IMF says Dominican policy implementation fails

WASHINGTON

An International Monetary Fund (IMF) mission led by Przemek Gajdeczka visited Santo Domingo during November 5 - 16, 2012 to conduct discussions for the Article IV consultation. The mission met with President Danilo Medina, members of the Economic Cabinet, senior government and central bank 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 in the Dominican Republic and discussed the near-term outlook. It noted that economic activity in 2012 has been supported by expansionary fiscal policies, which have affected the external position, while private sector activity has slowed.

"In the last 24 months economic performance has weakened. After reaching 7.8 percent in 2010, economic growth decelerated to 4½ percent in 2011 and is expected to remain below 4 percent in 2012. As the impact of earlier price shocks dissipated, headline inflation declined to 2.8 percent (y/y) in October 2012, while core inflation was about 3.3 percent, below the central bank's target range of 4.5-6.5 percent.

"Policy implementation has deteriorated. The fiscal deficit increased significantly in 2012. Revenue performance was weak (excluding one-off factors), while primary government expenditure increased by nearly 40 percent. As a result, the consolidated public sector deficit for end-2012 is projected at 8.5 percent of GDP, almost double the level of 2011. Moreover, a large share of government expenditure was undertaken above budgetary appropriations, thereby reducing the transparency of budgetary operations. Total public debt is projected to reach 44 percent of GDP in 2012, compared with 35 percent of GDP in 2007-08.

"The external position remains vulnerable. The external current account deficit is projected to close at about 7 percent of GDP in 2012, somewhat lower than in 2011, owing in part to the start of gold exports.

Owing primarily to expansionary fiscal policy, the external current account deficit is more than twice its historical average of 3 percent of GDP while international reserves remain low by international standards. However, net capital inflows are also lower. At end-October, gross international reserves stood at US$3.3 billion, down from US$4.1 billion at end-2011.

"The financial sector has shown resilience. Banks seem well capitalized and systemwide prudential indicators do not reveal significant risks. As of September 2012 average capital adequacy ratios were about 15 percent and non-performing loan ratios were broadly stable at about 3.5 percent. However, during 2012 lending in foreign currency increased, credit to the private sector slowed, and banks' exposure to the public sector rose markedly.

"In the mission's view, macroeconomic policies should be geared towards reducing fiscal and external vulnerabilities. On the fiscal front, the overarching goal should be to lower the public debt ratio to close to a preglobal crisis level of 2007-08 (35 percent of GDP). Attaining this goal would require a strategy to reduce the overall fiscal deficit to a prudent level in 2013-14.

The recently-approved fiscal reform is a step in this direction. Reducing external vulnerabilities would require, in addition to a strengthened fiscal position, a tighter monetary stance that is consistent with strengthening the international reserves position.

The resulting overall restraint in domestic absorption would help safeguard external stability.

"The mission welcomes the authorities' plan to pursue their reform agenda aimed at improving the business environment, enhancing competitiveness, and creating better conditions for an inclusive and job-rich growth.

Full implementation of reforms in the electricity sector is critical for securing sta- ble infrastructure that is necessary for private sector development. The mission welcomes the recent approval of a simplified "one-stop" process for registration of new businesses and the planned accelerated title registration for land and other property. It supports the authorities' intention to launch new programs to tackle poverty and inequality, reduce illiteracy, improve education and health, enhance security, and fight against corruption.

These programs should be implemented within available budgetary resources and consistent with efforts to restore fiscal sustainability. The mission encourages the authorities to enhance the transparency of public sector operations, in particular by communicating their fiscal policy intentions and regularly publishing reports on budget execution.