Since 1992, the Dominican Republic has experienced an extended period of robust economic growth, declining unemployment, modest inflation, and, for the most part, a manageable external position. The achievement of a satisfactory degree of financial discipline and the structural reforms implemented in the early 1990s underlie these positive results. This chapter offers an overview of the stabilization and reform efforts undertaken by the authorities in the 1990s and highlights some of the challenges that still lay ahead.


Since 1992, the Dominican Republic has experienced an extended period of robust economic growth, declining unemployment, modest inflation, and, for the most part, a manageable external position. The achievement of a satisfactory degree of financial discipline and the structural reforms implemented in the early 1990s underlie these positive results. This chapter offers an overview of the stabilization and reform efforts undertaken by the authorities in the 1990s and highlights some of the challenges that still lay ahead.

II. Stabilization and Structural Reforms1

A. Introduction

5. Since 1992, the Dominican Republic has experienced an extended period of robust economic growth, declining unemployment rates, modest consumer price inflation, and, a generally manageable external position. Indeed, during 1996–98, the Dominican Republic ranked among the world’s fastest growing economies, with particularly strong performances in the telecommunications, construction, free-trade-zone, and tourism sectors.

6. This picture contrasts dramatically with the country’s economic performance during the 1980s. In those years, the combination of severe monetary and fiscal imbalances, pervasive price controls, financial sector rigidities, multiple currency practices, and an extremely restrictive trade regime resulted in acute economic distortions and an inability to manage adverse shocks to the economy. External deficits soared, the peso was sharply devalued several times, and the government incurred external arrears. Moreover, economic activity stagnated.

7. The turnaround was accomplished through an impressive and wide-ranging stabilization and structural adjustment effort initiated during 1990–92. This program, although individual elements were met with varying degrees of success, permanently changed the economy’s growth path. Domestic imbalances were addressed through measures aimed at strengthening public finances, improving monetary control, and reducing distortions in financial markets. A large number of restrictions that plagued the exchange and trade regime were removed, thus fostering the integration of the Dominican Republic into the world economy.

8. Despite the fragile political situation that emerged from the 1994 and 1996 presidential elections, the Dominican authorities succeeded in maintaining a broadly stable macroeconomic framework, although the pace of structural reform slowed somewhat. More recently, momentum appears to have picked up again, with the ongoing reform of several public enterprises. In order to safeguard the benefits of previous reforms, the government has elaborated and sent to congress several other important reforms aimed at modernizing the structure of the state, strengthening governance, enhancing the effectiveness of monetary and fiscal policies, removing the last impediments to a full-fledged unification of the foreign exchange market, and deepening financial market and trade liberalization.

B. The Lost Decade: 1981–90

9. As was the case for most of Latin America, the 1980s was a period of economic turmoil for the Dominican Republic. Economic rigidities and policy inconsistencies prolonged the country’s difficulties. Large fiscal deficits contributed to excessive monetary expansion and inflationary pressures, which in turn exacerbated the distortions created by extensive price controls. An overvalued domestic currency and multiple exchange rates, combined with extensive foreign exchange surrender requirements and high trade barriers, stifled export growth and foreign investment, while protecting inefficient domestic industries. Caps on interest rates and controls on credit allocation contributed to financial disintermediation and a general weakening of the financial system. Moreover, the central bank was steadily losing official reserves, and payments arrears on the public sector’s external debt service obligations were accumulating. Attempts to implement stabilization programs were short lived, especially, because of lack of fiscal discipline.2

10. A number of structural weaknesses contributed to the severe fiscal imbalances. The consolidated public sector deficit3 averaged about 5 percent of GDP between 1981 and 1990 (Table 1). Several factors contributed to this weak fiscal performance. First, the level of government revenues was low and volatile because of the strong dependence on international trade taxes and weak tax administration.4 Second, public spending was highly discretionary and inflated by sizeable losses of public enterprises, large increases in wages and employment, and excessive public investment programs. Finally, the implementation of corrective measures frequently lacked effectiveness and continuity.5

Table 1.

Dominican Republic: Main Macroeconomic Indicators

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Sources: Central Bank of the Dominican Republic; and Fund staff estimates.

Average ratios in each subperiods are calculated as the ratio between the sum of the relevant variable and the sum of GDP over the given period.

Includes quasi-fiscal losses of the central bank. Since this information is not available for the 1990-93 period, central bank’s losses are assumed to be zero for those years.

The inflation tax is calculated as CPI inflation during the year times the stock of base money at the end of the previous year.

