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Wednesday, September 20, 2023

International Monetary Fund Says Dominica’s Economy Is Expanding Strongly But Faces Headwinds

The International Monetary Fund (IMF) executive board reports that although the Dominican economy is growing steadily, there are obstacles.

Following the completion of the 2023 Article IV Consultation with Dominic, the IMF executive board stated: “Severely affected by the pandemic, real GDP (gross domestic product) growth is estimated to have rebounded during 2021–22, driven by the construction of climate-resilient infrastructure, a pickup in tourism following the full lifting of mobility restrictions, and a substantial increase in agricultural output.

However, it noted that the pandemic’s lasting impacts are anticipated to have a negative impact on growth moving forward, and that limited budgetary room and erratic Citizenship by Investment (CBI) earnings may limit urgently needed public investment, especially that required to cope with frequent and expensive climate shocks.

The IMF reports that the construction of climate-resilient infrastructure, a partial revival in tourism, and a significant increase in agricultural output are expected to have contributed to real GDP growth of 6.9% in 2021 and 5.7 percent in 2022.

Despite mitigating gasoline price restrictions, it claimed that rising global commodity prices and shipping costs will cause inflation to reach an anticipated 7.5% in 2022.

Due to unfavorable terms of trade, significant imports of investment goods, and a partial rebound in tourism receipts, the current account deficit remained high, at 26% of GDP.

But it admitted that money is still scarce. High CBI revenue, which in recent years has been close to a record 30% of GDP, has supported public investment and crisis response actions.

That being said, the primary fiscal deficit increased to 6.2% in the budget year 2021–2022 and the public debt reached 106% of GDP.

According to the IMF, the country’s economic prognosis is favorable and is dependent on tourism’s ongoing growth and the implementation of its program for economic modernization and resilience building.

“The switch to locally produced geothermal energy and the upcoming building of a new airport would support economic activity, lessen reliance on fossil fuels, increase resilience to external shocks, and enhance global connectedness.

However, careful fiscal management will be necessary to resolve both domestic and international imbalances.

As tourism exports increase, commodity prices decline, and imports of fuel and investment goods weaken in line with fiscal austerity, the current account deficit is anticipated to decrease.

Meanwhile, efforts to cut current spending and improve tax collection should cause the national debt to gradually diminish in the years to come.

Building policy buffers and essential infrastructure will aid in addressing downside risks brought on by climate change, global economic instability, and the unpredictability of CBI revenue.

According to the IMF executive board, fiscal consolidation efforts should be increased in order to preserve space for investments in climate resilience and guarantee adherence to the regional debt objective.

It stated that in order to assure convergence to the 60 percent public debt objective by 2035, a path of consolidation in accordance with the national fiscal rule, rising the primary balance to two percent of GDP by 2026, is required.

The plan should be supported by a significant increase in non-CBI fiscal balances while safeguarding investment and other top priorities.

Stronger fiscal consolidation will make external rebalancing easier and lessen the financial system’s exposure to the public sector, reducing the risks associated with the sovereign-bank nexus.

The board stated that further ambitious measures would be required to support the fiscal consolidation that supports growth.

Mobilizing tax revenue is a top priority, and to do so, tax incentives must be streamlined, PIT allowances must be reviewed, and tax administration and compliance risk management must be strengthened.

In order to make up for the lost revenue from the highway charge, the cut in the VAT on electricity should be reversed once global fuel costs stabilize.

On the expenditure side, it was stated that reforms aimed at raising the minimum retirement age will streamline pension spending, lower the wage bill through civil service reform, and strengthen the financial position of the publicly owned water and sewage public company through higher tariffs that more accurately reflect cost recovery.

“Efforts should be made to reduce wasteful expenditure and better allocate funds from the medium-term public investment plan to the most productive projects, such the geothermal plant and new airport.

The IMF executive board continued, “Given the high exposure to climate change, a higher share of CBI revenue, including all unexpected windfalls, would strengthen financial resilience and strengthen debt sustainability.”



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