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Dominica: First Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Financing Assurances Review

Author(s):
International Monetary Fund
Published Date:
May 2004
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I. Recent Developments

1. The political situation remains stable following the sudden death of Prime Minister Charles on January 6, 2004. Parliament rapidly appointed Mr. Roosevelt Skerrit, the former Minister of Education, as the new prime minister. In the attached letter of intent, Prime Minister Skerrit reiterates his commitment to the program. There were only marginal changes in the cabinet, and national elections are expected by January 2005.

2. The economy appears to have bottomed out, and there are indications of an early recovery. Following an economic contraction of almost 10 percent in 2001–02, the economic decline appears to have ended. Data for the last quarter of 2003 indicate a modest recovery in manufacturing, construction, and tourism, partly offset by lower production levels in the banana sector. Other indications of the incipient recovery are buoyant tax collections, and rapid import growth. Exports (except for bananas) are also beginning to rebound. On the negative side, credit to the private sector continues to contract—although at a slower rate—due to weak business demand. The revised program for 2003 was based on the assumption that real GDP could fall by 1–3 percent, but the most recent data suggest that the economic decline has been arrested and that real GDP was flat in 2003.

3. Inflation rose due mostly to one-off price adjustments, as demand remained weak. Inflation picked up from ½ percent in 2002 to just under 3 percent in 2003. The main reason for this uptick in inflation is related to the tax measures adopted in the context of the 2003/04 budget, and the electricity tariff adjustment in August 2003, following the elimination of duty-free concessions to the electricity company.

4. Performance under the program continues to be strong. Policy implementation has strengthened significantly since the modification of the Stand-By Arrangement (SBA) in July 2003. All performance criteria under the PRGF-supported program for end-December 2003 were observed. In particular, the overall fiscal target was observed with large margins. It is estimated that the overall fiscal position was roughly in balance in the second half of 2003. This positive performance reflected better-than-expected improvements in tax collections (including on tax arrears), and a significant but temporary expenditure compression. In addition, the structural benchmark for end-December under the cancelled SBA related to the divesture of the National Commercial Bank (NCB) was observed.1

5. Approval of the PRGF catalyzed significant external resources. Following the approval of the PRGF on December 19 and the World Bank and IMF endorsement of the I-PRSP on December 29, the EU disbursed the remaining tranche of its grant (about US$1 million) and the CDB disbursed the second tranche of its budgetary support loan (US$1 million). In addition, the World Bank approved the Economic Recovery Support Operation (ERSO) loan on January 29, 2004 (aimed at strengthening the public administration and the financial system). The management of the World Bank agreed to present this operation to their Board despite an apparent violation of the negative pledge clause on Dominica’s IBRD loans. The last tranche of the CDB loan (US$1 million) is expected to be released shortly, and the Fund will make available US$0.5 million upon completion of this review.

Dominica: External Support 2003/04(In millions of U.S. dollars)
CommittedDisbursed 1/Balance
IMF5.64.70.9
Barbados 2/4.74.7--
Trinidad and Tobago 2/4.04.0--
European Union3.33.3--
World Bank3.03.0--
CDB3.02.01.0
Bahamas1.51.5--
ECCB1.01.0--
Total26.124.21.9
Source: Dominican authorities.

Preliminary as of end-January 2004.

Bond roll over.

Source: Dominican authorities.

Preliminary as of end-January 2004.

Bond roll over.

6. The debt restructuring process is progressing as envisaged. Following the creditors’ meeting in Barbados on December 17, the authorities and their debt advisors had a roadshow during January 19–23 in Dominica, Barbados, St. Lucia, and Trinidad and Tobago to meet with the wide spectrum of creditors (including domestic) and exchange views. Based on these discussions, options will be presented to creditors in mid-March with the aim of finalizing the deal by early-April. The authorities and staff have also been in contact with the Paris Club Secretariat to inform them about their strategy. Dominica has had preliminary contacts with the United Kingdom and France regarding a meeting of the “Friends of Dominica” group, as there are too few bilateral creditors for a full meeting of the Paris Club. The staff attaches great importance to proceeding expeditiously with a multilateral resolution to Dominica’s official bilateral debt. Specific debt proposals have been exchanged with the CDB.

