Abstract
On behalf of the authorities of Dominica, we express gratitude to Mr. Alejandro Guerson and his team for constructive and candid discussions during the Article IV mission. Our authorities have expressed satisfaction with the discussions and are in broad agreement with staffs assessment and recommendations.
On behalf of the authorities of Dominica, we express gratitude to Mr. Alejandro Guerson and his team for constructive and candid discussions during the Article IV mission. Our authorities have expressed satisfaction with the discussions and are in broad agreement with staffs assessment and recommendations.
The authorities are focused on building a strategy that will facilitate post pandemic recovery while continuing to address the health situation. The government aims to vaccinate 70 percent of the population aged 18 and older and have accessed adequate vaccines to immunize the target population, but vaccine hesitancy is a major challenge. The authorities are therefore adopting several strategies, including working with social groups and civil society to increase vaccine uptake.
The Response to the COVID-19 Pandemic
The COVID-19 pandemic has hit Dominica hard, and the authorities have rightly prioritized preserving lives and livelihoods. Dominica has experienced two major waves of the pandemic. In the first wave in March 2020, borders were closed, and a domestic lockdown was instituted. The number of cases was relatively low, and no deaths were recorded. However, the second wave which started in August 2021 resulted in significant increases in cases, and the first COVID-related death was recorded. The authorities instituted another, less severe lockdown, but borders remained open.
To address the health situation, government revamped the health services and introduced new facilities to specifically provide medical services to COVID-positive people. Protective and other medical equipment were purchased for use in these new facilities, as well as at the island’s main tertiary care facility. Free quarantine facilities for local patients were introduced and quarantine arrangements were made for visitors who tested positive on arrival to Dominica. In addition, widespread testing has been adopted, with residents having access to regular testing at no cost to them.
The government’s response to the pandemic also addressed the economic impact and included the extension of the tax filing period, introduction of tax waivers, deferrals, incentives, and the elimination of import duties and VAT on cleaning and health products. Through the Social Security system, unemployment benefits were provided to employees and self-employed people whose livelihoods had been affected. All social transfers were maintained to protect the vulnerable. In addition, the authorities supported the measure of an ECCU-wide moratorium on loan repayments, to provide relief for borrowers. Funding for government’s response to the pandemic has been obtained from development partners, resources from the CBI program, and reallocation of budget priorities. In 2020, the Fund disbursed the equivalent of SDR 10.28 million (US$14 million; 89.3 9 percent of quota) under the Rapid Credit Facility (RCF), with additional concessional resources obtained from the World Bank (WB), the Caribbean Development Bank (CDB), and the OPEC Fund.
Recent Economic Developments
The economic impact of the pandemic has been severe. GDP is estimated to have declined 11 percent in 2020. The sectors which have been most affected include tourism, wholesale and retail trade, and construction. A modest recovery of 3.7 percent is estimated for 2021. This result is a consequence of the authorities’ efforts to accelerate the implementation of the public sector investment program, construction of new hotels, and activity in the retail sector. Consumer prices declined in 2020 by 0.7 percent, reflecting lower import prices. However, prices have been rebounding with the consumer price index measuring 3.0 percent in 2021. An overall fiscal deficit of 7.2 percent of GDP was recorded in fiscal year 2020/21. This reflected the impact of the various revenue measures and increased expenditures in response to the crisis. However, other recurrent spending remained contained, even with the implementation of a 1 Vi percent wage increase agreed with labor unions. Public debt increased to 106 percent of GDP at end 2020, from 94 percent in 2019. Measures implemented by the banking sector mitigated the impact of the pandemic in the financial sector, and the sector remained stable and liquid. Vulnerabilities exist in the non-bank sector especially among credit unions, some of which are under-capitalized. Overall, the level of non-performing loans is high and will need to be addressed. Large current account deficits exceeding 3 0 percent of GDP were recorded in 2020 and 2021. These outcomes are largely as a result of the declines in the tourism sector and increases in public investment, but these were partly offset by lower imports of goods and services.
Economic Outlook
The risks to the economic outlook are tilted to the downside, with the trajectory of recovery subject to the path of the pandemic. Growth of 7.6 percent is projected in 2022 on the assumption that the health situation will improve, the tourism sector will re-emerge, and robust implementation of large public sector investment projects will take place. Growth over the medium term (2023 to 2025) will average five percent per annum. Inflation is projected at 2.5 percent in 2022 and two percent in the medium term. The current account deficit is expected to reduce to 28.7 percent of GDP in 2022 and to fall progressively to 14.7 percent of GDP by 2026.
Fiscal Policy
The immediate priority for the authorities is to bolster the post pandemic recovery even while starting the process of fiscal consolidation. Where necessary, fiscal relief measures will remain in place until the recovery firmly takes root. However, the focus will shift to rebuilding fiscal buffers into the medium term and advancing reforms to support fiscal and debtsustainability.
