Dominica: Staff Report for the 2021 Article IV Consultation—Debt Sustainability Analysis
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
14 Feb 2022
eISBN:
9798400202506
ISBN:
9798400202506
Language:
English
Keywords:
CBI revenue; public sector debt sustainability framework; debt sustainability challenge; debt projection; debt financing parameter; Natural disasters; Debt sustainability; Public investment spending; Global; Caribbean
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DOMINICA

Abstract

DOMINICA

Title Page

DOMINICA

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS1

January 27, 2022

Approved By

Julie Kozakand Natalia Tamirisa (IMF) and Marcello Estevao and Robert R. Taliercio (IDA).

Prepared by the staffs of the International Monetary Fund and the International Development Association.

Dominica Joint Bank-Fund Debt Joint Bank-Fund Debt Sustainability Analysis2

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Dominica’s debt is sustainable, but the country remains at high risk of debt distress with elevated ieveis of public and external debt. The COVID-19 pandemic compounded preexisting debt sustainability challenges, as the economy was still recovering from back-to-back natural disasters in 2015 and 2017. Public debt peaked at 106 percent of GDP in 2020. The authorities remain committed to the fiscal consolidation plan committed to in the 2020 IMF Rapid Credit Facility Disbursement. The plan would put debt on a downward trajectory and bring the debt-to-GDP ratio below the regional debt target of 60 percent of GDP by 2035. While the COVID-19 pandemic has worsened the debt trajectory, the execution of the fiscal consolidation plan, along with a sound recovery from the pandemic and continued CBI inflows, would put public and external debt on a sustainable path. Main downside risks to the debt sustainability outlook include a more prolonged impact of the COVID-19 pandemic resulting in slower growth and weaker tourism-related revenue, natural disasters, and weaker than projected revenues from the Citizenship-by-lnvestment program.

Public Debt Coverage

1. Public sector debt includes central government direct and guaranteed debt. Dominica’s public and total external debts are high, estimated at 106 and 105 percent of GDP respectively, in 2020. Central government direct debt accounts for over 80 percent of total public debt. Guaranteed debts are directed to State Owned Enterprises (SOEs), including borrowing under the Petrocaribe arrangement with Venezuela.3 Public and Publicly Guaranteed (PPG) external debt is mostly owed to multilateral creditors, while the National Bank of Dominica and the Dominica Social security are the main domestic creditors. Recent measures to improve coverage and timeliness of debt reporting include introducing an annual Debt Policy Review (DPR), including loan guarantees under the 2019 DPR, submitting the DPR to Parliament and publishing the DPR on the Ministry of Finance website. SOE’s non-guaranteed debts, which are mostly domestic and mainly from National Bank of Dominica, the Agricultural and Industrial Development Bank of Dominica, and the Dominica Social Security, are not included in the public debt stock but they are expected to be small relative to their guaranteed part4 SOEs are not permitted to borrow externally without government guarantees. It is expected that all SOE debts will be included in the public debt with progress on monitoring the SOEs under the Public Procurement and Disposal of Public Property Act5 There are no Public-Private Partnerships in Dominica and therefore no related contingent liability has been included. There is no borrowing by local/state governments and no borrowing by the central bank on behalf of the government. External debt is defined using a residency criterion. There is no material difference between defining external debt on the residency or currency basis. The financial market contingency liability included is above the default to account for enhanced risk from natural disasters6.

Text Table 1.

Coverage of Public Sector Debt

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Text Table 2.

Contingency Liability Calibration Table

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured underthe country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Background on Debt

2. Successive natural disasters have put public debt on an upward trajectory which peaked in the aftermath of the Covid-19 pandemic. Tropical storm Erika in 2015 and Hurricane Maria in 2017 resulted in large declines in public revenue while imposing sizeable reconstruction expenditures needs on the budget. Though strong CBI revenues provided significant financing for the reconstruction efforts, large and persistent primary deficits led to an increase in the public debt level from an average of 72 percent of GDP in 2012–15 to 94 percent of GDP by 2019. The onset of the pandemic further exacerbated debt dynamics, with an output contraction of 4.1 percent in FY 2020–21 resulting in the debt-to-GDP ratio reaching 106 percent, even as resurgent CBI revenues contained the fiscal deficit.

