IMF says Dominica’s recovery losing momentum
Today the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Dominica.
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 nearterm 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 US dollar visà-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.