Press Release No. 06/95

Press Release: IMF Executive Board Completes Third and Fourth Reviews and Financing Assurances Review Under the Stand-By Arrangement for the Dominican Republic

May 10, 2006

The Executive Board of the International Monetary Fund (IMF) has completed the third and fourth reviews of a 28-month SDR 437.8 million (about US$ 648.2 million ) Stand-By Arrangement with the Dominican Republic, which had been initially approved on January 31, 2005 (see Press Release No. 05/18).

As part of its reviews, the Board granted the Dominican Republic's request for seven waivers related to incomplete fulfillment of structural performance criteria.

The Executive Board also completed a review of the country's financing assurances¹.

Completion of the reviews enables up to the equivalent of SDR 96.3 million (about US$142.6 million) to be immediately available to the Dominican Republic.

Following the Board's discussion of the Dominican Republic on May 8,  2006, Mr.  Agustín Carstens, Deputy Managing Director and Acting Chair, made the following statement:

"The Dominican Republic's economic program, supported by a stand-by arrangement, has led to a remarkable improvement in economic conditions. The authorities continue to implement appropriate macroeconomic policies, which have resulted in strong growth, single-digit inflation, a lower public debt ratio, and a rise in international reserves. The consolidation of the fiscal position during 2005 was notable, as the combined public sector deficit was reduced sharply, and a prudent monetary policy restored financial stability under a flexible exchange rate regime. Looking ahead, strengthening medium-term growth prospects and reducing vulnerabilities will require continued vigilance in program implementation.

"The 2006 budget provides a good basis for further reducing public debt to more comfortable levels. Adhering to the budget target will be an important challenge, particularly in light of the recent increase in oil prices and their effect on the electricity sector, but the authorities are committed to adopt adjustment measures if necessary. To ensure the continued adjustment effort in 2007, the authorities will need to give early consideration to additional revenue measures that would address the shortfall stemming from the recent tax reform and the expected implementation of the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) with the United States.

"Action is needed to contain the deficit of the electricity sector, including by raising the cash recovery indices of electricity distributors. Allowing electricity prices to adjust in response to changes in costs, while improving services, will contribute to reducing government transfers, establish a sound commercial basis for the operation of the sector, and spur greatly needed capital investments.

"The central bank intends to continue to enhance monetary policy management and the communication of policy to the public in order to anchor inflationary expectations, consolidate market confidence, and contribute to a reduction of real interest rates over the medium term. Plans to strengthen the central bank, both institutionally and financially, should further improve its ability to conduct monetary policy. A comprehensive strategy to recapitalize the central bank is being developed, aimed at a gradual reduction in the bank's quasi-fiscal deficit.

"Timely implementation of structural reforms covering a wide range of governance and transparency issues in the fiscal and banking sectors will be critical in the period ahead. Criminal proceedings against former owners of those banks involved in the 2003 banking crisis should send a strong signal regarding the consequences of misconduct, and it will be important to ensure the proceedings are sufficiently comprehensive to include all concerned officials. The enactment of legislation to overhaul financial management procedures and centralize fiscal functions will be key to improving the planning and execution of fiscal policy. The new banking regulatory framework will require enhancing bank supervision practices further, including through effective consolidated supervision to ensure broad oversight of the sector. These steps to strengthen the legal and supervisory framework need to be accompanied by a program of capacity-building and human resource development," Mr. Carstens said.

¹ The staff report for the Third and Fourth Reviews of the Stand-By Arrangement, and the Review of Financing Assurances with the Dominican Republic may be made available at a later date if the authorities consent.