7. Market reaction to the announcement of the debt strategy has been benign. Domestically, the situation has been managed very well. Deposits have been stable and there have been no pressures on domestic banks. Regionally, there is no evidence of financial turbulence related to this announcement. Reactions among creditors have been mixed. While individual creditors understandably are disappointed, on the whole they recognize that the debt situation is unsustainable and that a restructuring is necessary. Most creditors have been pleased with Dominica’s approach to the debt restructuring as best practices are being adopted in dealing with creditors, including transparency and inter-creditor equity. Nevertheless it should be recognized that it may be difficult to secure agreement on a restructuring that includes sufficient relief to restore sustainability.

II. Policy Discussions

8. There was broad agreement that the program is achieving its goals. The authorities reiterated their commitment to the program, and were pleased with recent macroeconomic outcomes. They also reaffirmed their medium-term objectives of restoring economic growth and sustainability. They were encouraged with the progress made thus far in the debt negotiations, and the recent strengthening of the fiscal position. The authorities also expect unemployment-related poverty to be reduced once the economy starts growing.

A. Macroeconomic Framework

9. The authorities were encouraged by the stronger-than-envisaged performance but considered it premature to change the macroeconomic framework. While the authorities were pleased with the apparent bottoming out of the economy, they felt it was too soon to change the program assumptions. The mission agreed with the authorities’ assessment. Furthermore, the recent encouraging developments on the growth front enhanced the credibility of the macroeconomic framework and increased the chances of success. There was agreement that the price adjustments observed since August 2003 had only a temporary impact on measured inflation, and that the inflation objective of 1½ percent for 2004 remained feasible.

Dominica: Macroeconomic Framework, 2002–2004
SBAPRGF
Prog. 1/Est.Prog.
200220032004
(In percent)
GDP growth-4.7-1 to -30.01.0
Inflation0.50.52.91.5
Current account/GDP-15.0-15.1-16.9-15.4
(In percent of GDP, fiscal year)
Structural primary balance-4.5-3.0-2.00.5
Overall fiscal balance-7.1-7.7-5.5-5.5
Public debt (NFPS)111.5113.6114.6
Sources: Dominican authorities; and Fund staff estimates.

As modified in July, IMF Country Report 03/293.

Sources: Dominican authorities; and Fund staff estimates.

As modified in July, IMF Country Report 03/293.

B. Fiscal Policy

10. While the fiscal margins observed through end-2003 are expected to narrow somewhat, the targets for the first half of 2004 remain comfortably feasible. The over-performance on the overall fiscal target for end-December 2003 has been due to a combination of higher-than-anticipated revenues and lower-than-programmed expenditures. However, these factors are not expected to continue. In particular:

  • On the revenue side, there has been a significant collection of tax arrears, which accumulated since the outset of the contractive economic phase and cannot be sustained as the stock of tax arrears has declined to low levels. At the same time, some of the projected gains in nontax revenues may not materialize due to a dispute with the largest telephone company over the level of license fees following the liberalization of the telecommunications sector.
  • On the expenditure side, there has been budgetary sequestration mostly on expenditures related to goods and services and the savings of the last six months are likely to be temporary as the budget is fully implemented. The legally authorized expenditure limits are likely to be used once the budgetary allocations are assigned to the proper spending units.

All in all, the staff estimates that for FY 2003/04 there will be a small primary surplus, which is consistent with the program.

11. The authorities are conducting preparatory work for the 2004/05 budget and reaffirmed their commitment to a primary surplus of ½ percent of GDP. The budget is expected to be submitted to parliament in mid-June. This is going to be a complex budget not only because of the agreed fiscal measures, amounting to 2½ percent of GDP (see IMF Country Report No. 04/6), but also because of the interaction with the structural reform agenda. In this regard, the proper and timely design and execution of the public sector reform will be key to the success of the budget. The mission and the authorities recalibrated fiscal projections for 2004/05 and reached the conclusion that the objective of reaching a primary surplus of ½ percent of GDP continues to be feasible, provided that the agreed fiscal measures are adopted.

