Abstract
IMF Country Report No. 22/217
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IMF Country Report No. 22/217
DOMINICAN REPUBLIC
2022 ARTICLE IV CONSULTATION—PRESS RELEASE; AND STAFF REPORT
July 2022
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with the Dominican Republic, the following documents have been released and are included in this package:
A Press Release.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on a lapse of time basis on July 5, 2022, following discussions that ended on May 13, 2022, with the officials of the Dominican Republic on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on June 16, 2022.
An Informational Annex prepared by the IMF staff.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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International Monetary Fund
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© 2022 International Monetary Fund
Press Release
PR22/248
IMF Executive Board Concludes 2022 Article IV Consultation with the Dominican Republic
FOR IMMEDIATE RELEASE
Washington, DC – July 5, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Dominican Republic and considered and endorsed the staff appraisal without a meeting2.
The Dominican Republic continued to show remarkable resilience to global shocks, supported by sound policies, monetary policy support, a nimble COVID vaccination campaign and a well-attuned reopening that allowed the economy to make the most of the global rebound last year. This resilience and strong signals of policy sustainability are placing the Dominican economy in a good position to face emerging global challenges going forward.
The economy recovered strongly from the pandemic, despite global factors that created challenges in terms of inflation. Real GDP increased by 12.3 percent in 2021, amid broad sectoral growth—including a notable recovery in tourism, with arrivals exceeding 2019 levels since last fall. By end-2021, output was 5 percent above pre-pandemic levels, consistent with strong employment growth. Inflation convergence is taking longer than envisaged—headline inflation exceeds the target range due primarily to high inflation in the United States, higher global energy and food prices, and supply chain disruptions. The external position was sound, with the current account financed by FDI and a significant accumulation of reserves. The financial system remains resilient and continues to support the economy despite the unwinding of pandemic-related regulatory flexibility.
The outlook points to a continued recovery, though global developments pose risks. GDP growth would converge to its potential and inflation would return to the target range by next year as the impact of global shocks recedes, in the context of financial stability and a sound external position. As for risks, the war in Ukraine may have a stronger-than-expected effect on global growth and inflation. The pandemic, while well-contained in the Dominican Republic, may downgrade growth in other regions. And monetary policy tightening in the United States may have a stronger-than-expected impact on capital flows. The authorities have responded with temporary measures while maintaining budget discipline through expenditure control and executing proactive debt-management that reduced financing risks. The central bank has begun a normalization of monetary policy; absorbing liquidity and increasing the monetary policy rate.
Executive Board Assessment
In concluding the 2022 Article IV Consultation with the Dominican Republic, Executive Directors endorsed staff’s appraisal, as follows:
As in the past, the Dominican Republic’s economy showed remarkable resilience. Sound policies that supported stability and maintained good market access, an effective health campaign and well-attuned re-opening—including to tourism—allowed the Dominican Republic to make the most of the global rebound and to limit scarring and the increase in poverty. The strong, broad-based recovery—with GDP at end-2021 about 5 percent above pre-pandemic levels—allowed a front-loaded fiscal consolidation and the normalization of monetary policy to address inflationary pressures.
Strong growth momentum and a well-sequenced policy response continue to help the Dominican Republic face a challenging global environment. Amid abating global tailwinds, growth should converge to its longer-term trend. Supply shocks have driven inflation higher than previously projected, but fiscal measures are easing the impact while the normalization of monetary policy should allow inflation convergence to the target over the policy horizon. Risks are mainly associated with the war in Ukraine and the tightening of global financial conditions. The main impact from the war is expected to take place through higher commodity prices—direct trade and financial linkages are limited—while global financial conditions may have a stronger-than-expected impact on capital flows. The front-loaded fiscal consolidation, timely debt issuance and pro-active debt management help reduce vulnerabilities through lower near-term financing needs. Overall, this provides some space to face downside risks.
