Economic recovery losing momentum in Dominica warns IMF

Following its 2012 Article IV consultation with Dominica the IMF concludes that private sector-led growth has to replace government stimulus.

ROSEAU, Dominica, Thursday, November 15, 2012 - Over the past two years, Dominica’s economy grew at a tepid rate of about 1 percent, supported by a notable fiscal stimulus, and output recovered to its pre-crisis peak.

However, following the conclusion of its 2012 Article IV consultation with Dominica on November 7, the Executive Board of the International Monetary Fund (IMF) has said that the pace of activity has been decelerating so far this year with weakening external and domestic demand, and growth of only about ½ percent of Gross Domestic Product (GDP) is forecast for 2012.

The IMF has suggested that with heightened global uncertainty and the planned stoppage of flights by the only non-regional carrier servicing the island, only geothermal energy development or the opening of new tourist facilities could strengthen the long-term outlook.

The IMF added that weak growth and the earlier failure of regional insurance companies have weakened the resilience of the financial sector in some areas. While the system as a whole remains highly liquid, non-performing loans and exposures to the failed insurance companies remain a drag on financial sector’s income and capitalization, especially in the large credit union sector.

It added that monetary conditions have not eased meaningfully and Dominica has not benefited from the significantly eased U.S. monetary policy rates. Moreover, the real effective exchange rate has depreciated only moderately, strengthening recently with the appreciation of the US dollar vis-à-vis major currencies.

Thus far, expansionary fiscal policy has been the only tool to support economic activity, but strains on the fiscal position have been mounting with subdued growth and the need to respond to natural disasters, noted the IMF.

The overall central government deficit widened to about 4½ percent of GDP in fiscal year 2011–12 and pushed debt to over 70 percent of GDP, almost 7 percentage points above pre-crisis levels. To meet the increasing financing requirements, the authorities successfully launched a T-bill in the regional securities market for the first time since the 2004–05 debt restructuring. With fiscal policies reaching the limits of their ability to support economic activity, the authorities have budgeted a strong retrenchment for fiscal year 2012–13, although weakening economic conditions may undermine its feasibility.

The IMF Executive Directors noted that supportive policies have helped the Dominican economy weather the effects of the global financial crisis. However, the room for countercyclical fiscal support has narrowed considerably.

The directors stressed that revamping the structural reform agenda is necessary to foster private sectorled growth and boost competitiveness. They welcomed efforts to harness the country’s geothermal energy potential, which could boost potential growth, and stressed the importance of accelerating reforms to improve the investment and business environment, narrow the infrastructure gap, and improve social outcomes.

The directors also emphasized that maintaining financial stability is an immediate priority. They encouraged the authorities to address pockets of vulnerability in credit unions to maintain confidence in the financial system at large. Decisive action is also needed to upgrade supervision, regulation, and the crisis management framework for all financial institutions, including by tightening loan loss provisioning requirements. The directors agreed that a lower interest rate floor on savings deposit would reduce banks’ funding costs and help support the economic recovery.  Click here to receive free news bulletins via email from Caribbean360. (View sample)