12. Progress in reducing tax exemptions has been in line with the program, although there is room for improvement in the mechanisms used for granting these exemptions, notwithstanding the creation of a committee to oversee their approval.2 This is a complex area where the mission and the authorities are discovering that the distinction between discretionary and statutory tax exemptions is at times blurred. In several cases, the committee’s recommendations against granting a tax exemption was legally challenged and eventually reversed. The mission gathered all the relevant information and is coordinating with FAD policy recommendations on how best to address the situation. The authorities are expected to present solutions to the problem in the context of the comprehensive review of discretionary and statutory tax exemptions expected by June, a benchmark under the program (Box 1).

13. The rate of implementation of the public sector investment program has been strong. This is a positive development as an accelerated public investment (mostly financed with external grants and soft loans) has helped to bring the economy back from the severe contraction. The program allows public investment to be 1 percent of GDP higher than budgeted to reach a maximum of 8 percent of GDP, which is likely to materialize. Consistent with sustainability, the focus of the fiscal program will switch to a primary balance objective, which allows higher public sector investment while requiring that it be offset by higher revenues or lower current expenditures. To this end, the program adjustor for up to 1 percent of GDP for investment outlays will no longer apply after June 2004.

14. The debt restructuring will ease recent financing constraints. Despite the fiscal overperformance, the financing situation became difficult in December 2003 owing to delays in donor financing, and a couple of debt service payments (to Venezuela and Taiwan) were delayed for a few weeks. The delays were covered by grace periods in the loan agreements, or not considered to be arrears by the creditor, and therefore they were not deemed to be arrears for program purposes. Thus, the continuous performance criterion on nonaccumulation of external arrears was observed. The external support unlocked by the PRGF was available only at the end of December and in January. A similar situation could emerge in the second half of April if the debt restructuring is not completed. The authorities remain confident that the debt deal could be finalized before these financing pressures are manifested.

C. Monetary Issues

15. Liquidity conditions in the banking system remain abundant but need to be monitored closely. The authorities indicated that they would follow liquidity developments in the banking system, while acknowledging the limited role of the government on monetary policy in the context of a currency union. The authorities support the recommendations made by the FSAP mission designed to strengthen the ECCB’s regulatory and enforcement powers (Box 2). The announcement of the debt restructuring did not have a significant impact on the functioning of the financial system, as noted above, but the situation needs to be monitored closely. In fact, deposits continued growing and liquidity remains ample as credit demand remains low due to the weak economy. As a consequence, the higher deposits are invested abroad, increasing banks’ net foreign asset position. Thus, banks are capable of withstanding some tightening of liquidity conditions. The capital of the banking system is not expected to be eroded as a result of the debt restructuring.

16. The authorities saw some scope for the ECCB to ease its interest rate policy to facilitate the economic recovery and reduce capital inflows. There is an increasing awareness that the ECCB minimum deposit rate is creating a floor on interest rates in the region at a time interest rates in the U.S., are at historical lows. The positive spread in interest rates in favor of the Eastern Caribbean dollar creates an incentive for capital flows to the region that cannot be discouraged because the minimum deposit rate imposes a binding floor on the structure of interest rates. The relatively high domestic interest rate creates a recessive bias in the economy as investment is discouraged and growth is reduced. The interest rate disparity could erode the profitability of the banking system as banks increase their net foreign asset position rather than intermediate the deposits domestically, due to weak credit demand. The authorities intend to express their views at the next meeting of the ECCB’s monetary council.

D. External Issues

17. The program’s financing assurances are provided by the prospect of having a comprehensive debt restructuring. The staff estimates that there are enough resources to cover the financing needs through late-March or early-April. There is a residual financing gap of US$21 million for the rest of 2004 that is expected to be covered by the debt restructuring (IMF Country Report No. 04/6). The authorities expect to finalize a consensual debt restructuring by early-April while servicing their obligations during this time, as envisaged under the program. Progress has been made toward completing the debt restructuring and the authorities continue to negotiate in good faith with all creditors. In the staff’s view, the authorities have followed best practices in dealing with creditors.

18. The authorities will need to follow strict borrowing policies to ensure that sustainability is preserved. Once a successful debt restructuring is achieved and sustainability is regained, the authorities would need to adopt a rigorous debt management policy. While access to capital markets is not expected any time soon, there will continue to be significant donor flows for project financing. The authorities would need to prioritize the public investment program and implement only those projects with high social returns.

19. This staff report does not include a debt sustainability scenario as the debt negotiations have not been concluded. The authorities have determined that the debt situation is not sustainable, an assessment with which the staff concurs (IMF Country Report No. 04/6). Sustainability will be regained only after the successful completion of the debt restructuring, provided that the authorities continue with their fiscal adjustment efforts. Preliminary calculations suggest that significant amounts of debt reduction in net present value terms would be required to regain sustainability. The staff will present a debt sustainability analysis once the terms of the debt restructuring are known.

E. Structural Reform

20. The heavy structural reform agenda that needs to be implemented in the next few months requires significant technical assistance. The main structural reform area pertains to fiscal issues. A donors’ meeting was organized in Roseau on February 5 with the purpose of coordinating the necessary technical assistance from the different agencies. Donors agreed that while the number of benchmarks was low, the agenda was ambitious but necessary, as the reforms envisaged were quite substantive. Donors acknowledged that, because of the broad range of reforms, it would be difficult to provide the necessary technical assistance at such short notice. However, the authorities are committed to the reform agenda and efforts will be made to provide the required assistance so as to be able to implement all agreed reforms. The authorities have appointed an official to coordinate this assistance and liaise with aid agencies to ensure that the program remains on track.

  • Public sector reform. The objective of this reform is to reduce the wage bill by 10 percent in nominal terms over the next two fiscal years (through labor retrenchment). This is perhaps the single most important reform in the program, as it integrates key structural and macroeconomic areas. This reform needs to be ready by June 2004 so that it can be implemented with the 2004/05 budget. A benchmark under the program is to conduct a study by end-March 2004 outlining the process by which the target of a 5 percent reduction in the wage bill for 2004/05 will be achieved. The European Union (EU) is taking the lead in providing technical assistance; they are financing two resident experts in this area and will provide a grant of US$8 million to finance severance packages for retrenched workers. The World Bank and the United Kingdom Department for International Development (DFID) is also providing technical assistance and helping to coordinate efforts in this difficult reform area.
  • Tax policy. The objective of this reform is to rationalize tax exemptions and incentives in order to broaden the tax base. There is an increasing awareness that this is a more complex reform area than initially thought. A benchmark under the program is to conduct a review of all statutory and discretionary tax exemptions by end-June 2004. The Fund is taking the lead in providing advice in this area, and policy recommendations will be sent to the authorities shortly for their consideration. The EU will also provide some assistance.
Dominica: Structural Reform Agenda for 2004
Reform AreaConditionality (Date)ObjectiveTechnical Assistance Provider
1. Public Sector ReformBenchmarkReduce wage billEU
(March)10% in two yearsWB
2. Tax PolicyBenchmarkRationalize taxIMF
(June)exemptionsEU
3. Pension ReformBenchmarkIncrease retirementIMF
(June)age for publicUNDP
servants to 60 yearsCARTAC
4. Tax SystemBenchmarkIntroduce the VATCARTAC
(September)by FY 2005/06IMF
5. Budgetary ProceduresPerformanceBudget consistentDFID
Criteronwith program; andCIDA
(July)3-year budgetCARTAC
6. Fiscal Responsibility LawMeasureGuide fiscal policyIMF
over business cycleCARTAC
7. Institutional StrengtheningBenchmarkImprove frameworkWB
(September)for electricity sector
Sources: Dominican authorities and Fund staff.
Sources: Dominican authorities and Fund staff.
  • Pension reform. The objective of this reform is to review the financial position of the social security system and to increase the retirement age of civil servants from 55 to 60 years. A benchmark under the program is to submit legislation to parliament to increase that retirement age by end-June 2004. The Fund is taking the lead in coordinating efforts and providing advice; FAD has been studying the situation and will be preparing a policy note to assist the authorities. The United Nations Development Program (UNDP) will also provide some support in this area, and the Caribbean Regional Technical Assistance Center (CARTAC) is organizing a seminar in April on the subject.
  • Tax system. The objective of this reform is to conduct preparatory work for the introduction of the VAT in 2005. The budget for 2004/05 will announce the adoption of the tax the following fiscal year. A benchmark under the program is the approval by cabinet of key parameters for the tax by end-September 2004. CARTAC and FAD are taking the lead in providing technical assistance in this area. The preparatory work is already well advanced, and the authorities intend to step up their efforts to remain on schedule.
  • Budgetary procedures. The objective of this reform is to design a 2004/05 budget that is consistent with the program, and that introduces three-year rolling budgetary projections to better reflect medium-term policy intentions. Approval of the 2004/05 budget consistent with the program is a structural performance criterion for end-July 2004. It was acknowledged that while the cash management system had been effective, there was room for improvement. DFID is taking the lead in providing technical assistance on the three-year rolling budgetary projections and cash management system, while the Canadian International Development Agency (CIDA) and CARTAC are providing some additional support.
  • Fiscal Responsibility Law (FRL). The objective of this reform is to guide fiscal policy over the business cycle and prevent an unsustainable accumulation of debt. The introduction of a FRL was initially scheduled for the 2005/06 budget but, during the Board discussion in December 2003, a strong case was made for the advancement of this measure to the 2004/05 budget to increase credibility for the debt deal and reduce political uncertainty. The authorities have agreed to bring this reform forward to the extent possible. The mission is taking the lead in coordinating efforts and providing advice to the authorities while CARTAC is also expected to be involved.
  • Institutional strengthening. The objective of this reform is to improve the regulatory framework for electricity supply. A benchmark under the program is the adoption of amendments to this regulatory framework by end-September 2004. The World Bank is taking the lead in providing technical assistance in this area.

21. The authorities embraced this ambitious structural reform agenda as a necessary course of action to address the complex problems faced by Dominica. While there is room for prioritizing, the authorities are of the view that it would be best to try to accomplish all the reforms initially at once, so that the 2004/05 budget is laid on a sound foundation to ensure the return to sustainability.

F. Program Related Issues

22. The new letter of intent reaffirms the new cabinet’s commitment to the program. The authorities felt that there have been enough assurances provided to society and creditors about their commitment to the program despite the changes in the leadership of the country. However, in order to reiterate that commitment, Prime Minister Skerrit has written a simple letter of intent which reaffirms the commitment of the Government of Dominica to the PRGF-supported program.

23. Some progress has been made in the preparation of the full Poverty Reduction Strategy Paper (PRSP). The interim paper (I-PRSP) was endorsed by the World Bank and IMF Boards in late December 2003. Work continues on the consultative process and the preparation of the full paper. However, the conditions for sustained growth and permanent poverty reduction will be established only after the restructuring deal has been secured, a budget for 2004/05 according to the program has been presented to parliament, and the heavy structural reform agenda begins to be implemented. The work on the PRSP continues, albeit at a slower pace, given the capacity constraints in public administration. The authorities remain confident that the full PRSP will be finalized by end-2004 as originally envisaged.

III. Staff Appraisal

24. The program had a good start, reflecting the authorities’ commitment and determination. The authorities should be commended for their continued strong performance under difficult conditions, following the modification of the Stand-By Arrangement in July 2003. All performance criteria and benchmarks have been observed since then, including those covered under the first PRGF review. There have certainly been several encouraging developments, including the bottoming out of the economy, the recovery in tax collections and regained control over the budgetary process. However, there are many challenging tasks ahead that will require careful implementation as the structural reform agenda interacts more closely with the macroeconomic program.

25. The implementation of the debt strategy continues to be at the top of the list in measures that need to be implemented in the very short run. The staff is encouraged to see that the authorities and their advisors have adopted best practices in facing this complex restructuring negotiation that involves different classes of creditors, while continuing to service their debt obligations. The debt restructuring will provide the required financing under the program and will be an important factor in regaining sustainability.

26. A continuation of the fiscal consolidation efforts would be key to the success of the program. The authorities’ renewed commitment to a primary surplus of ½ percent of GDP for the 2004/05 budget, as envisaged in the program, is a critical step towards reaching a primary surplus of 3 percent of GDP by 2006/07 and thereby ensure the return to a sustainable situation. To this end, it is important that all measures envisaged under the program are implemented in the context of the 2004/05 budget and that the authorities continue conducting a tight fiscal policy, as programmed.

27. On the structural reform agenda, the key issue is the public sector reform. This is an extremely complex reform that will require careful coordination of a wide variety of issues ranging from managerial criteria and the legal basis for the retrenchment and compensation to ensure proper financing for the reform. The authorities are fully aware of the importance of this reform to the success of the program and are paying special attention to its proper implementation, including by having weekly meetings to monitor progress and resolve possible bottlenecks.