The external position is broadly in line with fundamentals and desirable policies. Exports and remittances grew robustly, while higher domestic demand and commodity prices increased the current account deficit—which nonetheless remained fully financed by resilient FDI—the external position is assessed as sustainable, with international reserves up strongly, improving reserve adequacy. The real exchange rate appreciated slightly in 2021 and remains broadly in line with fundamentals.
Economic policies—fiscal prudence, temporary commodity price mitigation measures, and monetary policy tightening—remain appropriate. Expenditure rationalization and tax administration efforts will help maintain a gradual fiscal consolidation, putting public debt on a stronger downward trajectory than previously projected while protecting investment and social spending. The use of temporary fiscal measures to contain the impact of commodity price shocks on domestic fuel and food prices is appropriate, as well as continuing with electricity sector reforms and improved targeting of subsidies and social assistance. Ongoing monetary and prudential policy normalization are warranted to maintain inflation expectations anchored and moderate financial risk-taking, respectively.
The exit from the financial regulatory response to the pandemic has been appropriate and the financial system proved its resilience. The exit was well designed and remains based on intensive monitoring and transparency in the assessment of asset quality. Going forward, the system would benefit from implementing higher international standards of supervision and regulation, enhancing the macroprudential and crisis management toolkit, and strengthening the regulatory framework for credit and savings cooperatives financial oversight.
Well-sequenced reform implementation can help strengthen medium-term policies. The authorities continue taking steps to strengthen policy frameworks, in particular by enhancing public financial management and transparency. This will pave the way for the introduction of fiscal responsibility legislation to better anchor medium-term policies and further secure debt sustainability. Together with ongoing reforms in the electricity sector, enhanced policy frameworks can build consensus for future revenue mobilization initiatives that create space for needed investment in infrastructure and human capital. An agreed roadmap for central bank recapitalization can also help by enhancing financial and institutional independence.
Reforms to foster inclusive growth and improved social outcomes remain critical. Ongoing efforts to improving governance, securing stable, competitive, and sustainable energy supply, building climate change resilience, and tackling other productivity bottlenecks—e.g., modernizing the labor code, increasing years and quality of education, and narrowing skills gaps in labor markets—along with enhanced effectiveness of social programs continue to be critical for sustainable and more equitable growth. Further efforts to address social issues—such as reducing regional and gender inequality—would also help making growth more inclusive.
Dominican Republic: Selected Economic and Social Indicators
Latest available. For the Policy interest rate, the latest available is as of end-May (effective June 1).
The consolidated public sector includes the central government, some decentralized entities, the electricity holding company, and the central bank.
Excluding reserves. (- = net inflow; + = net outflow
Dominican Republic: Selected Economic and Social Indicators
| Population (millions, 2021) | 10.5 | GDP per capita (2021, U.S. dollars) | 8,986 | |||||
| Quota | 477.4 millions SDRs / 0.10% of total | Poverty (2021, share of population) | 23.9 | |||||
