An International Monetary Fund staff team, led by Mr. Alejandro Guerson,
visited Dominica from March 7-20 to conduct the 2017 Article IV
consultation. The team met with Prime Minister Roosevelt Skerrit, senior
government officials, labor unions, and private sector representatives.
Mr. Guerson issued the following statement at the conclusion of the visit.
“Since tropical storm Erika in August 2015, government efforts continued to
focus on infrastructure rehabilitation and social relief, while addressing
fiscal sustainability. Significant effort and resources were allocated to
the reconstruction of public infrastructure and support to the affected
population, while the first-generation of fiscal measures committed in the
Rapid Credit Facility disbursement, and some additional measures, have been
passed.
“Economic activity in 2016 remained weak as capacity constraints and
unfavorable weather conditions slowed public investment more than
anticipated. Growth is projected to accelerate to above 3 percent in
2017-18 on the back of a pickup in public investment and several
large-scale projects, and to stabilize at a potential rate of 1.5 percent
over the medium term. The external current account deficit is projected to
widen due to the increase in imports of goods and services during the
execution of reconstruction investment and the large investment projects.
In the medium term, the external balance is projected to gradually improve
as agriculture, tourism, and manufacturing recover, and geothermal
electricity generation reduces oil imports.
“Despite high Citizenship-By-Investment (CBI) revenues, the fiscal outlook
has deteriorated largely due to lower projected grant revenues; a downward
revision in the projected yields of the fiscal consolidation measures; the
increase in social transfers; and the reduction of the corporate income tax
rate in January 2017. As a result, the use of government deposits to cover
financing needs would be necessary to reach the regional debt target of 60
percent of GDP by 2030 without increasing the fiscal consolidation effort
above the commitments in the RCF disbursement.
“The fiscal outlook underscores the importance of a timely implementation
of the fiscal consolidation package. The efforts to improve tax
administration should be maintained to make the gains in compliance
durable. On the expenditure side, the government should limit the increase
in the wage bill and prepare specific plans for the gradual unwinding of
the expenditures related to recovery and reconstruction in the aftermath of
Erika. Fiscal consolidation should focus on reducing the underlying primary
balance, that is, the primary balance excluding unpredictable revenues,
such as CBI flows, and transitory factors. Given the risks to the fiscal
outlook, the authorities should also explore contingent fiscal
consolidation measures such as developing a formal tax incentives policy
for private investment, preparing a revenue enhancing tax reform, and
improving spending efficiency through better targeting and means testing of
social programs. In addition, strengthening fiscal management is critical
for the durability of the fiscal consolidation gains, including through
enhancing budget preparation and execution processes, further improving the
integrity of the CBI program, and considering the adoption of fiscal
responsibility legislation.
“Despite ample liquidity, banks’ credit to the private sector remains weak
as a result of insufficient bankable projects, persisting low
profitability, and high non-performing loans (NPLs). The authorities took
steps to increase the capital of the National Bank of Dominica, but
persistent actions are needed to improve the soundness of financial
institutions and to reduce NPLs, including though the operationalization of
the Eastern Caribbean Asset Management Company.
Moreover, the significant government involvement with credit programs
through public financial institutions reduces the scope for efficient
financial intermediation. The credit union sector is increasing its share
in financial intermediation, relieving some financing constraints, but also
adding risk to financial stability given their high NPLs and low capital
buffers. The regulation and supervision of credit unions should thus be
revamped with a stronger enforcement framework, in coordination with the
regional initiative. The global tightening of the requirements for
correspondent banking relationships (CBRs) confronts Dominica with
important challenges. Significant progress has been made to strengthen
AML/CFT legislation closer to international standards in recent years, but
enforcement remains a challenge given capacity constraints. Lowering the
risk of withdrawal of CBRs would require improving information sharing
agreements between respondent and correspondent banks, as well as
encouraging bank mergers.
“Improving the conditions for private investment, especially for export
activities, is the key to accelerating growth. Efforts should therefore
focus on the removal of costs and barriers that affect investment decisions
and profitability. Specifically, the government should enhance labor market
legislation and better target education programs in order to improve labor
productivity and mobility across sectors; reduce the cost of doing
business, especially in terms of resolving insolvency, registering
property, paying taxes, and obtaining construction permits; explore the
potential for expansion and further diversification of tourism markets;
enhance the resilience of public infrastructure to natural disasters; and
advance on the development of geothermal generation of electricity.
“The IMF will continue to have a close dialogue with the authorities as
they address these challenges. The team would like to express its gratitude
to the authorities, labor unions, and private sector representatives for
the close and constructive dialogue.”
