IMF urges Do­mini­can Re­pub­lic to boost re­form plan

The Pak Banker - - COMPANIES/BOSS -

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.

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