IMF projects an average growth of 5 percent per year for Dominica from 2022-26

The International Monetary Fund (IMF) is predicting a promising economic growth for Dominica at 5% in 2022 to 2026, as the country recovers from the economic impact of the global pandemic covid-19.

This comes as the agency released its concluding statement which describes the preliminary findings of IMF staff at the end of an official visit to Dominica.

Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The Washington, DC financial institution in its report said, growth outlook is promising for Dominica as the Gross Domestic Product (GDP) for the country is expected to reach pre-pandemic level by 2023 and tourism recovery will be supported by the ongoing construction of new hotels and the inauguration of direct flights from the United States from December 2021.

Dominica’s GDP is estimated to have contracted by 11% in 2020 IMF stated and have shown a modest recovery of 3.7% in 2021 underpinned by a sharp reduction in tourism and related sectors, plus the Covid-19 outbreak that forced a lockdown in August 2021.

Supported by the large public investment program, and the projected gradual recovery in tourism with added hotel capacity, IMF stated, the government plans to maintain high levels of public investment into the medium term financed mainly by Citizenship By Investment (CBI) revenue.

“Key projects include a new international airport, housing resilient to natural disasters, roads improvement, a resilient water and sewage network, improvements in the hospital capacity (including a new hospital financed by the People’s Republic of China), and a geothermal electricity plant. These projects will accelerate growth in the near term during the construction phase and will also increase potential output in the long term—including spillovers in tourism and reduction of fossil fuel dependency, all of which improve Dominica’s external sustainability and competitiveness.”

On the fiscal front, the agency has advised that near term policies should prioritize expenditure efficiency, while avoiding additional taxes and fees that hamper the recovery of the private sector and the business climate.

With public debt approaching 106% of GDP after the pandemic, according to the IMF, the recent passage of the Fiscal Responsibility Bill will support public debt reduction and the sustainability of the government development plan.

“The authorities should also reconsider the allocation of a portion of CBI revenue to build an insurance framework against natural disasters and debt reduction. On the financial sector front, priority should be given to the capitalization of credit unions and the reduction of non-performing loans (NPLs),” they guided.

Output decline is reported to have been contained by strong growth in the construction sector due to the large public investment program in housing and infrastructure resilient to natural disasters, financed with record-high CBI revenue of 30% of GDP.

The IMF averred, “despite sharp declines in tax revenue and increase in spending,” large CBI revenue led to a small reduction in the fiscal balance in FY2020. However, the estimated public debt increased to 106% of GDP in 2020 with higher official borrowing.

“In this context, the current account deficit is estimated to have widened to nearly 30% of GDP, underpinned by the loss of tourism exports and increase in imports related to public investment, and the increase in commodity prices—albeit contained by a decline in private demand for imports.”

While the IMF stated that the financial sector has remained liquid and stable during the pandemic, the above prudential benchmarks for Non Performing Loans (NPLs) was recorded.

“The loan service moratoria authorized by the regulators of banks and credit unions helped support firms and households affected by loss of income, helping contain a deterioration in portfolio performance. Despite an improvement relative to 2020, NPLs remain high, in the range of 11-14 percent of loans for banks and 10-17 percent for credit unions (the prudential benchmark is 5 percent in both sectors).”

To comply with the ECCB requirement, banks have prepared plans to increase provisioning to 100% of NPLs by 2024—pre-Covid precautionary increase in provisions with adoption of IFRS9 standards in 2018 has facilitated this process.

A reallocation of windfall CBI revenue was recommended by the IMF to balance public investment with government financial resilience and debt sustainability to strengthen the outlook.

“Thus far, the authorities have used the majority of CBI revenue to invest in infrastructure resilient to natural disasters. This is understandable considering Dominica’s significant exposure. Moreover, the improvements in infrastructure in the public investment plan are important and expected to boost potential output—especially with resilient investments in roads, electricity generation, a new hospital, and the water and sanitation network.”

In the near term, the agency suggested that the government should continue maximizing the effort to increase vaccination, which according to them is critical from health and economic recovery perspectives.

The IMF said, thus far the government has made progress on several measures it committed to which includes, establishing limits on discretionary tax exemptions on imports; advanced preparations of an income tax reform including a presumptive tax (which could be passed in FY2022); and launching a property tax reform to incentivize the use of idle property in prime urban areas.

Additionally, the agency reported that the government f Dominica intention to avoid additional new taxes or charges is welcome, consistent with the objective of creating a favorable environment for private investment while minimizing the burden on tax administration, which is affected by limited capacity.

They say, the actuarial analysis update of the pension system by the Dominica Social Security (DSS) planned by early 2022 (delayed due to covid mobility restrictions) would trigger parametric amendments if needed for sustainability.

As it relates to the introduction of a solid waste charge, IMF suggested that this could be delayed or reconsidered, in light of the low potential revenue and the additional tax administration burden, while a reduction of the preferential rate on diesel could be done later once the economy has recovered, to reduce its distortionary impact.

Instead, they recommended that the government prioritize cost-saving expenditure efficiency measures and begin preparations for their implementation as soon as feasible.

“These include a civil service reform including a review of allowances (at an advanced stage with support from CARICAD); and better targeting of social transfers—the national census needed to update the Ministry of Social Services’ database, has been delayed to 2022 due to the pandemic.”

To strengthen the public debt sustainability outlook and support achievement of the regional debt target, the momentary fund said,  the government should maintain progress on institutional fiscal reforms.

On the positive side, it was report that projects are mostly financed with CBI revenue which implies that the external and fiscal solvency position has improved with the buildup of valuable revenue-generating assets that are expected to have positive spillovers on private investment and growth.

On the downside, the added capital stock will require sustained recurrent maintenance spending—underscoring the importance of disaster resiliency, which has been incorporated in all the projects. With low-cost geothermal electricity generation, the government should maximize the potential reduction of electricity tariffs, currently among the highest in the world. This would improve further external competitiveness and the business environment.

The IMF advised domestic banks to prepare a capitalization plan to comply with the provisioning targets set by the ECCB as according to them, banks operating in Dominica are working on medium-term plans to strengthen capital buffers in 2022-24, including to meet increasing loan-loss provisioning requirements set by the ECCB (60 percent of loans by 2022 and 100 percent by 2024).

Considering what they dubbed the “weaknesses in the credit union sector, a plan is needed to address capital shortfalls as soon as feasible. The national regulator of non-bank financial institutions should stress test credit unions and insurance companies in lieu of the risks to the outlook. While the loan moratorium and restructuring has helped maintain financial stability during the pandemic, credit unions should prepare a plan to reduce NPLs.”

Additionally, IMF posited that Dominica should  continue progress on the AML/CFT legislation framework, as such is important to minimize risks to correspondent banking relationships.