International Monetary Fund

Yale University

EliScholar – A Digital Platform for Scholarly Publishing at Yale YPFS Resource Library 10-14-2003 Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Dominican Republic International Monetary Fund https://elischolar.library.yale.edu/ypfs-documents2/4249  This resource is brought to you for free and open access by the Yale Program on Financial Stability and EliScholar, a digital platform for scholarly publishing provided by Yale University Library. For more information, please contact ypfs@yale.edu. Public Information Notice: IMF Concludes 2003 Article IVConsultation with the Dominican RepublicOctober 14, 2003Public Information Notices (PINs) are issued, (i) at the request of a member country, following theconclusion of the Article IV (/external/pubs/ft/aa/aa04.htm) consultation for countries seeking tomake known the views of the IMF to the public. This action is intended to strengthen IMFsurveillance over the economic policies of member countries by increasing the transparency of theIMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at thedecision of the Board.On August 29, 2003, the Executive Board of the International Monetary Fund (IMF) concluded theArticle IV consultation with the Dominican Republic.BackgroundAfter a strong economic performance during 1992-2000, the Dominican Republic economy is facinga serious crisis. The country experienced a series of external shocks, starting in 2001, including a risein oil prices, the September 11 events, and the ensuing economic slowdown in the United States andEurope. However, the country faced a bigger shock in 2003 with the failure of a large private bankfollowing revelations of fraud. The banking problems contributed to pressures on the peso and to asharp rise in public sector debt. Economic activity has weakened and inflation is expected to rise toan annual rate close to 35 percent in 2003 reflecting the weaker exchange rate. With a drop inconsumer confidence and investment, economic activity has declined by around 1.5 percent so far in2003, and is projected to decline by 3 percent for the year as a whole, after rising by 4 percent in2002.The banking crisis arose mainly from governance problems that went undetected for many years,including accounting malpractices, mismanagement, and fraud. Unregistered liabilities amounting toseveral times registered deposits were found in Baninter, the third largest bank in the country at thetime. This bank was intervened by the Central Bank in April 2003 and was granted considerableliquidity assistance to prevent contagion and protect the payments system. However, contagion soonextended to two other medium-sized banks with management deficiencies. These banks have alsobeen assisted by the Central Bank, and are currently being restructured. The authorities havelaunched a comprehensive program to strengthen the banking system, including conducting auditsof banks, reinforcing the legal framework for bank resolution, and strengthening prudential regulationand bank supervision.To compensate for this assistance and mop up liquidity, the Central Bank issued large amounts ofcertificates, leading to increases in quasi-fiscal losses of the central bank, the public sector debt, andthe combined fiscal deficit. Public sector debt has increased to around 45 percent of GDP, fromaround 26 percent in 2002, raising concerns about debt sustainability. To address these concerns, theauthorities have taken a number of measures to contain the deterioration in the public finances,including expenditure cuts and new revenue measures, including a tax on checks, an importsurcharge, and other temporary measures. Further measures and reforms are envisaged for thecoming months and the public sector deficit is projected to be contained at 3.5 percent of GDP in2003.Exports and tourism have recovered so far in 2003, and imports have fallen as a result of thedownturn in the domestic demand and the sharp real depreciation of the peso. The external currentaccount has shifted into a surplus of about 1 percent of GDP in the first half of the year, from a deficitof 4 percent in 2002. The financial account has weakened sharply, despite the placement of aUS$600 million sovereign bond in early 2003; foreign direct investment has declined and there havebeen capital outflows. Net international reserves fell by about US$65 million in the first half of the                 PUBLIC INFORMATION NOTICE NO. 03/123Search1 (#P28_375)        ABOUT RESEARCH COUNTRIES CAPACITY DEVELOPMENT NEWS VIDEOS DATA PUBLICATIONS COVID-19year bringing gross international reserves to around US$500 million