Text Figure 1.
Text Figure 1.

Gross Public Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2022, 040; 10.5089/9798400202506.002.A003

Sources: Authorities data and Fund Staff calculations.

3. External debt has risen on account of persistent current account (CA) deficits from large reconstruction needs, contained by high CBI revenue. Public and private investments in reconstruction work following Hurricane Maria in 2017 resulted in steep increases in imports during 2018–2019, with the import bill exceeding 50 percent of GDP in both years. While the pandemic greatly reduced the import bill by reducing economic activity during 2020, the sharp contraction in GDP resulted in the CA deficit remaining significantly higher than the pre-Maria average in percent of GDP terms. Moreover, while the PPG external debt had remained relatively contained in past years owing to strong CBI revenues and use of government deposits to finance reconstruction work, increased reliance on concessional financing for the pandemic translated into a steep increase in the PPG external debt in 2020.

4. Dominica has no access to international financial markets and borrows mainly from official creditors, resulting in hard constraints on debt accumulation. Two thirds of Dominica’s debt is external, but 90 percent of the PPG external debt is owed to official bilateral and multilateral creditors. The Caribbean Development Bank is Dominica’s largest creditor, holding 20 percent of the total external public debt stock. Venezuela’s Petrocaribe is the largest bilateral creditor, followed by the French Development Agency and the Government of China. Additional external financing is obtained through bonds purchased by regional commercial banks and insurance companies and pension funds. Domestic financing comes primarily through direct credit from the National Bank of Dominica and local debt holders, mainly the Dominica Social Security. Reliance on domestic debt has increased owing to a larger amount of direct borrowing from the National Bank of Dominica during FY 2017–18, which coincided with Hurricane Maria, and increased use of their overdraft facility, most notably in 2018–19 when reconstruction costs were high and the level of grant financing low.

Text Figure 2.
Text Figure 2.

Composition of Public Debt

(Percent of Total, 2020)

Citation: IMF Staff Country Reports 2022, 040; 10.5089/9798400202506.002.A003

Sources: Authorities data and Fund Staff calculations.

5. External and public debt sustainability forecasts are underpinned by assumptions of steady CBI revenue inflows which contribute to growth recovery through public investment. CBI revenue is projected to remain buoyant in the medium term, tapering gradually from a 30 percent of GDP outturn in 2020 to 14 percent of GDP by 2026. This assumption is supported by several years of sizeable inflows starting from 2014 which have remained resilient in the face of successive natural disasters and a pandemic. In FY 2020–21, CBI revenues increased 145 percent year-on-year despite the pandemic causing severe disruption in the rest of the economy and data from 2021 indicates a similar outturn for the current fiscal year.7 The CBI revenue is expected to finance an ambitious public investment budget, which includes a new international airport and geothermal electricity generation plant. Higher public capital expenditures are expected to provide an impulse to growth in the medium term, with a more gradual recovery of the tourism sector beginning in 2022 providing further support to economic growth.8 Official external financing is projected at 5 percent of GDP in the medium term (2024–26) and 4 percent of GDP in the long term (after 2026), in line with the historical average in 2012–14 (4 percent of GDP) before the surge in CBI revenue, that will cover the planned public investment along with the CBI revenue. Long-term growth projections and fiscal parameters incorporate the long-term impact of natural disasters.9

6. Growth projections include a permanent loss of output due to the pandemic, and the boost of the large public investment plan. The output decline during the pandemic is followed by a projected recovery with an average growth of 5.5 percent in 2021–26. This projection internalizes the execution of the large public investment plan and the recovery of the tourism sector under the assumption that the Covid-19 pandemic abates domestically and globally with increasing vaccination rates, and a continuing recovery from the impact of Hurricane Maria. The tourism recovery is also boosted by new hotel facilities becoming operational. The large public investment is largely financed by the upward revision of CBI revenue relative to the projection in the 2020 Rapid Credit Facility Disbursement DSA. Without the public investment boost, output would show a permanent loss of about 10 percent relative to the counterfactual level without the impact of the pandemic (text chart). In the long term, after 2026, output is projected to gradually decline and to converge to a potential growth rate of 1.5 percent.

