IMF urges Dominican Republic to boost reform plan
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Dominican Republic, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
The Dominican economy has continued its vibrant performance. Growth averaged over 7 percent during 2014-15, fueled mainly by domestic demand. Employment recovery and the decline in oil prices boosted disposable income, while the consumption-led recovery in the U.S provided tailwinds through linkages with tourism and remittance flows. Strong growth in private investment dovetailed the expansion in consumption.
Despite strong growth, lower oil prices kept inflation low and strengthened the external position. While inflation expectations remained within the central bank's target of 4±1 percent, actual inflation was below the target range throughout 2015, picking up to over 2 percent by end-year as the oil price effect waned and food prices spiked following a mid-year drought. The external position strengthened on the back of lower oil prices and robust remittance and tourism inflows. The current account deficit is estimated at about 2 percent of GDP by end-2015 and reserves recovered to a level equivalent to over three and a half months of imports, excluding free-trade zones. The current account deficit and the real exchange rate are broadly in line with the economy's fundamentals.
The monetary policy stance remained broadly neutral during 2015. Softening core inflation prompted several rounds of interest rate cuts by the central bank in early 2015, to 5 percent, which offset an earlier policy tightening. The banking sys- tem continues to show healthy capitalization, profitability and asset quality.
Fiscal policies continued to safeguard the gains from the recent fiscal consolidation. The fiscal adjustment during 2013-14, to a consolidated public sector deficit of about 4.5 percent of GDP, has been critical in restoring confidence. Excluding one-off receipts, the deficit in 2015 is estimated to have been maintained at broadly similar levels as the previous year. This, together with the face value reduction in public debt (by 3.1 percent of GDP) due to the restructuring of the Petrocaribe liabilities, moderated the increase in consolidated public sector debt (including the debt of the electricity sector and the central bank) to 48.5 percent of GDP estimated by staff for 2015.
Going forward, the growth momentum will soften as the economy returns to its potential growth. Staff projects growth to slow to 5.4 per- cent in 2016 and to its longer-term potential rate of 4.5-5 percent by 2017. The positive output gap and the incipient pressures on real wages are projected to return inflation to the target range in 2016. Risks to the staff's macroeconomic outlook are moderate and somewhat tilted to the downside, largely owing to potential negative spillovers from weaker growth in advanced economies.
In concluding the 2015 Article IV consultation with the Dominican Republic, Executive Directors endorsed the staff's appraisal as follows: Economic activity maintains a strong momentum, aided by a favorable external environment and a strengthened policy framework. Domestic demand has been the main growth engine, supported by an expansion in employment, robust credit growth, lower oil prices, and the recovery in the U.S. Inflation remained low, the current account deficit contracted, and key social indicators improved. The imple- mentation of sound policies has underpinned the strong economic performance. The inflation targeting framework has been successful at maintaining inflation expectations around the official target range in the face of positive supply shocks, and notable fiscal consolidation efforts over the past three years have slowed further increases in public debt. Going forward, as some of the external tailwinds dissipate, the economy is expected to slow to its potential growth of 4.5-5 percent. The challenge for macroeconomic policies will be to sustain high growth rates and address remaining poverty and inequality challenges, further strengthening the fiscal position, limiting risks of negative international spillovers and tackling longterm legacies in the electricity sector.
Fiscal sustainability and social spending pressures require renewed attention to strengthening the fiscal position.