Dominican Republic: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Dominican Republic
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
15 Aug 2019
eISBN:
9781513511108
Language:
English
Keywords:
ISCR; CR; monetary policy; government; IMF staff calculation; inflation expectation; prompted authorities; headline inflation; exchange rate; private sector; foreign exchange; fiscal policy; operating income
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Dominican Republic

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Dominican Republic

Overview

1. The economy remains among the most dynamic in the Western Hemisphere, with low inflation and a stable external position. The Dominican Republic has enjoyed a strong expansion over the last five years (6% percent on average), supported by a strengthened policy framework, a supportive external environment and favorable terms of trade. Inflation remains muted, unemployment is at historical lows, and the external position is broadly in line with fundamentals. The strong growth performance—supported by a policy focus on strengthening social outcomes—has resulted in continued convergence of income per capita towards advanced economy levels, and a significant decline in poverty and inequality (Annex I).

2. The current growth momentum provides a window of opportunity to address remaining challenges to maintain a strong, sustainable and more inclusive growth. These challenges include moderate sustainability and affordability pressures on the fiscal position, despite strong growth; structural bottlenecks to higher productivity, especially in the electricity sector; still elevated poverty and inequality, while social safety nets are not fully developed. Although the upcoming general elections in May 2020 may be dominating the near-term policy landscape, the reform effort needs to be sustained to tackle these challenges.

Recent Developments

3. After a temporary moderation, growth regained momentum in 2018. The economy expanded by 7 percent in 2018, and the positive momentum continued in early 2019 despite a severe drought in the North, albeit at a slower pace. The dynamism in 2018 reflected a recovery in investment from its 2017 slump and a strengthening of consumption. Growth also benefitted from buoyant external demand, although the demand and fuel-price related pickup in imports turned its net contribution negative in 2018. The above-potential growth widened the output gap to an estimated 0.9 percent of potential GDP in 2018.

4. The timely relaxation of monetary policy in response to the economic slowdown in 2017, the supportive external conditions and strengthening incomes fueled the 2018 recovery.

  • Accommodative monetary conditions early in the year strengthened credit growth… The mid -2017 cut in the domestic policy rate and reserve requirements led to a recovery in credit growth (to above 12 percent by mid-2018), especially in sectors most affected by the mid-2017 slowdown, such as construction (Figure 3, top row). The strong demand response is consistent with the finding of the growth-at-risk exercise that domestic interest rates and credit are particularly potent when growth falls below its average values (Annex II).

  • …which moderated as the central bank removed the stimulus. The strong demand response and the anticipated inflation pressures led the central bank to reverse the easing cycle and increase its policy rate in July 2018 by 25 basis points to 5.5 percent. With the latest increase, the monetary policy stance became marginally contractionary at end-2018, moderating private sector credit growth to 10½ percent by March 2019. Overall financial conditions, however, were still supportive due to the real exchange rate depreciation (Figure 3, bottom row).

  • External financial conditions remained supportive. The nominal exchange rate depreciated moderately (by around 4 percent, more than in previous years) against the U.S. dollar in 2018 with narrowing interest differentials against advanced countries. Due to subdued inflationary pressures, the real exchange rate depreciated against the U.S. dollar along the nominal one, although in effective terms this depreciation was muted by the strong U.S. dollar vis-à-vis trading partners.

  • Stronger incomes with recovery in labor markets and growing remittances. Employment is growing strongly as discouraged workers reenter the labor force, increasing the labor force participation rate to an 18-year peak (64⅓ percent of active population) by end-2018 (Figure 4). This increase in the participation rate also led to a recent uptick in unemployment to 5.8 percent by end-2018, still below its long-term average. The bulk of the increase in employment has been in the formal sector, pushing formal employment to 43½ percent of the total at end-2018.1 Real wages also continued to grow, recovering only now to their levels before the 2003–04 financial crisis, and broadly in line with productivity growth, keeping unit labor costs largely unchanged since the crisis and inflationary pressures at bay. Wage growth has been stronger in the lower deciles of the wage distribution, thus lowering inequality and poverty. Net remittances strengthened to a historical high of 7.3 percent of GDP in 2018, further boosting incomes.

Figure 1.
Figure 1.

Dominican Republic: Growth and Social Indicators

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations.1/ Annual average of semi-annually reported values; based on the Official Bulletin of Monetary Poverty Statistics.2/ Methodological break in poverty and market income Gini between 2015 and 2016.
Figure 2.
Figure 2.

Dominican Republic: Strong Expansion Due to Recovery in Domestic Demand

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations.
Figure 3.
Figure 3.

Dominican Republic: Domestic Demand Supported by Financial Conditions…

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorites, IMF International Finance Statistics and IMF staff c alculations.1/ Based on the interbank interest rate and real effective exchange rate, presented as standardized deviations from January 2012.
Figure 4.
Figure 4.

…and Recovering Incomes

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations.

5. Despite strong activity, there are no signs of overheating. Headline inflation accelerated to near the upper band of the inflation target (4±1 percent) by mid-2018, due to a weather-related shock to domestic food production and rising fuel prices. Both supply shocks reversed in the second half of the year, pushing headline inflation down to 1.2 percent at end-December (well below the target band). In early 2019, international oil market developments and a drought in the agricultural areas of the country drove headline inflation back up towards 1.5 percent in March. Core inflation failed to respond to demand conditions and remained stable at around 2.5 percent in 2018, easing slightly in the first quarter of 2019. Staff estimates suggest that the downside pressures from the second-round effects of the positive supply shocks have more than offset the upside pressures from demand and policy factors during 2018 and kept core inflation subdued (Figure 5). A higher than estimated potential growth could be another explanatory factor.

Figure 5.
Figure 5.

Dominican Republic: Inflation Remains Subdued

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.1/ Based on the IMF’s Monetary Policy Analysis and Forecasting (MPAF) model.
Figure 6.
Figure 6.

Dominican Republic: External Position Reflects Strong Fundamentals

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.1/ Capital account and net errors and omissions multiplied by negative one to reflect the BOP identify.
Figure 7.
Figure 7.
Figure 7.

Dominican Republic: Outlook

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.
Figure 8.
Figure 8.

Dominican Republic: Fiscal Risks

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: World Economic Outlook, National authorities and IMF staff calculations.1/ Based on a dataset of 186 countries.2/ Budget revenue ratios use nominal GDP in the budget.

6. The external position weakened somewhat in 2018 but remains solid. Higher oil prices and a demand-related increase in imports widened the current account deficit from a near balance to 1.4 percent of GDP in 2018, still stronger than the historical average. High external demand (especially for tourism), the depreciation of the real exchange rate, and strong remittances (which remain around 1 percent of GDP above the historical average) only somewhat offset these pressures. High remittances are linked to increasing U.S. employment and wages, as well as uncertainty surrounding U.S. immigration policy. The current account deficit stayed adequately financed by foreign direct investment (FDI), and reserve coverage reached 3.7 months of prospective imports (4.5 months excluding the imports of the free trade zones). Overall, the widening of the current account deficit in 2018—broadly in line with staff projections—has shifted the external positon from being considered moderately stronger than fundamentals in 2017 to broadly consistent with medium-term fundamentals and desirable policy settings in 2018 (Annex III).

7. The financial sector remains sound and macro-financial vulnerabilities appear limited, although financial depth is constrained. After expanding for more than a decade to around 27 percent of GDP, private credit stabilized at broadly these levels during 2018—remaining low by historical and international standards but closing the slightly positive credit-to-GDP gap of previous years. Further deepening may be hindered by crowding-out effects, as investing in sovereign debt (currently at about 15 percent of banks’ assets or 123 percent of their equity) provides attractive yields and does not carry capital requirements. Credit quality improved during 2018, with nonperforming assets falling to 1.6 percent of the loan portfolio by end-2018, while provisioning increased. Higher provisioning reduced somewhat capital adequacy during 2018, but—at 17.1 percent at year-end—it remains significantly above the regulatory minimum of 10 percent. Dollarization of assets and liabilities remained broadly stable at around 20 percent and 30 percent, respectively, and banks enjoy healthy liquidity and profitability. The consolidation of the banking system has continued through voluntary restructuring or liquidation.

uA01fig01

Credit Growth and Credit-to-GDP Gap

(Credit to the private sector)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations
Text Table.

Dominican Republic: Financial Soundness Heat Map 1/

article image
Sources: National authorities and IMF staff calculations.

Methodology is detailed at http://www-intranet.imf.org/departments/MCM/tools/tools/Pages/Financial%20Soundness%20Indicators%20(FSIs).aspx

Relative to previous reports, the deposit base now includes certificates of deposits, which are equivalent to term deposits in the local financial system.

Outlook and Risks

8. After the impressive growth performance over the past five years, economic activity is expected to slow to its potential. The tightening financial conditions, a less supportive external environment and higher oil prices (and on the supply side the early 2019 drought) are expected to slow down growth to around 5½ percent in 2019 and 5 percent over the medium term, both within the estimated range of potential growth. With positive supply shocks fading and negative supply shocks emerging amid drought conditions, inflation will gradually move back towards the inflation target band of 4±1 percent The external position is projected to normalize around somewhat higher deficits. The slowdown in remittances and the gradual moderation of gold exports will widen the current account deficit closer to its historical average of 3 percent of GDP over the medium term, offset partly by a projected fall in the oil bill (especially in 2019). FDI, particularly in the tourism sector, is expected to continue to more than adequately finance the current account deficit.

9. Risks to the outlook appear moderate and broadly balanced (Annex IV). On the downside, a faster-than-expected weakening of external demand—especially from the U.S.— is the main risk to growth, and it would only be mildly offset by the concomitant looser financing conditions if the U.S. monetary policy normalization cycle is slowed (a 1 pp temporary decline in U.S. demand is estimated to reduce growth in the Dominican Republic by 0.4pp through trade and remittances channels). Higher energy prices could contribute to weaker demand and wider fiscal and current account deficits. Domestically, the main risks stem from uncertainty about the domestic demand momentum relative to staffs baseline scenario, although these are tilted to the upside in the near term in light of the April 2019 increase in public sector wages and pensions, the ongoing wage negotiations in the private sector, and the negotiation of a free trade agreement with China, which could unlock Chinese markets for Dominican exports and attract tourists and foreign investment2 On the downside, potential extreme weather events could pose a risk to tourism and agricultural exports while cyberattacks could disrupt financial markets and commercial infrastructure.

Authorities’ Views

10. The authorities broadly share staff’s views on the economy’s cyclical position, outlook and risks. They see the economy as operating above potential and expect growth to move close to potential in 2019 but see more upside risks to near-term growth as the strong performance has persisted throughout the first quarter of 2019. Robust private investment (both domestic and foreign) and private consumption highlight the strong fundamentals supporting growth. The authorities consider a slowdown in the U.S. economy the largest downside risk to growth. They also expect headline inflation to remain towards the lower bound of the 4±1 percent target range by end-2019, and to move closer to the center of the band subsequently. Strong export performance, especially in tourism, and high remittances support the external position, which authorities expect to gradually converge to historical averages.

Policy Discussions

Policy discussions focused on (i) the need to strengthen the fiscal position and framework to reduce sustainability risks; (ii) maintaining a data-dependent monetary stance and progress in strengthening the financial system framework; and (iii) policies to support higher productivity and income convergence.

