WASHINGTON, USA — On July 22, 2011, the executive board of the International Monetary Fund (IMF) concluded the Article IV consultation with Dominica, and considered and endorsed the staff appraisal without a meeting.
Background
Dominica has made significant progress over the past decade in strengthening its macroeconomic policy management. Prudent fiscal management in the years leading up to the crisis has served the authorities well, leading to primary surpluses that average 3 percent of Gross Domestic Product (GDP) over the past eight years and to a significant reduction in public debt, to about 67 percent by mid-2011. Social indicators have also improved, with a major fall in unemployment and poverty levels, although these remain high at 14 percent and 29 percent, respectively, as of 2009.
Dominica is emerging from the crisis. The decline in global activity led to a relatively mild contraction due to a strong counter cyclical fiscal response and limited reliance on tourism. Growth turned positive in 2010, but tepid demand and the needed fiscal consolidation will weigh on the near-term prospects, with activity projected to growth at 0.9 percent in 2011. Near-term risks to growth are tilted to the downside on account of a potentially stronger impact of a slowing demand in advanced economies and weaker performance in agriculture, manufacturing and trade.
High world commodity prices are expected to put some pressures on inflation and the balance of payments in 2011, but these should be manageable and should subside in line with world fuel and food prices.
The financial system has weathered the crisis, although tremors in the regional financial markets, to which Dominica is heavily exposed, have heightened solvency and liquidity risks. Modest credit expansion prior to the crisis limited the accumulation of nonperforming loans and preserved capital ratios, but the financial system remains exposed to the failed regional insurance companies, other impaired investments in the Eastern Caribbean Currency Union (ECCU), and potential spillovers across segments of the financial system.
With regard to macro policies, the weakening of the fiscal position during the past two years is set to reverse in fiscal year (FY) 2011 that started in July. The proposed budget for FY 2011 targets a primary balance of 0.6 percent of GDP, an adjustment of almost two percentage points of GDP, the brunt of which falls on investment. As the achievement of the budget target hinges critically on the ability to raise revenue from house sales, which has proven difficult in recent years, staff projects that under current policies the primary balance would remain marginally negative in FY 2011 and debt will remain broadly unchanged in GDP terms.
Executive Board Assessment
In concluding the 2011 Article IV consultation with Dominica, Executive Directors endorsed staff’s appraisal, as follows:
Dominica has managed the crisis well, but the recovery has been lackluster and growth prospects remain weak. The fiscal stimulus during the crisis helped the country avoid a deep recession, but tepid demand in advanced countries (Dominica’s main tourist source), weak competitiveness and lack of clear growth drivers have led to a slow recovery and will constrain future growth.
While appropriately supportive during the crisis, fiscal policies need to be returned to a sounder footing to correct the weakening fiscal position. Staff welcomes the authorities’ plan to start withdrawing the fiscal stimulus in FY 2011 but underscores the importance of a close monitoring of fiscal developments with a view to ensuring that the budget’s primary deficit target of 0.6 percent of GDP for FY 2011 will be achieved. Given weakening revenues, staff believes that achieving the authorities’ target will necessitate additional fiscal measures beyond those envisaged in the budget. In this context, staff urges the authorities to contain the growth in current spending, as this reduces space for investment critical for future growth and makes further fiscal corrections more difficult in light of the likely permanent nature of the spending increase.
The adjustment effort will need to continue over the next few years, as debt levels remain uncomfortably high and current policies do not provide sufficient assurances that debt would remain on a downward path given the country’s exposure to external and natural disaster shocks. In this regard, staff welcomes the authorities’ commitment to the primary surplus target of 2.4 percent of GDP by FY 2013 and encourages them to develop a clear plan for achieving it. This long-standing fiscal objective has served the authorities well in the past and achieving it will help put the public debt back on its downward path, preserve the hard-earned confidence in the country’s fiscal management, and improve its ability to cope with future shocks. In this context, staff suggests focus on reining in current spending, safeguarding revenues, and ensuring sustainability of the adjustment efforts through structural reforms. Achievement of the FY 2011 fiscal targets will be an essential stepping stone and will boost fiscal policy credibility.
