 2 percent of GDP from 2026 onward to reduce public debt below 60 percent of GDP by 2035; and ii) adequately capitalizing the Vulnerability, Risk and Resilience Fund (VRF) to help insure against natural disaster shocks.[1] Reaching these goals will require identifying an estimated EC$75 million in cumulative fiscal consolidation measures over two years to sustain 3½ percent of GDP primary surplus from FY2026/27. The consolidation strategy should focus on improving non-CBI fiscal balances, while safeguarding critical social and economic investment to protect growth and the most vulnerable. Stronger fiscal consolidation would help reduce debt vulnerabilities and the financial sector’s exposure to the public sector, and also facilitate external rebalancing thereby reducing external vulnerabilities.
A multipronged strategy is recommended to broaden revenues and rationalize expenditures to preserve vital social and economic investments for resilient growth. Revenue mobilization should build on recent initiatives to reduce the reliance on CBI inflows, including by rationalizing tax incentives to curb leakage, enhancing VAT yields via a rate adjustment, pursuing levies on tourism and highways, introducing a solid waste fee, and improving tax administration and compliance. On the expenditure side, exploiting further efficiencies in goods and services spending while sustaining restraint in wages are priorities. A reprioritization of expenditure outlays is also essential, including by revamping the National Employment Program (NEP) into a revolving skills training program to alleviate skills gaps within the economy, and recalibrating the housing program to provide support on a need's basis through means-testing and with cost recovery mechanisms. Additionally, tariff adjustments on key public services should be pursued, thus reducing government transfers and contingent liability risks.
Enhancing the targeting and sustainability of social protection programs are a key part of the adjustment strategy to safeguard social inclusion and resilience. Dominica’s social protection framework is fragmented and mostly unconditional, with expenditures nearly twice that of peers with similar per capita GDP. Reducing overlap and improving targeting requires a centralized beneficiary registry and information management system to monitor support, identify gaps and duplication, and facilitate payments. To ensure pension system sustainability, further parametric reforms are needed, including higher contribution rates, lower replacement rates, and establishing a harmonized national retirement age of 65.
Reducing balance sheet vulnerabilities and strengthening regulatory oversight is critical. For banks, efforts should focus on stricter enforcement of provisioning and NPL standards, managing loan loss allowances, and facilitating the disposal of impaired assets, while closely monitoring sovereign and foreign investment exposures. For credit unions, the push to modernize the regulatory framework and close arbitrage opportunities by end-2025 is timely. Priorities should include reinforcing the operational independence of Financial Supervisory Unit (FSU), enhancing risk-based supervision tools, updating regulatory thresholds, articulating strengthened provisioning and loan management frameworks, and bolstering enforcement tools. Broader financial stability can also be reinforced by: i) participating in the ECCB’s regional initiative to set common minimum regulatory standards for non-bank financial institutions, ii) ensuring the FSU is adequately resourced for monitoring asset quality (especially for restructured loans and forbearance measures), iii) conducting regular audits and on-site examinations, especially for larger credit unions, and iv) strengthening governance via enhanced "fit and proper" criteria for board members.
Addressing structural challenges that hinder financial intermediation remains a priority. Despite abundant liquidity in the banking system, businesses continue to face barriers to access financing that stem, in part, from long-standing structural deficiencies related to weak credit information, outdated collateral and foreclosure laws, and inefficient bankruptcy procedures. The upcoming launch of a regional credit bureau should streamline the lending process and improve credit quality. This should be complemented by reforms to modernize national collateral, foreclosure, and bankruptcy frameworks and efforts to streamline loan documentation processes.
Continued structural reforms are essential for fostering resilient and sustainable growth. Persistent structural bottlenecks have weighed on growth potential by weakening contributions from human and physical capital and eroding innovation and productivity. Eliminating gaps in education and training relative to economic needs is essential to improve labor market outcomes. Resilient infrastructure is crucial to safeguard physical capital from natural disaster shocks and the transition to geothermal power generation is pivotal to reduce external vulnerabilities and bolster prospects for resilient growth. A comprehensive policy approach is required to alleviate impediments to innovation and allocative efficiency. Efforts to redress skills gaps and improve financial intermediation should be complemented by measures to improve the business environment, including by exploiting digitalization opportunities and streamlining regulatory and administrative processes for tax compliance, business registration, licensing, and permitting.
Concerted efforts to bolster institutional frameworks to mitigate risks and support surveillance, economic planning, and policy execution should continue. Ongoing efforts to strengthen AML/CFT legislation and procedures in line with the Caribbean Financial Action Task Force (CFATF) mutual evaluation should help protect correspondent bank relationships. Progress to enhance coordination across regional CBI programs to improve due diligence and transparency is welcome. Dominica should maintain its strategy of proactive engagement to address concerns around its CBI regime to safeguard this critical source for development finance. Weaknesses in statistical compilation, tax administration, and public financial management (PFM) frameworks—including under-developed internal CBI reporting systems—complicate policy monitoring, development, and execution. Priorities for ongoing engagement include strengthening institutional capacity in statistical compilation and improving PFM processes across fiscal reporting, treasury operations, public investment management, and budget processes to enable full fiscal rule implementation. The IMF stands ready to build on its ongoing capacity development program with Dominica in these and other areas.

The IMF team is grateful to the authorities and other local stakeholders for their warm hospitality, collaboration, and constructive dialogue.

