Projections and recommendations made by the IMF on the Dominican economy after concluding its visit.
An International Monetary Fund (IMF) mission that visited the Dominican Republic described the Government’s fiscal management as positive, and praised the resilience and dynamism of the country’s economy.
It was from May 8 to 19 that the IMF team, led by Emilio Fernandez-Corugedo, visited the DR to hold discussions in the framework of the 2023 Article IV consultation.
At the end of the mission, Mr. Fernandez-Corugedo made the following statement with some projections and recommendations:
“The Dominican Republic’s economy has been one of the most dynamic and resilient in the Americas over the past two decades. Reforms and sound monetary and fiscal policies have strengthened the macroeconomic frameworks – most notably the inflation targeting regime and the introduction of a medium-term fiscal framework – as well as the banking system, and the resulting macroeconomic stability has attracted substantial foreign direct investment inflows, allowing per capita income to more than double and poverty to halve.
These factors have contributed to a remarkable post-pandemic economic recovery, supported by both sound policies adopted by the authorities and positive spillovers from the global economy.
The strong recovery began to moderate in late 2022 as a result of tighter global financial conditions, weaker global demand, and the appropriate withdrawal of stimulus policies, which have contributed to inflation converging toward its target.
The current account deficit widened in 2022 due to the moderation of goods exports, higher commodity prices and the continued recovery of domestic demand.
The deficit was mostly financed by foreign direct investment (FDI) inflows, with the country maintaining uninterrupted and adequate access to markets. Despite the recent tightening of global and domestic financial conditions, the financial sector has adequate levels of capitalization, liquidity and profitability.
“Thanks to sound economic fundamentals and policies, the economic outlook is favorable, but subject to a high degree of uncertainty, mainly global.
After posting a strong rebound, the post-pandemic recovery has moderated, with growth projected to slow slightly from 4.9 percent in 2022 to around 4 percent in 2023, easing inflation back to the central bank’s target.
In 2024, growth is projected to return to around the potential level as global growth picks up.
The current account deficit is projected to narrow in the medium term due to lower commodity prices and continued improvements in exports and tourism receipts in light of the global recovery.
Overall uncertainty surrounding the outlook is high: in the short term, downside risks-such as a further tightening of international financial conditions and a more pronounced slowdown in global growth-predominate.
In the medium term, risks are more balanced, with some of these being significant-mostly domestic-and would imply better outcomes, such as greater opportunities for investment and the crystallization of ongoing reforms that could reduce risk premia and boost potential growth.
“In the near term, policy priorities should continue to seek to ensure that inflation returns to the target level, maintain the downward path of public debt while weathering the growth moderation and safeguarding financial stability:
- Policies that seek to bring inflation back to target and preserve financial stability remain appropriate. With inflation projected to decline and inflation expectations anchored, monetary policy should continue to monitor economic and financial conditions and be calibrated to ensure full convergence of inflation to target over the policy horizon. Exchange rate flexibility and reserve accumulation, which have reached historic levels, can continue to serve as buffers.
- Fiscal policy should remain focused on putting debt on a steadily declining path. Fiscal consolidation, facilitated by a gradual withdrawal of untargeted support measures in response to adverse shocks and supported by appropriately targeted measures for the most vulnerable, can complement efforts to reduce inflation and will be important for fiscal buffers.
- The financial sector remains resilient, but the current environment of tighter financial conditions calls for continued close monitoring, including through continued improvements in data collection and macroprudential analysis of household and corporate financial conditions.
Over the medium term, policies should focus on further strengthening policy frameworks, the business climate, and social safety nets to reinforce inclusive growth:
- Monetary policy and exchange rate. Recapitalization of the central bank will strengthen its autonomy, while a strategy to further deepen the foreign exchange market and expand the use of hedging mechanisms will also underpin the inflation targeting framework.
- Fiscal policy. Further improvements to fiscal policy frameworks-including with the introduction of a fiscal responsibility law, improvements in public financial management, infrastructure governance, and tax administration-in parallel with initiatives to durably increase revenues by broadening the tax base and reducing exemptions could also support fiscal sustainability.
- Financial policy. Further progress is needed in modernizing the regulatory framework and expanding the macroprudential toolkit. The Superintendency of Banks is already closely monitoring the ability of financial institutions to meet international standards. Introducing a prudential regulatory framework for credit unions would also strengthen financial stability.
- Structural reforms. Strong efforts to improve public institutions, governance, and the business climate-a central aspect of the authorities’ reform agenda-are key to promoting inclusive and resilient growth. The authorities should persevere with power sector reforms while ensuring adequate support for the most vulnerable population. Climate adaptation and mitigation policies should continue to be adopted within the framework of the Nationally Determined Contributions action plan to reduce vulnerabilities.
The mission held meetings with the Governor of the Central Bank, Héctor Valdez Albizu; the Minister of Finance, José Manuel Vicente Dubocq, and other senior officials and representatives of civil society and the private sector.
The mission expressed its “sincere thanks to the authorities for their exceptional hospitality, full cooperation and open and frank dialogue.”