A. Fiscal Policies and Framework

11. Fiscal policy faces the challenge of maintaining sustainability, amid weak debt carrying capacity. Despite strong growth, consolidated public debt continues to grow as a share of GDP (53.1 percent of GDP in 2018) due to persistent structural deficits, averaging around 4½ percent of GDP over the last five years.3 The government is aiming to put a dent in the deficits through expenditure restraint and concerted efforts to increase tax collection by closing loopholes and curbing pervasive evasion (Annex V, section C). Ongoing efforts are critical for widening the revenue base and correcting previous governance gaps in revenue administration. However, the gains from revenue administration measures (estimated at 0.2 percent of GDP in 2018) have been broadly neutralized by declines in one-off revenues, and tax revenue has not visibly increased so far. The tax base remains low by international comparison (at 13.7 percent of GDP) due to widespread exemptions and incentives (tax expenditure in 2018 is estimated at 5.1 percent of GDP). In addition to a narrow tax base, the main contributors to persistent public sector deficits are the electricity sector (with an average annual subsidization cost of 1.7 percent of GDP during 2014–18) and a high interest burden (3.9 percent of GDP, or 28.5 percent of tax revenues in 2018). The high cost of debt relative to a narrow revenue stream suggests a low debt carrying capacity, with additional fiscal risks stemming from a high share of foreign currency debt (54 percent at the consolidated level) and relatively high financing needs (averaging 9⅓ percent of GDP in 2019–23) (Annex VI).

12. The authorities aim to continue improving the fiscal position in 2019, but this will be challenging. The planned adjustment relies on a high anticipated yield from revenue administration efforts (0.9 percent of GDP) to help offset higher investment in infrastructure and a growing interest bill.4 If successful, the authorities’ strategy would at least stabilize public debt or—if spending pressures are not significant—could even put debt on a downward path. However, the targets will be challenging to attain in the absence of substantive tax and electricity sector reforms, and with additional pressures from post-budget increases in minimum public sector wages and pensions (0.1–0.2 percent of GDP) and an expected scale-up in investment to upgrade the electricity infrastructure.5 Staff estimates that, without additional measures, consolidated deficits would remain at around 4 percent of GDP and debt would gradually increase in the medium term, reaching about 56.5 percent of GDP in five years.

uA01fig02

Consolidated Public Sector Overall Balance

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source:Nat’ora a-1horifesara MF staff cicjli’ors.

13. Positive surprises to the fiscal outlook are possible, but there are also downside risks. On the upside, the authorities’ efforts to curb tax evasion may be more successful than assumed in staff’s baseline; cost savings from the new Punta Catalina coal-powered generation plant could be larger; and divesting state’s shares in the coal plant, as planned by the government, could also reduce debt directly, recovering at least partly the cost of its construction.6 On the downside, in addition to macroeconomic risks from higher borrowing costs, lower growth or a larger depreciation than expected, the government may face liabilities from potential arrears of non-central government entities to the private pension system. Finally, the government is exposed to fiscal risks from natural disasters (hurricanes, floods and earthquakes), although the authorities have also taken some steps to build resilience, including by signing a contingent precautionary loan with the World Bank (Catastrophe Deferred Drawdown Option, or CAT-DDO).

14. Sustainably improving the fiscal position will require comprehensive reforms to broaden the tax base and address electricity sector weaknesses. To ensure fiscal sustainability, contain fiscal risks, and reduce borrowing costs, the upward debt dynamics should be reversed. Staff recommends targeting a debt reduction sufficiently below 50 percent of GDP to allow room for countercyclical policies and potential fiscal risk materialization without exceeding this ceiling.7 This will require an additional adjustment effort relative to staffs baseline of 2–2½ percent of GDP over two years to bring debt to 45–47 percent of GDP over five years, with a frontloaded adjustment warranted by the current cyclical position.8 The adjustment should focus on reducing generalized subsidies on electricity, rationalizing CIT incentives, phasing out the least progressive exemptions from the VAT, and reducing the high PIT threshold (less than 10 percent of those employed have income above the threshold). In doing this, the authorities would need to be mindful of the distributional effects of the measures, and the additional fiscal space created from a lower interest burden could be used to strengthen social protection and support growth through higher investment spending.9 In case of a negative demand shock, the authorities have some fiscal space to respond, but current demand, sustainability and affordability considerations argue against its use.

article image

15. Given the uncertainty around the fiscal policy path, a policy framework anchored on a medium-term debt target and fiscal responsibility would strengthen policy credibility. Such a framework would clarify the government’s medium-term objectives, guide current policies towards the debt anchor through an operational rule and remove policy uncertainty in light of the unlikely launch of discussions on the Fiscal Pact Enacting such fiscal responsibility legislation, which could enter in effect in 2020, would help advance the fiscal reform agenda in a pre-election environment, build public trust in fiscal policies and potentially lower the sovereign risk premium. The framework could also strengthen the management of fiscal risks, through the identification and quantification of existing exposures, developing principles for taking these on and strategies for managing them better. Staff welcomes the authorities’ work on developing a fiscal risk statement and encourages its publication during the next budget.

16. The authorities have focused on strengthening the institutional framework for fiscal policies. They are improving the quality and frequency of published fiscal statistics, including through transition to GFSM2014. They are also reinforcing the capacity of the debt management office; broadening the coverage of the treasury single account to virtually all public institutions; and strengthening the institutional capacity to assess risks from public-private partnerships (associated legislation is in congress). Ongoing reforms have also aimed to enhance governance: the procurement system has been modernized to allow real-time public access to information during the procurement cycle through a transactional portal; bearer shares have been eliminated, and tax fraud and bribery have been criminalized (Annex V).10 Remaining challenges include broadening the coverage of fiscal reporting and statistics (including debt) to public institutions outside the central government (municipalities and decentralized institutions), for which reforms have already been initiated, and revisiting the system of intergovernmental relations to clarify responsibilities and the intergovernmental transfer system.

Authorities’ Views

17. The authorities recognize that achieving the 2019 budget targets will be challenging but remain committed to improving the fiscal position. They believe that the staffs baseline scenario is too conservative and underestimates: (i) the ability of the envisaged revenue administration measures to increase the tax base, and (ii) the decline in the electricity sector deficits from lower electricity purchase prices with the entry into operation of Punta Catalina, as well as from the expected profits from the plant In their views, these two reforms, plus other measures, could deliver the needed adjustment to reduce the debt ratio over the medium term. The authorities agreed on the desirability of the fiscal responsibility framework, but they see its adoption as unlikely in the near term. A medium-term fiscal framework for 2018–22 has been developed and is being used internally to guide fiscal analysis, accompanied by an assessment of fiscal risks around the medium-term baseline projections. The authorities have also developed an internal fiscal risk report that assesses risks associated with macroeconomic shocks, natural disasters, the pension system, the electricity sector and public-private partnerships.

B. Monetary Policies

18. The monetary policy stance is appropriate, and any future change should depend on domestic demand and changes in external financing conditions. Muted inflationary pressures provide some space for keeping the monetary policy on hold, but policy should remain data dependent. The positive output gap and the potential second-round effects from rebounding fuel and food prices are consistent with a near-term recovery in inflation and may require monetary policy tightening, especially if tightening financial conditions in the rest of the world bear pressure on domestic inflation. At the same time, while the mid-2018 increase in the policy rate was effective in moderating credit growth, there are indicators that demand may be slowing, and signs of capacity constraints have not yet shown up in core inflation. This suggests that the authorities have room to keep the monetary policy stance unchanged until there are firmer indications of either resource pressures or slack.

19. The central bank continues to strengthen the monetary policy framework and its credibility is increasingly anchoring inflation expectations. Evidence from surveys on macroeconomic expectations shows that inflation expectations are well-anchored seven years after the switch to inflation targeting (Annex VII). To further increase the credibility of its inflation targeting framework, the central bank has recently introduced forward guidance in the monthly press releases and will launch a foreign exchange trading platform in June 2019. The introduction of the platform is expected to increase market transparency, lower price dispersion and information asymmetry, and help promote usage of foreign exchange derivatives.11 While exchange rate volatility is relatively limited, the real exchange rate has been broadly in line with fundamentals, there are no sustained pressures on the currency, and foreign exchange interventions have been moderate and double-sided. With inflation expectations increasingly anchored and with the foreign exchange trading platform in place soon, the authorities would be in a position to increasingly limit the use of foreign exchange interventions to smoothing excessive volatility or accumulating reserves.

uA01fig03

Expected Inflation and Inflation Targeting

(Forecast horizon: End of next year, percent)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations

20. The strong external position allows further accumulation of reserve buffers, but the pace will likely be constrained by high sterilization costs. Reserve coverage has increased to 68 percent of the IMF’s reserve adequacy (ARA) metric compared to only 28 percent in 2012, but remains below the recommended 100–150 percent12 Staff considers that there is scope for further accumulation of international reserves, taking advantage of the favorable external position. Nevertheless, the rate of such accumulation will be constrained by the costs of sterilizing the reserves: the relatively high domestic interest rates imply a significant negative carry for reserves. This adds to the already large quasi-fiscal deficit and debt of the central bank, a legacy of recapitalizing commercial banks during the 2003–04 crisis and sterilizing the associated debt service (Figure 9). A recent agreement to recapitalize the central bank aims to gradually move these quasi-fiscal liabilities to the balance sheet of the central government over a 15-year period; draft legislation to this effect will be submitted to congress as soon as the agreement is formalized. The approval of the plan and steadfast adherence to the recapitalization schedule will be important for strengthening the central bank’s financial position and improving public debt management13

Figure 9.
Figure 9.

Dominican Republic: Reserves and Central Bank Financial Position

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations.1/ Includes reserve position in the IMF.
Figure 11.
Figure 11.

Dominican Republic: Electricity Sector

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations.
Figure 10.
Figure 10.

Dominican Republic: Financial Sector Developments

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: National authorities, World Bank Development Indicators and IMF staff calculations.1/ CAPDR includes the Dominican Republic, Nicaragua, Honduras, El Salvador, Guatemala, Costa Rica, and Panama.2/ Financial margin refers to net interest income. The latest data for Honduras is 2016.

Authorities’ Views

21. The authorities agreed that the neutral policy stance and continued reserve accumulation are appropriate. They stand ready to tighten if inflationary pressures increase while remaining vigilant to downside risks to the global economy and domestic demand moderation. They will continue to exploit the favorable external balance and the steady inflow of foreign exchange to build precautionary buffers. The implementation of the electronic exchange trading platform will help to make the foreign exchange market more transparent and efficient, including through developing the foreign exchange derivatives market. An updated agreement to recapitalize the central bank will help reduce the quasi-fiscal deficit and raise its capital to an adequate level.

C. Financial Sector Policies

22. Macro-financial risks appear limited, but pockets of vulnerability remain and are monitored by authorities. The financial system remains healthy by international comparison, in terms of its capitalization, asset quality, liquidity and profitability (¶; text table). Limited information about borrower creditworthiness and a large share of foreign currency loans extended to non-exporters (although highly collateralized) may be adding to credit risks.14 Bank profitability relies on high intermediation spreads to offset operating costs (suggesting room for exploiting economies of scale through consolidation) and on high commissions (likely undermining ongoing efforts to increase financial inclusion).15 Other risks may also require attention, including potential liquidity risks in banks that have large shares of wholesale deposits from pension funds, and large investments in sovereign debt that could expose banks to interest risk. Pension funds, which became over the years the largest institutional investor (17 percent of GDP in assets), also have a high concentration of their portfolio in sovereign debt. Finally, risks in the financial cooperatives are not well known – the sector is relatively small (3 percent of financial system assets), but some cooperatives are as large as banks and are not regulated or supervised.