Text Figure 3.
Text Figure 3.

Nominal GDP Trajectory

(Current vs. Counterfactuals with no External Shocks and Airport Investment)

Citation: IMF Staff Country Reports 2022, 040; 10.5089/9798400202506.002.A003

Sources: Fund staff calculations.

7. Relative to the baseline scenario for the 2020 Article IV, growth is more buoyant as a result of higher public capital expenditures. Growth has been revised upwards to account for higher CBI inflows generating a higher public investment profile. Inflation has been revised upwards in line with global trends. The primary balance trajectory has deteriorated owing to a stronger than anticipated drag on the economy from the pandemic. The current account balance is expected to deteriorate as well, with capital expenditures fueling a larger import bill.

Text Table 3.

IMF staff projections 2020 vs 2021

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Percent of GDP, fiscal year basis.

Percent of GDP, calendar year basis

Background on Macro Forecasts

8. This DSA is built on the baseline scenario of the November 2021 Staff Report. General assumptions include:

  • Fiscal position. After a sharp deterioration in tax revenues and concurrent increase in spending on health, social transfers, and goods and services to support the recovery from the pandemic in 2020, tax revenues are projected to gradually recover in the medium term. The projection assumes the execution of a fiscal consolidation plan that with cumulative savings of 5.1 percent of GDP during 2022–26. The plan was fully identified prior to the Covid-19 pandemic, in the context of creating fiscal space to invest in building resilience to natural disasters, and progress has been made on several measures, with some adjustments to account for evolving circumstances as a result of Covid.10 On the revenue side, several measures have already been passed or are under preparation, including streamlining of discretionary tax exemptions, income and property tax reform, and containment of recurrent spending (aid by the Parliament approval of a Fiscal Responsibility Act in December 2021). The elimination of the diesel fuel preferential rate will be considered once output has recovered. On the expenditure side, it includes measures to increase spending efficiency: a civil service reform (under preparation with technical support from CARICAD), better targeting of social transfers (which will be aid by the national census data planed in 2022), and a review of pension contributions to ensure the sustainability of the system (an actuarial assessment is planned in 2022). Together with the robust CBI revenue, the plan would result in a primary surplus by 2023.

  • CBI revenue. The baseline scenario assumes steady revenues from the CBI program through the medium term, with inflows of 25 percent of GDP in 2021, tapering to 14 percent of GDP by 2026.

  • Grants. Grants are projected at 2.3 percent of GDP, in line with the amount recorded in 2020 to assist with pandemic recovery.

  • Real GDP. Real GDP in 2020 is estimated to have declined by 11 percent in 2020, as a result of travel restrictions that brought tourism exports to a halt and also by domestic lockdowns to prevent COVID-19 contagion. Growth is projected to rebound in 2021 owing to a significantly expanded portfolio of public sector investment projects. The largest project is the construction of a new international airport at an estimated cost of 65 percent of GDP, which the government plans to execute within the next 3–4 years. Other large projects include roads, housing resilient to natural disasters, a new hospital and health centers, a geothermal electricity plant, a resilient water and sewage network, an industrial park to support the development of agriculture processing, and schools. The baseline assumes an execution over 6 years given capacity constraints and available fiscal space. The public investment plan will have ripple effects in other sectors and aid the pandemic recovery, pushing GDP growth to a 5 percent average in the medium term. The government’s intention to improve fiscal buffers by accumulating savings in the Vulnerability and Resiliency Fund (VRF) for self-insurance against natural disasters will further contribute to cushioning the growth impact of catastrophic climate events in the medium term. In the long term, after 2026, the output growth is projected to gradually decline and to converge to a potential growth rate of 1.5 percent based largely on the implementation of the public investment program and resultant increased resilience, improved built infrastructure, a new international airport, and geothermal developments, all of which should support improved long term growth potential.

