Press Release No. 08/150

Press Release: IMF Deputy Managing Director Murilo Portugal's Statement at the Conclusion of his Visit to the Dominican Republic

June 25, 2008

Mr. Murilo Portugal, Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement today after the conclusion of his visit to the Dominican Republic during June 23-25, 2008, where he met with President Fernandez and his economic team, as well as with the business community (CONEP) and Monsignor Agripino Nuñez Collado, Rector of the Pontificia Universidad Católica Madre y Maestra.

"This has been my first visit to the Dominican Republic as Deputy Managing Director of the International Monetary Fund. I am very grateful for this opportunity and want to thank President Fernandez and his economic team for their gracious hospitality and very frank and open dialogue. Our discussions focused on global economic developments and their implications for the Dominican Republic, as well as issues specific to the Dominican Republic, including macroeconomic policies and the future form of engagement between the Fund and the Dominican Republic.

"The Dominican Republic's economy has experienced a strong and quick recovery from the 2002-04 financial and economic crisis. At the core of this recovery were the prudent policies implemented by President Fernandez' government. The fiscal position shifted from primary deficits to primary surpluses and public debt ratios declined markedly. The fundamentals of the banking system have strengthened significantly, the international reserve position of the central bank has been substantially bolstered, and steps have been taken to address structural weaknesses in the Dominican economy. I welcome the President's commitment to continue to pursue a macroeconomic policy course that stresses low inflation and to press ahead with needed structural reforms.

"As President Fernandez is about to start a new term in office, his administration faces new challenges. The Dominican economy is likely to be affected by the slowdown in the United States and is already feeling the impact of price shocks for major food staples and petroleum. Inflationary pressures are on the rise and the external current account deficit has widened significantly.

"Containing the fallout from this environment will require sufficiently tight monetary policy that keeps inflation and inflationary expectations contained, and sound fiscal policy that allows the government to protect those sectors of society that are vulnerable to higher food and energy prices.

"I am pleased to note that the monetary authorities have been giving clear signals of their commitment to bring inflation down by raising interest rates and allowing for appropriate exchange rate flexibility, and we understand that the central bank stands ready to take additional action if necessary. In view of the likely cost of using mainly monetary policy to control inflation and reduce the deficit on the current account of the balance of payments, fiscal policy should take a predominant role. It will be crucial to look at all aspects of taxation and spending, because, in addition to help bring down inflation, room needs to be made to ensure adequate funding for social protection programs.

"I share the concern expressed to me by President Fernandez, as well as by Monsignor Agripino, about the effect that high food and fuels prices had on the poor people in the Dominican Republic. This is particularly worrisome because of the poverty levels and income inequality that exist and because—as is well known—the poor spend a proportionately higher share of their income on food. While price increases from imported food need to be fully passed through to domestic food prices, the adverse impact on the poor has to be addressed. In my discussions with President Fernandez and Monsignor Agripino I noted that, as a general policy, the most effective way to protect the most vulnerable segments of the population is through well-targeted, direct transfers.

"A key policy goal for the long term should be increasing supply by boosting domestic production of agricultural staples by providing seeds and fertilizer and access to financing, as well as efforts to improve agricultural productivity. In addition, progress is needed by the international community in the context of the Doha round to liberalize agricultural trade further.

"The IMF stands ready to assist the Dominican Republic to face the challenges from the current external environment. We discussed various modalities of future engagement for the IMF to assist the Dominican Republic, and President Fernandez and his economic team, and we agreed that the most appropriate at this time is an intensification of the dialogue and of the assessment by the IMF of the government's program.

"I wish the Government and the people of the Dominican Republic every success in their efforts to secure strong, sustainable growth and continued social progress."