Text Table.

Financial Soundness Indicators in 2018: Regional Perspective1

article image
Source: National authorities, World Bank Development Indicators and IMF staff calculations.

Covers the overall financial sector.

CAPDR includes the Dominican Republic, Nicaragua, Honduras, El Salvador, Guatemala, Costa Rica, and Panama.

LA5 includes Brazil, Chile, Colombia, Mexico, and Peru.

23. The authorities continue to strengthen the financing system through improved bank and systemic risk oversight, upgrading its regulation and institutional framework:

  • The authorities are modernizing the institutional framework for systemic financial oversight. Macroprudential surveillance has been strengthened with the operationalization of the Systemic Risk Committee —chaired by the Central Bank and comprising the Ministry of Finance and the Bank Superintendency. The committee recently launched the Financial Stability Report, providing an overview of the financial system health and its resilience to shocks.16 Given contained macro-stability risks, no macroprudential tool was deployed yet, and the authorities continue to develop their toolkit

  • The authorities are gradually moving towards adopting international reporting (IFRS) and supervisory (Basel III) principles, with remaining gaps related to consolidated supervision, capital, market risk and liquidity requirements. The mark-to-market regulation, in particular, is being rolled out gradually by 2020 and could reveal additional capital requirements, especially if financial conditions tighten.

  • Risk-based supervision is also being strengthened with a recent tightening of reporting requirements.

  • Putting in place a strong cybersecurity framework has become a critical priority for the authorities. The recent strategic plan for 2018–21 and the cybersecurity regulation for the financial sector, both approved in 2018, aim to create a state-of-the-art cybersecurity center that would provide cyber defense and data protection functions to the central bank, commercial banks, and other public institutions (Annex V, section B).

24. Further action is needed to strengthen the authorities’ ability to respond to risks and prevent their buildup.

  • Nonbank financial system needs to be brought into the supervisory perimeter. Reforms to bring the regulation and supervision of the sector on a par with banks are critical but need to be designed carefully so as not to overwhelm the financial regulatory capacity.

  • Further developing the prudential toolkit. This would require legislative and regulatory changes that would bring the regulatory, reporting and resolution regimes closer to international norms, including to allow for (i) countercyclical and risk-based capital requirements;17 (ii) improved consolidated financial supervision; (iii) automatic increases in the capital of the public bank (the largest in the system), which are currently done through one-off legislation; (iv) tuning up the resolution tools for banks and households; and (v) formalizing regulatory limits on borrower leverage. In addition, developing a housing price index would help monitor risks given the rapid development of the sector. These reforms, along with those to bring bank commissions to regional averages, are already being considered by the authorities. The authorities should also monitor risks associated with concentrated exposure to sovereign risk and analyze prospects of allowing pension funds to diversify investments abroad while preserving macroeconomic stability.

  • Continue efforts in effectively implementing the AML/CFT framework. The authorities overhauled the AML/CFT legal framework in 2017, and GAFILAT’s 2018 AML/CFT assessment found a relatively strong technical compliance with the Financial Action Task Force (FATF) standard. However, the assessment also concluded that the AML/CFT regime is only effective to some extent and that major improvements are needed to mitigate money laundering and terrorism financing risks.

Authorities’ Views

25. The authorities noted that the financial system, having benefitted from years of continuous reforms since the 2003–04 crisis, is strong and has ample capital and liquidity cushions. Nevertheless, they are committed to continued vigilance and integrating additional tools to strengthen supervisory oversight over banks and the overall system to prevent a buildup of risks. They also agreed with the need to regulate and supervise financial cooperatives, but views differed on whether the supervision should rest with the current bank authorities (without affecting the current quality of bank supervision) or with a new self-supervisory authority.

D. Policies for Stronger and More Inclusive Growth

26. The main medium-term challenge is to boost productivity and continue improving social outcomes. The National Development Strategy for 2010–30, which guides the authorities’ reform agenda, aims at reaching advanced economy status by 2030. While the country’s economic outlook is very favorable, staff’s baseline medium-term growth projections (around 5 percent, or 4 percent in per capita terms) suggest a slower convergence to these levels (Annex I). The authorities have focused on measures that are feasible and can yield quick productivity gains. However, structural policies need to address a few long-standing bottlenecks weighing on the potential growth outlook, including costly electricity disruptions, administrative and regulatory hurdles, shortages of skilled labor, weak institutions and inefficiencies in the transport sector.

27. Improving the investment climate has been a strong policy focus over the past few years. The National Competitiveness Council, headed by the President, has fostered closer collaboration between the private and the public sector to improve the business environment and increase productivity. Its structural reform agenda in 2018 focused on trade facilitation and easing regulatory requirements, including through the introduction of a one-stop shop for exports and one for construction permits, significant reduction in the time for obtaining permits, extending operating hours for ports and airports, simplifying customs procedures, and good progress in implementing the recently ratified WTO Trade Facilitation agreement, among others. In 2019, the agenda will focus on promoting innovation, the weakest-rated pillar in the World Economic Forum’s competitiveness index for the country. Progress has also been made in the last few years in strengthening institutions and governance (another relative weakness) in some areas, especially in curbing tax evasion, reforming revenue administration and improving the AML/CFT legal framework (Annex V).

uA01fig04

Global Competitiveness Index 4.0

(Index, from 1 to 100, where 1: worst and 100: best)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: World Economic Forum and IMF Staff calculations.1/ LAC stands for Latin America and the Caribbean.

28. Promoting more inclusive growth through social reforms has been the long-standing focus of the current administration. Strengthening of the physical and human infrastructure in the education and health sectors, where outcomes lag regional peers, has been supported by higher investments, wage increases, and training of teachers for the additional schools. The government has recently initiated a reform of the pension system, which aims at increasing returns through a reduction in pension fund fees and regularization of employer arrears, and at improving the administration of the system.

29. Going forward, structural reforms will need to tackle areas that present the most binding constraints on growth and social inclusion.

  • Electricity sector. The electricity sector faces multi-decade weaknesses caused by infrastructure gaps and inefficiencies in the state-run transmission and distribution sectors.18 The Electricity Pact agreed among most civil society participants in 2018 after three years of negotiation, has not been enacted due to opposition by some stakeholders.19 While a broadly supported Pact would provide the needed backing for reforms —including the alignment of electricity tariffs closer to costs and the institutional reform of the sector—the authorities could undertake needed reforms even in the absence of the pact. The authorities’ strategy to improve the financial standing of the sector currently relies on (i) the coming online of the new coal-fueled power plant (Punta Catalina) to reduce electricity costs and shield the sector from the more volatile fuel prices; (ii) increased investments to help reduce infrastructure gaps and technical losses in the electricity sector; and (iii) continued shift towards green and gas energy. In staff estimates, these may not be sufficient to eliminate the deficit in the sector without tariff adjustments, higher investments, and increased efficiency in the sector—although upside risks around the gains from the coal plant are high (¶13).

  • Aligning education with needed skills. Weak educational outcomes have limited the Dominican Republic’s capacity for innovation and attracting skill-intensive industries. The primary and secondary education reforms started in 2014 under the auspices of the Education Pact have not had time to translate into improved outcomes. As these reforms mature, there is scope for developing vocational education to address skill mismatches and better align tertiary training to productive needs; the authorities are currently developing such a strategy.

  • Addressing weaknesses in product and labor markets. In product markets, the cost of cargo transport is one of the highest in the region due to the oligopoly structure of the sector and strong trade unions; reforms could help reduce logistics costs across the economy and improve competitiveness. In labor markets, the almost 30-year-old labor code needs to be modernized to allow more flexible working hours and improve the mediation/litigation mechanisms. There is broad agreement among the social partners in these areas, but reforms have stalled on disagreements about the severance pay, where a right balance is being sought between relieving the burden on employers and providing protection to employees in case of unemployment.

  • Further strengthening the investment environment. A simpler, more streamlined and broader-based tax system—in addition to supporting a fiscal adjustment—would also relieve the compliance and the tax burden on the formal sector, facilitate formalization, and remove one of the major doing-business impediments cited by the private sector. The investment environment would also benefit from steadfast implementation of ongoing reforms to improve the efficiency and governance of state institutions, including to reduce vulnerability to corruption, and from addressing other remaining vulnerabilities.

  • Further progress in improving social outcomes will require deeper social security reforms. The social security system, established in 2001, currently receives contributions for pension, healthcare and other social insurance schemes only from those formally employed (43½ of the population). Two of the system’s pillars have not been fully operationalized due to fiscal costs, preventing access to pension and healthcare insurance by the self-employed or those employed in the informal sector (contributory-subsidized pillar) and by those that cannot contribute (subsidized pillar). Even the active contributory pillar is not functioning efficiently, as many employers have accumulated arrears to the privately-managed funded schemes; controls over contributions and arrears are weak; and pension benefits are estimated to be inadequate when the first wave of retirements under the system picks up in about five years (the replacement rate is currently estimated at 30 percent of last wages). The authorities have recently tabled a reform of the social security system to strengthen the management and control of the system, regularize arrears, and reduce pension fund fees in order to increase pension benefits. Staff welcomes these important steps, but a more far-reaching reform, including parametric adjustments, will be needed to ensure broader access to the social security system and adequate retirement income when the system matures.

Authorities’ Views

30. The authorities agree that achieving a higher level of income and social prosperity hinges on the country’s ability to boost productivity and strengthen social safety nets. This spurred the relaunch of the National Competitiveness Council to identify, together with the private sector, obstacles to easier trade, business environment and innovation. It also fueled the multi-year focus on strengthening the education and health sectors, fostering financial inclusion, boosting employment and incomes, and developing opportunities for the less privileged. In education, the authorities pointed out that as reforms mature, the focus will shift from building infrastructure to training teachers – but results in terms of improved educational outcomes and reducing shortages of skilled labor will take longer to materialize. In healthcare, the focus remains on building modern well-equipped hospitals. The authorities acknowledged that outstanding reforms to simplify the tax system, modernize the labor code, broaden social security coverage and benefits, and addressing electricity sector deficits—many of which have undergone extensive discussions with the civil society—require extended negotiations and consensus building that can lengthen the process. They argued, however, that substantial progress was made on many fronts already: the launch of a new power plant and expected large investments in distribution infrastructure should improve electricity supply and reduce costs for the state-owned distribution companies; and the reforms of the management of social security and pension fund fees will help increase retirement income.

Staff Appraisal

31. The economy likely reached its cyclical peak in 2018 and is expected to moderate to potential growth rates. The strong expansion over the past decades and the economic and social reforms being put in place have made the economy more resilient and brought many people out of poverty. However, even at potential growth rates of 5–5½ percent, incomes will converge only slowly to advanced economy levels. A combination of factors is holding back higher productivity and growth, including unreliable electricity supply, weak institutions and red tape, a complex tax system, and relatively weak social safety nets. These should be addressed while the cyclical position remains favorable and external demand strong, to safeguard against potential headwinds, especially from external global factors.

32. Undertaking fiscal adjustment in the near term would reduce uncertainty about fiscal sustainability and take due advantage of the favorable cyclical conditions. While the public debt level of around 53 percent of GDP does not breach accepted sustainability thresholds and is broadly in line with other emerging markets, its dynamics remain unfavorable despite vibrant growth and ambitious revenue administration reforms. In addition, high interest costs, a low revenue base, and a large share of foreign currency debt limit the country’s debt carrying capacity. Tax administration reforms alone are not likely to be sufficient to put a dent in public deficits, which would require addressing the main deficit drivers – the electricity sector and base-eroding tax incentives and exemptions. Reforms in both areas are politically and socially difficult but should be designed to offset their negative distributional effects. A meaningful fiscal adjustment would not only contribute to reducing real interest rates but would also create additional fiscal space to strengthen social safety nets and undertake priority infrastructure projects.

