IMF staff completes 2022 Article IV Mission to the Dominican Republic

• The Dominican Republic has experienced a strong recovery from the pandemic, supported by well-sequenced policies, an agile reopening and global growth
• This recovery allowed the authorities to take steps to secure policy sustainability, placing the country in a good position to face challenges from global developments
• Ongoing and planned reforms have the potential to improve policy frameworks and foster inclusive growth over the medium term

By IMF Communications Department

Santo Domingo, DOMINICAN REPUBLIC – An International Monetary Fund (IMF) team led by Esteban Vesperoni visited the Dominican Republic from April 29 to May 13 to hold the 2022 Article IV Consultation discussions.

At the conclusion of the mission, Vesperoni issued the following statement:

“The Dominican Republic’s dynamic economy continued to show remarkable resilience to global shocks. This was 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 construction and tourism, with arrivals exceeding 2019 levels since last fall. By end-2021, output was five percent above pre-pandemic levels, pointing to a recovery beyond a statistical rebound and consistent with strong employment growth. Inflation convergence is taking longer than envisaged.

At about nine percent last March, it continued to exceed 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 robust, 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 5 percent – around 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. These shocks are creating fiscal and monetary policy challenges. The authorities have appropriately 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 warranted normalization of monetary policy, absorbing liquidity and increasing the monetary policy rate.

“In the short term, policy priorities should aim at securing the return of inflation to the target range and keeping the downward trajectory in public debt, while supporting the vulnerable population from the impact of global shocks. The pace of the ongoing monetary policy tightening cycle should be data-dependent, keeping inflation expectations well-anchored and safeguarding the hard-won credibility of the inflation targeting regime. The response of fiscal policy to the impact of global shocks on inflation should continue to be based on temporary budgeted measures while improving their targeting where feasible. An inclusive fiscal consolidation can secure the current downward path in public debt.

“The team welcomes reforms in the electricity sector, which can ensure reliable provision of electricity, reduce fiscal transfers to the sector and enhance the quality of public spending. The electricity sector has been a burden to public finances in the past and the Electricity Sector Pact has given the authorities a mandate to enhance governance in the sector, create conditions to foster investment, and implement reforms in the tariff and subsidy system, which can achieve sustainability in the sector.

“We also commend the authorities for the reforms to improve policy frameworks that aim at fostering their vision of a more effective public administration. The authorities are fully committed to implement a fiscal responsibility law. In pursuing this objective, they are assessing plans to strengthen public financial management and the medium-term fiscal framework while working on increasing transparency and governance, including in public procurement. The authorities continue to align the banking regulatory and supervision framework to international standards.

“Over the medium term, well-sequenced reforms – some of which are ongoing – would foster inclusive growth:

• Strengthening policy and regulatory frameworks. The monetary policy framework would benefit from the recapitalization of the central bank to strengthen its institutional and financial independence. Sustained work on financial supervision and regulation, the macroprudential and crisis management frameworks, and the regulatory framework for financial cooperatives will be important.
• Revenue mobilization. There is scope to mobilize more revenue by broadening the tax base and streamlining exemptions while calibrating the distributional impact. This would aid medium-term inclusive fiscal consolidation, while maintaining policy space for critical spending.
• Reforms to support growth. Improvements in the business climate – such as the zero-bureaucracy initiative and the new customs law – can foster investment. Infrastructure and human capital investment, more flexible and formal labor markets, educational quality and labor market participation of women, and climate change policies can further unlock growth potential.
• Improvements in social outcomes. There is ongoing work to improve the targeting of social programs while strengthening their focus on facilitating labor market insertion, as well as to reinforce the application of the social security law in the context of ongoing discussions in the social pact.

The mission met with president Luis Abinader, Central Bank Governor Héctor Valdez Albizu, minister of finance José Manuel Vicente Dubocq, other senior officials, and representatives of the civil society and the private sector. The team would like to thank the authorities for exceptional hospitality and open and productive discussions.”