At the conclusion of its recent visit, the International Monetary Fund (IMF) mission issued probably its most critical report on performance of a Dominican government. The reports focuses on what has been said about the economy. What is newsworthy is that it is the IMF that is critical of government overspending and is calling for more transparency from the Dominican government.
The IMF reports in its 18 November statement that the economic performance has weakened, policy implementation has deteriorated, and fiscal deficit has increased significantly in 2012 while economic activity of the private sector has slowed down. At the same time, the IMF acknowledges that primary government expenditure has increased by nearly 40%. “As a result, the consolidated public sector deficit for end-2012 is projected at 8.5% of GDP, almost double the level of 2011,” says the IMF.
The statement stresses: “Moreover, a large share of government expenditure was undertaken above budgetary appropriations, thereby reducing the transparency of budgetary operations. Total public debt is projected to reach 44 percent of GDP in 2012, compared with 35 percent of GDP in 2007-08”.
The IMF says that overspending by the government was at record levels and as a result the external position remains vulnerable. “Owing primarily to expansionary fiscal policy, the external current account deficit is more than twice its historical average of 3 percent of GDP while international reserves remain low by international standards. However, net capital inflows are also lower. At end-October, gross international reserves stood at US$3.3 billion, down from US$4.1 billion at end-2011,” says the report.
On the positive side it reports on successful efforts to maintain macroeconomic stability, despite the overspending by the central government. Says the IMF: “In the last 24 months economic performance has weakened. After reaching 7.8% in 2010, economic growth decelerated to 4.5% in 2011 and is expected to remain below 4% in 2012. As the impact of earlier price shocks dissipated, headline inflation declined to 2.8% (y/y) in October 2012, while core inflation was about 3.3%, below the Central Bank’s target range of 4.5n6.5%.
The report mentions that the financial sector is resilient but again acknowledges that it was the government that was doing the borrowing. “The financial sector has shown resilience. Banks seem well capitalized and system-wide prudential indicators do not reveal significant risks. As of September 2012 average capital adequacy ratios were about 15 percent and non-performing loan ratios were broadly stable at about 3.5 percent. However, during 2012 lending in foreign currency increased, credit to the private sector slowed, and banks’ exposure to the public sector rose markedly.”
In conclusion, the report says that the implementation of reforms in the electricity sector is critical. It also calls for the authorities to enhance the transparency of public sector operations, in particular by communicating their fiscal policy intentions and regularly publishing reports on budget execution.
The mission said it would recommend that the post-program monitoring of the stand-by arrangement that expired in March 2012 should be completed. An IMF mission will visit “in the first part of 2013” for this purpose.
www.imf.org/external/np/sec/pr/2012/pr12445.htm