33. A credible fiscal path is needed, especially if deficits take longer to reduce. Fiscal responsibility legislation could help establish a medium-term debt anchor, mark out the path towards this debt target through an operational rule, and determine responses to and accountability for structural deviations from targets. It could also establish a framework for taking on fiscal risks, including from public-private partnerships, and limit contingent liabilities. Such legislation could impart additional credibility to the needed fiscal adjustment, with positive feedback effects on sovereign spreads.

34. Monetary policy faces weak inflation, despite strong demand, and a neutral policy setting appears appropriate. The recent policy tightening has slowed credit growth, helping the economy adjust towards potential levels. With core inflation still weak, monetary policy has room to remain on hold in the near term, while being mindful of both upside and downside pressures on inflation, including from external financial conditions, the speed of moderation of domestic demand, and higher food and fuel prices.

35. The external position is broadly in line with fundamentals. The temporary boost in remittances and steady foreign exchange inflows, especially from tourism, provide conditions that are favorable to continue building the needed reserve buffers. Nevertheless, the pace of such a buildup will be moderated by its sterilization costs amid already high quasi-fiscal deficits. Finalizing and implementing the agreement to recapitalize the central bank will be important for reducing the burden of the quasi-fiscal losses on monetary policy. The introduction of the electronic foreign exchange trading platform and the development of the foreign exchange derivatives market will help further strengthen the monetary policy framework.

36. Systemic financial risks appear limited, but progress in strengthening the financial system architecture should continue. The strengthening of the systemic risk oversight through the development of the macroprudential policy framework, a continued strengthening of bank regulation and supervision, and cybersecurity reforms are welcome reforms to strengthen the financial system. The main challenge going forward will be the steady implementation of these reforms, including the transition to international regulatory and reporting standards in the banking system, developing tools to monitor risks in all corners of the financial system (including housing and borrower creditworthiness), and bringing the financial cooperative sector into the financial system’s supervisory and regulatory net without overwhelming it Staff also welcomes the revised AML/CFT legislation and encourages the authorities to work on ensuring its effectiveness.

37. There is a pressing need to address barriers to higher productivity, income convergence and social inclusion. Staff commends the fast pace of structural reforms to remove trade and investment barriers, strengthen the education and health systems, and improve the administration and regulation of the social security system. Nevertheless, important bottlenecks to an improved doing business environment remain. Needed reforms to address them include the implementation of the Electricity Pact, reducing the complexity of the tax system, stopping anti-competitive business practices, especially in transportation, and modernizing the labor code to allow for more flexible work arrangements. Social outcomes would also be strengthened further by widening access to the social security system, which would help reduce informality, and ensuring adequate retirement incomes.

38. It is recommended that the next Article IV consultations take place on the standard 12- month cycle.

Table 1.

Dominican Republic: Selected Economic Indicators

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Sources: National authorities; World Bank; and IMF staff calculations.

Latest available.

Improvement in 2015 reflects the grant element of a debt buy back operation with Venezuela’s state owned-oil company (PDVSA) of 3.1 percent of GDP.

The consolidated public sector includes the central government, some decentralized entities, the electricity holding company, and the central bank.

Table 2.

Dominican Republic: Public Sector Accounts

(in percent of GDP)

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Sources: National authorities and IMF staff calculations.

Based on Government Financial Statistics Manual (GFSM) 2014.

Outcome in 2015 reflects the grant element of a debt buy back operation with Venezuela’s state owned-oil company (PDVSA) of 3.1 percent of GDP.

Net of one-off revenues, including gains from PDVSA debt buy back.

Adjusts revenues and expenditures for the economic cycle, and excludes one-off gains from PDVSA debt buy back

Before government transers; it covers the Dominican Corporation of State Electricity Companies (CDEEE).

Table 3.

Dominican Republic: Public Sector Accounts

(in billions of Dominican pesos)

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Sources: National authorities and IMF staff calculations.

Based on Government Financial Statistics Manual (GFSM) 2014.

Outcome in 2015 reflects the grant element of a debt buy back operation with Venezuela’s state owned-oil company (PDVSA) of 3.1 percent of GDP.

Before government transers; it covers the Dominican Corporation of State Electricity Companies (CDEEE).

Table 4.

Dominican Republic: Income Statement of the Central Bank

(in billions of Dominican pesos, unless otherwise specified)

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Sources: National authorities and IMF staff calculations.

Includes both interest on recapitalization bonds and direct transfers.

Includes the cost of issuing money bills.

Stock at end of period. Equivalent to the par value, minus the net discount/premium at which paper was sold, plus accrued but unpaid interest.

Table 5.

Dominican Republic: Summary Accounts of the Banking System

(in billions of Dominican pesos, unless otherwise specified)

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Sources: National authorities and IMF staff calculations.

On a residency basis.

Excludes transfers related to central bank recapitalization.

Table 6.

Dominican Republic: Balance of Payments

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Sources: National authorities and IMF staff calculations.

For 2015 includes the grant-element of a debt buyback operation with PDVSA of 3.1 percent of GDP.

The ARA metric shows the adequate level of international reserves as precautionary buffers. The benchmark coverage lies between 100 – 150 percent. The IMF classifies the Dominican Republic’s exchange rate regime as a “crawl-like arrangement”. If the regime were classified as flexible, reserves would have reached over 100 percent of the metric in 2018.

Table 7.

Dominican Republic: Financial Soundness Indicators

(in percent; end of year)

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Sources: National authorities.

Includes all deposit-taking institutions.

Annex I. Growth, Social Gains and Income Convergence1

The Dominican economy demonstrated impressive growth in recent times, which – along with targeted policies – helped raise real incomes and reduce poverty and inequality. Despite its undeniable strengths, a combination of factors, such as unaddressed domestic institutional and policy weaknesses as well as unfavorable changes in external conditions, may dampen Dominican growth prospects going forward, making it difficult for the country to reach high-income status by 2030.

A. Growth Performance

1. The Dominican Republic was among the two fastest growing economies in the region over the last two decades. Among the countries of the Latin America and the Caribbean region, growth in the Dominican Republic was outpaced only by Panama over the last two decades, despite the recession of 2003–04 triggered by a banking crisis. In the post-crisis period (2005–18), the Dominican economy grew faster than the average for emerging and developing economies and was the twenty-seventh fastest growing economy in the world, outperformed largely by important commodity exporters who benefitted from the commodity super-cycle of 2000–14.

2. Impressive post-crisis growth rates yielded significant gains in per-capita incomes. With an average output growth of 5.9 percent since 2005 – supported initially by a sizable depreciation of the exchange rate (and therefore higher export competitiveness), and later by robust domestic demand and an internal devaluation – the Dominican economy generated a near doubling of per-capita income, to US$7,926 by 2018. The country reached upper-middle-income status in 2008, according to the World Bank classification methodology.

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Dominican Republic: Growth Performance in International Perspective

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: IMF, World Economic Outlook and IMF staff calculations.1/ Emerging Market and Developing economies.2/ Latin America and the Caribbean region.

B. Improved Social Outcomes

3. Robust growth and a committed social policy contributed to a sustained reduction in the poverty headcount.2 The social cost of the 2003–04 banking crisis was long lasting, with the incidence of poverty increasing dramatically during the crisis and remaining above its pre-crisis level for over a decade, until 2015. In recent years, the incidence of poverty declined from 39.7 to 25.5 percent of the population between 2012 and 2017, and extreme poverty from 9.9 to 3.8 percent. This reduction in the poverty headcount has been more pronounced in rural areas, especially with respect to extreme poverty (although rural poverty rates remain above the national average). This was due to the prolonged economic expansion – which boosted real incomes, particularly for the poor – along with increased spending on education and healthcare, which complemented earlier reforms to strengthen social safety nets. Notably, since public education in the Dominican Republic is mainly consumed by lower income households, raising the public expenditure on education from 2 to 4 percent of GDP in 2013 was an important policy shift and a signal of the authorities’ commitment to strengthening social outcomes.

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Dominican Republic: Poverty Reduction in Urban and Rural Zones

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National Statistics Office Official Bulletin of Monetary Poverty Statistics and IMF staff calculations.

4. Similarly, income inequality declined in recent years, especially in urban areas, amid wage and remittance growth. Income inequality as measured by the Gini coefficient (an index value between 0 and 1, with higher values indicating more inequality) dropped from 0.49 in 2012 to 0.44 in 2017 indicating a reduction in the spread between the highest- and lowest-income households.3 Geographical disaggregation indicates that most of the inequality reduction took place in urban areas, yet rural areas still exhibit relatively lower levels of inequality. The decrease in inequality can be attributed to growth in real wages in the lower income decile, but also expanding non-labor income due to the government’s continued expansion of conditional cash transfers and robust remittance growth, which reached double digits in 2016–18.

C. Income Convergence

5. Income levels in the Dominican Republic reached almost 30 percent of those in the U.S., surpassing the regional average from 2016 onwards. With robust per capita output growth in the post-crisis period, convergence to U.S. income levels in the Dominican Republic overtook the median for Latin America and the Caribbean in recent years. When compared to high-income economies more broadly, incomes in the Dominican Republic reached 36 percent of the advanced-economy average in 2018. Currently, several countries in Latin America and the Caribbean that are classified as high-income: Chile and Uruguay (both since 2012), Argentina (in 2014 and 2017 -present), Panama (since 2017), and a number of Caribbean states.

6. Anticipated convergence to high-income status by 2030 may take longer. The Dominican Republic aspires to reach high-income country status by 2030, which is articulated in its National Development Strategy (Vision 2030). However, in order to achieve this ambitious target while pursuing the goals of inclusivity and shared prosperity, the economy would have to grow somewhat faster than staffs currently assumed 5 percent over the medium term. Per-capita output in the Dominican Republic was only in the second quintile of the upper-middle-to-high income range in 2017. According to estimates based on GNI per capita and GDP per capita in PPP terms, it would take about 15–20 years for the Dominican economy to converge to high-income country status absent major changes.4

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GDP Per Capita Relative to the U.S., 1970 vs. 20181

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: IMF, World Economic Outlook and IMF staff calculations.1/ PPP GDP per capita by country divided by US PPP GDP per capita, based on methodology developed by Cherif and Hasanov, IMF WP/19/74.2/ Includes low-middle-income countries and low-income countries.
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Dominican Republic: Income Convergence

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: IMF, World Economic Outlook, World Bank, World Development Indicators and IMF staff calculations.

Annex II. Growth at Risk in the Dominican Republic1

This annex uses the Growth-at-Risk (GaR) methodology to examine how macro-financial conditions affect the growth outlook and its probability distribution.2 We apply the GaR methodology to evaluate risks to GDP growth in the Dominican Republic using quarterly data for 1996–2018 based on 32 indicators. Our findings show that domestic monetary policy plays a particularly important role in reducing growth vulnerabilities when the economy is weak, and that the Dominican economy is sensitive to external demand conditions regardless of its growth position.