at end-June, or less than 1month of imports.Executive Board AssessmentDirectors recalled that the Dominican Republic had long been one of the fastest growing and stablecountries in the region, they focused on the policy framework that would help the economy recoverfrom recent shocks, notably the after-effects of September 11, 2001 and, especially, the recentbanking crisis that was triggered by massive fraud. This crisis has induced a substantial depreciation ofthe peso, a sharp increase in inflation, and a deceleration in economic activity.Directors endorsed the authorities' policy package to address the severe consequences of theseshocks. They expressed confidence that the authorities' strategy—which centers on improvinggovernance, accountability and oversight of the banking system, and strengthening the publicfinances—will help reverse the recent slowdown in growth, the overshooting of the depreciation ofthe peso, and the associated sharp increase in inflation.Directors welcomed the recent actions the authorities have taken to strengthen the banking sector,including dealing with three weak banks and the steps to avoid further contagion. A number ofDirectors regretted that the bank oversight structure had not caught signs of the banking problems atan earlier stage—especially in light of the recently completed Financial Sector Assessment Program.Directors agreed with the high priority given to the immediate assessment of the health of thebanking system through internationally assisted inspections of banks, and urged prompt correctiveactions in response to any weaknesses that are identified. They also supported the measures tostrengthen the legal framework, prudential regulations, and bank supervision. Restoring publicconfidence in the supervisory framework is of the essence, and Directors welcomed the authorities'commitment to initiate an inquiry into regulatory lapses that contributed to the delay in discoveringthe banking fraud.Directors observed that the public debt ratio has increased sharply to almost 50 percent of GDP as aresult of currency depreciation and the assistance provided to the banking system. Therefore, theyfavored an increase in the primary fiscal surplus to enable the authorities to offset some of the highercost of servicing debt, and allow a gradual reduction in the debt ratio over the medium term. Theauthorities are working through legal channels to attach the assets of shareholders of banks wherefraud has been found, and any recoveries from the sale of such assets would also help limit the publiccosts of bank resolution. Directors also welcomed the actions undertaken by the authorities to avoida bailout of the former owners. Forensic audits will seek to establish the responsibility of formerowners and managers for the banks' losses.Against this background, Directors supported steps to raise revenue and curtail expenditure to limitthe budget deficit in the period ahead. They stressed the importance of the authorities' plan toreplace expenditure compression and temporary revenue measures with comprehensive tax andexpenditure reforms, which will be key to generating higher primary surpluses over the medium term.Directors urged the authorities to advance approval of a tax reform to broaden the base ofconsumption and income taxes, and to seek prompt approval of budgetary reforms to improve theefficiency of public spending. They also noted that the sale of public assets could contribute to thereduction of public debt over the medium term.Directors emphasized the need to protect the poor from the effects of the crisis, and to shield socialspending from expenditure cuts, as poverty remains high. They welcomed the authorities' efforts toimprove the efficiency of social programs and subsidies, including through better targeting. Directorsalso welcomed the steps to reduce the impact on the poor of electricity price increases. However,they noted that the effectiveness of electricity subsidies could be improved by better targeting.Directors considered that a tight monetary stance will be crucial to limit pressures on the exchangerate and bring inflation back to single digits. Particular care is needed to ensure that liquidity supportprovided to individual banks does not result in excessive monetary expansion in the system as awhole. Directors favored greater reliance on market-based instruments to achieve monetary targets,and welcomed the recent start of open market operations through auctions for central bank paper.Directors welcomed the decision to unify the exchange market and the authorities' commitment to afully flexible exchange rate policy. They supported