IMF Executive Board Concludes 2021 Article IV Consultation with Dominica

February 14, 2022

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded on February 2 the Article IV consultation with Dominica. [1]

The COVID-19 pandemic took a heavy toll at the Dominican economy. GDP is estimated to have contracted by 11 percent in 2020 and is expected to recover modestly to 3.7 percent in 2021. The output decline, driven by a sharp reduction in tourism and related sectors, was contained by strong growth in the construction sector stemming from the large public investment program through 2020-21, financed by exceptionally high revenue from the Citizenship by Investment (CBI) program.

Despite record CBI revenue, the sharp decline in tax revenue and increase in health spending and social transfers led to large fiscal deficits in 2020 and 2021 and caused public debt to peak at an estimated 106 percent of GDP in 2020. The current account deficit estimate remained high at around 30 percent of GDP in 2020-21, owing to the loss of tourism exports and an increase in imports related to higher public investment and commodity prices—despite a decline in private demand for imports.

The financial sector has remained liquid and stable during the pandemic, but Non-Performing Loans (NPLs) remain above prudential benchmarks. The loan service moratoria authorized by the banks and credit union regulators supported firms and households facing income loss, containing a deterioration in portfolio performance.

In the medium term, growth is expected to recover underpinned by the return of tourism, expanding hotel capacity, and high public investment in infrastructure resilient to natural disasters financed by CBI revenue. Risks are skewed to the downside and include renewed worldwide and domestic Covid-19 contagion waves, CBI revenue and/or official financing below projected levels, which would slow public investment and economic activity. Weakness in the financial sector, particularly the credit unions, could amplify downside risks.


Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for their pandemic response to support households and businesses. They noted that the outlook for medium-term growth is promising but remains subject to significant downside risks, including from the pandemic trajectory and recovery of tourism. This calls for continued efforts to contain the pandemic and support the recovery in the near term, including by addressing vaccine hesitancy. Looking ahead, Directors encouraged sustained reforms to ensure debt sustainability, strengthen the financial sector, and improve climate resilience.

Given the increase in public debt during the pandemic, Directors underscored the importance of maintaining momentum on fiscal consolidation. They welcomed the approval of the Fiscal Responsibility Act, which will support the reduction of public debt and the achievement of the regional debt target. Going forward, Directors recommended creating space for investment focused on building resilience to natural disasters, and prioritizing expenditure efficiency measures, including a civil service reform and better targeting of social transfers. They also encouraged measures to improve tax administration and broaden the tax base.

Directors stressed the need for prudent use of Citizenship by Investment (CBI) revenue. They encouraged the authorities to save part of CBI revenue for self-insurance against natural disasters and public debt reduction. Directors also considered that securing additional insurance, as part of a layered insurance framework, would help cover losses in the case of large and extreme disasters.

Directors noted that, while the financial sector remains liquid and stable, long-standing sectoral vulnerabilities persist, including high non-performing loans and capital adequacy gaps. In this regard, they welcomed banks’ plans to strengthen capital buffers to meet increasing loan-loss provisioning requirements. For the non-bank sector, Directors highlighted the importance of addressing capital and liquidity requirements and strengthening supervision. They also encouraged maintaining progress on strengthening the AML/CFT framework to minimize risk to correspondent banking relationships.

Directors encouraged the authorities to implement structural reforms, aimed particularly at reducing informality in the economy and fostering inclusive, sustainable growth more broadly. They also noted that progress on structural reforms that boost competitiveness and build resilience to natural disasters, along with fiscal consolidation, would help strengthen external sustainability.

It is expected that the next Article IV consultation with Dominica will be held on the standard 12-month cycle.



[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

Dominica: Selected Economic Indicators , 2018–22

Est.

Projected

2018

2019

2020

2021

2022

Output and prices

(annual percent change, unless otherwise specified)

Real GDP 1/

3.5

7.5

-11.0

3.7

7.6

Nominal GDP 1/

4.6

9.1

-11.6

6.8

10.3

Consumer prices

Period average

1.0

1.5

-0.7

3.0

2.5

Central government balances 2/

(in percent of GDP, unless otherwise specified)

Revenue

44.2

38.1

55.5

49.9

46.5

Taxes

27.4

23.2

21.9

21.3

23.0

Non-tax revenue

16.0

13.0

31.3

26.3

21.2

Grants 3/

0.9

1.9

2.3

2.3

2.3

Expenditure

62.1

46.2

62.7

59.3

48.4

Current primary expenditure

35.9

34.5

34.4

32.4

30.9

Interest payments

1.9

2.4

2.0

2.0

2.2

Capital expenditure

24.4

9.3

26.3

24.9

15.4

Primary balance

-16.0

-5.8

-5.2

-7.4

0.3

Primary balance, excluding CBI

-29.1

-17.5

-34.7

-31.9

-18.7

Overall balance

-17.9

-8.2

-7.2

-11.0

-1.8

Central government debt (incl. guaranteed) 4/

84.6

94.2

106.0

100.9

100.3

External

52.4

54.7

66.7

64.2

66.5

Domestic

32.2

39.5

39.3

36.8

33.8

Money and credit

(annual percent change)

Broad money (M2)

1.4

-6.3

-9.9

1.6

5.6

Real credit to the private sector

-5.3

-6.1

0.4

-1.3

1.0

Balance of payments

(in percent of GDP, unless otherwise specified)

Current account balance, of which:

-42.4

-37.9

-30.0

-31.4

-28.7

Exports of goods and services

27.7

35.0

20.2

20.0

27.4

Imports of goods and services 5/

74.4

78.0

57.6

52.8

56.2

Capital and financial account balance

14.7

-9.5

21.3

2.6

10.6

FDI

-13.6

-6.1

-4.5

-6.7

-6.6

Capital grants

26.1

12.3

26.6

16.1

21.0

Other (incl. errors and omissions)

2.2

-15.7

-0.8

-6.8

-3.9

External debt (gross) 6/

100.4

93.5

106.1

101.9

100.8

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

1/ At market prices.

2/ Data for fiscal years from July to June.

3/ Does not include grants received but not spent.

4/ Includes estimated commitments under the Petrocaribe arrangement with Venezuela.

5/ Includes public capital expenditure induced imports from 2019 onwards to account for possible mitigation of natural disasters.

6/ Comprises public sector external debt, foreign liabilities of commercial banks, and other private debt. Calendar year basis.

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