11. Large and persistent fiscal deficits represented a significant burden for monetary policy. While at the beginning of the decade more than half of the public deficit was financed by foreign loans, episodes of default on external and domestic government debt led to a progressive drying up of these sources of financing. This resulted in an increasing monetization of the overall public deficit, which in turn fueled inflationary and exchange rate pressures. The inflation tax, which averaged about ½ percent of GDP in 1981–83, surged to an average of over 3 percent of GDP for the rest of the decade.

12. Financial repression hampered the formation of savings and its productive allocation. With the aim of preserving financial equilibrium, although pursuing conflicting policy objectives, the government tried to maintain a tight control over the financial sector. Ceilings imposed on lending rates, high and differentiated reserve requirements, extensive financial restrictions, and the allocation of credit according to political priorities created a highly inefficient and distorted financial system that adversely affected the formation of domestic savings. At the same time, these restrictions led to the emergence of an active informal financial market, complicating control of monetary aggregates.

13. The limited degree of openness perpetuated domestic distortions. A system of multiple currency practices, foreign exchange restrictions, surrender requirements, import prohibitions, high import duties with discretionary exemptions, and export controls contributed to perpetuate distortions in domestic markets and undermined the development of the export sector.6 Inconsistency between exchange rate policy and the stance of financial policies generated overvaluations of the peso that ended with sizable devaluations in 1984, 1988, and in 1990.

14. As a result of these rigidities, economic performance was poor. Over the whole period, economic activity expanded at a slow pace (Figure 1) and output per capita was stagnant. Consumer price inflation, which in the early 1980s was below 10 percent, increased rapidly, reaching almost 80 percent during 1990. External current account deficits averaged 4 percent of GDP. Since inflows of foreign direct investment were hindered by the uncertain economic environment, external imbalances brought about a rapid accumulation of external debt. Despite some debt relief from official bilateral creditors in the mid-1980s, persistent large balance-of-payments deficits were financed through a rundown of official reserves and a buildup of payments arrears.7

Figure 1.
Figure 1.

Dominican Republic: Scatter Diagram of Real GDP Growth Rates and Inflation Rates for Selected Periods

(In percent, period averages shown)

Citation: IMF Staff Country Reports 1999, 117; 10.5089/9781451811285.002.A002

Sources: Central Bank of the Dominican Republic; and Fund staff estimates.

C. The Initial Phase of the Reform Effort: 1991–95

15. In 1990, the economic situation deteriorated markedly owing to a pre-electoral loosening of financial policies, a sharp deterioration of the terms of trade, and a prolonged drought.8 Economic activity weakened, inflation accelerated, the balance of payments deficit widened, pressures on the exchange rate intensified, and external arrears increased, including to the IMF, the World Bank and the IDB. Under these circumstances, the government of President Balaguer, upon receiving a new mandate in August 1990, embarked on a comprehensive economic program—known as the New Economic Program—that included price liberalization, fiscal consolidation, devaluation of the exchange rate, and decontrol of interest rates. Significant progress was made in normalizing relations with external creditors.9 Although the reforms implemented in the early 1990s were substantial, several important distortions and policy weaknesses remained.

16. Fiscal consolidation lay at the heart of the New Economic Program. During 1990, the prices of a wide range of public sector goods and services were corrected to better reflect opportunity costs. In particular, the significant correction in prices of petroleum products led to a remarkable increase in fuel tax revenues. The use of a market-determined exchange rate to calculate import duties boosted custom receipts.10 A tax reform, approved in 1992, modified the income tax, converted all excise taxes from specific to ad valorem, broadened the VAT tax, and raised its rate from 6 to 8 percent. On the expenditure side, food subsidies were largely removed in 1990, and current and capital outlays were restrained during the early 1990s, mainly through strict application of a daily cash management system, particularly for special funds managed by the presidency. These measures shifted the public sector primary balance from a deficit of about 1 percent of GDP in 1990 to a surplus of close to 4 percent of GDP in 1991.11 Despite some recovery of government expenditures in the following years, especially capital expenditures, which suffered the brunt of the earlier adjustment, the consolidated public sector deficit averaged only 1 percent of GDP over the 1991–95 period.12

17. In order to curb inflation, monetary conditions were tightened and monetary policy was made more effective. Lending and deposit rates were liberalized and they soared to high positive levels in real terms. Reserve requirements, freezes on excess reserves, and credit ceilings continued to be the main instruments for the conduct of monetary policy. However, the central bank started moving toward a more market-oriented management of domestic liquidity through the issue of its own certificates, with the aim of increasing reliance on open market operations.

