The Executive Board of the International Monetary Fund (IMF) has completed the second and third reviews of the Dominican Republic’s economic performance under a program supported by a 28-month Stand-By Arrangement (SBA). The completion of the reviews allowed the immediate disbursement of an amount equivalent to SDR 158.5 million (about US$249 million at current rates), bringing total disbursements under the arrangement to an amount equivalent to SDR 437.8 million (about US$687.6 million at current rates).
The SBA was approved on November 9, 2009 (see Press Release No. 09/393), for an amount equivalent to SDR 1.1 billion (about US$1.72 billion at current rates), or 500 percent of the Dominican Republic’s IMF quota. The first review of the program was completed on April 7, 2010 (see Press Release No. 10/137), for an amount equivalent to SDR 79.27 million (about US$124.5 million at current rates). The second review was postponed as authorities needed additional time to articulate policies for the second half of 2010.
In addition to completing the reviews on October 22, 2010, the Executive Board approved a waiver of non-observance for the end-September performance criterion for public sector arrears to electricity generators (which were subsequently corrected); and waivers of applicability for two fiscal targets for which data on performance were not available at the time of the Executive Board Meeting. The Executive Board also approved additional performance criteria for 2011 and structural benchmarks for 2010 and 2011. All quantitative and structural benchmarks for the second and third reviews were met.
Following the Executive Board’s discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, made the following statement:
“Following near stagnation at the beginning of last year, the Dominican economy is rebounding strongly. It is expected that real GDP will increase more than previously projected in 2010 and 2011, with low inflation. The positive economic activity has been achieved thanks to stimulative monetary and fiscal policies through mid-2010 and less adverse external conditions. The financial system has weathered the global crisis well.
“Fiscal policy has entered now a new phase in the second half of 2010 and the process of fiscal consolidation has appropriately begun. To ensure observance of the fiscal targets for 2010, the authorities exercising a strict control on current spending. The 2011 budget envisages a consolidated fiscal deficit of 3 percent of GDP, which represents an adjustment of 1 percent of GDP, to be achieved through a reduction in indiscriminate electricity subsidies and a strengthening of tax collections by rationalizing tax exemptions and improving tax administration, targets that are in line with the original program.
“The central bank has managed monetary policy flexibly and has a commendable track record in this area. Given the shrinking output gap, the central bank recently increased its policy rate to 4¾ percent—a still stimulative stance—after about a year of keeping it at 4 percent. The central bank indicated it stands ready to undertake further tightening if needed to confront eventual inflationary pressures. The authorities’ plan to adopt inflation targeting by 2012 would be aided by a more flexible exchange rate. Continuing with the plan for recapitalization of the central bank is essential for monetary policy credibility. The authorities also plan to implement risk-based consolidated supervision which would further shield the banking system against financial shocks.
“Risks to the outlook remain balanced and could be managed with continued structural reforms and flexible macroeconomic policy. Reforms in the electricity sector, to lower its burden on public finances, and improvements in tax collections will be critical for fiscal sustainability.”