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IMF Executive Board Concludes the 2018 Article IV Consultation with Dominica

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
September 2018
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On June 18, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Dominica.

On September 18, 2017, category 5 Hurricane Maria hit Dominica while the country was still recovering from tropical storm Erika. Maria was Dominica’s worst natural disaster with damage estimated at US$1.3 billion (226 percent of GDP). Most economic sectors sustained significant damage and losses, with public infrastructure carrying the brunt. The output collapse and costs of reconstruction resulted in large fiscal and current account deficits. Fiscal performance deteriorated sharply due to the fall in tax revenue after the hurricane, but was partially offset by a surge in grants and buoyant Citizenship-by-Investment (CBI) sales revenues. With limited revenue, drawdown of large government deposits, grants, and an insurance payout helped meet financing needs. The hurricane also exacerbated weaknesses in the financial sector, particularly of non-bank institutions, which face undercapitalization, low profitability and high non-performing loans. Credit to the private sector has been flat and inflation remains subdued.

In 2018, output is projected to decline by 14 percent and to take about 5 years to recover to pre-hurricane levels. The fall in output and government revenue, coupled with increased expenditure for rehabilitation and reconstruction, will lead to a substantial worsening of fiscal and external deficits. However, signs of recovery, particularly in construction and the public sector, have already started to emerge. The risks to the outlook include the budget becoming financially constrained and unable to sustain adequate investment given high debt, limited buffers, weak revenue, and urgent needs for reconstruction spending. Other risks include financial instability stemming from undercapitalization of systemic financial institutions, recurrent natural disasters with low resilience, uncertainty regarding CBI and grant income, and external competitiveness challenges.

Executive Board Assessment2

Directors commended the authorities’ efforts in responding to the humanitarian crisis and significant devastation wrought by Hurricane Maria. Directors stressed the need to implement cost effective fiscal policies and reforms to support recovery while containing expansion of public debt. They recommended containing current spending extraneous to recovery, and enhancing the efficiency of capital investment while protecting critical social and recovery spending. Given Dominica’s vulnerability to natural disasters, directors noted that investment in resilient infrastructure was appropriate, despite its higher cost. They encouraged the authorities to create a savings fund for natural disasters. Once output recovers, directors recommend fiscal consolidation to sustain reconstruction while generating a primary surplus sufficient to set public debt on a downward trajectory.

Directors highlighted the need for stronger financial sector regulation and supervision to address vulnerabilities exacerbated by Hurricane Maria. They stressed the importance of decisive action to reduce non-performing loans and capital shortfalls, as well as adequate preparedness for possible liquidity pressures in line with recommendations of Fund’s technical assistance. Directors recommended maintaining a proactive stance to mitigate the risk of withdrawal of correspondent banking relationships including continued strengthening of the AML/CFT framework. They supported the phasing out of the off-shore bank sector and welcomed cessation of new license issuance.

Directors agreed that enhancing growth prospects requires higher private sector participation and improving the business environment. To this end, directors recommended identification and removal of costs and barriers that affect investment and profitability. They advocated that public sector compensation decisions consider their impact on private wages and competitiveness. Directors stressed the need to improve the business environment, including efforts to reduce the costs of dealing with the government. They urged strict enforcement of construction and zoning regulations given vulnerability to natural disasters.

Dominica: Selected Economic and Financial Indicators, 2012–23
Est.Projected
2014201520162017201820192020202120222023
Output and prices
Real GDP 1/4.2-3.72.6-4.7-14.19.46.83.62.31.5
Nominal GDP 1/3.91.38.7-4.1-12.911.28.75.54.43.2
Consumer prices, end of period0.5-0.5-0.21.41.41.81.82.02.02.0
Central government balances2/
Revenue27.131.547.146.837.034.827.827.227.327.3
Expenditure31.732.443.346.141.038.936.234.226.326.5
Primary balance-3.01.05.42.0-2.1-2.3-6.6-5.22.92.6
Overall balance (incl. ND cost buffers), of which:-4.6-0.93.80.7-5.5-5.6-9.9-8.5-0.5-0.7
Central government debt (incl. guaranteed) 3/78.775.371.782.787.783.386.187.887.185.2
External61.058.154.766.071.168.172.875.875.774.7
Domestic17.717.117.116.716.615.213.212.111.410.5
Balance of payments 4/
Current account balance, of which:-7.1-1.90.8-12.5-31.7-22.1-20.4-21.3-14.2-11.9
Exports of goods and services51.650.148.342.633.241.444.243.443.743.7
Imports of goods and services 5/63.458.854.067.283.181.075.770.361.558.5
External debt (gross) 6/83.786.577.988.899.695.699.7101.102.101.
920
Net imputed international reserves:
End-year (millions of U.S. dollars)99.9125.220.210.210.208.206.202.210.215.
499795163
Months of imports of goods and services3.64.88.46.86.35.75.65.66.46.6
Saving-Investment Balance-7.1-1.90.8-12.5-31.7-22.1-20.4-21.3-14.2-11.9
Saving7.614.320.010.8-6.3-1.0-2.2-6.7-5.0-6.0
Investment14.816.219.223.325.421.118.214.69.25.9
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

At market prices.

Data for fiscal years from July to June.

Includes estimated commitments under the Petrocaribe arrangement with Venezuela.

BoP data prior to 2014 are compiled on BPM5 basis and revised to conform with BPM6 methodology but are not fully comparable.

Includes public capital expenditure induced imports from 2019 onwards to account for possible mitigation of natural disasters.

Comprises public sector external debt, foreign liabilities of commercial banks, and other private debt.

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

At market prices.

Data for fiscal years from July to June.

Includes estimated commitments under the Petrocaribe arrangement with Venezuela.

BoP data prior to 2014 are compiled on BPM5 basis and revised to conform with BPM6 methodology but are not fully comparable.

Includes public capital expenditure induced imports from 2019 onwards to account for possible mitigation of natural disasters.

Comprises public sector external debt, foreign liabilities of commercial banks, and other private debt.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with country officials’ economic developments and policies. Upon return to headquarters, staff prepare a report, which serves as the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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