the steps that are being taken to eliminate themultiple currency practice arising from the existence of an official exchange rate and a market ratefor current exchange transactions, and approved this multiple currency practice until September 30,2003.Directors considered that the realization of the Dominican Republic's considerable medium-termgrowth potential requires structural reforms beyond the banking, governance, and fiscal areas. Inparticular, it will be important to open up the economy further to international trade and investmentand to eliminate infrastructural bottlenecks, especially in the power sector, where high electricitytariffs hamper competitiveness. In this context, Directors emphasized the urgency of placing thepower sector on a sustainable financial basis, and they encouraged the authorities to work closelywith the World Bank to implement reforms in these areas.Directors welcomed the significant progress the Dominican Republic has made in recent years incombating money laundering and the financing of terrorism, and encouraged the authorities to buildon this success in the context of strengthening the financial system.Dominican Republic: Selected Economic and Financial Indicators      Prel. Proj.  1999 2000 2001 2002 2003             (Annual percentage changes, unless otherwiseindicated)           National accounts and prices          Real GDP 7.8 7.3 2.9 4.1 -3.0Real GDP per capita 6.1 5.4 1.4 2.3 -4.7Consumer price index (end of period) 5.1 9.0 4.4 10.5 35.0Unemployment rate (in percent) 13.1 13.9 15.6 16.1 ...Gross domestic investment (in percent of GDP) 24.2 24.0 23.1 23.2 21.7Gross national savings (in percent of GDP) 21.8 18.8 19.7 23.2 22.7           Banking system          Liabilities to private sector 24.3 11.7 21.3 13.2 44.6Lending interest rate (period average) 25.3 26.8 24.6 26.1 39.4             (In percent of GDP)           Public finances          Central government          Primary balance -2.5 -1.3 -1.1 -1.3 1.9Overall balance -3.2 -2.1 -1.9 -2.2 -0.4Consolidated public sector          Primary balance -1.7 -0.8 -1.0 -1.3 1.1Overall balance -3.0 -2.0 -2.1 -2.6 -3.5             (In millions of U.S. dollars, unless otherwiseindicated)           Balance of payments          Current account -429 -1,026 -752 -875 159Merchandise trade balance -2,904 -3,742 -3,503 -3,699 -3,076Exports 5,137 5,737 5,276 5,183 5,525Imports -8,041 -9,479 -8,779 -8,883 -8,602Services and transfers (net) 2,475 2,716 2,751 2,824 3,235Of which: interest -180 -201 -196 -215 -272Capital and financial account 1,068 1,580 1,724 952 1,318Foreign direct investment 1,338 953 1,079 961 621Change in gross international reserves (-=increase) -194 70 -519 526 -155           Current account (in percent of GDP) -2.5 -5.2 -3.4 -4.0 1.0Exports (in US$, annual percentage change) 1.0 16.1 -8.4 -1.8 6.6Imports (in US$, annual percentage change) 6.3 23.2 -7.2 1.2 -3.2Terms of trade (annual percentage change) -4.8 -6.0 0.8 0.9 -0.3Real effective exchange rate (end-period,depreciation -)3.3 5.9 2.4 -16.7 ...           International reserve position and external debt      Gross official reserves 706 637 1,155 630 785(in months of imports) 1.3 1.0 1.9 1.0 0.9Net official reserves 547 442 962 376 347           Outstanding external public debt, in percent of GDP 21.0 18.6 19.6 20.9 33.8Total debt service ratio (in percent of exports ofgoods & services)5.0 5.2 7.1 8.0 8.6Gross reserves/short-term debt (in percent) 71.1 52.4 79.7 46.8 58.5Sources: Central Bank of the Dominican Republic; World Bank; and IMF staff estimates andprojections.Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussionswith members, usually every year. A staff team visits the country, collects economic and financialinformation, and discusses with officials the country's economic developments and policies. Onreturn to headquarters, the staff prepares a report, which forms the basis for discussion by theExecutive Board. At the conclusion of the discussion, the Managing Director, as Chairman of theBoard, summarizes the views of Executive Directors, and this summary is transmitted to thecountry's authorities.IMF EXTERNAL RELATIONS DEPARTMENTPublic Affairs  Media RelationsE-mail:publicaffairs@imf.org (mailto:publicaffairs@imf.org)E-mail:media@imf.org (mailto:media@imf.org)Fax: 202-623-6278 Phone: 202-623-71001 (#P28_376) 

Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Dominican Republic

https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=5179&context=ypfs-documents2

Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Dominican Republic

Abstract

Similar works

Full text

Available Versions

Yale University