Dominica: Staff Concluding Statement of the 2023 Article IV Mission
April 3, 2023
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: An International Monetary Fund (IMF) staff team, led by Ms. Joana Pereira, visited Roseau and held discussions on the 2023 Article IV consultation with Dominica’s authorities during March 20–31. At the end of the consultation, the mission issued the following statement, which summarizes its main conclusions and recommendations.
1. The Dominican economy is expanding strongly but faces headwinds from global inflationary shocks. Severely affected by the pandemic, real GDP growth is estimated to have reached 6.9 percent in 2021 and 5.7 percent in 2022, driven by construction of climate-resilient infrastructure, a rebound in tourism since the full lifting of COVID-related restrictions in April 2022, and a substantial rise in agricultural output. Global commodity price pressures aggravated by Russia’s war in Ukraine, notably oil and food, in tandem with high shipping costs, pushed inflation up to an estimated 7.5 percent in 2022, despite mitigating price policies – fuel subsidies, custom fees waivers, and VAT cuts for electricity. The current account deficit, which has fallen substantially since hurricane Maria and COVID shocks, remained elevated at 28 percent of GDP in 2022 on account of unfavorable terms of trade, large imports of investment goods, and incomplete recovery in tourism receipts.
2. High Citizenship-by-Investment (CBI) revenue has supported public investment and crisis response measures, but fiscal space remains tight. Despite record high CBI inflows, nearing 30 percent of GDP, the primary balance deteriorated to -6.2 percent in FY21/22. The construction of resilient infrastructure – roads, housing, hospitals, and shelters – and a new airport kept public investment at high levels, while economic measures implemented in response to the pandemic and the cost-of-living crisis heightened current expenditures and weakened tax revenue. Public debt declined somewhat, to 107 percent of GDP, but stays above regional peers and constrains fiscal space going forward.
3. The financial sector enjoys ample liquidity and improving capital buffers, yet credit to the private sector is subdued. Given abundant liquidity, deposit and lending rates remain low and have fallen in some sectors, despite tighter global financing conditions and exit of non-indigenous banks in recent years. Banks have strengthened provisions in line with ECCB requirements and remain well capitalized, while the implementation of credit unions’ recapitalization plans is progressing. Meanwhile, credit to the private sector has underperformed relative to GDP growth, while bank exposure to the public sector grew since the pandemic.
4. The economic outlook is positive, predicated on a full recovery in tourism in the near term, implementation of public investment plans, and prudent fiscal management. Growth is expected to stay above 4.5 percent in 2023-24, as tourism returns to pre-COVID levels, and the construction of the new international airport and geothermal power plant take hold. Inflation is projected to recede to 6.3 percent in 2023 and to continue falling afterwards along with international trends. The current account deficit is expected to gradually narrow over the medium term with the increase of tourism exports, on the back of expanded hotel and air transport capacity, the normalization of commodity prices, and a steady decline in investment goods’ imports. Public debt is set to decline in coming years, albeit slowly, supported by a gradual consolidation of public finances.
5. However, downside risks remain, stemming from global economic uncertainty, climate change, and volatility of CBI revenue. External risks from geopolitical tensions or tighter global financial conditions cloud the outlook for trade, commodity prices and global demand, with significant spillovers to the Dominican economy. An intensification of natural disasters due to climate change could lead to large output and capital losses, hindering fiscal sustainability and financial stability. Shortfalls in CBI inflows could hamper implementation of infrastructure investment plans, climate resilience, economic activity, and the fiscal position. Disruptions in corresponding banking relationships (CBR) could raise barriers to trade.
6. To safeguard room for climate resilience investments and ensure compliance with the regional debt target, fiscal consolidation efforts should redouble. A consolidation path in line with the national fiscal rule – raising the primary balance to 2 percent of GDP by 2026 – is necessary to reach the 60 percent public debt target by 2035. The plan should be underpinned by a sizeable improvement of non-CBI fiscal balances, while protecting investment and other priority programs. Stronger fiscal consolidation would facilitate external rebalancing and reduce the exposure of the financial system to the public sector.