| Main exports | tourism, gold, tobacco | Unemployment rate (2021, percent) | 7.7 | |||||
| Key export markets | U.S., Canada, Haiti | Adult literacy rate (percent, 2018) | 93 | |||||
| Projection | ||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||
| Output | (Annual percentage change, unless otherwise stated) | |||||||
| Real GDP | 4.7 | 7.0 | 5.1 | -6.7 | 12.3 | 5.0 | 5.0 | |
| Contributions to growth | ||||||||
| Consumption | 3.1 | 4.1 | 3.7 | -1.9 | 5.0 | 4.0 | 4.0 | |
| Investment | -1.4 | 4.6 | 1.1 | -4.4 | 7.0 | 0.9 | 1.5 | |
| Net exports | 2.2 | -0.9 | -1.4 | -3.2 | 0.6 | 0.8 | 1.0 | |
| Nominal GDP (RD$ billion) | 3,803 | 4,236 | 4,562 | 4,457 | 5,407 | 6,160 | 6,846 | |
| Nominal GDP (US$ billion) | 80.1 | 85.6 | 89.0 | 78.9 | 94.7 | … | … | |
| Gross national saving (percent of GDP) | 22.3 | 24.3 | 24.7 | 23.4 | 28.7 | 27.7 | 27.7 | |
| Output gap (in percent of potential output) | -1.8 | -0.5 | -0.6 | -6.3 | -1.9 | -0.5 | -0.1 | |
| Prices | ||||||||
| Consumer price inflation (end of period) | 4.2 | 1.2 | 3.7 | 5.6 | 8.5 | 8.0 | 4.5 | |
| Exchange Rate | ||||||||
| Exchange rate (RD$/US$ - period average) 1/ | 47.5 | 49.5 | 51.2 | 56.5 | 57.1 | … | … | |
| Exchange rate (RD$/US$ - eop) 1/ | 48.2 | 50.2 | 52.9 | 58.2 | 57.3 | … | … | |
| Real effective exchange rate (eop, - depreciation) 1/ | -4.8 | -1.9 | -3.4 | -8.2 | 5.8 | … | … | |
| Government Finances | (in percent of GDP) | |||||||
| Consolidated public sector debt 2/ | 48.5 | 50.1 | 53.2 | 70.3 | 62.1 | 59.2 | 57.5 | |
| Consolidated public sector overall balance 2/ | -4.0 | -3.4 | -3.3 | -9.0 | -3.9 | -3.9 | -3.7 | |
| Consolidated public sector primary balance | 0.1 | 0.6 | 0.9 | -4.3 | 0.4 | 0.4 | 0.8 | |
| Central government balance | -3.1 | -2.2 | -2.2 | -7.9 | -2.9 | -3.0 | -2.7 | |
| Revenues and grants | 14.0 | 14.2 | 14.4 | 14.2 | 15.6 | 14.4 | 14.4 | |
| Primary spending | 14.5 | 13.8 | 13.8 | 18.9 | 15.4 | 14.4 | 14.0 | |
| Interest expenditure | 2.5 | 2.6 | 2.7 | 3.2 | 3.1 | 3.0 | 3.2 | |
| Rest of NFPS | 0.3 | -0.1 | -0.1 | 0.3 | 0.2 | 0.0 | 0.0 | |
| Financial Sector | (Annual percentage change; unless otherwise stated) | |||||||
| Broad money (M3) | 11.2 | 7.0 | 11.7 | 20.8 | 13.2 | 12.5 | 11.7 | |
| Credit to the private sector | 10.1 | 11.1 | 11.8 | 5.3 | 11.5 | 11.1 | 11.1 | |
| Policy interest rate 1/ | 5.3 | 5.5 | 4.5 | 3.0 | 3.5 | 6.5 | … | |
| Average deposit rate (1-year; in percent) 1/ | 5.0 | 7.4 | 6.7 | 3.1 | 3.7 | … | … | |
| Average lending rate (1-year; in percent) 1/ | 11.2 | 12.1 | 12.4 | 9.9 | 11.1 | … | … | |
| Balance of Payments | (in percent of GDP) | |||||||
| Current account | -0.2 | -1.5 | -1.3 | -1.7 | -2.8 | -3.4 | -2.4 | |
| Goods, net | -9.5 | -11.2 | -10.2 | -8.6 | -12.3 | -13.5 | -13.2 | |
| Services, net | 6.9 | 6.4 | 5.7 | 1.8 | 3.9 | 5.7 | 6.5 | |
| Income, net | 2.4 | 3.2 | 3.2 | 5.2 | 5.6 | 4.4 | 4.3 | |
| Capital account | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Financial account 3/ | -2.6 | -3.6 | -3.6 | -4.4 | -5.7 | -4.6 | -3.3 | |
| Foreign direct investment, net | -4.5 | -3.0 | -3.4 | -3.2 | -3.3 | -3.2 | -3.3 | |
| Portfolio investment, net | -2.2 | -3.1 | -2.4 | -7.1 | -2.7 | -2.9 | -2.9 | |
| Financial derivatives, net | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Other investment, net | 4.0 | 2.5 | 2.3 | 5.9 | 0.3 | 1.5 | 2.9 | |
| Change in reserves (- increase) | -0.9 | -1.0 | -1.3 | -2.5 | -2.4 | -1.2 | -0.8 | |
| GIR (in millions of U.S. dollars) | 6,781 | 7,628 | 8,782 | 10,752 | 12,943 | 14,256 | 15,215 | |
| Total external debt (in percent of GDP) | 41.9 | 40.2 | 41.9 | 56.4 | 49.9 | 46.8 | 46.4 | |
| of which: Public sector | 24.2 | 25.8 | 27.3 | 40.3 | 35.5 | 33.9 | 32.9 | |
Latest available. For the Policy interest rate, the latest available is as of end-May (effective June 1).
