Interviewed by Pablo McKinney for the late evening television program “McKinney” on Color Visión, Channel 9, presidential economic advisor Pedro Silverio addressed the present global uncertainties and summarized the short, medium and long-term effects of the “genocide in Ukraine.” During the interview, he spoke of the political, social and economic impacts the present risk-filled times have on the Dominican Republic. Silverio is a former dean of economics of the Pontifical Catholic University Madre y Maestra.
The war impacts mainly on tourism, as well as on the prices of petrol, natural gas, and farm products, with secondary impacts on products imported from Europe and from Ukraine. The Dominican Republic is a leading importer of iron and steel from Ukraine.
Pedro Silverio spoke of the impact on specific markets that create favorable or disfavorable conditions for international trade. “There is uncertainty with the economic sanctions that will be difficult to dismantle in the short-range, even when there is a military solution, the problem will be how to deal with the consequences of the economic sanctions to Russia,” he stressed.
He recalled that the economic hardships to Germany after World War I led to World War II. He said: “…even if Putin wins the war, it will be difficult for him to win the peace.”
Silverio spoke of how the tensions on the global scale will have a medium and long-term impact.
Directly regarding the Dominican Republic, he said the country will suffer consequences directly and indirectly. He said that while Russia is not the leading source of tourists to the Dominican Republic, it “was on the way to become an important source.” With the change of administration, Hans Dannenberg Castellanos was sent as ambassador to Russia and he promptly maneuvered to attract numerous Russian and Ukrainian tour operators and airlines from diverse destinations even during the pandemic year.
Silverio pointed out that between Russians and Ukrainians around 260,000 visitors came in 2021. “That number would have doubled in 2022,” he said. Now all flights are suspended, the air space is suspended in Europe and United States. Silverio quantified this as US$400 million less the Dominican Republic will receive in tourist flows from this market in 2022.
The crisis is also having an impact on construction and farming inputs. The Dominican Republic is a big importer of petrol, iron, steel, fertilizers from Russia and the Ukraine. Prices of corn, soy, sorghum, and wheat are now increasing after the escalating of the eastern Europe crisis. He said after the invasion, the price of petrol increased US$20-US$25 the barrel. The previous price had already been reflecting the possible war. The present situation just worsens the inflation that was already escalating before the invasion.
Silverio explained that the 2022 National Budget was designed with the price of petrol at US$68 the barrel. “We are now affected by US$40 more the barrel,” he said. He did not address the increase in taxation revenues the higher price of fuel will bring for the government.
He mentioned the US Federal Reserve is contemplating increasing interest rates in the United States. This joint increase will have an additional impact on the price of fuel and food.
What can be done to confront this situation?
The greatest concern is inflation, how to protect the most vulnerable sectors, says Silverio. “We cannot change petrol prices nor farm products imports, but we can try that the vulnerable sectors not be so affected by the inflation,” he said. He mentioned that President Abinader had given advances of the government strategies in his 27 of February 2022 rendition of accounts speech.
Silverio explained that at the start of the Abinader administration in August 2020, the price of petroleum was US$40 the barrel. The government budgeted US$68 for 2022. “We already were working on mitigating the situation. The President spoke of adding 300,000 Dominicans to the Superate social program, and thousands more are being added to Bonogas welfare program that recently was increased. These are strategies to reduce the impact on the poorer segments of society,” he said, referring to fiscal policy steps taken by the government.
He also highlighted the restrictive monetary policy exercised by the Central Bank with the increase in the cost of money to control inflation. He said it is difficult to quantify the passing on of the rising cost of credit because it is gradual. He said the full impact will be felt in three to six months time.
“Uncertainty generates speculation of prices, this is unavoidable,” he said. He said that to counteract this, the government is in close contact with commercial and productive sectors to mitigate the impact of speculation on local prices.
He explained that the local authorities are monitoring the situation day by day.
He spoke of the constant dialogue between monetary authorities and financial entities. He said the objectives are that credit be available at the lowest rates yet the financial system’s integrity be maintained. “At the end the result be what is most convenient for the country,” he said.
Silverio said that decisions are being taken to protect the vulnerable sectors but also the macroeconomic stability. “The government is committed and in permanent session to find solutions that are economically healthy for the country and socially viable. Macroeconomic stability is unnegotiable,” he stressed.
He made the point the local financial sector will not be significantly impacted because our most important trading partner is the United States, and others in the financial system that are not impacted by the war sanctions. He mentioned the US dollar has appreciated compared to the Euro, and expects it to continue to be the main global currency.
He mentioned during the interview that Chinese and Russian currencies are not international reserve currencies. Moreso, he forecast the alliance between Europe and the United States would be strengthened. “What the war has proven is that the West has never been so close to a single goal,” he remarked.
He said the Russia-Ukraine crisis is adding the increases in petrol and food inputs to the economic equation and there are now not conditions for a fiscal reform. Silverio does not expect a fiscal reform to happen in this term of the Abinader administration. He said it now is all about being more efficient in managing the current revenue flows and spending. He remarked that the sanitary crisis [Covid-19] had already led the government to postpone raising taxes. “Fiscal reform will not happen in this government but in the next,” he remarked.
Instead, he insisted the government is concentrating on being more efficient in public spending. He said the additional revenues collected by the Tax Agency and Customs Agency are being used to mitigate the impact of the situation on the vulnerable sectors.
Silverio said the budgetary restrictions and rising imported prices are impacting the pace of investment in new public infrastructure. “The government is trying to use the resources for the most needed sectors and investments in infrastructure second,” he mentioned.
Yet he remarked that when critics focus on the lows in public infrastructure spending, they do not take into account that while social expenditures are regarded as current expenditures, these are capital expenditures because they are targeted to improve the capacities of human capital that is key to the development of any country. He was referring to social expenditures such as for medical, education and housing needs of the population.
He stressed that if the government spends well, it will have the legitimacy to increase taxes when the time is right.
“The government is monitoring the situation minute by minute to take decisions to preserve the macroeconomic stability,” he reiterated. He summed up that at present, the government is struggling with imported inflation that is expected to escalate in months to come.
Forecast for future months
Dealing with inflation will continue to be tops on the agenda of future months, especially with the imported price rises. The government is focused on implementing a combination of monetary policy and fiscal policy through social programs to neutralize the imported price rises.
Silverio considered that the sanctions imposed on Russia will be difficult to dismantle even after the military operation is over, adding that the uncertainty in world trade and the dangers of an escalation of conflicts in the world could occur if Russian President Vladimir Putin feels he is being cornered, as reported in Hoy.
Read more in Spanish:
Hoy
Pablo McKinney
El Dia
7 March 2022