1. We derive five broad indicators of financial conditions for the Dominican Republic, which on average point to currently neutral financial conditions. These indicators are derived as principal components of 32 quarterly economic series for 1996–2018, normalized around zero, i.e. indicating tight (easy) stance of financial conditions for their positive (negative) values (see table). Domestic leverage (credit) indicators point to neutral conditions, which is consistent with the recent closing of the credit gap as the mid-2018 monetary policy tightening slowed credit growth (see chart). Domestic financial conditions (which capture domestic spreads, interest rates, monetary aggregates, inflation, reserve requirements and the policy rate) suggest still accommodative conditions as EMBIG spreads and inflation remain low. External financial indicators—external cost of borrowing, liquidity and demand—reflect the normalization of external financial conditions from the earlier accommodative stance, with tightening liquidity conditions capturing lower bond flows and higher volatility in financial markets.

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Dominican Republic: Domestic and External Subdimensions of Macro Financial Risk

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities, Haver Analytics, and IMF staff calculations.

2. Our analysis indicates that growth in the Dominican Republic is most vulnerable to negative shocks to domestic financial conditions, domestic leverage, and external demand (see chart). Such shocks—calibrated as one standard deviation of the composite indicators— would shift the entire growth distribution leftwards, intensifying downside risks:

  • Deterioration of external demand conditions would be the most detrimental to domestic growth, increasing the probability of a recession by a factor of 25, from 0.02 percent to 5.3 percent. They have a negative and statistically significant impact on future growth in the Dominican Republic at all three considered forecast horizons (4, 8 and 12 quarters ahead), regardless of the initial growth conditions (i.e. “good” times or “bad” times).

  • Tighter domestic financial conditions would increase the probability of a recession from 0.02 percent to 2.54 percent, shifting the 5th percentile of the weakest growth outcomes from 4¾ percent to 2 percent. Domestic financial conditions have the strongest impact in “bad” times and in the short-run (4 quarters ahead), suggesting a particularly large role for monetary policy in staving off growth slowdowns.

  • Negative shocks to domestic leverage would reduce the modal projection of growth by 3 percentage points, while maintaining the previous balance of upside and downside risks. A tightening in domestic leverage in particular—caused by slower credit growth, worsening credit quality or higher regulatory capital requirements—has a negative and statistically significant impact on future growth at all forecast horizons, and under all initial growth conditions. Thus, policy makers will have to be mindful of deteriorating domestic credit.

  • External liquidity conditions and the cost of borrowing do not have a strong effect on growth in the Dominican Republic, given its relatively weak integration in global financial markets. In fact, the positive (but on average statistically insignificant) effect in the short run likely reflects the concomitant improvement in growth prospects in the country’s trading partners, which have a larger first order effect on growth than their accompanying tightening of monetary policy.

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Dominican Republic: One-Standard-Deviation Negative Shocks to Individual Partitions

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: IMF staff calculations.

Dominican Republic: Determinants of Growth at Risk

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Annex III. External Sector Assessment

The 2018 external position is estimated to be broadly in line with medium-term fundamentals and desirable policies. Risks to external stability are limited as FDI inflows remain strong and external debt is stable. Reserve adequacy has improved and exceeds traditional metrics but remains below the IMF’s risk-weighted adequacy metric.

A. Background

Current Account

1. In line with higher oil prices and growing private investment, the current account deficit has widened to 1.4 percent of GDP in 2018, after more than five years of decline. The current account balance remains strong compared to its historical average of around -3.5 percent of GDP. After benefiting from low world oil prices in 2017, higher oil prices over most of 2018 and the pickup in private investment account for most of the increase in the trade deficit. Strong export growth, especially in the tourism sector and in the free trade zones, partially offset this negative impact. With remittances about 1 percent of GDP higher than the historical average, 2018 saw again a strong secondary income balance.

2. The current account deficit will be dampened by falling oil prices throughout 2019 but is expected to widen gradually – up to 2.8 percent of GDP by 2024 – as remittances return to historical norms and investment remains high. After three years of exceptionally high inflows, remittances are expected to normalize as U.S. employment growth moderates, the main source of remittances for the Dominican Republic. Strong economic growth will sustain the demand for imports to finance investment. Although gold exports will continue to decline gradually as resources deplete, this will largely be offset by a relatively low oil bill.

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Dominican Republic: Current Account

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.
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Dominican Republic: Real Exchange Rate and Foreign Exchange Intervention

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: IMF’s Information Notice System, BCRD and IMF staff calculations.

B. Real Exchange Rate

3. The average real effective exchange rate depreciated by 3.4 percent in 2018, reflecting the depreciation of the nominal exchange rate (4.1 percent) against the U.S. dollar. Although recent movements are consistent with the managed float exchange rate regime, the recent depreciation vis-à-vis the U.S. dollar is stronger than in previous years. The appreciation of the U.S. dollar has not translated into an appreciation of the real effective exchange rate. FX intervention continued to be double-sided, but overall sales slightly exceeded purchases in 2018. Nevertheless, the accumulation of foreign reserves continued throughout 2018. The central bank’s foreign currency purchases continued to be sterilized.

Capital and Financial Flows

4. The financing structure of the current account supports external stability. With 2.5 billion U.S. dollars (3.1 percent of GDP) of net FDI flows in 2018, the current account deficit remains adequately financed.1 In the medium term, Dominican Republic’s well diversified FDI inflows are expected to stay at around 3 percent of GDP. Portfolio inflows increased relative to 2017 due to a large external issuance of government bonds but are predicted to stay between 1 and 2 percent of GDP over the medium run. Since 2015, other investment outflows have been higher than average as private holdings of foreign currency and external deposits increased, and loans were paid back, a trend that is expected to moderate over the medium term.

uA01fig13

Current Account by Source of Financing1

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.1/ Capital account and net errors and omissions multiplied by negative one to reflect the BOP identify.
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Dominican Republic: Foreign Direct Investment

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.1/ Negative values correspond to operative losses, disinvestment or dividend payments.

Foreign Asset and Liability Position and Trajectory

5. The net international investment position (NIIP) reached its lowest level at -66.9 percent of GDP in 2017 and improved to -63.5 percent of GDP in 2018 with assets reaching 22.4 percent and liabilities 86.0 percent of GDP. Foreign direct investment and portfolio liabilities, largely foreign-held government bonds, make up most of the liabilities. In the medium term the NIIP is projected to improve to about -55 percent of GDP due to a combination of continued robust growth and a relatively small current account deficit. Risks to external stability are limited with FDI making up around 57 percent of total liabilities and the projected path over the medium term showing a gradual improvement of the NIIP.

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IIP Composition, by Instrument

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: IMF Balance of Payments Statistics, IMF World Economic Outlook

6. External debt reached 41.5 percent of GDP in 2018. While private external debt has declined to 12.7 percent of GDP, down from 18.6 percent in 2013, public external debt has increased to 28.7 percent of GDP.2 Public external debt thus accounts for about 69 percent of the total. Direct enterprise borrowing makes up around 40 percent of private external debt while deposit-taking institutions account for only around 15 percent.

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Net International Investment Position and External Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.

7. Gross external debt is expected to stabilize below 40 percent of GDP in the medium term. While private debt is projected to continue to decrease as a share of GDP, public debt will stabilize around 29 percent of GDP. The external debt sustainability assessment suggests that the medium-term debt profile is resilient to several shocks, with the most important risk related to a depreciation, which would raise the external debt ratio significantly.

C. Assessment

8. While all methodologies point to some undervaluation of the real exchange rate, the external position is broadly in line with fundamentals and desirable policy settings.

  • The current account assessment uses the EBA-lite methodology, adjusted to reflect the temporary boost in remittances reflecting uncertainty related to U.S. immigration policy. The underlying current account gap is assessed to be 0.7 percent of GDP and the REER is undervalued by 3.9 percent suggesting that the 2018 external position is broadly in line with fundamentals. Without the adjustment for remittances, the undervaluation of the REER would be 6.4 percent. The current account gap is driven by unexplained factors (residual) rather than policy deviations. Although there are policy gaps, they largely offset each other. For example, fiscal policy is looser than the desirable policy setting, given the need for fiscal adjustment of about 2.5 percent of GDP while private credit to GDP and its growth are lower than would be desirable to support financial deepening.

  • The external stability approach estimates the external position to be in line with fundamentals if the NIIP is stabilized at its 2018 level. This implies an IIP-stabilizing current account deficit of 4.1 percent of GDP, which is higher than the projected deficit of 3.0 percent of GDP over the medium term, suggesting a REER undervaluation of 5.3 percent. Reducing the NIIP from -64 percent of GDP in 2018 to 55 percent of GDP over five years, consistent with staff’s projections for a gradual improvement in the NIIP, would require a current account deficit of 2.4 percent of GDP and implies an exchange rate overvaluation of 3.3 percent.

  • IMF’s multilaterally consistent estimates following the REER index approach of EBA-lite suggest an exchange rate undervaluation of 14.6 percent, with the gap driven by a large residual rather than deviations from desirable policy. Staff builds its overall assessment on the current account approach which has a larger explanatory power.

uA01fig17

Current Account: Actual, Fitted, and Norm

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations

Dominican Republic: EBA Lite Current Account Panel Regression

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Adjusts for natural disasters and conflict, and multilateral consistency

D. Other Competitiveness Indicators

11. The Dominican Republic continues to perform well in its main exports. After a strong surge in competitiveness between 2011 and 2016 due to shifts in the export composition recovering from the decline in the textiles industry, the Dominican Republic’s market shares have remained broadly unchanged over the past two years. Tourism exports reached 7.6 billion U.S. dollars in 2018 (9.3 percent of GDP), a 5.2 percent increase over the previous year. The Dominican Republic’s income from tourism is the highest in Latin America and the Caribbean3 in absolute terms. This strong performance has boosted its market share in world tourism, especially leisure. Only its share within the CAPDR region has fallen, with Panama capturing more of the market. The Dominican Republic has also maintained its market share in world exports of goods after a sustained increase since the global financial crisis, mainly driven by exports from the free trade zones. A decomposition of the growth in world market export shares suggests that stagnating productivity compared to competitors explains why market shares have plateaued. After 2014, positive contributions of product mix and growth in Dominican export markets (geography effects) explain most of this trend. The adjusted market share, which captures price and non-price factors in competitiveness, however, had a negative impact on market shares.4

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uA01fig18

Dominican Republic: Market-based Competitiveness Indicators

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: IMF DOTS Database, World Bank MEC Database, World Travel and Tourism Council (WTCQ, UNCTADstat and IMF staff calculations.1/ Tourism includes leisure and business tourism.

12. Survey-based indicators show an improvement in competitiveness compared to last year.5 In the World Economic Forum’s (WEF) Global Competitiveness Index6, the Dominican Republic received a score of 57.4 (on a scale of 1 to 100) for 2018, an increase compared to its 2017 score of 55.6.7 The score improved in all categories, especially Information and Communication Technologies (ICT) adoption and Business Dynamism, reflecting the growing numbers of internet users and reductions in the time and cost of starting a business as well as recent reforms to improve the regulatory framework for insolvency. The index also suggests that addressing shortcomings in Institutions, ICT adoption, and Skills and Innovation Capability will be crucial to enhance competitiveness. Nevertheless, the Dominican Republic outperforms the average for the Latin American and Caribbean. A similar improvement is seen in the Doing Business (DB) 2019 report, with the Dominican Republic’s score increasing from 58.8 in DB 2016 to 61.1 in DB 2019, helped by the insolvency reform and better access to electricity. Despite the recent improvements, strengthening governance remains a priority to reduce factors hindering business, where the country lags its peers. Further improvements in electricity access are also needed to improve the business environment.