7. More ambitious reforms will be necessary to underpin the growth friendly fiscal consolidation . Mobilizing tax revenue by streamlining tax incentives, reviewing PIT allowances, and strengthening tax administration and compliance risk management is a priority. As international fuel prices moderate, the reduction of VAT on electricity should be phased out, and motor vehicle licenses revised up to compensate revenue losses from the foregone highway levy. On the spending side, it remains critical to reduce the wage bill through civil service reform, while pension spending could lessen further through an increase in the minimum (early retirement) pensionable age. Given limited fiscal space, efforts should continue to rationalize inefficient spending as well as prioritizing the government’s medium-term public investment plan (PSIP) towards growth-enhancing projects – such as transition to geothermal energy and new airport. In addition, a revision of water and sewerage tariffs will strengthen the financial position of the publicly owned water company, reducing contingent liabilities. Given high exposure to climate change, allocating a higher share of CBI revenue, including all unexpected windfalls, to disaster insurance and debt amortization would bolster financial resilience and strengthen debt sustainability.
8. Meanwhile, it is essential to strengthen social protection systems. While conventional income-based targeting is hampered by widespread informality and capacity constraints, the government could pursue avenues for proxy-targeting, tailoring social assistance to vulnerable households in a systematized way. This would enable the streamlining of untargeted programs and deploying exceptional support swiftly and cost- effectively in the face of large shocks. As a first step, completing the ongoing population census, which would form the basis for a comprehensive social registry, is paramount.
9. Addressing longstanding constraints to financial intermediation is needed to prudently bolster credit to the private sector. The upcoming ECCU regional credit bureau and the already operating Eastern Caribbean Partial Credit Guarantee scheme can facilitate credit access by streamlining lending processes and addressing collateral constraints for small businesses. Ongoing initiatives to support small business development and financial management will further facilitate MSMEs’ access to credit. Efforts to modernize the national insolvency law remain essential to facilitate resolution of NPLs, which remain elevated, thereby encouraging prudent risk-taking.
10. Modernizing supervisory frameworks is crucial to preserve financial stability. Efforts are needed to bolster the resources and capacity of the national supervisor considering its large mandate, which expanded further with the adoption of the Virtual Assets Business Act in mid-2022. Modernizing supervisory regulations and granting statutory independence from the Ministry of Finance would further improve its effectiveness and support risk-based supervision. To foster financial resilience to climate change, supervisory frameworks should account for related risks. Meanwhile, it remains critical to continue to pursue the needed capitalization of systemic credit unions.
11. Continued efforts to modernize the economy and strengthen economic resilience are necessary, including through policies that foster diversification and inclusiveness. The transition to geothermal energy will reduce carbon emissions, lessen external vulnerabilities, and increase economic competitiveness over medium term through lower energy costs. The new international airport will significantly boost connectivity with large markets and should be accompanied by efforts to enhance regional connectivity. Initiatives to support the agricultural sector are welcome and should be furthered to broaden the export base and explore synergies with the growing tourism sector. Digitalization and professional training will enable inclusive development and further increase productivity.
12. Advancing institutional reforms can help mitigate risks and support economic policymaking. Continued progress in strengthening AML/CFT legislation and procedures, in line with the recommendations of the upcoming CFAFT mutual evaluation report, will protect the integrity of CBI programs and the stability of CBRs. The publication of timely high-quality statistics is essential to inform policy decisions and monitor compliance with the fiscal rules. The implementation of the national fiscal rule necessitates an enhancement of public financial management processes, including for medium-term budgeting, fiscal reporting, treasury operations, and public investment management.
The IMF team is grateful to the authorities and other local stakeholders for their warm hospitality, collaboration, and constructive dialog.
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Table 1. Dominica: Selected Economic Indicators, 2018–28 |
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