IMF Executive Board Concludes 2012 Article IV Consultation with Dominica

Public Information Notice (PIN) No. 12/126
November 13, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On November 7, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Dominica.1

Background

The economic recovery continues, but is losing momentum. Over the past two years, Dominica’s economy grew at a tepid rate of about 1 percent, supported by a notable fiscal stimulus, and output recovered to its pre-crisis peak. The pace of activity has been decelerating so far this year with weakening external and domestic demand, and staff forecasts growth of about ½ percent of Gross Domestic Product (GDP) in 2012. Weak demand has kept price pressures subdued and, along with a recovery in service receipts, contributed to a significant adjustment in the external current account deficit. While rising world food prices may contribute to a modest pickup in inflation and weigh on the balance of payments in 2012, pressures are expected to subside later next year. Downside risks to the near-term outlook have intensified with heightened global uncertainty and the planned stoppage of flights from the only non-regional carrier servicing the island. Geothermal energy development or the opening of new tourist facilities could strengthen the long-term outlook.

Weak growth and the earlier failure of regional insurance companies have weakened the resilience of the financial sector in some areas. While the system as a whole remains highly liquid, nonperforming loans and exposures to the failed insurance companies remain a drag on financial sector’s income and capitalization, especially in the large credit union sector.

Monetary conditions have not eased meaningfully. With policy and lending rates stable throughout the crisis―as monetary policy in the Eastern Caribbean Currency Union remains fully committed to maintaining the hard peg to the U.S. dollar―Dominica has not benefited from the significantly eased U.S. monetary policy rates. Moreover, the real effective exchange rate has depreciated only moderately, strengthening recently with the appreciation of the U.S. dollar vis-à-vis major currencies. Expansionary fiscal policy has thus been the only tool to support economic activity, but strains on the fiscal position have been mounting with subdued growth and the need to respond to natural disasters. The overall central government deficit widened to about 4½ percent of GDP in fiscal year 2011–12 and pushed debt to over 70 percent of GDP, almost 7 percentage points above pre-crisis levels. To meet the increasing financing requirements, the authorities successfully launched a T-bill in the regional securities market for the first time since the 2004–05 debt restructuring. With fiscal policies reaching the limits of their ability to support economic activity, the authorities have budgeted a strong retrenchment for fiscal year 2012–13, although weakening economic conditions may undermine its feasibility.

Executive Board Assessment

Executive Directors noted that supportive policies have helped the Dominican economy weather the effects of the global financial crisis. However, worsening external and internal environments have weakened the forward momentum and amplified risks to macroeconomic stability. Continued prudent macroeconomic policies, enhanced vigilance in the financial sector, and accelerated structural reforms remain key to stronger growth prospects.

Noting that the room for countercyclical fiscal support has narrowed considerably, Directors welcomed the authorities’ intention to return gradually to their pre-crisis primary surplus target. They agreed that the proposed pace of fiscal adjustment strikes a right balance between the need to rebuild fiscal buffers over time and the need to support the flagging recovery. Directors supported the authorities’ efforts to contain spending in the face of weakening revenues. However, consolidation plans need to be clearly specified and additional measures may need to be taken to achieve the fiscal targets by streamlining current expenditures and directing capital spending to infrastructure and other productivity-enhancing investments.

Directors agreed that reinforcing the framework for public financial management should be an important plank of the authorities’ fiscal strategy. Strengthening budget preparation and execution and introducing fiscal responsibility legislation would underpin the government’s ability to rationalize spending and provide an important fiscal anchor in the medium term.

Directors emphasized that maintaining financial stability is an immediate priority. They encouraged the authorities to address pockets of vulnerability in credit unions to maintain confidence in the financial system at large. Decisive action is also needed to upgrade supervision, regulation, and the crisis management framework for all financial institutions, including by tightening loan loss provisioning requirements. Directors agreed that a lower interest rate floor on savings deposit would reduce banks’ funding costs and help support the economic recovery. Achieving compliance with international standards against money laundering and the financing of terrorism is also important.

Directors stressed that revamping the structural reform agenda is necessary to foster private sector-led growth and boost competitiveness. They welcomed efforts to harness the country’s geothermal energy potential, which could boost potential growth, and stressed the importance of accelerating reforms to improve the investment and business environment, narrow the infrastructure gap, and improve social outcomes.


Dominica: Selected Economic Indicators
 
        Est. Proj.
 

2008

2009 2010 2011 2012
 
  (Annual percentage change)

Output and prices

         

Real GDP 1/

7.9 -1.3 1.2 1.0 0.4

Consumer prices (end of period)

2.0 3.2 0.1 2.0 3.6

Consumer prices (period average)

6.4 0.0 2.8 1.4 2.3

Output gap (in percent of potential GDP)

5.0 1.3 0.5 -0.5 -1.3

Real effective exchange rate

         

(period average, depreciation -)

0.9 5.0 -2.8 -4.2

Central government operations 2/

(In percent of GDP) 

Revenue 3/

35.4 36.0 37.0 30.9 29.4

Expenditure

34.7 36.3 40.5 35.3 33.3

Primary balance

2.4 1.0 -1.9 -2.9 -2.3

Overall balance

0.7 -0.3 -3.5 -4.4 -3.9

Central government debt (incl. guaranteed) 4/

64.3 63.3 68.9 70.2 72.3

External

45.2 44.3 50.5 50.2 52.4

Domestic

19.2 19.0 18.4 20.0 19.8

Money and credit

(Annual percentage change)

Broad money (M2)

4.3 10.0 6.1 0.3 4.3

Real credit to the private sector

6.1 3.6 9.4 4.4 0.8

Balance of payments

(In percent of GDP)

Current account balance

-27.1 -21.0 -16.0 -12.7 -13.3

Exports of goods and services

35.4 32.0 35.9 40.4 39.0

Imports of goods and services

62.6 54.1 54.0 53.6 53.4

Capital and financial account balance

25.7 22.4 19.5 20.4 13.1

FDI

12.3 8.4 5.1 3.7 3.7

Capital grants

11.8 8.4 6.3 3.2 4.4

Other (incl. errors and omissions)

1.6 5.6 8.2 13.5 5.0

External debt (gross) 5/

64.9 65.3 70.3 75.1 74.4

Savings-Investment Balance

-27.1 -21.0 -16.0 -12.7 -13.3

Savings

-6.0 -1.6 5.2 7.1 2.7

Investment

21.1 19.4 21.2 19.8 16.0

Memorandum items:

         

Nominal GDP at market prices (EC$ millions)

         

Calendar year

1,239 1,320 1,300 1,304 1,341

Net imputed international reserves

         

Millions of U.S. dollars, end-of-period

55.1 64.5 66.4 74.5 73.5

Months of imports of goods and services

2.3 2.9 3.1 3.5 3.3
 

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and IMF staff estimates.

1/ Historical data revised with real GDP now measured at market prices, instead of basic prices.

2/ Fiscal year (July–June) basis. In this report, the fiscal operations are presented for the first time in the GFSM 2001 format, causing some fiscal data reported here to not be fully comparable to earlier reports.

3/ Does not include grants that were received but not spent.

4/ Excludes debt incurred under the Petro Caribe arrangement with Venezuela.

5/ Comprises public sector external debt, foreign liabilities of commercial banks and other private debt.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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