  • Inflation. Inflation is projected to rise to 3 percent in 2021 in line with global inflationary trends but tempered by administered prices for fuel and cement and strong domestic food production. Inflation is expected to converge to 2 percent in the medium-term, in line with international inflation, and consistent with the fixed exchange rate under the currency board arrangement of the Eastern Caribbean Central Bank, the regional monetary authority.

  • Balance of Payments. The current account deficit deteriorated substantially in 2020 to about 30 percent of GDP, owing largely to a decline of exports and remittances as a result of the pandemic. In 2021, the CA deficit is projected to deteriorate further to 30 percent of GDP as import growth accelerates due to large public investment projects coming on stream. In the medium term, the CA deficit is projected to decline as exports strengthen but it remains above the single-digits average in 2013–17. Export growth is driven by recovery of service exports in the tourism sector towards pre-Maria levels, combined with expanding hotel capacity.

  • Financing conditions. Dominica is projected to obtain financing from multilateral lenders and domestic borrowing, with negligible borrowing from other sources. Multilateral financing is expected to contribute the bulk of external financing in the medium term with ongoing projects to build resilience to natural disasters and to improve fiscal institutions.11 Domestic debt is mostly held by the National Bank of Dominica, a majority-owned public bank, and the Dominica Social Security (DSS). Domestic debt is also issued in relatively favorable terms.12 However, borrowing from DSS has reached its prudential limits and further borrowing will be limited in the near term under the current repayment schedule. The G20’s Debt Service Suspension Initiative (DSSI) repayment schedule is reflected in the DSA assumptions.13 The DSA, and baseline macroframework, assumes that the authorities do not use their SDR allocation.

Text Table 4.

Dominica: Government Financing Needs and Sources

(In US$ million, fiscal years July-June)

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9. Results from applying DSA Realism Tools are affected by substantial growth volatility related to the pandemic (see Figure 4). Real GDP growth paths implied from fiscal multipliers significantly diverge from baseline growth projections (see upper-right chart). Fiscal multipliers are not expected to produce accurate projections in the context of rebound from a pandemic and a primary surplus which is being financed by large CBI revenues which allow public investment of much higher levels than previously anticipated (see bottom left chart). Moreover, the extent of primary adjustment is overstated as the non-CBI primary balance remains a deficit. The projected relation between public investment and real GDP growth differs substantially from the historical relation due the impact of unexpected shocks from the pandemic and successive natural disasters in 2015 and 2017 which delink growth from fiscal spending (see lower-right chart).

Country Classification and Determination of Scenario Stress Tests

10. Indicative debt thresholds in this DSA are determined by the “Medium” rating of Dominica’s debt carrying capacity. The rating is based on the Composite Index (Cl) score of the country, which assumes that the risk of debt distress is determined by the quality of institutions (measured by the World Bank Country Policy and Institutional Assessment (CPIA) score), and other country-specific factors such as economic growth, reserves level, and remittances.14 The calculation of the Cl is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projection, and the corresponding CPIA. Import coverage of reserves continues to be a factor supporting this rating in Dominica. On the other hand, a declining trend in reserves coverage is contributing to a decline in its CPIA score. The rating remains unchanged from the previous DSA.

Text Table 5.

Calculation of Cl Index

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11. Both external and public debt analysis consider standard-DSA alternative scenarios to this baseline. The DSA includes six standardized and a contingent liability stress tests. The financial market contingency liability included at 7 percent of GDP, above the default of 5 percent of GDP, to account for the risk from natural disasters. This adjustment is made to account for potentially higher fiscal costs of strengthening financial sector balance sheets in the event of a natural disaster given undercapitalization of non-bank financial institutions and high non-performing loans in Dominica. A customized “Catastrophic Climate Event” scenario is added, which assumes the reoccurrence of a Category 5 Hurricane in the second half of 2022. This scenario assumes declines in real GDP, exports, and revenues in line with those following hurricane Maria, as well as a considerable increase in expenditure in rehabilitation, albeit with a slower pace of recovery to account for more binding financing constraints.15

