Press Release No. 04/23

Press Release: IMF Completes First Review of the Dominican Republic's Stand-By Arrangement, Approves US$66 Million Disbursement, and Grants Waivers

February 11, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the first review of the Dominican Republic's performance under a two-year SDR 437.8 million (about US$657 million) Stand-By Arrangement that was approved on August 29, 2003 (see Press Release No. 03/147). This decision entitles the Dominican Republic to the release of a further SDR 43.78 million (about US$66 million), which brings the total amount approved under the program to SDR 131.34 million (about US$197 million).

In completing the review, the Executive Board approved the Dominican Republic's request to waive the nonobservance of structural performance criteria regarding the approval of by-laws of the Monetary and Financial Law, the approval of the law for systemic bank resolution, the approval of the 2004 budget law, and the unification of the foreign exchange market; four quantitative performance criteria for the end of December 2003 on fiscal and monetary targets; and the continuous performance criteria concerning accumulation of external arrears, exchange rate restrictions, and multiple currency practices. The Executive Board also approved a request to waive the applicability of the quantitative performance criteria for the end of December 2003 on the contracting of external debt, as final data on this criterion was not yet available.

Following the Executive Board's discussion of the Dominican Republic, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"The Dominican Republic continues to face a difficult economic situation precipitated by last year's banking sector crisis, which led to a rapid increase in public debt, currency depreciation, and accelerating inflation. Although the authorities succeeded in stabilizing the banking system, key performance criteria under the Fund-supported program were not observed, and a number of structural measures were delayed, including in the key banking area. With policy implementation lagging, and political uncertainties on the rise, outflows of capital accelerated and the peso came under renewed pressure, thus straining the finances of the ailing electricity sector and contributing to power blackouts and social tensions.

"Against this background, the Dominican authorities recently implemented a set of corrective policies. Early this year, they secured congressional approval of a budget consistent with a combined public sector deficit of 3¾ percent of GDP, initiated new electricity sector reforms, tightened monetary conditions, ended intervention in the operation of the foreign exchange market, cleared nonreschedulable external arrears, and implemented structural policies that had been delayed.

"These recent steps constitute a significant effort to reinvigorate economic policy with a view to restoring confidence and macroeconomic stability and boosting output growth. Fiscal policy adjustment will stabilize public debt, while monetary policy will keep liquidity under control to significantly reduce inflation. Together with those measures, official external financing will support confidence and help international reserves recover. To further ease the external liquidity situation, the government has sought and received financing assurances from official bilateral creditors. In the electricity sector, the reform of tariffs and retargeting of subsidies will be phased in over the first half of 2004. The authorities also will implement a comprehensive set of further banking reforms.

"In the important areas of fiscal policy and the electricity sector, additional reforms are expected to be implemented later this year, after the elections. In the meantime, the authorities are developing reform proposals on taxes, and on the banking and electricity sectors, in consultation with international experts.

"Rigorous implementation of the program, together with a strong political commitment to further reform, will be critical to overcoming the current crisis in the Dominican Republic. Provided confidence can be re-established, and structural reforms are resolutely implemented, the country could restore the high growth and macroeconomic stability that were the hallmarks of its development through most of the 1990s and early 2000s," Mr. Carstens stated.