After making significant progress in reducing debt levels, a series of natural disasters forced the authorities to increase spending for rehabilitation and restoration. The authorities have signed on the ECCU target of a debt to GDP ratio of 60 percent by 2035 and are committed to reaching this target. The approval of the fiscal rule in December 2021 is a most important step and gives credibility to the authorities’ commitment to achieve the debt target. Other elements of the fiscal rules include establishing the primary fiscal balance as an operational target and the inclusion of contingent clauses in debt agreements, including for natural disasters and pandemics.
Dominica was impacted by the COVID-19 pandemic while it was still grappling with the effects of hurricane Maria, which hit the country in 2017 and resulted in loss and damage equivalent to 226 percent of GDP. The cost of the hurricane Maria rehabilitation has been significant, and initial spending was financed mostly by drawing down buffers which had been accumulated from revenues raised under the Citizenship By Investment Program (CBIP). A critical part of the fiscal consolidation strategy is to rebuild these buffers and strengthen financial resilience. Towards that end, the authorities have established a Vulnerability and Resiliency Fund (VRF), for self-insurance against natural disasters. This Fund is complementary to the participation in the Caribbean Catastrophe Risk Insurance Facility (CCRIF).
The authorities remain committed to continuing with the implementation of fiscal reforms pledged in the Rapid Credit Facility (RCF) disbursement, and progress is being made with implementation. They have proposed a phased fiscal consolidation plan of 5.1 percent of GDP, to be executed over five years. This includes amendments to the income tax regime, additional streamlining of discretionary tax exemptions, introduction of a property tax, public sector reform, better targeting of social transfers, and a review of the social security pension system to ensure that it remains sustainable and funded.
The authorities are pursuing an ambitious public investment program that includes construction of an international airport, a geothermal plant and resilient housing, and rehabilitation of major road infrastructure. Recognizing the capacity limitations, the Climate Resilient Execution Agency of Dominica (CREAD) was established to spearhead project implementation. That agency has proved to be useful in addressing the bottlenecks and implementation challenges normally associated with the implementation of large donor financed projects.
Revenues from the CBIP is critical to the success of the authorities’ fiscal and debt performance. In addition to financing the public sector investment program and funding the VRF, the authorities intend to pay down debt using these resources.
Financial Sector
Maintaining financial sector stability remains crucial to support economic recovery, and actions to bolster financial system stability will deepen. The sector has weathered the pandemic well and is broadly sound. The authorities support banks’ plans to strengthen capital buffers and to increase provisioning to 100 percent of NPLs by 2024, as set by the ECCB. With the purchase of the Dominica branch of the Royal Bank of Canada, the country’s indigenous bank, namely the National Bank of Dominica, now has a significant share of the market accounting for 73 percent of total loans. The authorities are mindful that enhanced supervision for this entity is necessary.
The authorities also support the implementation of measures to address the shortcomings in the non-bank sector and especially within the credit union sector. The capacity of the Financial Services Unit (FSU), the non-bank regulator, is being strengthened to improve surveillance and equip staff to provide guidance on critical matters such as increasing capital, addressing NPLs, and preparation of crisis management plans.
The authorities continue to implement measures to improve the AML/CFT framework. Dominica made the necessary legislative changes to designate the ECCB as the competent authority for the AML/CFT regulation and supervision of the banking sector in 2020. The National Risk Assessment (NRA) was recently completed, and the report is being finalized. The Caribbean Financial Action Task Force (CFATF) is currently engaging Dominica in preparation for the fourth-round mutual evaluation, with the expectation that the report will be presented to the plenary session of the CFATF in November 2022.
Structural Reforms
Dominica is highly susceptible to natural disasters and especially to the impacts of climate change. Since the announcement of plans to make Dominica the first climate resilient nation, the authorities have ramped up efforts to enhance climate resilience and are focusing on ‘climate proofing’ new infrastructure. Access to financing for climate mitigation remains a challenge but the country is armed with a Disaster Resilience Strategy (DRS), which was prepared with assistance of the Fund. The DRS is an important tool to assist the authorities in seeking financing for its activities.
More broadly, the authorities will continue to pursue policies aimed at improving the business environment.
Concluding Remarks
The ongoing pandemic poses an immense challenge for service-based economies. The authorities are aware that risks are tilted to the downside and that the longer the pandemic lasts, the deeper will be the impact. They have therefore adopted a strategy to accelerate the implementation of the public sector investment projects to spur economic activity and create direct and indirect employment opportunities. The near-term priority is to protect lives and livelihoods and to protect the economic and social gains that have been made in the past. They do, however, acknowledge that they need to rebuild buffers and consolidate the fiscal position if they are to achieve durable and inclusive growth.