Do­mini­can Repub­lic fis­cal deficit rose to 8.5 per cent

The Pak Banker - - COMPANIES/BOSS -

On Jan­uary 25, 2013, the Ex­ec­u­tive Board of the In­ter­na­tional Mon­e­tary Fund (IMF) con­cluded the 2012 Ar­ti­cle IV con­sul­ta­tion with the Do­mini­can Repub­lic. Over the past two years, eco­nomic ac­tiv­ity has de­cel­er­ated and macroe­co­nomic im­bal­ances have in­creased. Eco­nomic growth de­clined from 7.8 per­cent in 2010 to 4.5 per­cent in 2011 and to a pro­jected 4 per­cent in 2012. A large in­crease in government spend­ing in 2012 was partly off­set by de­clin­ing pri­vate sec­tor de­mand. As the im­pact of ear­lier world price shocks dis­si­pated, head­line in­fla­tion de­clined be­low 3 per­cent, well be­low the cen­tral bank's tar­get range of 4.5-6.5 per­cent. The large fis­cal ex­pan­sion com­bined with the eas­ing of mon­e­tary pol­icy, and lim­ited ex­change rate flex­i­bil­ity in­creased pub­lic sec­tor debt, kept the ex­ter­nal cur­rent ac­count deficit high, and fu­eled losses in in­ter­na­tional re­serves.

The fis­cal deficit in 2012 rose to an es­ti­mated 8.5 per­cent of GDP. This re­flected a com­bi­na­tion of weak rev­enue per­for­mance (ex­clud­ing tem­po­rary fac­tors), and an in­crease of about 40 per­cent in pri­mary ex­pen­di­ture. As fis­cal deficits widened, the stock of pub­lic debt reached nearly 45 per­cent of GDP, com­pared with 35 per­cent of GDP in 2007-08.

Mon­e­tary pol­icy was eased. In De­cem­ber 2011 the cen­tral bank for­mally adopted an in­fla­tion-tar­get­ing frame­work and set a tar­get for in­fla­tion of 5½ per­cent (+/- 1 per­cent) for 2012 and 4 per­cent by 2015. As in­fla­tion eased dur­ing the year, the cen­tral bank low­ered its overnight de­posit rate dur­ing May-Au­gust by a to­tal of 175 ba­sis points (to 5 per­cent). Fol­low­ing the eas­ing of mon­e­tary con­di­tions, pri­vate sec­tor credit growth picked up in re­cent months.

The ex­ter­nal po­si­tion weak­ened. The ex­ter­nal cur­rent ac­count deficit in 2012 was about 7 per­cent of GDP, some­what lower than in 2011, but still above the 1994-2011 av­er­age of about 3 per­cent of GDP. How­ever, net cap­i­tal in­flows were also lower than in 2011 and gross in­ter­na­tional re­serves de­clined to about US$3.6 bil­lion (about two months of im­ports), about US$500 mil­lion lower than at end-2011.

Ac­cord­ing to of­fi­cial data, the fi­nan­cial sec­tor is well cap­i­tal­ized. At end-Oc­to­ber, av­er­age cap­i­tal ad­e­quacy ra­tios of com­mer­cial banks were 15 per­cent of as­sets, although non-per­form­ing loan ra­tios rose to 3½ per­cent. The share of claims on the government in the as­set port­fo­lio of some banks in­creased sig­nif­i­cantly. The government is plan­ning to de­velop spe­cial fi­nanc­ing fa­cil­i­ties to sup­port small- and medium-size en­ter­prises and mi­cro­fi­nance. The re­cap­i­tal­iza­tion of the cen­tral bank con­tin­ues broadly as en­vis­aged.

There are risks in the neart­erm. The fis­cal tight­en­ing con­tem­plated by the au­thor­i­ties would keep growth sub­dued while in­fla­tion is ex­pected to rise to 5 per­cent (within the cen­tral bank's tar­get). Con­fi­dence and the ex­ter­nal en­vi­ron­ment will be crit­i­cal for a strong re­cov­ery in pri­vate sec­tor ac­tiv­ity. Lower-thanpro­jected growth in the United States and Europe could worsen the out­look for tourism and re­mit­tances. Un­ex­pected in­creases in oil prices and lower avail­abil­ity of ex­ter­nal fi­nanc­ing would also carry risks.

IMF Ex­ec­u­tive Direc­tors ob­served that eco­nomic growth in the Do­mini­can Repub­lic has slowed sig­nif­i­cantly since 2010, while in­fla­tion also de­clined sharply in 2012. Direc­tors saw down­side risks to the out­look stem­ming from con­tin­u­ing global un­cer­tain­ties and domestic and ex­ter­nal vul­ner­a­bil­i­ties. They urged de­ci­sive im­ple­men­ta­tion of strong macroe­co­nomic poli­cies and struc­tural re­forms to ad­dress fis­cal and ex­ter­nal im­bal­ances, build pol­icy space, and boost growth.

Direc­tors wel­comed the fis­cal package put for­ward by the new government to en­hance rev­enue col­lec­tion and con­tain to­tal spend­ing, while in­creas­ing spend­ing on ed­u­ca­tion. They en­cour­aged timely spec­i­fi­ca­tion of ad­di­tional con­sol­i­da­tion mea­sures, and steps to en­hance fis­cal trans­parency and pub­lic accountability.

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