The executive board of the International Monetary Fund (IMF) says the Dominican economy is expanding strongly but faces headwinds.
“Severely affected by the pandemic, real GDP (gross domestic product) growth is estimated to have rebounded during 2021–22, driven by construction of climate-resilient infrastructure, a pickup in tourism following the full lifting of mobility restrictions, and a substantial rise in agricultural output,” the IMF executive board said following the conclusion of the 2023 Article IV Consultation with Dominic.
It said, however, the scarring effects from the pandemic are expected to weigh on growth going forward, while tight fiscal space and volatile Citizenship by Investment (CBI) revenue may constrain much-needed public investment, including dealing with frequent and costly climate shocks.
The IMF notes that the real GDP growth is estimated to have reached 6.9 per cent in 2021 and 5.7 per cent in 2022, driven by the construction of climate-resilient infrastructure, a partial rebound in tourism, and a substantial rise in agricultural output.
It said high global commodity prices and shipping costs pushed inflation up to an estimated 7.5 per cent in 2022, despite mitigating fuel price policies. The current account deficit remained elevated, at 26 per cent of GDP, due to unfavorable terms of trade, large imports of investment goods, and incomplete recovery in tourism receipts
But it acknowledged that fiscal space remains tight. High CBI revenue, nearing a record 30 per cent of GDP in recent years, has supported public investment and crisis response measures.
“That said the primary fiscal deficit expanded to 6.2 per cent in financial year 2021–22, with public debt reaching at 106 per cent of GDP.”
The IMF said that the economic outlook is positive, predicated on a continued expansion in tourism and implementation of the country’s economic modernization and resilience building agenda
“The transition to local geothermal energy production and construction of a new airport, planned for the coming years, will sustain economic activity, reduce dependency on fossil fuels, bolster resilience to external shocks, and improve international connectivity.
“Prudent fiscal management, however, will be of essence to address external and domestic imbalances. The current account deficit is expected to narrow as tourism exports expand, commodity prices fall, and imports of fuel and investment goods soften, in line with fiscal consolidation.
“Meanwhile, public debt is set to decline gradually in coming years, supported by efforts to reduce current spending and strengthen tax collection. Building policy buffers and critical infrastructure will help address downside risks stemming from global economic uncertainty, climate change, and volatility of CBI revenue.”
The IMF executive board said to safeguard room for climate resilience investments and ensure compliance with the regional debt target, fiscal consolidation efforts should redouble. It said a consolidation path in line with the national fiscal rule, raising the primary balance to two per cent of GDP by 2026, is necessary to ensure convergence to the 60 per cent public debt target by 2035.
“The plan should be underpinned by a sizeable improvement of non-CBI fiscal balances while protecting investment and other priority programs. Stronger fiscal consolidation would facilitate external rebalancing and reduce the exposure of the financial system to the public sector, mitigating sovereign-bank nexus risks.”
The board said more ambitious reforms would be necessary to underpin the growth friendly fiscal consolidation.
“Mobilizing tax revenue by streamlining tax incentives, reviewing PIT allowances, and strengthening tax administration and compliance risk management is a priority. As international fuel prices moderate, the reduction of VAT on electricity should be reversed and motor vehicle licenses revised up to compensate losses from the foregone highway levy.”
It said on the expenditure side, it remains critical to reduce the wage bill through civil service reform, streamline pension spending through reforms aimed at increasing in the minimum retirement age and strengthen the financial position of the publicly-owned water and sewage public company through higher tariffs that better reflect cost recovery.
“Efforts should continue to cut inefficient spending and better prioritize the medium-term public investment plan towards projects with greatest productivity, such as the geothermal plant and new airport.
“Given high exposure to climate change, allocating a higher share of CBI revenue, including all unexpected windfalls, to disaster insurance and debt amortization would bolster financial resilience and strengthen debt sustainability,” the IMF executive board added.
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