28. The prioritization of tasks and provision of technical assistance will be critical to the success of the program. The donor community recognizes the level of complexity in the reform agenda and the authorities’ limited implementation capacity. Against that background, it becomes indispensable that appropriate technical assistance is provided on a timely and coordinated basis to enhance the chances of program success.

29. The many risks mentioned on previous occasions continue to be valid. However, to the extent that the program continues performing, the risks are mitigated. Continued strong program performance and implementation of the debt strategy would significantly reduce those risks. On the latter, additional efforts are needed to ensure its success. Financing assurances under the program are at risk in the event the debt restructuring is not completed. At the same time, there is political uncertainty, as there could be elections in January 2005. Similarly, there are legal challenges to the 5 percent wage cut of last July and there might be further challenges to future policies. There is a need to establish priorities in the structural agenda to avoid the risk of the agenda not being implemented. However, the policies included in the program are necessary and need to be pursued with determination.

30. In view of the strong performance and the renewed commitment to the program, the staff supports completion of the first review and the financing assurances review under the PRGF. Given the positive performance under the program, the observance of all performance criteria, the expectation that future targets will be achieved, the request for technical assistance to implement the reform agenda and the negotiations in good faith with creditors, the staff supports the authorities’ request for completion of the first review and disbursement of the second loan under the PRGF.

Box 1:Dominica—Tax Exemptions

Exemptions have significantly eroded Dominica’s tax base. The average effective rate of tax on consumption of non-oil products—the ratio of revenues to consumption—was about 6 percent over the last three years, far lower than the statutory consumption tax rate of 25 percent. While this difference can be partly explained by tax evasion on domestic consumption, most is attributable to the erosion of the tax base through import concessions (since an important portion of Dominica’s consumption is imported). Another striking indicator of the degree of proliferation of tax exemptions is the revenue loss from indirect tax concessions at the border, estimated at 5 percent of GDP (equivalent to about 30 percent of tax revenue collected on international transactions).

Dominica’s legislation contains multiple provisions for direct and indirect tax concessions. Provisions for tax exemptions are scattered in over 10 different pieces of legislation. The most important in terms of revenue loss is the Fiscal Incentives Act, which aims at promoting economic growth and development and is based on the Harmonization of Fiscal Incentives agreement between the countries of the Caribbean Common Market. Only under this law revenue foregone from concessions on consumption tax, import duties and other taxes at the border comprised 1.4 percent of GDP in 2003. At the same time, entitlement to most of the concessions is not clearly defined in the law and requires approval by either the minister of finance or the cabinet. All this makes the administration and monitoring of tax exemptions difficult and opens opportunities for abuse.

The authorities face serious challenges in administering and monitoring tax exemptions. The ministry of finance reviews about 40 applications for tax exemptions every month, and few people in the ministry are fully familiar with the relevant legislation. There is essentially no monitoring of tax exemptions, partly because of administrative capacity constraints and partly due to the poor coordination between the responsible institutions. For instance, the National Development Corporation (NDC), which provides recommendations on granting concessions under the Fiscal Incentives Act, has to advise customs about the cases when import concessions are abused and the duty needs to be reinstated; in practice, NDC rarely follows up on exemptions granted and the submission of income statements by the enterprises granted tax holidays is not enforced.

Box 2:Dominica—FSAP Principal Findings and Key Recommendations

I. Principal Findings:

The Financial System Stability Assessment identified the following significant threats to the financial stability of the Eastern Caribbean region as a whole, which are even more pronounced in the case of Dominica:

A. Commercial Banks

The region’s banks are characterized by “an unacceptably high” level of nonperforming loans, with the weakest banks—now on the ECCB’s watch list—accounting for approximately 41 percent of banking assets.

While often exceeding Basle norms, the quality of the capital of local banks is uncertain, owing to: under provisioning of nonperforming loans, recording of accrued interest on government loans in arrears as income, and assignment of zero risk weights to public sector loans in arrears.

There are identifiable weaknesses in the current commercial bank regulatory and supervisory framework, which should be addressed in part by the proposed amendments to the Uniform Banking Act and commercial bank prudential regulations. However, there is also a need to strengthen the ECCB’s on- and off-site monitoring capabilities as well as its supervisory enforcement powers.