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uA01fig19

Dominican Republic: Survey-based Competitiveness Indicators

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: World Economic Forum, World Bank Doing Business Index and IMF staff calculations.Note: LAC stands for Latin America and the Caribbean.

E. Foreign Exchange Intervention and Reserve Adequacy Assessment

13. Reserve adequacy has improved but stays below the IMF’s reserve adequacy metric. The Dominican Republic continued to accumulate international reserves throughout 2018, sufficient to continue to improve adequacy ratios. Coverage is above traditional metrics (greater than 3 months of prospective imports, 20 percent of broad money, and 100 percent of short-term debt (on a remaining maturity basis). As the Dominican Republic integrates further into the world economy, its external exposure increases, especially through growing portfolio liabilities. Accordingly, the Fund’s recommended buffer of international reserves, which considers medium and long-term external debt in addition to short-term debt, rises. In 2018, the reserve coverage reached 68 percent, up from 63 percent in 2017, but below the recommended 100–150 percent. However, based on the Fund’s metric, allowing for more exchange rate flexibility would lower the amount of additional reserves needed. Under a flexible exchange rate regime, coverage would reach 102 percent of the metric due to lower recommended precautionary holdings. The Dominican Republic has a crawl-like exchange rate arrangement and frequently intervenes in the foreign exchange market. Recently, the central bank has scaled back the size of its foreign exchange interventions and with the introduction of the electronic foreign exchange trading platform in 2019, this trend is expected to continue. If the exchange rate is allowed to absorb more external shocks, the need for large holdings of international reserves will be reduced. In the meantime, the country should continue to build up precautionary buffers.

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Dominican Republic: Reserve Adequacy

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: BCRD and IMF staff calculations.

Dominican Republic: Reserve Adequacy

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Sources: National authorities and IMF staff calculations.

Emerging market metric for fixed exchange rate countries: net reserves divided by the sum of 30% of short-term debt (remaining maturity basis), 10% of broad money (M3); 20% of IIP MLT portfolio liabilities; and 10% of exports. Revised data for IIP MLT portfolio liabilities increased recommended adequate level of reserve holdings, explaining a lower metric for 2016 and 2017 compared to the 2018 Article IV.

Private and public, based on residency.

Figure 1.
Figure 1.

Dominican Republic: External Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: International Monetary Fund, Country desk data, and IMF staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2019.
Table 1.

Dominican Republic: External Debt Sustainability Framework, 2015–24

(in percent of GDP, unless otherwise indicated)

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Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Annex IV. Risk Assessment Matrix1

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Annex V. Institutional and Governance Reforms: AML/CFT, Cybersecurity and Revenue Administration1

Several institutional reforms undertaken recently will have important macroeconomic implications for the strength of the financial system, governance and transparency, as well as fiscal outcomes. These include the AML/CFT reforms, cybersecurity, and revenue administration and are discussed in this annex. A fuller discussion of institutional and governance issues in line with the IMF’s New Framework for Enhanced Engagement on Governance will be undertaken during the next Article IV consultation.

A. AML/CFT and Other Institutional Reforms

1. The authorities overhauled the AML/CFT legal framework in 2017 and GAFILAT’s 2018 assessment concluded a relatively strong technical compliance with the Financial Action Task Force (FATF) standard and overall moderate effectiveness. In 2014, the authorities carried out a National Risk Assessment (NRA), which identified drug trafficking, financial crimes, corruption and crime against the State as the country’s main threat to money laundering and terrorism financing (ML/FT). In 2017, the AML/CFT legal framework was comprehensively revamped through the enactment of a new AML/CFT law (Law 155–17). In 2018, GAFILAT evaluated the updated framework and the authorities’ overall adherence with FATF 2012 standards and found relatively strong technical compliance and overall moderate level of effectiveness. In what follows, we discuss selective reforms to the extent that they contribute to addressing governance and institutional shortcomings.

  • Criminalization of predicate offences to money laundering. Law 155–17 doubled the number of predicate offences from 19 to 38, and includes, among others, tax evasion, bribery, financial crimes, fraud, and crimes committed by public officials while in office. The previous lack of criminalization of tax evasion has undermined fiscal outcomes.

  • The AML/CFT supervisory and compliance framework. The law also brought business activities and professions (e.g. lawyers, accountants, notaries, dealers in precious metals, real estate agents, car dealers), considered as high risk and previously not covered by the AML/CFT framework, under the scope of AML/CFT supervision of the General Directorate of Internal Taxes (DGII), a newly-designated entity for this purpose. Accordingly, it enhanced the powers and resources of relevant agencies, including DGII and the Financial Intelligence Unit (FIU). Furthermore, the law requires all reporting financial and non-financial institutions to adopt, develop and implement a compliance program focused on a risk-based approach. However, as pointed out by GAFILAT in its 2018 assessment, weaknesses remain, particularly in the understanding of risks inherent in these non-financial business activities, partly due to difficulties in obtaining reliable data from some sectors, and the application of customer due diligence measures (CDD) and risk-based approaches. The regulation and supervision of the cooperatives, insurance and designated non-financial businesses and professions (DNFBPs) sectors remains an important challenge.

  • Identification of Politically Exposed Persons (PEPs). The new legal framework defines a PEP, including individuals entrusted with high level public functions currently and in the past, both domestic and foreign. On top of this, the authorities have developed a list of positions and functions to enable reporting entities to identify and perform enhanced due diligence on domestic PEPs, as they are considered high risk by law. As noted by GAFILAT, the authorities should clarify whether individuals that perform key functions, such as representatives of political parties, should be considered as PEPs.

  • Beneficial ownership of corporate and legal arrangements. The tax code has been modified to require all corporate and legal structures, resident or non-resident, to register in the Registry of National Taxpayers, and together with the computerization of the company registry maintained by the Chambers of Commerce this facilitates greater access to company information, including the beneficiary owner. The issuance of bearer shares has been eliminated. Despite the upgraded database, further progress will be required to ensure accurate and up to date beneficial ownership information and in ensuring that mechanisms are in place for the authorities to have timely access to such company information.

  • Interagency coordination. Law 155–17 reorganized the National Committee against Money Laundering and Terrorist Financing (CONCLAFIT), comprising key institutions involved in the detection, prevention, and investigation of ML/TF offences; this is allowing for greater powers of access and exchange of information to the FIU. The authorities have also created a specialized Anti-Money Laundering Prosecutor’s Office; and specialized body for border security.

  • Asset Declaration by Public Officials. In recognition of the importance of asset declaration as a powerful anti-corruption tool, several efforts have been made in recent years to enhance the asset declaration regime, notably by amending the law in 2014 to broaden the type of assets to be reported and recording the asset declarations in a centralized public database. While a detailed assessment is required to determine the effectiveness of the new regime, in the meantime, efforts should focus on improving filing, the imposition of appropriate sanctions for non-filers and submission of files for investigation when cases of illicit enrichment are identified. In addition, a bill was submitted to Congress in December 2018, aimed at strengthening valuation of properties for tax and criminal investigation purposes.

B. Cybersecurity Reforms

2. The Dominican authorities have put cybersecurity in the forefront of their policy agenda and are making progress on various aspects of the cyber defense framework. These efforts are focused on putting in place a legal, institutional and strategic framework to combat cyberattacks, centralizing cyber defense functions while expanding their coverage beyond the central bank to reduce vulnerabilities across key institutions:

  • The legal and institutional framework. In 2013, the Dominican Republic became the first country in Latin America to join the Budapest Convention on Cybercrime, ratifying its provisions into domestic substantive and procedural law. More recently, the Central Bank of the Dominican Republic (BCRD) developed an Information and Cybersecurity Regulation (ICR) for the financial sector, which defined a common legal basis for all entities connected to the national payment system. The goal of the ICR is to ensure the implementation of best practices for information security and cybersecurity risk management across relevant entities (financial institutions, payment system participants, all services and institutions connected to these).

  • Strategic plan for developing technical capacity. In November 2018, the BCRD Monetary Board approved a Cybersecurity Strategic Plan 2018–2021 aimed at: (i) addressing the deficiencies in technological infrastructure (creation of threat management and prevention capabilities); (ii) capacity building (including the establishment of cybersecurity culture at BCRD); and (iii) governance. It is intended to centralize the country’s cyber defense policy and define a common set of norms and rules to effectively respond to digital threats.

  • Cybersecurity Incidents Response Center for the financial system. The Center will be equipped with a forensic laboratory and a threat-intelligence unit to prevent, detect and respond to cyberattacks. The Center will cover not only the central bank but also all financial institutions, which would particularly benefit small local banks that lack cyber defense capacity of their own, and the institutions connected to these (e.g. Superintendency of Banks). The Center will also provide data protection services for other core public sector institutions.

  • Cross-sector cooperation and social awareness. The Dominican authorities have also been broadening cybersecurity measures beyond the financial sector to better protect all digitally-connected infrastructure and business processes (e.g. retail, energy delivery, nonfinancial services) as well as personal privacy and safety. The government is improving its collaboration with the private sector to disclose cyber breaches and provide vulnerability reports, while Dominican Telecommunications Institute’s Healthy Internet initiative intends to promote social awareness of cybersecurity threats.

C. Revenue Administration Reforms

3. Since the new administration entered into office mid-2016, it focused fiscal policies on strengthening the revenue administration functions in order to increase tax collections. Recent government reports estimate non-compliance with VAT and income taxes at 9.5 percent of GDP, suggesting ample space to increase tax collections through improved revenue administration. The initial efforts were directed towards tackling tax evasion and fraud in excises taxes on alcohol, cigarettes and fuel, and on institutional strengthening of both internal and external revenue administrations.

  • Institutional strengthening: The two institutions managing revenue collections—General Directorate of Internal Revenues (DGII) and General Directorate of Customs (DGA)—have connected their online system, which allows the automatic exchange of information reported to both institutions and closes an important source of fraud and evasion. Both institutions have also created or strengthened areas related to controls and implementation of the recent AML/CFT legislation, including the Asset Laundering Department, the Fraud and Tax Crimes Investigation Management, the Special Regimes Management, the Control Management of Risks, Excise Tax Department, among others.

  • Enforcement: The tax administration has intensified closure of companies that do not comply with their tax obligations, significantly increasing the perception of risk among taxpayers. The number of tax evasion/fraud cases submitted to justice has more than doubled since 2016, supported by the new AML/CFT legislation. There has also been a reduction in the number of administrative cases that are under reconsideration, as the DGII enforces now the freezing of taxpayer’s banks accounts during the time of the judicial process, eliminating incentives of taxpayers to dispute with the objective of delaying the collection process (more than 90 percent of the audited taxpayers request a judicial reconsideration).

  • Electronic tax invoicing. The authorities have piloted the use of electronic tax invoicing in a few large companies. By tracing the details of any transaction (e.g. price, quantity, taxes paid or owed), invoicing will not only increase the transparency of business transactions but would also lower tax compliance costs and reduce fraud involving input VAT credit (since the invoicing will help determine taxes due by deducting VAT paid on purchases from VAT payable on sales). Once the pilot is completed, the invoicing will be gradually rolled out to the rest of the companies in 2020.

  • Implementation of traceability system for alcoholic beverages and cigarettes. The system will require that domestically produced or imported products carry tamper-proof digital stamps (with visible and invisible features) that would enable the verification of their authenticity by the authorities and consumers (through a mobile application) and real-time traceability of their production, import and commercialization. The system is expected to be functional by 2020 and to significantly reduce excise tax evasion on these items, estimated as high as 40 percent.