External DSA

12. The external public debt to GDP and debt to exports ratios decline to below the threshold for countries of medium debt carrying capacity in the baseline scenario. The PV of external public debt-to-GDP is on a declining trend in the near term and falls below the threshold established for countries with “medium” debt carrying capacity by 2025 (Figure 1). However, the threshold is breached by a large margin in the event of a catastrophic climate event or the most extreme shock scenario of a reduction in exports to one standard deviation below its historical average. PV of external public debt to exports falls below the threshold more rapidly and is relatively more immune to a catastrophic climate event (Figure 2). However, the most extreme shock scenario of a reduction in exports causes significant deterioration of this metric in the near and longer term. Both the PV of external public debt-to-GDP and PV of debt-to-exports ratios remain close to the threshold in the medium term, implying high risk of breaching in the event of downside shocks. The historical scenario has a more rapid decline in the debt to GDP ratio in initial years, but a similar trajectory.

13. Debt service metrics are on a declining trend and remain below the threshold for most of the projection period. Hence the debt service to exports ratio remains below threshold from 2023 in all scenarios barring the most extreme shock. Moreover, debt service to revenue remains below the threshold for all shocks (Figures 3 and 4).

14. Based on the threshold breaches in the near term under the baseline, the risk of external debt distress is assessed as high. The conclusion is based on baseline debt projections breaching their respective thresholds mainly as a result of high debt stock as a starting point. In addition, the alternative scenarios reinforce this conclusion, with historical and catastrophic climate shock scenarios resulting in breaching of thresholds for most debt indicators in the projection.

Overall Risk of Public Debt Distress

15. Under the baseline scenario, public debt is assessed to be sustainable but remains at high risk of debt distress. The fiscal consolidation plan, combined with continued robust CBI inflows to finance public investment projects and boost growth, result in a declining trajectory of the public debt. However, as discussed below, key metrics of debt sustainability remain elevated over most of the horizon owing mainly to the higher initial stock and are sensitive to stress scenarios. Relative to the historical scenario, debt declines more rapidly owing to stronger growth rebound following steeper than anticipated output reductions during the pandemic (see Figure 3). There is also smaller deposit accumulation from borrowing than historically projected.

16. PPG debt remains high and above the threshold under the baseline over much of the horizon. Under the baseline scenario assumptions, public debt remains on a declining trajectory, but the PV of total public-sector debt-to-GDP ratio remains above the corresponding benchmark until well into the projection period, only declining below the benchmark by 2029. All shocks result in large breaches of the benchmark. The debt service-to-revenue ratios increase in the near-term due to projected revenue losses during the pandemic and then decline.

Risk Rating, Vulnerability and Recommendations

17. The stress tests omit important mitigating factors that cannot be internalized within the standardized framework in this DSA:

  • Resilience to natural disasters. Large investments in physical and social resiliency to natural disasters, which underpin the large fiscal deficits in FY 2018–19 and most of FY 2019–20, will reduce rehabilitation and reconstruction spending following natural disasters and climate shocks in the long run by mitigating output and tax revenue declines after those events. This may reduce the fiscal deficit and debt financing parameters used in the stress test in the long term.

  • Fiscal buffers. Large government deposits obtained from buoyant CBI revenue have been used to finance fiscal deficits since 2015. Without this buffer, the fiscal deficits in 2018–19 would have been significantly smaller due to constrained financing, which would result in lower debt in the standardized stress test for the historical and catastrophic climate event scenarios. The government intention to improve fiscal buffers in the medium term by accumulating savings in the Vulnerability and Resiliency Fund (VRF) for self-insurance against natural disasters will further cushion the financial impact of catastrophic climate events. Staff recommendation to reprioritize CBI revenues towards enhancing VRF contributions and paying down debt would further enhance debt sustainability by reducing borrowing needs following extreme climate shocks and lowering outstanding debt stock.