18. Major reforms to the banking system were implemented to strengthen the financial system and eliminate distortions in credit markets. In late 1991, the structure of reserve requirements for commercial banks was unified at 20 percent for all deposits and selective portfolio requirements were abolished.13 Furthermore, beginning in 1993, significant progress was made in developing banking supervision and prudential regulations. To this end, the Superintendency of Banks was restructured and modernized, norms on capital requirements were reviewed along the lines of the Basel agreement; rules on provisioning were clarified to ensure their enforcement; and limits on lending were established to minimize concentration risk. At the same time, a draft Monetary and Financial Code (MFC) was presented to congress with the aim of reforming the statute of the central bank, strengthening banking supervision, and promoting competition in the financial system.14 Enforcement of the new prudential regulations brought to light the weaknesses of the financial system. Episodes of financial insolvency led the central bank to intervene in support of troubled institutions.15 A process of consolidation of the banking system was started through mergers and liquidations.

19. Significant measures were adopted to enhance the outward orientation of the Dominican economy.16 With the tax reform of September 1990, a process of gradual opening to external competition had started. The level, numbers, and dispersion of tariff rates were reduced; the scope of exemptions narrowed; and all import quotas and licensing agreements were eliminated, except in the case of certain agricultural products. In January 1991, the multiple exchange rate practice was discontinued, and the “unified” official rate was set in relation to the commercial banks’ exchange rate. Although the central bank continued to intervene in the foreign exchange market, a spread between the two rates still emerged on numerous occasions. A surrender requirement of foreign exchange to the central bank remained in effect for certain transactions, but the scope of this requirement was reduced and an increasing number of transactions was conducted through the interbank market. A new Foreign Investment Law, approved in November 1995, opened up key sectors to foreign investment, including the banking sector, extended to foreign investors the guarantees granted to domestic investors, and eliminated all restrictions on profit remittances and capital repatriation.

20. The response to the stabilization program was positive. Economic growth resumed, driven especially by those sectors that were more open to competition, such as tourism and tourism-related activities, construction, nonsugar manufacturing, and telecommunications. In 1991–95, the average rate of GDP growth accelerated to over 4 percent, while inflation slowed sharply. Between end-1990 and end-1991, the 12-month change in consumer prices fell from 80 to 8 percent. Since then, inflation has remained in single-digit territory, except in the 1994 election year. External imbalances were generally contained, except in 1992–93.17 In light of the improving economic situation, the Dominican Republic began to attract sizable amounts of foreign direct investment, which became a steady source of financing of current account deficits. Further relief of the external liquidity constraint was also provided by various rescheduling and refinancing agreements that the Dominican Republic reached with its official and private creditors.18 This contributed to a steady and significant decline of the public external debt, which, between 1990 and 1995, was more than halved from 72 to 33 percent of GDP.

21. Economic instability resumed in the run-up to the 1994 presidential election. Fiscal and monetary policies were relaxed, inflation rose, official foreign exchange reserves declined, and the spread between the official and the market exchange rate widened. The results of the presidential election were controversial. Ultimately, the political parties reached an agreement to shorten the presidential mandate and to hold a new election in 1996. During this interim period, the government resumed its efforts at stabilization. Although it lacked sufficient political support to implement a wide-ranging stabilization and reform program, the government avoided reversals of earlier reforms and was generally successful at containing economic imbalances.

D. The New Government: 1996–1999

22. Despite political difficulties, the new administration of President Fernandez has provided additional impetus to the process of stabilization and reform. Reviving economic growth is considered a prerequisite to poverty reduction. To this end, trade liberalization, privatization, and public sector modernization, including improvements in the supply of social services, have been integral components of the new administration’s program. This ambitious reform agenda has run into resistance from the opposition in congress. However, indications have recently emerged that political difficulties are easing.19

23. A significant acceleration of the pace of economic growth, in the context of low inflation, has characterized this last period. Since 1996, the Dominican Republic has ranked among the world’s fastest growing economies. The effects of past reforms and the sizable inflow of foreign direct investment are among the main factors that have contributed to this result. Unlike past episodes, this period of robust expansion has not been accompanied by a rekindling of inflationary pressures. Even in the months following Hurricane Georges, 12-month inflation remained in single digits.

