WASHINGTON, USA -- On May 28, 2014, the executive board of the International Monetary Fund (IMF) concluded the Article IV consultation and second post-program monitoring discussion with the Dominican Republic.
The Dominican Republic has experienced robust economic growth over the past several years. In 2013, real GDP increased by 4.1 percent driven by the mining, construction, agriculture, and tourism sectors. Activity slowed sharply early in the year, but then picked up supported by monetary policy easing and a normalization of fiscal policy. Headline inflation remained unchanged from 2012 at 3.9 percent (year-on-year) and was below the central bank’s target range (5 percent +/- 1 percent). Medium-term growth prospects are broadly favorable, though the balance of risks is to the downside.
The large increase in the fiscal deficit in 2012 was partially reversed in 2013. The deficit of the consolidated public sector declined by almost 3 percentage points of GDP, to 5 percent, owing to lower investment expenditure, the yield of the 2012 tax reform and the negotiation of new repayment terms with a private gold company. Despite this, the public debt-to-GDP ratio at end-2013 was close to 48 percent, up from 35 percent in 2008. The government’s fiscal targets for 2014 envisage a further decline in the overall public sector deficit to 4.2 percent of GDP, but this may not be sufficient to place the public debt ratio on a downward trajectory.
Monetary policy was eased substantially in May 2013 to stimulate credit growth and support economic activity. However as pressures emerged in the foreign exchange market, the central bank increased the policy rate by 200 basis points in August; it has remained on hold since then. As of end-March 2014, credit growth remained buoyant, at 14 percent (y/y).
The external current account deficit declined from 6.8 percent of GDP in 2012 to 4.2 percent of GDP in 2013, owing to the coming on stream of gold exports, higher tourism receipts, and lower public investment. Net capital inflows remained large, reflecting both government borrowing and foreign direct investment. Gross international reserves closed the year at US$4.7 billion; as of May 23, 2014, they stood at almost US$5 billion.
At end-2013, the capital adequacy ratio of the banking system stood at over 14 percent, and nonperforming loans were less than 2 percent. However, the banking system’s exposure to the public sector increased to the equivalent of 5.5 percent of GDP by end-year. Government recapitalization transfers to the central bank were kept below the amounts envisaged in the 2007 law.
Executive Board Assessment
Executive directors observed that economic growth has been robust in recent years and commended the authorities on lowering inflation. They noted that the outlook remains favorable for growth and inflation, but saw downside risks stemming from uncertainties in the global economy and large domestic fiscal and external financing requirements. To reduce these vulnerabilities and enhance long-term economic growth, directors recommended tightening the policy stance, building policy space, and speeding up progress in structural reforms.
Directors viewed favorably the recent steps toward fiscal consolidation, but agreed that additional measures may be needed to mitigate vulnerabilities stemming from large financing needs and put public debt on a more sustainable path. In particular, they recommended eliminating the deficit of the nonfinancial public sector over a period of three years, reducing tax exemptions, tightening public expenditure controls, and curbing transfers to the electricity sector.
Directors welcomed the authorities’ commitment to continue strengthening their inflation targeting framework. They encouraged the authorities to establish a mechanism for intervention in the foreign exchange market and to increase international reserves taking advantage of favorable balance of payments developments. Directors appreciated the authorities’ readiness to tighten monetary policy as needed to achieve their inflation and external objectives.
Directors underscored the importance for monetary policy credibility of central bank recapitalization, in line with the 2007 law. They welcomed the authorities’ intention to adopt governance reforms that would increase the independence of the state-owned commercial bank, strengthen its capitalization, and limit its exposure to the public sector.
Directors supported the authorities’ commitment to structural reforms. They agreed that labor market reform would help distribute the benefits of growth more broadly, and encouraged the authorities to foster competition and growth by reducing tax exemptions and removing distortions in the tax system. Directors welcomed the authorities’ plans to invest in electricity generation provided they do not undermine public finances. In addition, they saw room to encourage private investment in the electricity sector by reforming the regulatory framework and to enhance efficiency and reduce the budgetary cost of electricity transfers, especially by allowing tariffs to adjust in line with energy costs.