The IMF wants the Dominican Republic to increase tax revenues, reduce borrowing, and address long-standing inefficiencies in the electricity sector that result in high losses.
The bottom line is that an increase in tax revenues will better position the country to pay the large public debt taken on by past and present governments.
In an article published by IMF Deputy Division Chief Emilio Fernandez-Corugedo, senior economist in the IMF’s Western Hemisphere Department Pamela Madrid, and advisor to the IMF executive director representing the Dominican Republic Frank Fuentes touch on the key arguments they are unfolding in their visit to the Dominican Republic to discuss fiscal reform challenges.
The economists write that beyond the much-needed increase in tax revenues, comprehensive fiscal reform should include the adoption of a fiscal rule imposing long-term limits on public debt that would increase certainty and help safeguard fiscal sustainability.
Another critical reform is addressing the long-standing inefficiencies in the electricity sector that result in high losses, which have averaged between 1 and 2% of GDP per year in the last decade.
The IMF specialists unfold the convincing argument that comprehensive tax reform could help the country boost revenues and earn an investment-grade rating. Bringing tax revenues up to peers could boost the credit rating, reducing bond spreads, say the economists.
The economists stress that if the country reaches investment-grade on its sovereign bonds, this would further accelerate progress by lowering interest rates, increasing capital flows, and broadening the investor base. This would also reduce private sector financing costs and boost the economy’s growth potential.
The published article makes the point that tax revenues are limited by costly exemptions and a high threshold before personal income taxes apply. “Streamlining tax incentives and exemptions—which together amount to about 5% of GDP or a third of all tax revenues—is also crucial for simplifying the tax system and reducing evasion,” write the economists.
The IMF recommends the Dominican Republic permanently raise tax revenues by at least 2% of GDP to allow for sustainable increases in key public investment and social spending. The formula is to raise the level of GDP by around 1% after 10 years and by 2% after 30 years.
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IMF
25 June 2024