24. A high degree of fiscal and monetary discipline underlies these positive achievements. Despite an increase in government noninterest current spending, the consolidated fiscal deficit has remained relatively modest because of the rise in tax revenues stemming from a generalized improvement in tax enforcement and administration. Broad money growth has been contained and positive real interest rates have been maintained, although at times the central bank had to rely on direct instruments of monetary control, especially when exchange rate pressures emerged. Strengthening prudential regulations and banking supervision have remained a top priority of the monetary authorities, but the absence of a sufficient political consensus has further postponed the approval of the MFC.

25. The process of public enterprise reform has gathered momentum recently. The Public Enterprise Reform General Law, approved in June 1997, authorized increasing private sector participation in some productive sectors still dominated by state-owned enterprises such as the electricity and sugar sectors (Box 1 in accompanying staff report SM/99/185).20 The process of reform of state-owned companies entered into its executive stage in early 1999 with the sale of the state-owned flour mill (Molinos Dominicanos). This was followed in April and May 1999 by the private capitalization of the distribution and generation units of the state-owned electricity company (Box 1). The state-owned sugar company (Consejo Estatal del Azúcar—CEA) expects to complete the leasing of its sugar mills to the private sector by September 1999.

26. On the trade liberalization front, the results were mixed. While an ambitious trade reform bill was rejected by congress in 1996, further steps were made in reducing the restrictiveness of the trade regime. During 1998, a number of nontariff barriers were removed and free trade agreements were signed with the Central American Common Market (CACM) and the Caribbean Community (CARICOM). However, the draft tariff reform legislation is still being reviewed by congress.21

E. The Challenges Ahead

27. There is a need to press ahead with the reform agenda, which is broad and well articulated. In order to sustain a rapid pace of economic growth and development, the benefits of the previous reforms need to be supported with fresh efforts: from further financial sector deepening to enhancing competition in the markets for goods and services; from fostering trade integration to modernizing the structure of the state. The current administration has placed these reforms high on its agenda for debate, demonstrating the government’s willingness to carry them out.22 As shown in Table 2, important draft legislation is still being considered by congress. However, recently the three major political parties—the ruling Dominican Liberation Party (PLD), the Dominican Revolutionary Party (PRD, which controls congress), and the Reformist Social Christian Party (PRSC)—expressed their intention to work together for approving the pending reforms considered essential for the social and economic development of the country.

Table 2.

Dominican Republic: Pending Structural Reforms

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Source: Information provided by the Dominican authorities.

The Capitalization of the Dominican Electricity Corporation

The problem

The Dominican Electricity Corporation (CDE) has been plagued by unreliable service and poor bill collection. In 1995-98, energy losses (technical and fraud) amounted to over 40 percent of total production. Government transfers averaged about 1 percent of GDP. The intermittent electricity supply has been a constraint on economic growth, as local enterprises have had to depend on more expensive self-generated electricity.

The solution

In order to solve these problems, the government invited the private sector to participate in a capitalization process, whereby the highest bidder would receive half ownership (equal to the value of the bid) and full management control. The CDE was first divided into three distribution units and two generation units, with the remainder (hydroelectric generation and transmission) remaining under state ownership. In April 1998, 19 out of 21 interested companies were selected to participate in the bidding process, subject to transparent rules. CDE net worth was assessed by an internationally recognized auditing firm, and minimum bids were established- Final bids were accepted in April 1999 (distribution) and May 1999 (generation).


  • The winning bids were almost 25 percent higher, on average, than the minimum bids. Some US$643 million (4 percent of GDP) in fresh capital was raised.

  • However, the net injection was only about US$400 million, as a portion of the investment was allocated to reduce outstanding liabilities of the former CDE.

  • Tariff rates are to remain constant in real terms for the next four years, although a precise indexation mechanism has yet to be determined.

  • Net budget savings (transfers less payment of electricity bill) are estimated at about RD$600 million per year (0.2 percent of GDP).

The CDE Capitalization

(In millions of U.S. dollars)

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Sources: National Planning Office; and Commission for Reform of Public Enterprises.

The winning bid was for the purchase of both North and South distribution companies.

28. Further financial deepening is key to promoting domestic saving and channeling it toward the most productive investments. To this end, the Monetary and Financial Code and the Stock Market Law would strengthen the institutional setting, promote competition and enhance transparency in financial and securities markets. Additional stimulus to the process of financial deepening would be provided by a reform of the social security system, which, besides improving the quality and effectiveness of social services, should aim at promoting private sector involvement through the development of privately managed pension funds. In addition, increasing reliance on indirect monetary instruments by the central bank and a full-fledged unification of the exchange rate regime are critical prerequisites to the development of a sound financial and exchange system.

