Press Release No. 03/228

Press Release: IMF Approves In Principle US$11.4 Million PRGF Arrangement for Dominica

December 22, 2003

The Executive Board of the International Monetary Fund (IMF) has approved a three-year SDR 7.7 million (about US$11.4 million) credit for Dominica under the Poverty Reduction and Growth Facility (PRGF) arrangement. The decision approving the arrangement will become effective on December 29, 2003, provided that as of that date the Word Bank has concluded that Dominica's Interim Poverty Reduction Strategy Paper (IPRSP) provides a sound basis for the development of a fully participatory PRSP. The effectiveness of the decision will enable the release of SDR 2.4 million (about US$3.5 million) for Dominica under the PRGF arrangement.

The IMF Executive Board today also completed the second and final review of Dominica's one-year SDR 3.3 million (about US$4.9 million) Stand-By Arrangement, which had been approved on August 28, 2002 (see Press Release No. 02/37). The completion of this review entitles Dominica to the release of SDR 307,500 (about US$450,000), bringing total disbursements under the Stand-By Arrangement to SDR 2.97 million (about US$4.4 million). The Executive Board also noted Dominica's intention to cancel the Stand-By Arrangement as of January 2, 2004.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board's discussion on December 19, 2003 for Dominica, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"The recent performance by the Dominican authorities under the Stand-By Arrangement (SBA) has been encouraging. Policy implementation strengthened considerably, reflecting steps taken earlier this year to control government spending. The structural benchmarks for September, October, and November 2003, as well as all performance criteria for end-July and end-September 2003, were observed. In addition, the authorities have prepared their debt strategy and elaborated a comprehensive medium-term economic program designed to reestablish growth and reduce unemployment-related poverty. These actions evidenced the firm commitment of the government to achieving the objectives set out in the SBA.

"The authorities are now prepared to embark on the second stage of their economic strategy, during which they will implement an ambitious fiscal program, combined with their debt strategy and a comprehensive structural reform agenda, with the support of an arrangement under the Poverty Reduction and Growth Facility.

"During the first year and a half of the PRGF arrangement, the primary fiscal balance is projected to improve steadily. The adjustment will place greater emphasis on expenditure cuts, with key expenditure measures including a continuation of the freeze on all other non-interest current expenditures in the budget for FY2004/05, as well as a 5 percent reduction in the central government wage bill through the implementation of a comprehensive civil service reform.

"During the remainder of the PRGF arrangement, the primary fiscal surplus is targeted to reach 3 percent of GDP. Additional fiscal adjustment measures to achieve this goal will include expenditure moderation and a second round of public sector retrenchment during FY2005/06 designed to reduce the size of the public sector wage bill, as well as measures to broaden the tax base and enhance the efficiency of tax collections.

"A large residual financing gap will still remain over the medium term, which is expected to be covered by debt restructuring. However, determined efforts toward fiscal consolidation supported by reforms to improve the efficiency and competitiveness of the economy will continue to be essential for achieving debt sustainability and preventing the reemergence of a debt problem.

"The authorities plan to focus their structural reform agenda on four main areas, namely:

• Implementation of the debt strategy, which is critical to securing financing for the program;

• Fiscal reform, including civil service reform, tax reform, pension reform, and improved budgetary procedures;

• Financial sector strengthening and

• Other reforms to improve the investment climate, enhance competitiveness, and diversify the economy.

"These structural reforms will be implemented in line with the authorities' poverty reduction strategy, as articulated in the authorities' Interim Poverty Reduction Strategy Paper, with a view to preserving essential social safety nets and reducing employment-related poverty," Mr. Carstens stated.

ANNEX

Recent economic developments

Dominica's economic situation remains difficult, but there are signs of a modest recovery in manufacturing and tourism in the second quarter of this year, partly offsetting the continued deterioration in the banana sector. For the third quarter, tax collections have rebounded and imports are beginning to expand due to a surge in construction. However, exports continue to shrink, mostly on account of low banana production. GDP is expected to fall by 1 percent in 2003.

Program summary

The economic program supported by the PRGF arrangement envisages a return to growth by addressing the country's debt overhang and structural weaknesses. The program aims at boosting growth to an annual average of 2 percent, while preserving price stability. Growth is expected to rebound from negative 1 percent in 2003 to 1 percent in 2004, and to 2 percent thereafter. The program will also aim to significantly reduce the large current account deficit, mostly through improvements in competitiveness.

Consistent with a reduced level of debt, fiscal policy will be strengthened significantly over the medium term to reach a primary surplus of 3 percent of GDP. Achievement of this target will require the adoption of fiscal measures of about 5 percent of GDP in the next three years, given that the primary balance in 2003/04 is now projected to record a deficit of about 2 percent of GDP. The authorities indicated that the fiscal program would be designed to still preserve public investment at the historical average ratio of 7 percent of GDP.

The structural reform agenda seeks to remove key obstacles to growth, including the economic uncertainty stemming from weak public finances. The structural agenda covers four main areas: (i) debt strategy, to eliminate the debt overhang and create the conditions for growth; (ii) fiscal reform, which includes public sector reform, tax reform, pension reform and improved budgetary procedures; (iii) financial sector strengthening, to ensure an efficient functioning of financial intermediation; and (iv) other reforms to strengthen the investment climate, improve competitiveness and deregulate the economy.

Dominica joined the IMF on December 12, 1978, and its current quota is SDR 8.2 million (about US$12.1 million). Its outstanding use of IMF credit currently totals SDR 2.67 million (about US$3.9 million).