SANTO DOMINGO, Dominican Republic -- An International Monetary Fund (IMF) staff team led by Przemek Gajdeczka visited Santo Domingo during June 17–28 to conduct discussions in the context of the post-program monitoring for the Dominican Republic.
The mission met with senior central bank and government officials, and representatives of the private sector. At the conclusion of the visit, Gajdeczka issued the following statement.
“The mission reviewed recent economic developments and discussed the near-term outlook for the Dominican Republic.
“Preliminary data show that real Gross Domestic Product (GDP) grew in the first quarter of 2013 by 0.3 percent year on year (y/y) after growing almost 4 percent in each of the four quarters of 2012, as the fiscal stimulus was withdrawn and private sector confidence remained weak. The nonfinancial public sector deficit decreased to 0.2 percent of GDP in January-March 2013 from 1.6 percent of GDP in the same period of 2012, reflecting the impact of the tax reform and public investment slowdown. Annual inflation picked up, partly reflecting the impact of the November 2012 tax reform, and reached 5 percent in May, the center of the central bank’s target range. During May, the central bank reduced reserve requirements by 20 billion pesos and lowered the policy rate by 75 basis points to 4.25 percent. Growth of credit to the private sector strengthened since end-2012, reaching 11 percent y/y in May.
“The international reserves position improved significantly. The placement of a US$1 billion sovereign international bond in April and large private capital inflows during March-May allowed the authorities to increase international reserves. As of June 26, gross international reserves stood at US$4.1 billion.
“Real GDP growth is projected to recover gradually in the rest of 2013 for an annual growth of 2 percent, and then reach 3.6 percent in 2014. The recent increase in international reserves, the preliminary agreement to amend the taxation of gold exports, and the lower fiscal deficit have reduced near-term vulnerabilities. However, important risks may arise from the international environment. Adverse external shocks could reduce trade and tourism flows, lower gold exports, or reverse recent private capital inflows.
“The mission welcomes the initial important steps toward fiscal consolidation and the publication of the report on budget execution enhances transparency of the public sector operations. It also supports the authorities’ commitment to achieve the budget deficit target of the nonfinancial public sector of 2.8 percent of GDP in 2013. To ensure that this target is met, the mission encouraged the authorities to develop plans to compensate for potential revenue shortfalls or expenditure overruns, including from a higher than planned deficit of the electricity sector. The mission also welcomes the authorities’ intention to balance the accounts of the nonfinancial public sector by 2016. The recapitalization of the central bank under the 2007 law would be an important factor toward achieving a strong, sustainable fiscal position of the consolidated public sector over the medium term.
“The mission supports the monetary authorities’ commitment to increase international reserves. Reaching the target of three months of imports in coming years would go a long way toward strengthening the economy’s resilience to external shocks. The mission commends the central bank for taking advantage of large foreign exchange inflows earlier in 2013 to increase its reserves significantly while maintaining monetary stability. Recent monetary policy measures provided liquidity to the economy and supported credit growth to strengthen domestic demand. The mission advised to monitor the impact of policies on inflation and the external sector. Should market conditions change and inflationary or external pressures emerge, increased exchange rate flexibility and monetary tightening would be appropriate tools to address them.
“Financial system indicators are satisfactory. Average capital adequacy ratios of the banking system as of April 2013 were 16.3 percent and non-performing loans ratios remained slightly above 3 percent. The mission welcomed the progress made in implementing risk-based supervision and advised to contain the financial system’s lending to the public sector.
“The mission wishes to express its gratitude to the government, the central bank and other stakeholders for their cooperation and frank discussions. A mission for the Article IV consultation and the next Post-Program Monitoring discussions is scheduled to take place before the end of 2013.”