In a press release dated Friday 13 June, the Executive Board of the International Monetary Fund announced that the latest program monitoring with the Dominican monetary authorities has been completed, with a series of recommendations. The IMF commended the government for keeping inflation below the Central Bank’s target range of 5%+/- 1%, and partially reversing the large increase in fiscal deficit accumulated in 2012 at the start of the Medina administration. The IMF highlights that the deficit of the consolidated public sector declined by almost 3% to 5%, owing to lower public investment, the revenue from the 2012 taxation increase law and negotiations for better revenue terms with the Pueblo Viejo-Barrick gold mine company, leaving public debt-to-GDP at end-2013 at 48%, still high when compared to 35% in 2008. Mining revenue from gold exports helped the external current account deficit to decline from 6.8% of GDP in 2012 to 4.2% of GDP in 2013.
The IMF says that medium-term growth prospects are broadly favorable. According to the international financial institution, monetary policy was eased substantially in May 2013 to stimulate credit growth and support economic activity after a slow year start.
The IMF reports that net capital inflows remained large, reflecting both government borrowing and foreign direct investment. Gross international reserves closed the year at US$4.7 billion, and as of May 23, 2014, they stood at almost US$5 billion.
The banking system stands solid when taking into account private loans, with nonperforming loans at less than 2%. Nevertheless, the IMF reports that the banking system’s exposure to the public sector increased to the equivalent of 5.5% of GDP by end-year. Government recapitalization transfers to the central bank were kept below the amounts envisaged in the 2007 law.
The IMF also points to the downside and says that risks stem from uncertainties in the global economy and large domestic fiscal and external financing requirements. To reduce these vulnerabilities and enhance long-term economic growth, the IMF directors recommend: tightening the policy stance, building policy space, and speeding up progress in structural reforms. In their conclusion, they state that additional measures “may be needed to mitigate vulnerabilities stemming from large financing needs and put public debt on a more sustainable path. The IMF recommends eliminating the deficit of the non-financial public sector over a three-year period, reducing tax exemptions, tightening public expenditure controls, and curbing transfers to the electricity sector.
The directors encouraged the authorities to establish a mechanism for intervention in the foreign exchange market and to increase international reserves by making the most of favorable balance of payments developments.
The directors underscored the importance of monetary policy credibility of Central Bank recapitalization, in line with the 2007 law. They welcomed the authorities’ plan to adopt governance reforms that would increase the independence of the state-owned commercial bank, strengthen its capitalization, and limit its exposure to the public sector.
The IMF directors supported the authorities’ commitment to structural reforms, specifically mentioning the labor market and tax system where they called for elimination of tax exemptions. They caution that the government plans to invest in electricity generation should not undermine public finances. In addition, they saw room to encourage private investment in the electricity sector by reforming the regulatory framework and to enhance efficiency and reduce the budgetary cost of electricity transfers, especially by allowing tariffs to adjust in line with energy costs.
www.imf.org/external/np/sec/pr/2014/pr14281.htm