Journal Issue
Share
Article

Dominican Republic: Requests for a Waiver of Nonobservance of a Performance Criterion, and Waivers of Applicability of Performance Criteria – Supplementary Information, and Supplementary Letter of Intent

Author(s):
International Monetary Fund
Published Date:
March 2011
Share
  • ShareShare
Show Summary Details

I. Recent Developments

1. Recent indicators suggest that the strong economic expansion continues and point to a closing of the output gap. These developments are welcome and validate the authorities’ policy stance, which calls for a gradual adjustment that began in the second half of 2010 and should continue in 2011.

  • Economic activity continues expanding. The monthly index of economic activity (IMAE) increased 7.4 percent (yoy) in August 2010 following 5.2 percent (yoy) in July 2010. The expansion continues to be broad-based. Real GDP increased by 7.5 percent (yoy) in the first half of 2010.

  • There was an uptick in inflation which is now aligned with the Central Bank target. The monthly rate of headline inflation was 0.8 percent in September 2010 (from 0.2 percent in August) taking the 12-month rate to 5.7 percent (from 5 percent in August). The monthly rate of core inflation (which excludes food and fuels) also jumped to 1.0 percent in September 2010 (from 0.5 percent in August) taking the 12-month rate to 3.9 percent (from 3.5 percent in August).

  • Monetary policy moved to a tightening phase. The open market operation committee at the Central Bank (COMA) decided to increase the policy rate by 75 basis points to 4.75 percent in its last meeting. The announcement mentions this is a pre-emptive move as the COMA does not see inflationary pressures (this announcement was made before the inflation figure for September was released). http://www.bancentral.gov.do/notas_pm.asp?a=bc2010-10-01

II. Performance Criteria1

2. Information is available for four of the six quantitative targets for end-September 2010; one target was missed, and the authorities have requested a waiver of non-observance. The end-September 2010 performance criterion on the zero ceiling on arrears to private electricity generators (under the program definition) was not observed. The authorities indicated that these payments were not made on time due to unexpected delays in the enactment of the supplementary budget (submitted to Congress in July and approved in September) and in the related transfer to allow the payments to electricity generators as well as difficulties in securing alternative financing solutions. However the delay was short (4 business days, arrears were cleared by October 6) and the authorities are current on these obligations. The supplementary letter of intent (attached) requests a waiver for the non-observance of this performance criterion, which staff supports given the temporary nature of the deviation from the target. The other three end-September 2010 performance criteria for which information is available were observed: (i) the floor on net international reserves of the Central Bank; (ii) the ceiling on net domestic assets of the Central Bank; and (iii) the ceiling of zero on arrears to external creditors.2

Dominican Republic: Performance Criteria(Quantitative targets for end-September 2010)
Sep 2010Request for Waivers of
Prog.ActualStatusApplicabilityNon-observance
(In percent of GDP)
Fiscal Targets
Consolidated public sector deficit3.12.9 1/?Y
Central administration deficit2.01.8 1/?Y
(In percent of base money)
Monetary Targets
Net international reserves45.154.9NN
Net domestic assets54.945.1NN
(In percent of payments due)
Debt Targets
External arrears0.00.0NN
Arrears to electricity generators0.03.9xNY
Source: Dominican authorities and Fund staff estimates.

Estimates of fiscal targets for end-August 2010; data for end-September not available.

Source: Dominican authorities and Fund staff estimates.

Estimates of fiscal targets for end-August 2010; data for end-September not available.

3. There is no final information to assess two of the six targets for September 2010, for which the authorities are requesting a waiver of applicability.3 The two relevant performance criteria are: (i) the overall balance of the central administration; and (ii) the overall balance of the combined public sector. Preliminary information through end-August 2010 suggests that there was room to run small deficits in September. The cumulative fiscal deficit of the Central Administration and the consolidated public sector through August 2010 were equivalent to about 90 percent of the ceilings for end-September 2010 set under the program. The authorities believe that the end-September 2010 fiscal targets were observed, and staff has no clear evidence to suggest otherwise. The authorities requested waivers of applicability of these performance criteria in the letter of intent, which staff supports.

