Dominica’s economy has fully recovered, says IMF staff concluding statement 2024

ROSEAU, Dominica – An International Monetary Fund (IMF) staff team, led by  Christopher Faircloth, visited Roseau and held discussions on the 2024 Article IV consultation with Dominica’s authorities during March 5 –14. At the end of the consultation, the mission issued the following statement, which summarizes its main conclusions and recommendations.

The economy has fully recovered to pre-pandemic levels and economic imbalances have gradually narrowed. Real GDP grew by 5.6 percent in 2022 and 4.7 percent in 2023, returning to pre-pandemic output levels. The recovery has been underpinned by an ambitious public sector investment program (PSIP), strong agricultural activity, and a rebound in tourism despite airlift challenges. Inflation fell from its 2022 peak of 9.7 percent to 2.3 percent (y/y) at end 2023, largely due to softening global commodity prices. Favorable terms of trade and strong service exports further reduced the current account deficit to 26.2 percent.

The fiscal position has gradually improved but fiscal space remains tight with elevated public debt. The primary balance improved modestly in FY2022/23 to a deficit of 4.3 percent of GDP supported by record high citizenship-by-investment (CBI) revenues and reduced current expenditures. These developments were partly offset by increases in capital spending as the construction of resilient infrastructure (roads and bridges, water infrastructure, housing, and emergency shelters), the new airport, and geothermal project advanced. Public debt declined to 102.9 percent of GDP in FY2022/23 but remains elevated above pre-pandemic levels and constrains fiscal space going forward.

The financial system remains liquid despite slow credit growth. Banks remain well-capitalized and liquid, benefiting from a stable and low-cost deposit base, with a substantial portion of assets in overseas holdings. Banks’ asset quality has improved, but nonperforming loans (NPLs) remain elevated while provisioning is modestly below the Eastern Caribbean Central Bank’s (ECCB’s) 60 percent threshold. Credit Unions (CUs) play a significant role in the financial landscape, accounting for nearly half of private sector credit. Indicators point to relatively low capital adequacy, elevated NPLs, and declining profitability that bears careful monitoring. Overall, private sector credit growth remains subdued.

The outlook remains positive, predicated on the full recovery of stayover arrivals, implementation of key investment plans, and prudent fiscal management. Growth is expected to average 4½ percent during 2024-25, as stayover tourism returns to pre-pandemic levels, agriculture expansion initiatives take hold, and priority infrastructure projects further advance. Inflation is projected to converge to 2 percent consistent with trading partner dynamics.

The transition to geothermal production, the new airport and hotel projects to expand tourism capacity, and projects to bolster resilient infrastructure are expected to yield long-term growth dividends and reduce external imbalances. The current account deficit should gradually narrow over the medium term with the increase of tourism exports and a steady decline in the imports of investment goods and fuel. Public debt is set to decline in coming years, albeit slowly, supported by a consolidation of public finances.

However, risks stemming from an uncertain global environment, climate change, and volatile CBI flows, weigh on the downside. External risks from geopolitical tensions or tighter global financial conditions cloud the outlook for trade, commodity prices, and global demand, with significant spillovers to Dominica’s 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 planned infrastructure, climate resilience, economic activity, and the fiscal position.

More ambitious fiscal consolidation is needed to achieve objectives under the fiscal rule and adequately self-insure against disaster risks, thus setting the stage for resilient growth. The ongoing economic expansion provides an opportunity to rebuild essential fiscal buffers, which include not only achieving a minimum 2 percent of GDP primary surplus and reducing public debt to 60 percent of GDP by 2035, but also to adequately capitalize the Vulnerability, Risk and Resilience Fund as envisioned under the 2021 Disaster Resilience Strategy to insure against disaster shocks. On current estimates, this involves identifying roughly EC$65 million in fiscal consolidation measures, phased in over two years, to achieve a primary surplus of 3.5 percent of GDP by FY2025/26.

This consolidation plan should be underpinned by a sizeable improvement in non-CBI fiscal balances, while protecting investment and other priority programs to safeguard growth and the most vulnerable. Stronger fiscal consolidation would also benefit the economy by facilitating external rebalancing and reducing the exposure of the financial system to the public sector.

