IMF Staff Completes 2016 Article IV Mission to The Dominican Republic

IMF News, February 13, 2017

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Canonical URL: IMF Staff Completes 2016 Article IV Mission to The Dominican Republic

Mission leader: Aliona Cebotari.
Mission dates: January 31–February 10, 2017.
End-of-Mission press release date: February 13, 2017.
Scope: Article IV Consultation discussions with government and Central Bank officials, think tanks, and the private sector; exchanged views on economic developments, outlook, and policy challenges.
Statement: Views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

Growth performance:
- "The Dominican economy is in a cyclically strong position, with activity expanding at an average pace of 7 percent over the past three years."
- "Growth is projected to remain healthy while tapering off towards potential and inflation is expected to pick up towards target."
- "Growth is expected to slow towards the potential rate of around 5 percent from 2017 onward."
Drivers and dynamics:
- Domestic demand will continue to drive growth, supported by recovering real incomes, growth in the U.S., and strong investment.
- Positive supply shocks are muting inflationary pressures and strengthening the external position.
- Recovery in fuel prices expected to push inflation to target and moderately widen the current account during 2017.
Cyclical position:
- Economy operating above potential; sustained strong growth and prudent policies of past several years helped improve social indicators and build confidence.

Risks around the baseline outlook characterized as balanced.
Key identified risks:
- Uncertainty surrounding the economic and policy outlook for external trading partners, notably the U.S.
- Outlook for oil prices.
- Higher than expected global interest rates and the ensuing dollar appreciation.
- Tightening global financing conditions affecting financing costs and debt affordability.

Assessment:
- "The fiscal position needs to be decisively strengthened to maintain sustainability in the face of increasing risks."
- Government improved fiscal position through overall expenditure restraint and strong revenue administration efforts.
- Large projected deficits for the consolidated public sector (including financial and non-financial public sector) would generate sustainability and debt affordability pressures.
Recommended actions:
- Implement a strong fiscal adjustment, with a larger consolidation effort in the near term warranted by still favorable economic conditions.
- Broadly reform the tax system: broaden the very narrow tax base, simplify the tax system, and make it more equitable.
- Address the fiscal drag of the electricity sector.
- Increase spending efficiency.
- Adopt a robust medium-term fiscal framework anchored on a medium-term debt-to-GDP ratio and operationalized through a fiscal rule to deliver the debt target.
- Integrate fiscal responsibility objectives in the framework to cement fiscal discipline.

Assessment:
- "The tightening bias of monetary policy is appropriate, and progress towards a more flexible exchange rate framework should continue."
- Given upside risks to the inflation outlook from global financial conditions, monetary policy is appropriately leaning toward tightening.
Recommended actions and support:
- Build up reserve buffers in the face of increased uncertainty; limit foreign exchange interventions to smoothing excessive volatility.
- Move towards a progressively more flexible exchange rate through building up market infrastructure and instruments to facilitate transition.

Assessment:
- Financial soundness indicators for the banking system remain strong.
- Authorities appropriately focusing on gaps in regulation and supervision of nonbanks.
Recommended actions:
- Complete reforms addressing gaps identified in the recent Global Forum evaluation on tax transparency.
- Address potential issues arising from the upcoming Financial Action Task Force of Latin America evaluation on anti-money laundering and combating the financing of terrorism.
- Strengthen macro-prudential framework: bolster capacity to monitor and address systemic risks, further develop stress testing capacity, and prepare financial stability reports.

Priority reform areas identified:
- Improve educational outcomes.
- Boost housing supply.
- Strengthen social safety nets.
Additional reforms to support productivity and investment:
- Address governance challenges, infrastructure gaps, and pricing policies in the electricity sector via the ongoing electricity pact.
- Strengthen institutions and governance, increase predictability of the tax system, and continue public investment in infrastructure to preserve incentives for investment and improve the business environment.
Labor and social policies:
- Boost employment through improved labor markets, facilitated graduation from safety nets into the labor force, and skill development and retooling through vocational training to support poverty-reduction objectives.
- Strengthen social protection by expanding coverage of social insurance, addressing challenges in the public healthcare system, and adopting policies to encourage formalization.

Staff expressed thanks to authorities and counterparts at think tanks, private sector, and other organizations for engaging discussions and hospitality.

International Monetary Fund — Press Release No. 17/47, IMF Communications Department