On September 13, 2013 the Executive Board of the International Monetary Fund (IMF) concluded the First Post-Program Monitoring Discussion with the Dominican Republic.

In early 2013, economic growth in the Dominican Republic decelerated further in the context of fiscal contraction and weak confidence. According to preliminary data, real GDP growth was 1.6 percent (year-on-year) in the first half of 2013, after growing by almost 4 percent in 2012 and by 4.5 percent in 2011. Inflation picked up in early 2013, following a significant decline in 2012, partly reflecting the impact of the increases in value-added tax (VAT) rates announced in November. In July 2013, headline inflation was 5.7 percent (y/y), within the central bank’s target range of 4–6 percent.

Fiscal consolidation began in late 2012. The tax measures adopted in November 2012, as well as one-off revenues related to a new fiscal amnesty law and the advancement of tax payments on financial assets, helped boost revenues in early 2013. On the expenditure side, public investment slowed sharply in the first half of 2013 following a large expansion in the previous year. As a result, the nonfinancial public sector deficit narrowed to 1.1 percent of GDP in the first half of 2013, down from 6.7 percent of GDP in 2012 as a whole. On current policies, the deficit of the consolidated public sector in 2013 is projected to decline to 4.3 percent of GDP, from 7.8 percent of GDP last year.

In May, the central bank eased monetary policy to boost credit growth, responding to weak indicators of economic activity and stable inflation expectations. As of end-July, bank credit to the private sector grew by 14 percent (y/y); the easing of reserve requirements in May was a key factor for the pickup in credit. Foreign exchange market pressures intensified in August. The peso depreciated by close to 2 percent during the month. On August 28, the central bank approved a 200-basis point increase in the monetary policy rate to 6.25 percent. As of end-August, gross international reserves stood at US$3.7 billion.

The outlook is for a gradual economic recovery with moderate inflation and a strengthening external position. However, downside risks will remain, mostly from challenges to economic recovery in the United States and Europe, oil price shocks, lower gold prices, and large public sector external financing needs.

Executive Board Assessment ¹

Executive Directors commended the authorities’ efforts to restore macroeconomic stability, including revenue and expenditure measures to reduce the fiscal deficit. They noted, nonetheless, downside risks associated with the uncertain global environment and the large fiscal and external financing requirements. Accordingly, Directors underscored the need to address remaining vulnerabilities to restore investor confidence and sustain the economic recovery.

Directors welcomed the authorities’ commitment to fiscal consolidation and their intention to target a zero balance for the nonfinancial public sector by end-2016, which would boost the sustainability of the fiscal position. In this regard, they emphasized the need to reform the electricity sector to limit its drain on the budget.

Directors agreed that monetary policy should be geared at keeping inflation low and protecting the external position, and supported the intention of the authorities to increase international reserves to about 3 months of imports. They welcomed the increased exchange rate flexibility and the tighter monetary stance in response to recent pressures in the foreign exchange market. Directors noted with satisfaction the recent improvements in short-term liquidity management, and encouraged the authorities to continue to upgrade the monetary framework, including its transparency. Directors generally stressed the importance of continuing the recapitalization of the central bank in line with the 2007 law.

Directors observed that indicators of financial sector soundness are broadly satisfactory. They nonetheless encouraged the authorities to redress the large increase in banks’ exposure to the public sector and improve the governance of the largest commercial bank.

Directors welcomed the authorities’ plans to remedy the structural shortcomings in the electricity sector. In this regard, they highlighted the need for a comprehensive strategy to improve efficiency in the sector without undermining the public finances.