The consolidated public sector includes the central government, some decentralized entities, the electricity holding company, and the central bank.
Excluding reserves. (- = net inflow; + = net outflow
Dominican Republic: Selected Economic and Social Indicators
| Population (millions, 2021) | 10.5 | GDP per capita (2021, U.S. dollars) | 8,986 | |||||
| Quota | 477.4 millions SDRs / 0.10% of total | Poverty (2021, share of population) | 23.9 | |||||
| Main exports | tourism, gold, tobacco | Unemployment rate (2021, percent) | 7.7 | |||||
| Key export markets | U.S., Canada, Haiti | Adult literacy rate (percent, 2018) | 93 | |||||
| Projection | ||||||||
| 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||
| Output | (Annual percentage change, unless otherwise stated) | |||||||
| Real GDP | 4.7 | 7.0 | 5.1 | -6.7 | 12.3 | 5.0 | 5.0 | |
| Contributions to growth | ||||||||
| Consumption | 3.1 | 4.1 | 3.7 | -1.9 | 5.0 | 4.0 | 4.0 | |
| Investment | -1.4 | 4.6 | 1.1 | -4.4 | 7.0 | 0.9 | 1.5 | |
| Net exports | 2.2 | -0.9 | -1.4 | -3.2 | 0.6 | 0.8 | 1.0 | |
| Nominal GDP (RD$ billion) | 3,803 | 4,236 | 4,562 | 4,457 | 5,407 | 6,160 | 6,846 | |
| Nominal GDP (US$ billion) | 80.1 | 85.6 | 89.0 | 78.9 | 94.7 | … | … | |
| Gross national saving (percent of GDP) | 22.3 | 24.3 | 24.7 | 23.4 | 28.7 | 27.7 | 27.7 | |
| Output gap (in percent of potential output) | -1.8 | -0.5 | -0.6 | -6.3 | -1.9 | -0.5 | -0.1 | |
| Prices | ||||||||
| Consumer price inflation (end of period) | 4.2 | 1.2 | 3.7 | 5.6 | 8.5 | 8.0 | 4.5 | |
| Exchange Rate | ||||||||
| Exchange rate (RD$/US$ - period average) 1/ | 47.5 | 49.5 | 51.2 | 56.5 | 57.1 | … | … | |
| Exchange rate (RD$/US$ - eop) 1/ | 48.2 | 50.2 | 52.9 | 58.2 | 57.3 | … | … | |
| Real effective exchange rate (eop, - depreciation) 1/ | -4.8 | -1.9 | -3.4 | -8.2 | 5.8 | … | … | |
| Government Finances | (in percent of GDP) | |||||||
| Consolidated public sector debt 2/ | 48.5 | 50.1 | 53.2 | 70.3 | 62.1 | 59.2 | 57.5 | |
| Consolidated public sector overall balance 2/ | -4.0 | -3.4 | -3.3 | -9.0 | -3.9 | -3.9 | -3.7 | |
| Consolidated public sector primary balance | 0.1 | 0.6 | 0.9 | -4.3 | 0.4 | 0.4 | 0.8 | |
| Central government balance | -3.1 | -2.2 | -2.2 | -7.9 | -2.9 | -3.0 | -2.7 | |
| Revenues and grants | 14.0 | 14.2 | 14.4 | 14.2 | 15.6 | 14.4 | 14.4 | |
| Primary spending | 14.5 | 13.8 | 13.8 | 18.9 | 15.4 | 14.4 | 14.0 | |
| Interest expenditure | 2.5 | 2.6 | 2.7 | 3.2 | 3.1 | 3.0 | 3.2 | |
| Rest of NFPS | 0.3 | -0.1 | -0.1 | 0.3 | 0.2 | 0.0 | 0.0 | |