Table 1. Dominica: Selected Economic Indicators, 2020–27


					Prel.	Projections
	2020	2021	2022	2023	2024	2025	2026	2027


Output and prices
Real GDP 1/	-16.6	6.9	5.6	4.7	3.5	4.2	3.3	2.9
Nominal GDP 1/	-17.5	10.1	9.3	7.7	6.7	7.2	5.7	4.9
Consumer prices
Period average	-0.7	1.6	7.7	4.2	3.1	2.8	2.3	2.0
End of period	-0.7	3.5	8.7	2.5	2.1	3.1	2.3	2.0
Central government balances 2/
Revenue	59.1	58.8	62.3	59.1	54.5	47.5	38.4	37.8
Taxes	23.3	22.3	22.4	21.5	21.5	20.9	19.7	19.1
Non-tax revenue	33.3	30.9	38.4	34.0	31.0	24.7	16.7	16.7
Grants	2.4	5.5	1.5	3.6	2.0	2.0	2.0	2.0
Expenditure	66.6	67.0	69.5	63.6	57.4	50.2	40.6	39.4
Current primary expenditure	36.5	37.5	31.3	27.3	27.4	27.0	27.0	27.0
Interest payments	2.1	2.6	2.9	2.5	3.0	3.0	2.8	2.6
Capital expenditure	28.0	26.8	35.3	33.8	27.0	20.2	10.8	9.8
Primary balance	-5.4	-5.6	-4.3	-2.0	0.1	0.4	0.7	1.0
Primary balance, excluding CBI	-36.7	-34.8	-41.0	-35.0	-29.9	-23.3	-15.0	-14.7
Overall balance	-7.5	-8.2	-7.2	-4.5	-2.9	-2.7	-2.2	-1.6
Central government debt (incl. guaranteed) 3/	112.5	108.5	104.3	99.8	100.6	96.9	94.1	91.5
External	70.9	70.2	66.7	64.2	69.3	65.4	66.7	67.4
Domestic	41.6	38.3	37.6	35.7	31.3	31.5	27.4	24.1
Money and credit (annual percent change)
Broad money (M2)	-9.9	1.9	-1.3	-0.4	4.2	6.2	5.7	4.9
Credit to the private sector	-0.3	3.6	2.7	-3.6	-1.5	1.2	3.7	5.0
External Sector
Terms of Trade (% change)	11.9	-11.1	-6.2	2.6	1.3	0.3	-0.4	-0.8
Current account balance, of which:	-37.0	-33.5	-27.0	-34.2	-32.2	-30.4	-23.1	-17.1
Exports of goods and services	20.0	21.2	28.6	28.9	31.8	35.0	33.9	33.9
Imports of goods and services 4/	60.0	57.1	58.3	63.8	65.5	66.5	58.1	52.1
Capital and financial account 5/	36.2	28.0	29.1	36.2	33.5	31.0	23.6	17.6
FDI	4.6	4.7	2.9	7.2	7.0	5.6	5.5	5.5
Capital transfers	23.0	29.1	21.6	30.4	21.8	23.0	14.6	8.4
of which Citizenship By Investment	23.2	30.2	33.1	34.8	31.5	26.7	19.5	15.7
Other (incl. errors and omissions)	8.6	-5.8	4.6	-1.4	4.7	2.4	3.6	3.8
External debt (gross) 6/	107.6	87.5	100.2	86.9	89.7	82.1	83.5	83.1
Saving-Investment Balance	-37.0	-33.5	-27.0	-34.2	-32.2	-30.4	-23.1	-17.1
Saving	-12.9	1.7	10.3	3.9	2.4	-2.7	-3.5	-2.5
Investment	24.0	35.3	37.3	38.1	34.7	27.7	19.6	14.6
Public	21.0	28.3	32.3	36.1	32.2	25.2	17.1	12.1
Private	3.0	7.0	5.0	2.0	2.5	2.5	2.5	2.5
Memorandum items:
Nominal GDP (EC$ millions)	1,361	1,499	1,639	1,766	1,885	2,020	2,135	2,240
Nominal GDP, fiscal year (EC$ millions)	1,430	1,569	1,703	1,825	1,952	2,077	2,188	2,294
Net imputed international reserves:
End-year (millions of U.S. dollars)	165.6	165.2	182.3	164.2	168.3	179.8	192.2	203.9
Months of imports of goods and services	6.6	6.2	6.2	4.7	4.4	4.3	5.0	5.7
Holdings of SDRs (millions of SDRs)	0.2	11.1	9.6	8.0	7.9	7.9	7.9	7.9


Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.
1/ At market prices.
2/ Data for fiscal years from July to June. Figures shown for a given year relate to the fiscal year beginning on July 1 of that year.
3/ Includes estimated commitments under the Petrocaribe arrangement with Venezuela.
4/ Includes public capital expenditure induced imports from 2019 onwards to account for possible mitigation of natural disasters.
5/ Positive sign means inflow.
6/ Comprises public sector external debt, foreign liabilities of commercial banks, and other private debt. Calendar year basis.

[1] The VRF is one of three main pillars of Dominica’s multi-layered disaster resilience strategy intended to self-insure against small but frequent NDs by accumulating 12 percent of GDP in a dedicated natural disaster contingency fund at a rate of 1.5 percent per year.

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Mission Concluding Statement

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Dominica: Staff Concluding Statement of the 2025 Article IV Mission

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