18. Non-resident deposits of Dominican expats reduce rollover risk of external debt while enhancing imputed international reserves. Nearly 20 percent of the stock of external debt, equivalent to about 19 percent of GDP, is composed of non-resident deposits held in the banking sector. These depositors are typically Dominica nationals that have migrated to developed nations but continue to have family and economic links with Dominica and therefore continue to maintain assets in the banking sector. This liability enhances overall stability of external debt given its low rollover risk. In addition, these deposit inflows generate an increase of imputed international reserves given the regional currency board arrangement.

19. With sustained progress on the fiscal consolidation plan and the commitment to continue seeking concessional financing terms, Dominica’s external and overall debt are sustainable but remain at high risk of distress. The authorities’ fiscal consolidation plans are sufficient to bring public and external debt on a downward path, although some key indicators remain above the relevant thresholds for much of the horizon. The planned accumulation of a liquid fiscal reserve in the VRF will help protect debt service capacity and resilience to natural disasters, thereby reducing risk of debt becoming unsustainable. Execution of the government development plan centered on building resilience to natural disasters will further strengthen public and external debt sustainability, by reducing spending in reconstruction and rehabilitation after natural disasters, containing output and employment losses with resilient structures, and increasing output in the long term by stimulating investment and employment (including by reducing out-migration) in a more resilient economy. Adherence to staff recommendations for enhancing contributions to the VRF and paying down debt with CBI revenues will further enhance debt sustainability.

20. The debt projections are underpinned by macro-framework assumptions which are subject to risk. CBI inflow projections are subject to downside risk if there is a long-term decline in the global demand for traveling, or if traveling restrictions are imposed by third nations, reducing the value of holding a Dominican passport, which is the main incentive to acquire Dominica citizenship. CBI also has upside risk, including with a possible rebound of traveling worldwide when the Covid-19 pandemic recedes. This upside risk has materialized in 2020 with the receipt of unprecedented inflows of CBI revenues. Slower than expected recovery of the tourism sector may continue to place a downward pressure on GDP growth, which may also lead to a deterioration in debt dynamics. However, relative to other countries in the regions, Dominica’s reliance on tourism is lower and the assumptions underpinning growth recovery are determined primarily by high public investment. External grants have been projected conservatively and have upside risk. Market risks are contained as nearly 90 percent of the debt portfolio consists of fixed interest debt, and currency risks are limited by the currency board arrangement and external debt portfolio being dominated by USD and EC dollar debt.

21. Increased reliance on domestic borrowing heightened risks to public debt, which could become unsustainable should risk scenarios materialize. Higher than projected reliance on domestic debt during 2018–20 has resulted in larger debt service burdens arising from domestic borrowing which underscore a threat to financial stability due to the bank- and non-bank-sovereign nexus should unanticipated shocks threaten the government’s ability to service its debts. Domestic debt service spikes in 2023 but moderates thereafter. The authorities should closely monitor the financial stability of local bond holders, particularly Dominica Social Security. The stress tests highlight the exposure to a catastrophic climate event as main risk, a shock that could increase debt into unsustainability, reinforcing the importance of the authorities’ commitment to the fiscal consolidation plan in the 2020 RCF disbursement and of the continued multilateral and bilateral financial support on concessional terms.

Authorities’ Views

22. The authorities highlighted the direct link between climate change, cost of building resilience and Dominica’s debt trajectory. They agreed with staff assessment that public debt is at high risk of distress. The authorities noted that prior to the impact of the pandemic, the country was on a path towards achieving the regional debt target. Moreover, in the absence of Hurricane Erika and Hurricane Maria, the overall public debt path would be significantly lower, output would be higher, and fiscal burden have been lower. Hence, the authorities view Dominica’s debt problems as deriving from an external shock in 2017 which claimed over 200 percent of 2016 GDP in damages, followed by an unprecedented pandemic in 2020. They also highlighted that despite repeated shocks to the economy, Dominica has not faltered on its debt repayments to its creditors, nor is it seeking debt forgiveness, which is indicative of their high level of fiscal responsibility. They expressed confidence in their ability to meet the regional debt target of 60 percent of GDP by the extended deadline of 2035, supported by a strong plan of fiscal saving plan under execution and by institutional fiscal reforms, including a fiscal rule passed in December 2021.