| Financial Sector | (Annual percentage change; unless otherwise stated) | |||||||
| Broad money (M3) | 11.2 | 7.0 | 11.7 | 20.8 | 13.2 | 12.5 | 11.7 | |
| Credit to the private sector | 10.1 | 11.1 | 11.8 | 5.3 | 11.5 | 11.1 | 11.1 | |
| Policy interest rate 1/ | 5.3 | 5.5 | 4.5 | 3.0 | 3.5 | 6.5 | … | |
| Average deposit rate (1-year; in percent) 1/ | 5.0 | 7.4 | 6.7 | 3.1 | 3.7 | … | … | |
| Average lending rate (1-year; in percent) 1/ | 11.2 | 12.1 | 12.4 | 9.9 | 11.1 | … | … | |
| Balance of Payments | (in percent of GDP) | |||||||
| Current account | -0.2 | -1.5 | -1.3 | -1.7 | -2.8 | -3.4 | -2.4 | |
| Goods, net | -9.5 | -11.2 | -10.2 | -8.6 | -12.3 | -13.5 | -13.2 | |
| Services, net | 6.9 | 6.4 | 5.7 | 1.8 | 3.9 | 5.7 | 6.5 | |
| Income, net | 2.4 | 3.2 | 3.2 | 5.2 | 5.6 | 4.4 | 4.3 | |
| Capital account | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Financial account 3/ | -2.6 | -3.6 | -3.6 | -4.4 | -5.7 | -4.6 | -3.3 | |
| Foreign direct investment, net | -4.5 | -3.0 | -3.4 | -3.2 | -3.3 | -3.2 | -3.3 | |
| Portfolio investment, net | -2.2 | -3.1 | -2.4 | -7.1 | -2.7 | -2.9 | -2.9 | |
| Financial derivatives, net | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |
| Other investment, net | 4.0 | 2.5 | 2.3 | 5.9 | 0.3 | 1.5 | 2.9 | |
| Change in reserves (- increase) | -0.9 | -1.0 | -1.3 | -2.5 | -2.4 | -1.2 | -0.8 | |
| GIR (in millions of U.S. dollars) | 6,781 | 7,628 | 8,782 | 10,752 | 12,943 | 14,256 | 15,215 | |
| Total external debt (in percent of GDP) | 41.9 | 40.2 | 41.9 | 56.4 | 49.9 | 46.8 | 46.4 | |
| of which: Public sector | 24.2 | 25.8 | 27.3 | 40.3 | 35.5 | 33.9 | 32.9 | |
Latest available. For the Policy interest rate, the latest available is as of end-May (effective June 1).
The consolidated public sector includes the central government, some decentralized entities, the electricity holding company, and the central bank.
Excluding reserves. (- = net inflow; + = net outflow
Title Page
DOMINICAN REPUBLIC
STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION
June 16, 2022
KEY ISSUES
Context. As in the past, the Dominican Republic’s dynamic economy continued to show remarkable resilience to shocks, rebounding strongly from the impact of the pandemic. Sound policies, a nimble vaccination campaign and a well-attuned reopening—including international travel—allowed the economy to make the most of the global rebound. The recovery has been broad based; GDP was about 5 percent above pre-pandemic levels as of end-2021. The country maintained sound market access and benefitted from Fund support through the Rapid Financing Instrument (RFI).
