July 8, 2022
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Dominican Republic and considered and endorsed the staff appraisal without a meeting [2] .
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.