Table 1.

Dominica: External Debt Sustainability Framework, Baseline Scenario, 2018–41

(In percent of GDP, unless otherwise indicated)1

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Sources: Country authorities; and staff estimates and projections. 1 Includes both public and private sector external debt 2/ Derived as [r – g – ρ(1+g) + εα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); other public sector flows; changes in gross foreign assets; valuation adjustments; and a external financing gap in 2020. For projections also includes contribution from price and exchange rate changes. In Dominica’s case, the residual is mostly explained by the use of government deposits derived from CBI revenues and changes in privately held external debt 4/ Macroeconomic variables are calculated on a fiscal year basis. 5/ Current-year interest payments divided by previous period debt stock. 6/ Defined as grants, concessional loans, and debt relief. 7/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 8/ Assumes that PV of private sector debt is equivalent to its face value. 9/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Dominica: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2021–31

(In percent of GDP)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Includes official and private transfers and FDI.

Table 3.

Dominica: Public Sector Debt Sustainability Framework, 2018–41

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government government-guaranteed debt. Definition of external debt is Residency-based. 2/ Primary deficit coverage (revenue and expenditures) includes central government and SOEs. 3/ Residuals are mainly related to fluctuations in public sector deposits in the banking system, which have been accumulated mainly from CBI revenues. These deposits stood at 11 percent of GDP at end-2020. 4/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 5/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt 6/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 7/ Macroeconomic variables are calculated on a fiscal year basis, 8/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 9/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 4.

Dominica: Sensitivity Analysis for Key Indicators of Public Debt, 2021–31

(In percent of GDP)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

Figure 1.
Figure 1.

Dominica: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2021–311

Citation: IMF Staff Country Reports 2022, 040; 10.5089/9798400202506.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ Natural disaster shock applies, but is generated as Customized Scenario (not as a Tailored Scenario) to more precisely mimic the impact of recent Hurricane Maria.3/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Dominica: Indicators of Public Debt Under Alternative Scenarios, 2021–31

Citation: IMF Staff Country Reports 2022, 040; 10.5089/9798400202506.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Dominica: Drivers of Debt Dynamics—Baseline Scenario

Citation: IMF Staff Country Reports 2022, 040; 10.5089/9798400202506.002.A003

Sources: Country authorities; and staff estimates and projections.1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-in come countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Dominica: Realism Tools

Citation: IMF Staff Country Reports 2022, 040; 10.5089/9798400202506.002.A003

Sources: Country authorities; and staff estimates and projections.
1

The last published DSA for Dominica can be accessed here.

2

The Cl index for Dominica is 3.02 (medium debt carrying capacity) and is calculated based on data from the October 2021 WEO and the WB CPIA 2020 data.

3

Estimation of borrowing under Petrocaribe is based on the terms under its original loan agreement. It should be noted, however, that its debt service payments have been cancelled or rescheduled in recent years, a pattern that may continue in the coming years. Outstanding debt to Petrocaribe is estimated at 8.5 percent of the total debt stock as of 2020.

4

Non-guaranteed SOE debt is collateralized against assets of the SOE.

5

Debt service-to-revenue ratios may be biased favorably given incomplete coverage of SOE debt stock (i.e. non-guaranteed SOE debts) but complete coverage of SOE revenues in the fiscal accounts.

6

The financial market contingent liability shock is calibrated at 7 percent of GDP (higher than the 5 percent of GDP default) to account for potentially higher fiscal costs of strengthening financial sector balance sheets in the event of a natural disaster given undercapitalization of non-bank financial institutions and high non-performing loans in Dominica.