  • Simplified tax regime: A simplified tax regime was introduced for small enterprises to facilitate their compliance with what is viewed as a complex tax system. In addition, tax education programs were expanded, doubling the number of people and entities reached.

  • Risk-based collection strategy: With assistance from the regional center for technical assistance CAPTAC, the authorities are focusing collection efforts based on risk, type of debt, and amount, among other criteria. A new tax risk management division has also been created to evaluate non-compliance risks. The Large Taxpayer Unit is also being strengthened.

  • Reforming the tax voucher system: Tax vouchers (sale receipts provided by the DGII that carry the selling companies’ tax IDs) have been traded fraudulently to simulate transactions and claim input tax credits; vouchers will now be issued more selectively and depending on the risk profile of the taxpayer.

uA01fig21

Number of Cases in the Tax Administrative Tribunal

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: Directorate General of Internal Taxes

4. The authorities are already seeing results in terms of increased tax collections. In nominal terms, internal revenue collection targets in the budget were exceeded in both 2017 and 2018, for the first time in many years, although in part this was also due to stronger than budgeted growth. Revenue collections growth also increased as a percent of GDP: excluding one-off receipts from headline revenues, suggests that tax administration reforms have contributed to an increase of 0.3 percentage points of GDP during 2017–18, and an increase in tax revenue base by 0.4pp of GDP over the same period.

uA01fig22

Dominican Republic: Revenue Collections

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: Directorate General of Internal Taxes, Ministry of Finance and IMF staff calculations.

Annex VI. Public Debt Sustainability Analysis

Under current policies, both public debt (53.1 percent of GDP as of 2018) and gross financing needs (9 percent of GDP) remain within the debt burden benchmarks under the baseline and stress scenarios.1 Nevertheless, public debt is on an upward path, and the debt profile carries vulnerabilities due to a large share of debt held by non-residents or in foreign currency.

A. Debt and Financing Profiles

1. Debt profile. The consolidated public debt-to-GDP ratio is projected to reach 56.2 percent in 2023—3.1 pp higher than end-2018—despite favorable automatic debt dynamics (with a negative contribution from the interest-growth differential).

2. Sovereign yields. Dominican Republic’s foreign currency sovereign bonds have increased during 2018 along with other emerging markets, but—at an average credit spread of 306 basis points relative to U.S. Treasury Bonds (as of April 2019)—it compares favorably to the average of other emerging market and Latin American economies (with spreads of 364 and 486 basis points, respectively). The effective nominal interest rate on Dominican Republic’s total debt is projected to move in line with Libor rates, increasing in the near term from 8.4 percent in 2018 to 8.8 percent in 2020, before moderating to 8.2 percent in 2023. A faster passthrough of the international rates to the effective interest rate on public sector debt is being dampened by a large share of fixed-interest debt (about 80 percent), small share of debt that matures in the near term, and the rollover of the central bank securities at significantly lower rates than issued in the aftermath of the 2003–04 financial crisis. Moody’s rating agency upgraded the Dominican Republic’s foreign and local currency credit rating to Ba3 in 2017, while Standard and Poor’s and Fitch maintained it at BB-, and all credit rating agencies have a stable outlook.

uA01fig23

EMBIG Spreads

(In percentage points)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: Bloomberg

3. Gross financing needs remain below the upper early warning benchmarks over the medium term (17 percent of GDP), but follow an increasing trend after 2022 suggesting the potential for increasing rollover risks over the medium term. Gross financing needs will decrease over the next three years from 9.0 to 7.4 percent of GDP, gradually increasing thereafter with maturing external central government and domestic central bank debt. The authorities are aiming at smoothing the path of amortizations by using instruments of different maturities to minimize financing pressures in their medium-term schedule.

4. Public debt profile. The authorities are prioritizing issuances of longer-term and local currency debt with a view to minimizing public debt vulnerabilities to financing and market risk. Thus: (i) the average maturity of debt has been increased to around 10 years for the non-financial public sector from 7.4 years in 2013; (ii) the share of foreign-currency denominated NFPS debt was reduced to 75 percent in 2018 (within the target of 77±3 percent in the national debt strategy) and to 54.1 percent of total consolidated debt as of 2018 (compared to an upper benchmark of 60 percent); (iii) the share held by non-residents (49 percent of total consolidated debt) is somewhat higher than the corresponding benchmark (45 percent), could expose the country to rollover risk from potential shifts in market sentiment; and (iv) the share of debt under a flexible rate has also declined (with only 20 percent of NFPS debt contracted at variable rates).

uA01fig24

Gross Financing Needs

(In percent of GDP, the consolidated public sector)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations.

B. Realism of Baseline Scenario2

5. Growth. Staff growth forecasts tended to be lower than the actual growth outcomes during the period 2009–17, with a median forecast error of 0.28 percentage points. Nevertheless, the forecast bias has decreased in the past few years.

6. Fiscal adjustment. Under the baseline scenario, without fiscal reforms, there is no significant adjustment in the cyclically-adjusted primary balance over the forecast horizon. The DSA template provides the distribution of projected fiscal adjustments across other debt market-access countries, placing the Dominican Republic at the 48th percentile rank based on the expected evolution of the cyclically-adjusted primary balance during the forecast horizon. From 2018 onward, the fiscal impulse converges to zero, implying a broadly neutral fiscal policy.

C. Stochastic Simulations

7. Fan charts. The fan charts illustrate the possible evolution of the debt ratio over the medium term, subject to shocks drawn from a symmetric (upside and downside risks are treated equally) and an asymmetric distribution of risk (which assumes there are no positive shocks to the primary balance). Under the symmetric scenario, there is a 90 percent probability that debt will remain below 70 percent of GDP benchmark for emerging economies over the medium term, while in the asymmetric (adverse) scenario, debt would remain below the 70 percent of GDP benchmark with 75 percent probability.

D. Stress Tests

8. Individual shocks. Under most tests – primary balance shock, growth shock, and real interest rate shock, debt-to-GDP ratio is not expected to breach the 70 percent benchmark. Results suggests that the Dominican Republic is more sensitive to a real growth shock. A one-standard deviation negative real GDP growth shock in 2019 and 2020 would increase debt to 58.2 percent of GDP by 2023 (compared to 56.2 percent of GDP under a no-shock scenario).

9. Combined shock. A combined shock incorporates the largest effect of individual shocks (real GDP growth, inflation, primary balance, exchange rate, and interest rate). In this scenario debt would increase to 63.5 percent of GDP while gross financing needs would increase to 12.6 percent by 2023 (both below the 70 percent and 17 percent benchmarks, respectively).

10. Contingent liability shock. While the contingent liability shock is not triggered since most SOE debt is already accounted for in the headline debt statistics, staff has added a natural disaster shock given the country’s exposure to disaster risk. The scenario assumes a disaster with 100-year return period and a 20 percent of GDP economy-wide loss, of which 15 percent (3 percent of GDP) is assumed to be the responsibility of the government. It is also assumed that this disaster has an adverse effect on growth in the first year (–0.9 percentage points), with a slight rebound of 0.3 percentage points the year following the disaster due to reconstruction activity. Under this scenario, debt would increase to 57.1 percent of GDP by 2023 (below the 70 percent benchmark).

Figure 1.
Figure 1.

Dominican Republic: Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: IMF staff calculations.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ EMBIG, an average over the last 3 months, 09-Feb-19 through 10-May-19.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure 2.
Figure 2.

Dominican Republic: Public DSA-Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: IMF staff calculations.1/ Plotted distribution includes all countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Not applicable for Dominican Republic, as it meets neither the positive output gap criterion nor the private credit growth criterion.4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.5/ The primary balance surplus in year 2015 reflects a restructuring of Petrocaribe liabilities (for around 3.1% of GDP), which are also accounted as as government revenues.
Figure 3.
Figure 3.

Dominican Republic: Public Sector Debt Sustainability Analysis (DSA)-Baseline Scenario

(in percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: IMF staff calculations.1/ Public sector is defined as consolidated public sector.2/ Based on available data.3/ EMBIG.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1+g) – g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Debt stabilizing of primary balance required to keep the debt-to-GDP ratio constant at its 2023 level. It assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 4.
Figure 4.

Dominican Republic: Public DSA – Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: IMF staff calculations.
Figure 5.
Figure 5.

Dominican Republic: Public DSA – Stress Tests

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Source: IMF staff calculations.

Annex VII. Monetary Policy Credibility in the Dominican Republic1

1. The Dominican Republic’s shift to inflation targeting has successfully transformed the monetary policy framework. The policy decision taken in 2005 eventually led to the adoption of an explicit inflation target in 2012. Initially set at 5.5±1 percent, the central bank gradually reduced the target to the current level of 4±1 percent, paired with explanations in regularly published monetary policy statements.2 Inflation performance, in terms of level and volatility, has improved significantly since this shift in policy. Whereas inflation averaged 5.4 percent in the 3 years preceding the inflation target, the Dominican Republic has successfully stabilized inflation at low levels with substantially lower volatility.

uA01fig25

Inflation Performance has Improved with the Shift to Inflation Targeting

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: National authorities and IMF staff calculations. Sample includes: Brazil, Chile, Colombia, Mexico and Peru.1/ Volatility is computed as the standard deviation of the HP filtered series of inflation.

2. Survey evidence shows that inflation expectations in the Dominican Republic are close to the policy target. Well-anchored inflation expectations are the cornerstone of effective monetary policy. Long-run expectations are the most important determinant of inflation and crucial to generate resilience of inflation to external shocks (see Chapter 3, WEO October 2018 and Chapter 3, REO Western Hemisphere April 2018). Both the Central Bank of the Dominican Republic and Consensus Economics publish survey expectations. The deviation of the average inflation forecast from Sample includes: Brazil, Chile, Colombia, Mexico and Peru. target has gradually declined and remains around the target, even when shocks push inflation outside the target bands, suggesting that monetary policy is credible.

uA01fig26

Expected Inflation and Inflation Targeting

(Forecast horizon: End of next year, percent)

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

3. Policy credibility in the Dominican Republic is comparable with the main inflation targeting countries in Latin America with a long track record, despite the policy change being more recent. The deviation of inflation expectations from target has fallen significantly since the onset of inflation targeting. In the last few months, average expectations were closer to the anchor than in most other inflation targeters in the region.3 Inflation uncertainty, as measured by the dispersion of forecasts, has also fallen substantially but remains above the regional average.4

uA01fig27

Policy Credibility Has Become on Par with Main Inflation Targeters in the Region

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: Consensus Economics, BCRD and IMF staff calculations.1/ Main inflation targeters are: Brazil, Chile, Colombia, Mexico and Peru.

4. Greater transparency in monetary policy operations and effective communication, along with a healthy track record on inflation outcomes, have accompanied the anchoring of inflation expectations. Clear explanations of monetary policy decisions and predictable interest rate movements can be effective tools to manage inflation expectations and enhance policy credibility. The central bank communications are clearly written as suggested by a Legibility Index compiled by IMF staff.5 Moreover, an index of central bank transparency suggests that the Dominican Republic has improved transparency along with the monetary policy reform and achieved levels similar to successful inflation targeters such as Chile or Peru. The index points towards room for improvement in the area of communicating central bank forecasts to the general public.

uA01fig28

Improved Central Bank Transparency Supports Anchoring of Inflation Expectations

Citation: IMF Staff Country Reports 2019, 273; 10.5089/9781513511108.002.A001

Sources: WHD REO April 2018, chapter 3, Bloomberg Finance L.P.; IMF staff calculations; Dincer and Eichengreen (2014) and BCRD.
1

The implied informality rate of 56½ percent may appear high but is not comparable to levels reported by other countries in the region, as the authorities were among the first to adopt the ILO definition of informality based on access to social security benefits, as opposed to employment in enterprises with 5 or fewer employees.

