The Dominican Republic’s economy has been one of the most dynamic and resilient in the Americas over the past two decades, experiencing a remarkable post-pandemic 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 financial conditions, weaker global demand, and the appropriate and timely withdrawal of stimulus policies, which have contributed to the convergence of inflation toward its target.
Economic activity expanded by 4.9 % led by the services and manufacturing sectors, while construction sector activity moderated in response to rising costs and tighter financial conditions, and mining activity declined due to temporary capacity issues. Inflation has been converging rapidly toward its target, declining from its peak level of 9.6 % in April 2022 to 4.4 % in May 2023.
The current account deficit widened to 5.6 % of GDP in 2022 due to moderating goods exports, rising commodity prices, and continued recovery in domestic demand, and was mostly financed by Foreign Direct Investment (FDI) inflows.
Financial sector
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. Real gross domestic product (GDP) growth is projected to slow slightly to around 4% in 2023 due to the lagged effects of tight financial conditions and lower global demand, facilitating the return of inflation to the central bank’s target.
By 2024, however, growth is expected to return to around potential as global financial conditions ease and global growth recovers.
The external position is sustainable and the current account deficit is projected to narrow over the medium term to 3.1% of GDP due to lower commodity prices and continued improvements in exports and tourism receipts in light of the global recovery.
Downside risks, including a further tightening of international financial conditions and a more pronounced slowdown in global growth, dominate the near-term outlook but are more balanced over the medium term.
Board of Executive Directors’ Assessment
Executive Directors highlighted the Dominican Republic’s remarkable economic growth performance over the past two decades, which has contributed to a significant reduction in poverty, and welcomed the sound macroeconomic policies implemented by the authorities as well as the strong institutional policy frameworks, which have allowed for a remarkable post-pandemic recovery.
Directors agreed that the economic outlook is positive, but that downside risks dominate in the near term. In this context, they recommended focusing near-term policies on maintaining macroeconomic and financial stability, as well as moving forward with structural reforms to foster inclusive and resilient growth.
Directors welcomed the monetary policy response, which has helped reduce inflationary pressures, and emphasized that it should continue to be calibrated to ensure that inflation remains within the target range over the policy horizon and that inflation expectations remain anchored. They emphasized the importance of strengthening central bank autonomy through recapitalization and legislative reforms. Directors noted that greater exchange rate flexibility and deepening of the foreign exchange market will improve the monetary transmission mechanism and help the economy cope with adverse shocks.
Directors commended the authorities’ continued efforts to implement a strong fiscal responsibility law which, together with improvements in public financial management, will contribute to a more transparent and efficient use of public resources, anchor fiscal policy, and improve the fiscal framework. They agreed that fiscal policy should continue to focus on putting public debt on a firm downward trajectory. In order to increase fiscal buffers and create space for much-needed social and infrastructure spending, Directors recommended that fiscal consolidation should be supported by tax reforms, further improvements in tax administration, and rationalization of spending-in particular through the implementation of the Electricity Pact.
Directors welcomed that the financial system remains resilient and urged continued close monitoring given the tighter financial conditions. To strengthen financial stability, Directors emphasized the need to continue modernizing the regulatory framework by implementing the best international standards for supervision and regulation and expanding macro-prudential tools. They also recommended continuing to strengthen the anti-money laundering and combating the financing of terrorism (AML/CFT) framework and introducing a proactive regulatory framework for financial stability.
Directors commended the authorities’ ambitious structural reform agenda focused on boosting inclusive and resilient growth by improving public institutions, governance, education, and the business environment. They encouraged the authorities to persevere with power sector reforms to improve its governance and efficiency and called for the implementation of climate adaptation and mitigation policies to further reduce economic and financial vulnerabilities. Directors welcomed the authorities’ continued interest in technical assistance from the Fund, including a Public Investment Management Assessment and its climate module (C-PIMA), and noted the authorities’ interest in the near future in the Resilience and Sustainability Facility.
Source:
