IMF says Do­mini­can pol­icy im­ple­men­ta­tion fails

The Pak Banker - - Front Page -


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.

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