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DOMINICA | IMF gives Dominica less than a passing grade

Featured International Monetary Fund International Monetary Fund
ROSEAU, Dominica, May 16, 2019 - The island of Dominica is struggling to get back on its feet, following the destruction wrought by hurricane Maria in September 2017, and efforts by the government to kick-start the economy by way of large scale public investments  aimed at rehabilitation, reconstruction and resilience.

An IMF Staff Concluding Statement of the 2019 Article IV Mission which recently concluded a visit to the island, said Output growth in 2019 is estimated at 10 percent, largely offsetting the cumulative decline of 10 percent since the hurricane.

The statement from the IMF said "Construction has been the main sector leading the recovery, with large investments in infrastructure and public services, aimed at building resilience to natural disasters. Tourism and agriculture, key for exports and employment, are growing with support from government programs and financing, but remain significantly below potential in light of the significant loss of trees and equipment."

In addition,"output is projected to reach pre-hurricane levels by 2020, and growth to rise above potential in the medium-term, owing largely to significant foreign investment in new hotels expected to start operations by end-2019. In the context of an uptick in tourism prospects, the increase in room supply above pre-hurricane levels should give a fillip to economic activity."

The IMF statement warned that " Large-scale public investment aimed at rehabilitation, reconstruction and resilience while contributing to growth, has worsened the fiscal outlook.The fiscal deficit is projected to remain large in FY2019/20 at 7 percent of GDP, but this is a significant improvement (4 percent of GDP) relative to the estimated outturn for FY2018/19."

"The narrowing of the deficit is explained by the recovery of tax revenues and more measured execution of public investment, owing to the decline of readily-available Citizenship-by-Investment (CBI) deposits. Beyond the near term, fiscal deficits are expected to narrow gradually with financing constraints becoming binding, constraining the space to sustain elevated levels of public investment," the IMF said.

The international lending agency also warned that "based on conservative projections of CBI revenues and loan disbursements from multilateral and bilateral creditors, and given downwardly-rigid recurrent spending, staff projects the fiscal space for public investment to decline to 4 percent of GDP by 2023. This low level of investment is insufficient to sustain resilient infrastructure needs and is a large decline from the 15 percent of GDP annual investment average in the previous five years. Public debt remains high at around 80 percent of GDP in the medium term.

The IMF statement pointed out that "External current account deficits are projected to decline over the medium term, from over 40 percent of GDP in 2018 to 10 percent of GDP by 2024.This goes in tandem with a recovery of exports and a depletion of CBI and insurance deposits, which would reduce domestic demand to more sustainable levels. The outlook is, however, subject to significant uncertainty. In particular, higher-than-projected CBI revenues would increase external and fiscal deficits and increase growth further."

The lending agency argued that "reaching the ECCU public debt target of 60 percent of GDP by 2030 while sustaining resilient investment requires a well-designed fiscal consolidation plan.The government should prepare fiscal consolidation measures expeditiously, targeting savings of at least 6 percent of GDP to be adopted gradually over the medium term."

"Measures should be staggered over 5-6 years to smooth the likely negative impact on growth. The plan will support growth by increasing fiscal space for public investment while reducing government consumption, along with tax measures aimed at improving the efficiency of resource allocation."

 

 

  • Countries: Dominica

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