An International Monetary Fund (IMF) staff team led by Przemek Gajdeczka visited Santo Domingo during March 4–14, 2014 to conduct discussions for the Article IV consultationi and second Post-Program Monitoring with the Dominican Republic. The mission met with senior central bank and government officials, representatives of the private sector, and union leaders. At the conclusion of the visit, Mr. Gajdeczka issued the following statement.
“The mission reviewed recent economic developments and discussed the near-term outlook for the Dominican Republic. It noted that economic developments in 2013 had been better than expected in the previous staff visit. However, it also noted that challenges remain, particularly in the area of public finances, electricity sector and the external position.
“In 2013 real GDP grew by more than 4 percent and the unemployment rate remained at 7 percent. The headline annual inflation rate was 3.9 percent, the same as in the previous year and below the central bank’s target range. The external current account deficit declined by more than 2½ percentage points of GDP (to 4.2 percent of GDP), reflecting strong exports buoyed by coming on stream of gold production and lower imports. Net capital flows were large, mainly as a result of government external borrowing, and foreign direct investment inflows remained strong. Gross international reserves fluctuated between US$3.4 and US$4.7 billion and at end 2013 were equivalent to 3.3 months of imports. As of March 14, 2014 gross international reserves stood at US$3.9 billion.
“The mission welcomed the steps taken toward fiscal consolidation in 2013. The deficit of the central government was brought below 3 percent of GDP (from 6.6 percent of GDP the year before) as a result of tax measures, the new payment stream agreed with the gold company and lower public investment. However, the electricity sector continued to record large deficits and as government’s transfers were reduced the quasi-fiscal losses of the central bank increased. As a result, the consolidated public sector recorded a deficit of about 5 percent of GDP, which raised public indebtedness to about 48 percent of GDP.
“For 2014, the mission projects real GDP growth of about 4.5 percent and inflation at the mid-point of the central bank’s target range (4 to 5 percent). The government’s program provides measures to lower the consolidated public sector deficit to 4.2 percent of GDP and the central bank envisages keeping a neutral monetary stance.
“The mission welcomed the authorities’ commitment to macroeconomic stability and recommended setting more ambitious targets for fiscal consolidation. It advised the authorities to develop a medium-term fiscal strategy to lower government borrowing requirements more rapidly and rebuild fiscal buffers that would also facilitate the accumulation of international reserves. It noted that such strategy should be underpinned by a broadening of the tax base and lower tax exemptions, as well as continued expenditure restraint. The mission supported the development of a comprehensive electricity strategy including the introduction of an automatic tariff adjustment mechanism and welcomed the planned new investments in the energy sector provided they are consistent with the medium-term fiscal strategy.
“The mission welcomed the monetary authorities’ commitment to its inflation target and to increase international reserves. Maintaining gross reserves at a level that exceeds three months of imports would help increase the economy’s resilience to external shocks. Should market conditions change or external pressures emerge, increased exchange rate flexibility and monetary tightening would be appropriate tools to address them.
“Financial system indicators are broadly satisfactory. The average capital adequacy ratio of the banking system as of December 2013 was 14.6 percent and the non-performing loan ratio declined to 1.9 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 next Post-Program Monitoring discussions is expected to take place in the third quarter of 2014.”
i 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.