Press Release No. 02/37

The Executive Board of the International Monetary Fund (IMF) today approved a one-year SDR 3.28 million (about US$4.3 million) stand-by credit for Dominica in support of its economic program for 2002/03. As a result of the Board's decision, Dominica will be able to draw SDR 2.05 million (about US$2.7 million) immediately.

After the Executive Board's discussion, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:

"The Dominican authorities' decision to address squarely the economic situation faced by their country is commendable. Successful implementation of the authorities' program for 2002-03 should lay the basis for sustained higher growth of output and employment and poverty reduction. It will also strengthen public confidence and help to catalyze financing for the public sector, including adjustment lending by multilateral institutions.

"The program aims to restore macroeconomic stability through improvement in the financial position of the public sector and the introduction of key structural reforms. The program targets a narrowing of the fiscal deficit by nearly half to 5¾ percent of GDP, through a combination of revenue-raising measures and improved expenditure control. The recent introduction of a stabilization levy, broadening of the sales tax base, and the reduction in exemptions from import duties and the consumption tax will raise revenues, while containment of the central government wage bill and strict monitoring of investment outlays will lower expenditures. This will be supported by the strengthening, with technical assistance, of the budget execution and monitoring system and the government's cash management and financial planning systems.

"Systemic risk to the financial sector is within manageable limits. The banking system's holdings of government debt will be reduced, and oversight of the financial system will be strengthened through a further consolidation of supervision.

"Important structural reforms are planned in the areas of tax policy and administration, public expenditure management, civil service reform, agricultural diversification, and privatization, with support from the Caribbean Regional Technical Assistance Center, the World Bank, Caribbean Development Bank, and European Union. Continued progress with structural reforms will help to raise private investment and growth and alleviate poverty over the medium term," Mr. Aninat said.

Program Summary

Over the past years, output and employment growth in Dominica have been on the decline reflecting the ongoing retrenchment of the banana industry (due to weak export prices and the beginning of the phase out of preferential access to the European Union market), as well as the weak growth of non-banana agriculture and stay-over tourism. After growing on average by about 2½ percent during 1996-99, real GDP stagnated in 2000 and is estimated to have contracted by over 4½ percent in 2001, as banana production fell by 35 percent (owing also to adverse weather conditions), and tourism was hit by the global slowdown and the events of September 11. The downturn in the economy appears to have further increased unemployment and poverty, particularly in the rural areas affected by the displacement of banana farmers. The public finances have deteriorated in recent years as capital expenditure increased sharply, while saving has been declining. However, the public sector's overall deficit is estimated to have declined from 12½ percent of GDP in 2000/01 to about 10 percent in 2001/02, as capital expenditure declined slightly mainly on account of the completion of major investment projects. The overall deficit of the central government is estimated to have declined to about 10½ percent in 2001/02.

The authorities' program for 2002/03 is aimed at restoring order to the public finances and putting the economy on a path consistent with public debt sustainability, a recovery of private investment, and sustainable output and employment growth. The program is based on real GDP growth of 1½ percent in 2003, which is predicated on a recovery in agriculture, mainly banana production (reflecting a rebound from the drought-stricken levels of 2001). Inflation would remain stable at 2 percent. To help achieve the program objectives, the central government's overall deficit is targeted to decline by about 4¾ percent of GDP to about 5¾ percent in 2002/03, while protecting public spending in essential economic and social services and infrastructure.

The 2002/03 fiscal program is aimed at improving the savings position of the central government by about 3⅓ percent of GDP, mainly through revenue measures. Current expenditure is expected to increase slightly in relation to GDP, as a 1 percent reduction in the central government wage bill would be offset by a similar increase in spending on goods and services. Capital expenditure would remain unchanged at 6 percent of GDP.

The authorities are firmly committed to the current fixed exchange rate arrangement with the Eastern Caribbean Central Bank (ECCB), which has conducted its credit operations with the objective of maintaining strong foreign exchange cover for currency issue, leaving little scope for monetary policy at the national level.

The external sector policy intends to narrow the current account deficit to 13¼ percent of GDP in 2003. Merchandise exports are expected to show an increase, reflecting largely the recovery in agricultural production, while imports are projected to be lower due in part to the slow output growth. The deficit is expected to be fully covered by grants, multilateral financing, and continued foreign direct investment.

As part of the structural reform agenda, the authorities are seeking to undertake a comprehensive review of the tax system and its administration with IMF technical assistance by end-2002, and will include tax reform measures emanating from this review by end-June 2003 and in the 2003/04 budget. The authorities also intend to conduct a public expenditure review with World Bank assistance by end-March 2003, with the aim of rationalizing and increasing the efficiency of public spending. They also propose to privatize the Dominican Banana Marketing Corporation and study the restructuring/privatization of other parastatal bodies.

Dominica: Selected Economic Indicators
	1998	1999	2000	Prel. 2001
Output and prices (change in percent)
Real GDP at factor cost	2.8	1.6	0.7	-4.6
Consumer prices (end of period)	1.5	0.0	1.1	1.9
Bananas (production for export)	-17.6	-4.3	-2.7	-35.4
Saving and investment (percent of GDP)
Gross national saving	18.6	10.5	6.5	4.8
Gross domestic investment	26.9	25.2	24.8	21.2
Public finances (in percent of GDP) 1/
Nonfinancial public sector saving	2.8	0.3	-1.6	-3.4
Nonfinancial public sector capital expenditure	14.4	15.3	23.0	8.9
Nonfinancial public sector overall balance (after grants)	-6.7	-11.9	-12.6	-10.1
Money and credit (end of year, percent change) 2/
Money and quasi-money	11.4	10.4	0.6	7.4
Credit to private sector	6.2	2.3	7.3	-3.1
Interest rates (percent)
Maximum deposits rate (on 3-month time deposits)	4.0	5.0	6.0	6.0
Maximum lending rate	19.5	19.5	20.8	20.8
Minimum lending rate	9.5	9.5	9.5	9.5
Balance of payments and public external debt (percent of GDP)
Current account balance	-8.3	-14.6	-18.3	-16.4
External debt 3/	35.1	48.4	54.0	64.8
Debt-service ratio 4/	5.0	5.4	7.3	9.1
Exchange rate (change in percent)
Real effective exchange rate (end of period,
depreciation -)	-3.8	0.8	4.9	4.8
Terms of trade	1.4	-6.2	-5.3	1.5
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and IMF staff estimates. 1/ Data are for fiscal years beginning July 1. 2/ Changes in relation to liabilities to private sector at beginning of period. 3/ Total public and publicly guaranteed debt. 4/ In percent of exports of goods and services.