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Statement by Michael Horgan, Executive Director for Dominica, and Glenn Purves, Senior Advisor

Author(s):
International Monetary Fund
Published Date:
September 2009
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July 10, 2009

My Dominican authorities express their appreciation to management and the staff for their ongoing constructive engagements and support during these turbulent times.

The Challenges Facing Dominica

As with many other Eastern Caribbean Islands, Dominica has faced tremendous challenges over the past period that has impacted all sectors of its economy. The damage caused by Hurricane Dean in 2007 to Dominica’s agricultural sector was consequential, while tourism, fishing, and important coastal infrastructure was greatly impacted by Hurricane Omar in 2008. Overlaying and compounding these challenges has been the global economic downturn with adverse effects on Dominica’s tourism receipts, remittances and FDI inflows.

The overall damage of Hurricane Dean alone was estimated by ECLAC/UNDP at nearly 20 percent of GDP, and in February 2008 the Board graciously approved the Dominican authorities’ request for a purchase equivalent to SDR 2.05 million (25 percent of quota) under the Fund’s policy of Emergency Assistance for Natural Disasters (ENDA). At that time, several members of the donor community also responded immediately to help meet these priorities. The authorities have asked that I convey their sincere gratitude to the Fund and the donor community for assisting in that recovery.

Nevertheless, it is now expected that Hurricane Omar has raised the combined cost of the natural disasters to roughly 35 percent of GDP, nearly US$130 million.

The Authorities’ Response and Request

The authorities continue to reallocate expenditures and have aggressively implemented a two-pronged strategy for dealing with the crisis. First, with the assistance of donors, they are repairing critical infrastructure (roads, bridges, and seawalls) and providing assistance to those who suffered abrupt losses in earnings. Secondly, they have revised and updated the country’s medium-term Growth and Social Protection Strategy (GSPS) which have served as an important basis for engaging multilateral agencies and the donor community. A legacy from Dominica’s successful PRGF-supported program which ended in 2006, the focus of the GSPS is to maintain prudent fiscal policy to keep public debt ratios on a downward trajectory, strengthen oversight of the financial sector, undertake important structural reforms, and target social assistance more effectively.

Notwithstanding these efforts that are given fuller attention below, the authorities are acutely aware of the near-term foreign exchange needs stemming from the decline of export receipts and weaker capital account flows that are negatively impacting Dominica’s external account (notably as tourism receipts have fallen as reconstruction imports have risen). The overall deficit in the balance of payments, therefore, is projected to rise to US$10.7 million in 2009, with an external financing gap of about US$ 8million. Given their past positive experiences with the Fund and the importance of easing pressure on the external position of the country, the Government of Dominica is requesting a purchase equivalent to SDR 3.28 million (40 percent of quota) under the rapid-access component of the Fund’s Exogenous Shock Facility.

Economic Outlook

Despite damage to agriculture caused by Hurricane Dean, particularly to bananas, Dominica still managed to exceed expectations and posted GDP growth of 3 percent in 2008. However, the combination of damage from both hurricanes and the global economic downturn is expected to pull GDP growth down again, and preliminary estimates suggest that GDP growth will come in at around 1 percent in 2009.

Looking forward, the authorities expect the economy to rebound in 2010 and to achieve roughly 2 percent growth. Nevertheless, as with many islands in the region, the risks remain on the downside as this forecast is predicated on achieving global economic recovery at the end of 2009 and strengthening tourism receipts and FDI flows.

Inflation is expected to remain modest at 2 percent, but as the staff report notes, could be subject to volatility depending on the direction of commodity prices.

Fiscal Position

The authorities recognize the importance of taking immediate action to offset the adverse effects of the crisis, and have responded by offering assistance to hotels, and have focused on critical capital projects that are intended to have a lasting economic impact while reinforcing the Island’s defences against natural disasters. While these measures have required necessary additional expenditure outlays, and in spite of the challenges facing Dominica’s fiscal framework, the authorities still intend to post a primary fiscal surplus of 1.5 percent in 2009/10 (compared to an estimated primary fiscal surplus of 1 percent in 2008/09). The ability to post this surplus was also, in part, attributed to higher-than-expected revenues from VAT and import duties as imports for hurricane rehabilitation surged. The authorities have since offered import duty concessions on capital items used in rehabilitating the properties, but as the staff report rightly notes, have eschewed the broad incentives packages for tourism in favour of holding course with the government’s economic recovery strategy, focusing on improving the business climate and enhancing critical infrastructure.

Moving forward, the authorities remain committed to the fiscal target of a primary surplus of 3 percent of GDP, and underpinning this target is the objective of bringing the public debt-to-GDP ratio to 60 percent, in line with regional initiatives to reach that level by 2020. The guiding principle for the authorities is that a low debt ratio provides for further fiscal flexibility needed to cope with exogenous shocks. Their track record over the past five years of reducing the debt-to-GDP ratio from 128 percent in 2003 to about 87 percent in 2008 is a testament to their commitment to reach 60 percent, four years ahead of schedule (in 2016). In achieving this, they will seek to bring capital expenditures back to historical levels as rehabilitation work tapers off, improve the targeting of social assistance to the most vulnerable, and contain the wage bill at 12 percent of GDP. Tourism-related infrastructure, including enhanced air access to the country and roads to tourist attractions, will continue to be largely financed through concessional resources, to ensure sustainability of public debt. The authorities are also committed to remaining current on all debt service payments. They also intend to continue with their good faith efforts toward collaborative debt restructuring agreements with the few remaining holdout creditors.

Structural Reforms

Implementation of structural reforms has continued after the expiration of the PRGF arrangement, as the authorities attach great importance to achieving faster economic growth and lower poverty levels. A central pillar of the GSPS is to enhance competitiveness by expanding the role of the private sector in raising and sustaining growth. The authorities’ approach is to address constraints identified in the World Bank index of doing business (continue to see improvements in their ranking) by reducing the costs of doing business, addressing infrastructure constraints, and improving contract enforcement and land registration. The authorities are utilizing EU funding to develop a program to address these constraints. In addition, to assist with cost planning, the authorities will continue to move towards a medium-term expenditure framework to enhance their ability to forecast capital expenditures to maintain consistency with their medium-term fiscal objectives.

On the financial services side, Dominica’s banking sector has seen a sharp drop in non-performing loans along with a decline in their capital to risk-weighted assets from 23.5 percent in 2004 to roughly 15 percent in 2008. However, the capital adequacy ratio remains roughly double the ECCU minimum requirement of 8 percent. The authorities continue to monitor developments in the non-bank financial sector, and along with other islands, are working with the ECCB to improve the regulatory regime for non-banks. At the heart of these efforts is the need to strengthen the Financial Services Unit (FSU), the agency that is responsible for enforcing the new legislation (the FSU Act) which is intended to limit excessive risk taking by insurance companies. The authorities are also monitoring developments with CL Financial Insurance subsidiaries and are pursuing a regional approach to resolve this matter.

Conclusion

The financing that the Fund could provide would make a valued contribution to Dominica’s rehabilitation effort alongside additional funds from other sources. Under these circumstances, the authorities would greatly appreciate a favourable response by the Board to their request for emergency assistance in the amount of 40 percent of quota under the rapid-access component of the Fund’s Exogenous Shock Facility.

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