29. More competitive markets are crucial to fostering economic growth and development. The proposed Market Order Code aims at removing impediments to competition in domestic markets for goods and services through establishing antitrust and unfair competition measures. Trade liberalization is crucial to creating a more competitive and dynamic economy.

30. Reforming the state and improving governance are also central to sustaining economic growth, because they impinge upon all the other aspects of the reform process. The achievement of these goals calls for improving accountability and transparency in public resource management, reducing opportunities for corruption, and reforming the civil service.

List of References

  • International Monetary Fund, Dominican Republic—Staff Report, various issues.

  • Leone, Alfredo Mario, 1997, “Stabilization, Structural Reforms and Challenges Ahead,” mimeo.

  • World Bank, 1999, “Dominican Republic: Country Assistance Strategy,” R99119, June 14.


This chapter was prepared by A. Giustiniani.


The intensity of the imbalances prompted recourse to IMF assistance in 1983 and 1985.


This measure of the fiscal deficit includes the central bank’s quasi-fiscal operational losses. These losses arise, inter alia, from operations associated with the intermediation of foreign loans to finance priority activities, the servicing of debt on behalf of the government, the financing of certain public enterprises, and payments to institutions being liquidated.


In 1981–90, taxes on international trade and transactions averaged 5 percent of GDP, representing more than one-third of central government revenues. In 1991–98, they amounted to less than 4 percent of GDP, equivalent to less than one-fourth of total revenues.


For example, the effectiveness of introducing a value added tax in 1983 was curtailed by administrative resolutions which limited the tax base.


For more details see the chapter on “Trade Reform in the Dominican Republic.”


At the end of 1990, the Dominican Republic’s outstanding public external debt was about US$4.5 billion (some 72 percent of GDP), of which about US$L5 billion was overdue.


During 1989–90, while oil prices were increasing, prices of ferronickel, the country’s main export item, were declining. This, in turn, negatively affected government revenues.


The government’s stabilization and reform efforts were supported by an IMF Stand-By Arrangement, approved in August 1991 and extended in July 1993.


Initially, import duties continued to be calculated at an exchange rate somewhat more appreciated than the market rate. In mid-1991, the authorities started to use the market exchange rate for this purpose.


In the 1991–93 period, the primary balance averaged a surplus of about 3 percent of GDP. It fell off again into deficit (2.1 percent of GDP) in 1994.


This figure partially underestimates the actual consolidated public sector deficit because data on the central bank’s quasi-fiscal losses are not available for the 1990–93 period.


While the basic reserve requirement has been unchanged since 1991, the authorities have continued to impose temporary reserve requirements in moments of particular tension in the money and exchange rate markets. Dollar deposits are only subject to reserve requirements when they exceed three times capital.


The original draft of the MFC aimed at strengthening central bank independence, but subsequent drafts weakened this particular aspect of the reform. However, by setting into law the various reforms that had been accomplished through decrees and resolutions by the Monetary Board, the MFC would encourage additional foreign entry in the banking system.


Given the absence of institutional arrangements to protect small depositors, the central bank typically took over the assets and liabilities of financial institutions being liquidated. Initially, only small deposits were paid in cash while large deposits were exchanged for central bank certificates with a one-year maturity. Since September 1994, all deposits of liquidated banks have been converted into certificates with maturities ranging from six months to four years, depending on the size of the deposit. The certificates bear an interest rate of 10 percent per annum.


For more details see the chapter on “Trade Reform in the Dominican Republic.”


In those two years the current account deficit widened to 6½ and 5½ percent of GDP, respectively, partially reflecting a sharp increase in imports, associated with the rapid expansion of the economy in 1992 (8 percent) and a decline in some traditional exports.


Agreements on debt restructuring were achieved with Paris Club creditors in November 1991 and with commercial banks in February 1994. Bilateral agreements were also signed with a number of countries, including Mexico and Venezuela.


As evidenced by the successful private capitalization of the state-owned electricity company, and congressional approval of several multilateral loans.


This Law, also, established the Commission for the Reform of Public Enterprises (Comision de Reforma de la Empresa Pública—CREP), which is responsible for managing the process of reform and transformation of state-owned enterprises.


For more details see the chapter on “Trade Reform in the Dominican Republic.”


On this issue, see in particular Annex C of the World Bank’s 1999 Country Assistance Strategy paper.

Dominican Republic: Selected Issues
Author: International Monetary Fund
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    Dominican Republic: Scatter Diagram of Real GDP Growth Rates and Inflation Rates for Selected Periods

    (In percent, period averages shown)