Increased vigilance is needed to safeguard against financial stability risks. Impaired investments in the failed insurance companies and other regional institutions are creating solvency and potential liquidity pressures. The authorities’ efforts to improve the regulation and supervision of nonbank institutions are commendable, but renewed efforts to identify and counteract sources of risks in the financial system are needed, including through (i) strengthened monitoring of credit unions, and a stricter enforcement of the newly legislated provisioning and capital requirements; and (ii) improved information-sharing arrangements with the Eastern Caribbean Central Bank, the bank supervisor, to allow the authorities to monitor risks in the banking system.
Improving growth prospects will require wide-ranging structural reforms. These should focus on increasing the country’s capacity to attract and absorb private investments, especially through swift reforms of the regulatory environment for investments. The upcoming review of the government’s medium-term Growth and Social Protection Strategy will provide a good opportunity to articulate a strong strategy of dealing with existing obstacles to growth.
Increased engagement with the Fund may be useful. While Dominica does not face an immediate financing need, the narrowing space to handle economic and natural disaster shocks and the need for policy correction suggest that such an engagement could be beneficial. Staff indicated that it stands ready to engage should the authorities deem appropriate
The first thing we most know about an article Iv mission is that as long as the country is not under an IMF program , the report will never be independent. When countries are not under a program the report is sent to the Ministry of finance ( minister) who will remove anything he does not like before giving the fund the right to publish.
having said that ,i will now turn to the report.
Both the IMf and the Ministry of finance ( primary deficit 0.6 inFY11)is anticipating a primary deficit for fiscal year 2011.
A primary deficit has two serious implication to the fiscal position of the country . (1) this implies that either debt will increase or we will default on debt service payment.adding intrest on debt service arreas means that debt will eevntually rise.
(2)It simply means that no funds is available for debt amortization – which again implies that dominica will be accumulating principle arrears.
This brings me to a very important question. Why the hell is no one seems be be concerned with the overall balance . Under the current fiscal stance the overal balnce is negative meaning no funds is available to close the fiscal gap .
This is why my people the imf in its last paragraph is calling for dominica to engage into a next program.
This makes Mr.Prevost look like a KING in his report on the budget when he indicates that we heading straight back to IMf.
The report also indicates the commitment of the government to a primary surplus of 2.4% of GDP. My people the only way this will be achieve is through more austerity measures. Under this economic climate can we in dominica absorb more austerity measures.
The question now is to ask what are the macro economic impact of the government fiscal policy stance.
1) slower growth as indicated by the article above
2) increase unemployment and poverty predicted
3) taxes will be increase
4) wages will remain stagnant
5) reduction in the social safety nets
6) increase current account deficit
7) a surge in public debt . note debt is now on an upward trajectory.
government floating debt will increase which may serious affect local companies who are filled with government LPOs.
@ conscious’ response to vip:
Macroeconomics focuses on GDP “richer or poorer as a nation” and “manufacturing”; Employment rates “loosing or creating jobs”; Consumption “disposable income”; Trade balance “exporting of our products”.
So, please give vip some credit here and be conscious of your own limitations as an expert in this slippery field.
I agree with vip–this “article” needs to be simplified and titled something like “Dominica having teething troubles with IMF; PM left with bite marks after IMF probe.” Is it too much to ask for language based on contextualized interpretation of the official report?
Esquire, do you have any comments to clarify the report?
Hey I’m Lazy too, but copy and pasting an IMF report in the original legaleses of IMF’s ever-cautious political language without providing a meaningful translation is not reporting, its “homework” for the readers. I have been in higher education for twelve years and I have no idea what the true meaning of this report is about without having a context in which to interpret it…and as I am lazy, it would be nice if DNO could report on this, instead of leaving all the work of understanding what this means to the readers. My best naive guess at reading between the lines is that the statement is a warning to the PM to shape up and make a commitment to transparency and a better plan if they want to continue getting help…anyone “out there” know what this report means to our future? thanks
One thing i know for sure is that one can’t lose job if one does not have a job.Take a look on the ground and tell me,have we done better economically or worse within the last eleven years and has more people find employment or lost employment,has more local businesses closed or more local businesses being created?It should not really matter to us what the IMF are saying,we should be able to know for ourselves whether the government is working in our interest on the ground.