III. Structural Benchmarks

4. The authorities have prepared a strategy paper to develop domestic capital markets in connection with a structural benchmark for end-September. The strategy aims at reducing domestic and external borrowing costs and improving the credit rating of the country. Staff is evaluating the strategy and will report to the Board on the formal status of the benchmark at the time of the next review.

Table 1.Dominican Republic: Quantitative Performance Criteria 2010-11 1/
Prog.ActualMarginProg.ActualMarginProg.ActualMarginProg.Prog.
MarJunSepDecMarJunSepDec
20102011
Fiscal Targets
1. Overall balance of the central administration (floor) 2/3/-73.7-69.34.4-88.4-87.50.9-95.8-102.3-14.9-21.3-27.9-33.5
2. Overall balance of the consolidated public sector (floor) 2/3/-97.5-91.36.2-119.5-118.41.1-133.0-147.0-21.5-35.6-49.5-63.8
Electricity Targets
3. Overall current balance of the public electricity sector (floor) 4/-201.4-279.6-77.0-145.2-241.6-350.0
Monetary Targets 4/
4. Net international reserves (floor) 5/1,7302,0252961,8882,1282401,6431,9673242,0151,6651,7651,8652,315
5. Net domestic assets (ceiling) 3/57.550.973.259.114.180.080.080.080.080.0
Debt Targets
6. Accumulation of public arrears with electricity generators (ceiling) 2/5/0.00.00.00.00.00.00.091.291.2X0.00.00.00.00.0
7. Accumulation of external public debt arrears 5/6/0.00.00.00.00.00.00.00.00.00.00.00.00.00.0

Targets for end of the month, defined in the Technical Memorandum of Understanding.

Cumulative flows from December 2008 for targets in 2010 and cumulative flows from December 2010 for targets in 2011.

In billions of Dominican Republic pesos.

Program targets are adjusted for shortfalls/excesses in external budgetary financing according to the Technical Memorandum of Understanding.

In millions of U.S. dollars.

Continuous target.

Targets for end of the month, defined in the Technical Memorandum of Understanding.

Cumulative flows from December 2008 for targets in 2010 and cumulative flows from December 2010 for targets in 2011.

In billions of Dominican Republic pesos.

Program targets are adjusted for shortfalls/excesses in external budgetary financing according to the Technical Memorandum of Understanding.

In millions of U.S. dollars.

Continuous target.

Banco Central de la República Dominicana

Ministerio de Hacienda Ministerio

de Economía, Planificación y Desarrollo

Santo Domingo, Dominican Republic

October 19, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Mr. Strauss-Kahn:

In addition to our letter of intent of October 7, 2010 which reiterates our commitment to the program supported by a Stand-By Arrangement from the International Monetary Fund and outlines our policies for the rest of 2010 and 2011, we are sending this letter to bring the Executive Board up to date on recent developments. Unfortunately, due to delays in the approval of the Supplementary Budget for 2010, which authorizes additional transfers from the Ministry of Finance to the state electricity company (CDEEE) for 2010, the performance criterion on the accumulation of public sector arrears with private electricity generators for end-September, 2010 was missed by US$ 91.2 million. The budgetary allocation was transferred to CDEEE on September 30, 2010 and the payment to generators took several days. These arrears were cleared by October 6, 2010 and the ceiling of zero arrears has been observed since then. Accordingly, we request a waiver of non-observance of the performance criterion on the accumulation of public sector arrears with private electricity generators for end-September 2010. It is our policy to remain current in our obligations to electricity generators (under program definitions) and to all creditors and suppliers.

Sincerely yours,

_________/s/__________________/s/__________________/s/_________
Héctor Manuel ValdezVicente BengoaTemistocles Montas
Governor of the Central BankMinister of FinanceMinister of Economy

Given the timing of the Board meeting on the completion of the second and third SBA reviews, the end-September 2010 performance criteria are the controlling targets.

The zero external arrears performance criterion has been observed continuously through the date of issuance of this supplement. Moreover, the authorities have also confirmed that they have met all other standard continuous performance criteria, including on non-imposition or intensification of exchange restrictions, or of import restrictions for balance of payments reasons, and non-introduction or modification of multiple currency practices.

Given the schedule for data reporting set in the technical memorandum of understanding (TMU), final information on observance of these targets should be available by November 5, 2010.

Other Resources Citing This Publication