7

Assumptions regarding CBI revenues and associated capital expenditures contrast from the projections made at the time of the previous Article IV. Current projections are underpinned by strong CBI outturn till 2020 and into October 2021. At the time of the previous Article IV, the persistence of CBI revenues remained uncertain.

8

Work on both the airport and geothermal project has already begun in the 2021–22 fiscal year.

9

The fiscal deficit includes an annualized cost of natural disasters of 1.5 percent of GDP. This is in line with guidance from the WB-IMF Staff Guidance Note.

10

Measures that have been reprioritized include the introduction of a solid waste charge in light of its low revenue potential and high tax administration burden, and a reduction of the preferential rate on diesel which is delayed till the economy shows stronger signs of recovery.

11

World Bank financing in the projection period is assumed to have grace period of 10 years and maturity of 40 years, at 0.75 percent interest, CDB financing is assumed at 5-year grace, 25-year maturity and 1 percent interest rate. Other multilateral borrowing is assumed at 5 years grace, 30-year maturity and 1 percent interest rate.

12

Domestic borrowing is assumed to accrue from the National Bank of Dominica. This takes the form of an overdraft facility, which is converted into long term bonds. These bonds have generous terms, with long maturities and low interest rates. The DSA assumes 0 years grace, 5-year maturity and 5 percent interest on domestic borrowing in the medium term. In the long term, domestic borrowing is assumed to have 7 year maturity, to account for the authorities’ medium term debt strategy to extend debt maturity to 9 years. DSA assumptions remain more conservative than authorities’ strategy in the medium and long term.

13

Dominica has requested an extension on the repayment schedule till December 2021. The DSA assumptions are built on the original repayment schedule, incorporating the extension only in cases where the agreements with the creditors have been finalized.

14

The Cl indicator is calculated based on data from the October 2021 WEO and the WB CPIA 2020 data.

15

The reconstruction after hurricane Maria included record-high public investment in resilient infrastructure which was possible with financing from large government deposits from the CBI program revenue accumulated before the hurricane.

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Cover IMF Staff Country Reports
Dominica: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Dominica
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2022: Issue 040
Publisher:
International Monetary Fund
ISBN:
9798400202506
ISSN:
1934-7685
Pages:
79
DOI:
https://doi.org/10.5089/9798400202506.002
  • <sup>Text Figure 1.</sup>
    View in gallery
    Text Figure 1.

    Gross Public Debt

    (Percent of GDP)

  • <sup>Text Figure 2.</sup>
    View in gallery
    Text Figure 2.

    Composition of Public Debt

    (Percent of Total, 2020)

  • <sup>Text Figure 3.</sup>
    View in gallery
    Text Figure 3.

    Nominal GDP Trajectory

    (Current vs. Counterfactuals with no External Shocks and Airport Investment)

  • <sup><xref rid="RA003fig04" ref-type="fig">Figure 1.</xref></sup>
    View in gallery
    Figure 1.

    Dominica: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2021–311

  • <sup><xref rid="RA003fig05" ref-type="fig">Figure 2.</xref></sup>
    View in gallery
    Figure 2.

    Dominica: Indicators of Public Debt Under Alternative Scenarios, 2021–31

  • <sup><xref rid="RA003fig06" ref-type="fig">Figure 3.</xref></sup>
    View in gallery
    Figure 3.

    Dominica: Drivers of Debt Dynamics—Baseline Scenario

  • <sup><xref rid="RA003fig07" ref-type="fig">Figure 4.</xref></sup>
    View in gallery
    Figure 4.

    Dominica: Realism Tools

Text Figure 1.

Gross Public Debt

(Percent of GDP)
Text Figure 2.

Composition of Public Debt

(Percent of Total, 2020)
Text Figure 3.

Nominal GDP Trajectory

(Current vs. Counterfactuals with no External Shocks and Airport Investment)
Figure 1.

Dominica: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2021–311
Figure 2.

Dominica: Indicators of Public Debt Under Alternative Scenarios, 2021–31
Figure 3.

Dominica: Drivers of Debt Dynamics—Baseline Scenario
Figure 4.

Dominica: Realism Tools