Public Information Notice No. 10/63

Public Information Notice: IMF Executive Board Concludes 2010 Article IV Consultation with Dominica

May 25, 2010

On May 10, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Dominica.¹

Background

The global downturn has adversely affected the Dominican economy through lower tourism arrivals, foreign direct investment inflows and remittances, although less severely than other Eastern Caribbean Currency Union (ECCU) economies. Real Gross Domestic Product is estimated to have declined by only 0.3 percent in 2009. Total tourism receipts contracted by 16 percent during 2009. This decline reflected falling stayover arrivals after the Reunion 2008 event and greater discounting in 2009 partly offset by growth in cruise arrivals. FDI and remittances inflows dropped by 51 percent and 18 percent respectively in 2009.

In response to the global slowdown, the government decided to maintain capital spending in 2009 at the high post-hurricane level in 2008. Despite high capital spending, the overall fiscal position remained in surplus during FY 2008/09 (July–June) and so far in FY 2009/10. This reflects primarily continuing strong performance of the VAT introduced in 2006.The strong performance also helped finance a scaling up of social assistance to protect the poor from the effects of the 2008 spike in food and fuel prices and the global economic slowdown.

Consumer price inflation has picked up recently. The Consumer Price Index (CPI) increased by 4.4 percent (yoy) through February 2010, as increases in world food and fuel prices were passed through. This reflected a pick up in the later part of the year. On a period average basis, inflation was close to zero.

The external current account deficit decreased to 28 percent of GDP in 2009. In 2008, the deficit had widened to 32 percent of GDP due to higher reconstruction-related and fuel imports, which were mostly financed by external grants and FDI. Lower FDI-related and fuel imports in 2009 are estimated to have more than offset lower tourism receipts and remittances. To mitigate the adverse impact of the global downturn on the balance of payments, the Executive Board on July 10, 2009 approved a disbursement of SDR 3.28 million (about US$5.1 million) under the Rapid-Access Component of the Exogenous Shocks Facility.

Monetary aggregates show steady growth and the banking system has remained resilient. In the 12 months to December 2009, banking sector credit to the private sector grew by 6.9 percent and broad money by 10 percent. Prudential indicators suggest that banks are liquid and well capitalized, with declining nonperforming loans. The average nonperforming loans ratio and capital-based soundness indicators remain above prudential norms, although returns on assets have declined markedly in recent years.

The collapse of the Trinidad and Tobago-based CL Financial Group has exposed regional weaknesses in the regulation of nonbanks. The eight KPMG judicial managers appointed in each ECCU jurisdiction for the British American Insurance Company (BAICO) issued a joint report in October 2009 finding that the company is insolvent and illiquid. The ECCU member authorities are making progress in the creation of a new company to take over BAICO’s operations in the region.

The near to medium-term economic outlook is modestly positive. With the recovery of the global economy and expected improvements in international trade and tourism activities, the Dominican economy is expected to grow by 1½ percent in 2010. The downside risks are related to a potentially very slow recovery in advanced economies, which would adversely affect tourism activity. In addition, a rebalancing of global demand could imply weaker demand for tourism services from Dominica’s main source markets.

Executive Board Assessment

The Executive Directors noted that the Dominican economy has been more resilient to the global crisis than other ECCU countries and that its near- to medium-term outlook is positive. Directors welcomed the authorities’ Growth and Social Protection Strategy, which is appropriately aimed at guiding the economy toward fostering growth and reducing poverty while lowering public debt. Downside risks relate to a slower global recovery, possibly implying weaker demand for tourism.

Directors commended the authorities’ prudent fiscal policy stance in recent years, which has placed public debt on a declining path and allowed the government to respond to the global downturn by keeping capital spending in 2009 at high levels. They encouraged the authorities to reduce the debt-to-GDP ratio further, thus maintaining the ability to respond to external shocks.

Most Directors expressed concern that the large externally financed projects could significantly slow the pace of decline in the debt-to-GDP ratio. While the likely departure from the fiscal anchor of a primary surplus of 3 percent of GDP implied by a loan for education and infrastructure projects is expected to be temporary, it risks undermining fiscal performance in the coming years. Directors encouraged the authorities to return rapidly to the fiscal anchor that has served the economy well. The expenditure that the authorities have contemplated on a large new tourism project carries considerable commercial risks. Directors recommended conducting an objective and independent assessment of the project, obtaining financing on concessional terms where feasible and— if the project proceeds—exploring partnerships with the private sector. A few Directors were of the view that some flexibility in borrowing and a temporary deviation from the declining debt trend with prudent policies should not be ruled out.

Directors stressed the importance of strengthening the supervision of the financial sector, including on-site examination of the insurance companies and credit unions. They welcomed the establishment of a single regulatory unit for the nonbank sector. Directors also welcomed the authorities’ regional approach to address the collapse of the Trinidad and Tobago-based CL Financial Group and recommended that the resolution strategy should avoid systemic spillovers while minimizing fiscal costs.

Directors recognized the recent considerable progress with structural reforms and noted that sustained efforts, geared toward improving the business climate, will be critical for achieving the growth target.