The recommended consolidation strategy involves broadening the revenue base, strategically rationalizing expenditures, and prioritizing investment with economic returns.Fiscal measures should build on the package advanced in the FY2023/24 budget. Mobilizing tax revenue by streamlining tax incentives (including by curtailing discretionary concession powers), rationalizing personal income tax allowances, and strengthening tax administration and compliance risk management are priorities.

Additional measures include reversing the reduction of VAT on electricity, raising the excise tax on diesel in line with gasoline, and exploring options to transition to a broader property tax regime. On the spending side, the decline in the public wage bill is welcome and should be preserved, including through further civil service reform. Given limited fiscal space, efforts should further rationalize inefficient spending and prioritize PSIP outlays on projects with clear economic returns. Tariff adjustments on key public services – notably water and sewerage and medical services – should be pursued to strengthen the financial position of state-owned enterprises, thus reducing contingent liability risks and current transfers.

The National Employment Program (NEP) has evolved beyond its original mandate and should be reassessed from a cost-benefit standpoint. Reforms that restore the program’s temporary skills-retooling orientation could achieve significant savings.

At the same time, it is critical to safeguard the social protection system and support the vulnerable. The framework of social protection in Dominica is fragmented, partly reflecting capacity constraints and widespread informality in the labor market that hamper the use of conventional income-based targeting. Streamlining and consolidating these programs to reduce overlap and tailor social assistance to the most vulnerable households is a priority. This involves operationalizing a centralized information system or unified database to track support and identify gaps. The completion of the ongoing population census would further support establishing a comprehensive social registry.

A package of parametric reforms should also be pursued to safeguard the viability of the National Insurance Scheme against the backdrop of increasing demographic pressures.

Addressing structural impediments to financial intermediation that constrain private sector credit remains a priority.The operationalization of the regional credit bureau should help streamline the lending process and enhance credit quality. Introducing a movable collateral framework could also help ease credit-access constraints. Recent enhancements to the Eastern Caribbean Partial Credit Guarantee Corporation could better support MSMEs in meeting documentation and collateral requirements for enhanced access to finance. Modernizing national foreclosure and bankruptcy legislation is critical for resolving NPLs.

A modern supervisory framework is necessary to underpin financial stability. Granting the national financial supervisory agency (FSU) statutory independence from the Ministry of Finance would further improve its effectiveness and support risk-based supervision. The FSU should pursue sound underwriting practices, proper asset classification and provisioning, and require CUs with capital shortfalls to submit credible restoration plans. Participating in ECCB-led initiatives to establish a Regional Standards Setting Body for non-bank financial institutions and regularize data sharing as well as integrating climate risks into supervisory frameworks are also recommended to enhance overall financial resilience.

Structural reforms to modernize the economy will support sustainable, inclusive, and resilient growth. The transition to geothermal energy is pivotal for meeting climate mitigation goals while [both] enhancing competitiveness and the external balance through lower electricity costs and fuel imports, respectively. The new international airport will significantly boost connectivity with large markets but should be accompanied by efforts to enhance regional connectivity and marketing strategies to tap new source markets.

Initiatives to support the agricultural sector and broaden the export base are welcome and should explore synergies with the growing tourism sector. Reforms to improve the business environment and reduce labor market frictions that hamper inclusive growth are also priorities. This includes policies to reduce burdensome administrative costs and persistent skills mismatches.

Institutional reforms to help mitigate risks and support economic policymaking should continue. Ongoing efforts to strengthen AML/CFT legislation and procedures in line with the latest Caribbean Financial Action Task Force (CFATF) mutual evaluation report should help protect correspondent bank relationships and the integrity of the CBI program. Efforts to further strengthen the CBI regime in line with the principles of the 2023 US-Caribbean Roundtable Agreement are welcome. Deepening regional cooperation on CBI programs in terms of common due diligence, transparency, and disclosure standards, could further safeguard this important source of revenue.

Weaknesses in statistical compilation, tax administration, and public financial management (PFM) frameworks – including under-developed internal CBI reporting systems – complicate policy management such as the implementation of the national fiscal rule. Strengthening institutional capacity in statistical compilation and PFM processes for medium-term budgeting, fiscal reporting, treasury operations, and public investment management remain priorities. The IMF stands ready to build on its ongoing capacity development program with Dominica in these and other areas.

IMF Communications Department