What I want the imf to tell me is where all this money comming from, we produce nothing export very little and import evrything.
May they just want us to keep begging so we are controlled by them.
For a change, Dominica does not have to swallow the IMF’s prescription because our economy, though not on a great footing, is experiencing relatively fair growth. The IMF is begging us to engage with them. If we can avoid it, stay away from IMF financing because there are too many strings attached.
The report did state that “Dominica has made significant progress in the last decade”. It also mentions “a major fall in unemployment and poverty levels” although these “remain high at 14% and 29% respectively.”
The reprot recognizes that a decline in global activity and the slowing demand in advanced economies,greatly affect our tourism. Additionally, the decline in our agriculture, manufacturing and trade will impact our growth and development. Commodity prices, including the prices of fuel and food, will also affect our growth.
The IMF thinks that Dominica is emerging successfully from the global economic crisis but it also needs to return to a sound fiscal policy. That, in a nut shell, is my understanding of the report, minus all the fiscal data and mumbo jumbo.
The conclusion of the IMF review is that Dominica could be facing another fiscal crisis if growth is not accelerated (increased) and if the Government does not make adjustments to its spending (i.e., reduce its recurrent expenditures). This is the message of the Fund in plain language.
I think I know how to comprehend the written word. Your interpretation or your attempt to interpret for me – is not only insulting but dismal failure.
You seem to want to put this analysis in to your personal political leaning context; I was being objective.
Once IMF gets their money, this is all that concerns them, they do no care if the people have to eat Moca, once they get their money, the country is doing good! The IMF is just a blood sucking, people enslaving institution. It would be folly to take them and their reports seriously!! Their job is to keep third world countries in their third world place, and they are doing a great job of it!
COULDN’T THEY SIMPLIFY THAT STATEMENT FOR ORDINARY DOMINICANS TO UNDERSTAND THE LANGUAGE OF THE IMF.Are we getting richer or poorer as a nation thats what we want to know?Are we losing jobs or creating more jobs.Do people have more disposable income or less?Are people able to service their loans on time?Is manufacturing and exporting of our products on the increase.?THESE ARE THE THINGS WE WANT TO KNOW.
Good points here, but the IMF tends to focus on macroeconomic (the overall picture )as apposed to micro issues (some of which you have listed).
conscious ,
The question being asked by VIP is part of the macro economic issues. The question of umemployment or job creation is central figure of macro econmics, the use of the word nation and people in vip question indicates that vip is questioning the growth of national income or moreover lookiing at the broad aggregates rather than the indivival consumer or firm that micro economics looks at at.
I hope u are not a student of economics.
Interesting! We are third world but not foolish! IMF completes consultation without visit. What does this caveat mean? Does it mean that we had no first hand evidence so we are not responsible for our utterances and should we be wrong blame the individuals who provided us with the information?
Instead of making such claims by this respected body, would it be more useful to have a fact finding mission undertaken? the report would seem more credible.
The IMF did visit, spending two weeks here meeting different people and instutions and collecting data and inforamtion
in short dominica is paying its debt but the people are getting financially weaker..with no manufacturing and corruption sky high in high places
This is a ploy, I smell a rat ….
I enjoyed finding such info on DNO. I want to highlight this part of the review analysis;
“…. This long-standing fiscal objective has served the authorities well in the past and achieving it will help put the public debt back on its downward path, preserve the hard-earned confidence in the country’s fiscal management, …..”
Very positive view of the PM, the Minister of Finance and the economic management team.
Hahahahaha!! Very funny!
If this is the view of the IMF…why aren’t they recommending the same for the US.
ARE U FOR REAL…
OR JUST PLAIN STUPID…
you seem to ignore the context in which the statement was made. The IMF is essentially saying that we need to get the public finances back on track which means that the Government, after having succeded in improving the fiscal situation, is now going off-track and therefore needs to take adjustment measures to get back on track.
Any country with smart leadership stays away from the International Mafia Fund.
So true my friend, once they have a hold on your country u never get away.
Say a we wish, but the report is positive in regards to our economic development. Lets give credit where it is due.
Then suggest what is to be done when one stays away from the IMF