Recent Developments. Following a decline of 6¾ percent in 2020, GDP grew by 12¼ percent last year. Aided by global spillovers and resilient FDI, the upturn was led initially by manufacturing and construction, followed by a strong recovery in tourism—by last fall, arrivals surpassed pre-pandemic levels. Amid global inflationary pressures, inflation convergence to the target (4±1 percent) is taking longer-than-envisaged; it reached 8½ percent by end-2021, though inflation expectations remained well-anchored. The external current account remained more than fully financed by FDI, and the international reserve position strengthened in 2021.
Outlook and Risks. A frontloaded fiscal consolidation tailored policies to the evolving impact of the pandemic—phasing out support as employment recovered and devoting efforts to the reopening—and allowed a significant reduction in public debt. Monetary policy aided the recovery and turned into normalization to address inflation pressures by end-2021. This will help facing challenges from the war in Ukraine and global financial tightening on inflation and activity amid constrained policy space.
Policy Issues. Discussions focused on the ongoing normalization of monetary policy, the fiscal response to global shocks amid efforts to secure fiscal sustainability, and the exit strategy from financial sector pandemic support. Persevering on electricity sector reforms while ensuring appropriate support for vulnerable population through well-targeted programs will be important going forward, as well as implementation of ongoing efforts to strengthen policy frameworks (including a fiscal responsibility law), governance, anti-corruption policy and transparency, and the business environment. These reforms—supported by Fund capacity development—can foster growth and signal strong commitment to sustainable policies. Sound sequencing in the reform agenda can build consensus for revenue mobilization going forward.
Approved By
Patricia Alonso-Gamo (WHD) and Eugenio Cerruti (SPR)
Discussions took place in Santo Domingo during April 29-May 13, 2022. The staff team comprised Esteban Vesperoni (head), Pamela Madrid, Mario Mansilla, Nicolás Fernández-Arias, (all WHD), Hassan Adan (FAD) and Dirk Jan Grolleman (MCM). Evelyn Carbajal, Soungbe Coquillat and Madina Toshmuhamedova (WHD) assisted the team through research assistance and editorial support. Messrs. Afonso Bevilaqua and Frank Fuentes (both OED) participated in the discussions. The team met with President Luis Abinader, Central Bank Governor Héctor Valdez, Minister of Finance José Manuel Vicente, Superintendent of Banks Alejandro Fernandez, and other senior officials, as well as private sector and civil society representatives.
Contents
STRONG RECOVERY, POLICY ADJUSTMENTS AND ONGOING REFORMS
RECENT DEVELOPMENTS, OUTLOOK, AND RISKS
POLICY DISCUSSIONS
A. Supporting Inclusive Growth and Policy Sustainability
B. Consolidating Policies to Secure Fiscal Sustainability
C. Maintaining Financial Stability and Strengthening Policy Frameworks
D. Strengthening Institutions and Supporting Inclusive Growth
FUND RELATIONS
STAFF APPRAISAL
FIGURES
1. Real Sector Developments
2. Fiscal Developments
3. Monetary Policy and Inflation
4. Exchange Rates and Sovereign Spreads
5. External Sector Developments
6. Financial Sector Developments
TABLES
1. Selected Economic and Social Indicators, 2017–27
2a. Public Sector Accounts, 2017–27 (In Percent of GDP)
2b. Public Sector Accounts, 2017–27 (In Billions of Dominican Pesos)
3. Summary Accounts of the Banking System, 2017–27
4. Balance of Payments, 2017–27
5. Financial Soundness Indicators, 2012–21
6. Indicators of Fund Credit, 2022–27
7. Recommendations of the 2021 Article IV Consultation
ANNEXES
I. Inflation Drivers
II. External Sector Assessment
III. Implications of the War in Ukraine for the Dominican Republic
IV. Potential Growth
V. Public Debt Sustainability Assessment
VI. Risk Assessment Matrix
VII. Growth-at-Risk
VIII. Electricity Sector Reforms
IX. Strengthening the Medium-Term Fiscal Framework
X. Governance Reforms: Rule of Law and Regulatory Framework
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.
The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