2

The Dominican Republic established diplomatic relations with China in May 2018 after cutting its ties with Taiwan Province of China.

3

In staffs analysis, the consolidated public sector covers the central government, other non-financial public sector institutions and the central bank, due to its large quasi-fiscal liabilities. Staffs estimates for the consolidated debt are higher than the authorities’ (50.4 percent of GDP) in that they include the accrued interest on central bank bullet bonds (0.6 percent of GDP), securitized arrears of the electricity sector (1.6 percent of GDP), with the remaining balance due to methodological differences for currency conversion.

4

Measures underlying the planned adjustment in the 2019 budget include the introduction of a digital tax stamps system for tobacco and alcoholic beverages to track the products till final sale, electronic billing for VAT and income tax, and administrative adjustments in fuel excises, among others.

5

Public sector wages in education, health and security have been increased over the past several years in line with the policy focus on these sectors, but wages in the rest of the public sector have remained frozen since the banking crisis of 2003–04. The recent increase entails raising the minimum public wage by 95 percent and minimum pension by 57 percent, with wages and pensions at higher scales by 5–10 percent.

6

The plant will supply an estimated 20 percent of the current demand for electricity, displacing the least efficient and more costly fossil fuel generation. With distribution and transmission already in public hands, this will increase the public sector footprint in the generation sector, although the authorities intend to auction off up to half of the government’s stake in the plant. The plant was built during 2014–19 at an estimated cost of US$2.6 billion or around 3.6 percent of GDP.

7

The staffs views on such a framework are discussed in more detail in Annex V of the 2017 Article IV Consultation.

8

The improvement in the overall balance would be larger than the fiscal effort (at 2½-3⅕ percent of GDP), because the decline in the interest bill along with debt would save an additional 0.5–0.6 percent of GDP.

9

See staff analysis of the distributional effects of fiscal adjustment measures in the 2018 Article IV Consultation, Box 1.

10

The authorities have also used the procurement system to advance their social objectives, introducing the Dominican Model for Inclusive and Sustainable Purchases that gives priorities to domestic SMEs and female-led supplier companies.

11

In the absence of the electronic trading platform, the central bank cannot monitor the foreign currency market in real time, which makes it harder to interpret the main drivers behind market movements and introduces unnecessary volatility in a relatively shallow market.

12

The IMF classifies the Dominican Republic’s exchange rate regime as a “crawl-like arrangement”. If the regime were classified as flexible, reserves would amount to about 102 percent of the ARA metric.

13

The 2007 recapitalization agreement fell short of its objectives to complete the recapitalization by 2016, as annual transfers from the government were significantly below the central bank’s quasi-fiscal deficit and agreed levels.

14

For a more in-depth discussion of financial system strength and vulnerabilities see the Selected Issues Paper accompanying the 2018 Article IV “A Flight over the Hispaniola Fifteen Years after the Financial Crisis”.

15

Financial inclusion and deepening have also been held back by the 0.15 percent tax on bank transfers, introduced as a temporary measure after the 2003–04 financial crisis and whose removal should be considered as fiscal space is created.

16

Authorities’ stress tests show that the financial system is resilient to the liquidity, market, credit, and growth risks.

17

The regulator lacks powers to require financial institutions to hold capital above the minimum requirement of 10 percent depending on its risk profile.

18

For a discussion of the issues faced by the electricity sector and the solutions agreed between the government and the civil society in the context of the Electricity Pact, see Annex V in the 2018 Article IV Consultation staff report.

19

Under the National Development Strategy, the authorities have committed to formulating three “pacts” with social partners to address key challenges, including in education (2014), electricity (partially agreed in 2018, but not enacted) and fiscal responsibility.

1

Prepared by M. Rousset.

2

Poverty as defined by the National Statistics Office Official Bulletin of Monetary Poverty Statistics. Extreme poverty threshold is defined as survey-based per-capita income that covers food essentials only but is not enough to purchase other basic goods and services. The general poverty line is defined as income that covers food essentials and a basket of basic goods and services such as clothing, footwear, housing, education, healthcare, and transportation.

3

The latest Gini coefficient is calculated using the updated labor market survey, ENCFT. Calculations of income trends using administrative data on tax revenues confirm the declining trend in inequality. Note that other data sources, such as World Data Atlas, cite a higher estimate for the Dominican Republic’s Gini coefficient at 45.7 (2016) but their data may not be based on the latest survey.

4

The first estimate uses nominal GNI per capita in PPP dollars as “income” and compares the 2018 income of the Dominican Republic growing at projected nominal rates through the medium term and a fixed rate of 7.2 percent thereafter to the 2018 minimum income across advanced economies per WEO definition, growing at WEO-projected nominal rates in the medium term and a fixed rate of 3.7 percent thereafter, both adjusted for WEO-projected population growth. The second estimate defines income convergence as reaching 50 percent of U.S. GDP per capita in PPP terms, based on the methodology developed by Cherif and Hasanov (IMF WP/19/74).

1

Prepared by O. Bespalova and M. Rousset, based on “Growth at Risk in the Dominican Republic” (forthcoming).

2

The methodology was developed by Adrian, Boyarchenko and Giannone (AER, April 2019). The GaR methodology includes the following steps: (i) selecting relevant variables and their grouping into partitions (i.e. using principal component analysis); (ii) estimating a quantile regression for the GDP growth using partitioned indicators as regressors; (iii) deriving a probability density function for the GDP growth using a skewed generalized t distribution; (iv) quantifying the downside risks to future growth under the baseline and alternative shock scenarios. See IMF WP/19/36 (2019) Growth at Risk: Concept and Application in IMF Country Surveillance for further details.

1

2017 saw temporarily large FDI inflows driven by the sale of a large Dominican company to a foreign investor, explaining the decrease in 2018 compared to the previous year.

2

Here external debt is defined by residency.

3

Excluding Mexico which is included in North America by the World Tourism Organization.

4

World Bank MEC Database ends in 2016Q2.

5

Survey-based indicators reflect investors’ perceptions on the business environment.

6

The World Economic Forum’s Global Competitiveness Index combines both official data and survey responses from business executives on several dimensions of competitiveness.

7

The change in methodology from GCI 2017–2018 to GCI 2018 moved the Dominican Republic from rank 104 to rank 82. Applying the updated methodology to the previous year the DR would have also ranked at 82nd place.

1/

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

1

Prepared by J. Okwuokei, M. Rousset, and J. Arze del Granado.

1

Public debt numbers are staff estimates and refer to the consolidated public sector, defined to cover liabilities of the non-financial public sector and the quasi-fiscal debt of the central bank.

2

The MAC-DSA framework is described in http://www.imf.org/external/np/pp/eng/2013/050913.pdf

1

Prepared by J. Faltermeier.

2

Monetary policy statements have been issued since 2009.

3

This group of countries includes Brazil, Chile, Colombia, Mexico and Peru.

4

Consensus Economics does not publish the standard deviation of forecasts for the Dominican Republic. The dispersion is measured from the Macroeconomic Expectations Survey conducted by the Central Bank of the Dominican Republic, so differences in survey methodology may explains the higher standard deviation.

5

Details of the methodology are described in the Western Hemisphere Department REO April 2018, Chapter 3. The Spanish press releases for Chile, Colombia, the Dominican Republic, Mexico, and Peru and the English translations for Brazil are used. The Flesch reading ease (RE) index is used for Brazil, which is defined as RE = 206.835 – (1.015 x ASL) – (84.6 x ASW), in which ASL = average sentence length, and ASW = average number of syllables per word. Following Taborda (2015), the Flesch-Szigriszt index for documents in Spanish is used for the other economies. That index is defined as RE = 206.835 – (ASL) – (84.6 x ASW).

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Cover IMF Staff Country Reports
Dominican Republic: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Dominican Republic
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2019: Issue 273
Publisher:
International Monetary Fund
ISBN:
9781513511108
ISSN:
1934-7685
Pages:
82
DOI:
https://doi.org/10.5089/9781513511108.002
Figure 1.

Dominican Republic: Growth and Social Indicators
Figure 2.

Dominican Republic: Strong Expansion Due to Recovery in Domestic Demand
Figure 3.

Dominican Republic: Domestic Demand Supported by Financial Conditions…
Figure 4.

…and Recovering Incomes
Figure 5.

Dominican Republic: Inflation Remains Subdued
Figure 6.

Dominican Republic: External Position Reflects Strong Fundamentals
Figure 7.

Dominican Republic: Outlook
Figure 7.

Dominican Republic: Outlook
Figure 8.

Dominican Republic: Fiscal Risks

Credit Growth and Credit-to-GDP Gap

(Credit to the private sector)

Consolidated Public Sector Overall Balance

Expected Inflation and Inflation Targeting

(Forecast horizon: End of next year, percent)
Figure 9.

Dominican Republic: Reserves and Central Bank Financial Position
Figure 11.

Dominican Republic: Electricity Sector
Figure 10.

Dominican Republic: Financial Sector Developments

Global Competitiveness Index 4.0

(Index, from 1 to 100, where 1: worst and 100: best)

Dominican Republic: Growth Performance in International Perspective

Dominican Republic: Poverty Reduction in Urban and Rural Zones

GDP Per Capita Relative to the U.S., 1970 vs. 20181

Dominican Republic: Income Convergence

Dominican Republic: Domestic and External Subdimensions of Macro Financial Risk

Dominican Republic: One-Standard-Deviation Negative Shocks to Individual Partitions

Dominican Republic: Current Account

Dominican Republic: Real Exchange Rate and Foreign Exchange Intervention

Current Account by Source of Financing1

(In percent of GDP)

Dominican Republic: Foreign Direct Investment

IIP Composition, by Instrument

(In percent of GDP)

Net International Investment Position and External Debt

(Percent of GDP)

Current Account: Actual, Fitted, and Norm

(In percent of GDP)

Dominican Republic: Market-based Competitiveness Indicators

Dominican Republic: Market-based Competitiveness Indicators

Dominican Republic: Survey-based Competitiveness Indicators

Dominican Republic: Survey-based Competitiveness Indicators

Dominican Republic: Reserve Adequacy
Figure 1.

Dominican Republic: External Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Number of Cases in the Tax Administrative Tribunal

Dominican Republic: Revenue Collections

EMBIG Spreads

(In percentage points)

Gross Financing Needs

(In percent of GDP, the consolidated public sector)
Figure 1.

Dominican Republic: Public DSA Risk Assessment
Figure 2.

Dominican Republic: Public DSA-Realism of Baseline Assumptions
Figure 3.

Dominican Republic: Public Sector Debt Sustainability Analysis (DSA)-Baseline Scenario

(in percent of GDP, unless otherwise indicated)
Figure 4.

Dominican Republic: Public DSA – Composition of Public Debt and Alternative Scenarios
Figure 5.

Dominican Republic: Public DSA – Stress Tests

Inflation Performance has Improved with the Shift to Inflation Targeting

Expected Inflation and Inflation Targeting

(Forecast horizon: End of next year, percent)

Policy Credibility Has Become on Par with Main Inflation Targeters in the Region

Improved Central Bank Transparency Supports Anchoring of Inflation Expectations