B. Nonbank financial institutions (NBFI) and offshore banks

Although of lesser systemic importance, the supervision of NBFIs is currently the responsibility of the individual member countries’ registrar of cooperatives, and supervisory framework lacks harmonization. Offshore banks are currently regulated and supervised by the individual ministries of finance, and effective regulation is hampered by data constraints and by weak on- and off-site inspection programs.

II. Main Recommendations:

A. ECCB Priorities

The ECCB was urged to take immediate action in the following areas: (a) reprioritizing of its resources and work program to focus on the regulation and supervision of domestic banks, especially with respect to on-site inspection; (b) developing a more structured program of supervision tailored to the risks inherent in each institution; (c) strengthening prudential regulations by: setting minimum capital commensurate with the risks of each institution; revising guidelines on the accrual of interest; and providing regulations on market (e.g. foreign exchange) risk; (d) mitigating the union-wide risks posed by government bank borrowing by assigning risk-weights for the purpose of establishing minimum capitalization and requiring provisioning on nonperforming government debts; and (e) enhancing crisis prevention through the strengthening of early warning systems and better crisis containment with the creation of an operational crisis contingency framework that is endorsed by all members.

B. Measures t Refine the Regulatory Architecture for the Remainder of the Financial System

There is currently a proposal to establish a Single Regulatory Unit within each country, to supervise nonbank financial institutions and offshore banks, with the exception of any large institutions of potentially systemic importance—such as large credit unions (e.g., the Roseau Co-operative Credit Union in Dominica, with assets of approximately EC$170 million), and some building societies. It is also recommended that the regulation of insurance companies could be strengthened by increased cross-border regulatory cooperation.

Table 1.Dominica: Quantitative Performance Criteria (PC) and Indicative Targets (IT) Under SBA and PRGF for 2003 1/
SBAPRGF
July 31September 30December 31
AdjustedMargin (+)/AdjustedMargin (+)/AdjustedMargin (+)/Mar. 31Jun. 30Sept. 30Dec. 31
PCActualExcess (-)PCActualExcess (-)PCActualExcess (-)(PC)(PC)(IT)(IT)
I. Performance Criteria
(In millions of Eastern Caribbean dollars)
Central government overall balance 2/3/-30.4-15.914.5-36.3-18.617.7-51.7-11.839.8-33.5-39.2-57.8-61.3
Central government primary balance 2/0.00.80.91.0
Central government wage bill37.536.90.655.854.81.084.081.32.783.2108.6134.4160.2
Banking system net credit to central government 4/15.08.66.410.44.65.88.4-16.324.73.03.03.03.0
Net changes in central government arrears to private domestic parties 5/15.0-2.517.515.0-4.719.715.0-5.620.615.015.015.015.0
(In millions of U.S. dollars)
Disbursement of central government or central government guaranteed external nonconcessional debt with maturity of at least one year 2/6/19.51.6-17.922.04.717.328.919.99.030.033.033.033.0
Net changes in the oustanding stock of contracted or guaranteed short-term external debt of the central government (with maturity of less than one year) 5/6/0.00.00.00.00.00.00.00.00.00.00.00.00.0
Net changes in external payments arrears of the central government 5/7/0.00.00.00.0-0.60.60.0-0.70.70.00.00.00.0
II. Indicative Targets
(In millions of Eastern Caribbean dollars)
Central government revenues58.969.010.189.3103.514.2140.5156.916.4148.5197.4245.1302.0
Central government primary savings-11.83.915.7-11.913.825.7-9.523.132.60.010.614.324.4
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Cumulative from March 31, 2003 for period ending December 31, 2003. Cumulative from June 30, 2003, beginning January 1, 2004.

Limits will be adjusted downward (upwards) to the extent that project financing falls short of (exceeds) programmed amounts. Upward adjustments will not exceed US$1.9 million by end-July 2003, US$2.6 million by end-September 2003, and US$3.9 million by end-December 2003.

Indicative target beginning March 31st.

Limits on banking system net credit to the central government will be adjusted upward to the extent that there are shortfalls in external nonproject financing that are outside the control of the authorities. These upward adjustments will not exceed US$2.6 million by end-July 2003, US$4.0 million by end-September 2003, and US$4.0 million by end-December 2003. Limits on banking system net credit to the central government will be adjusted downward to the extent that external nonproject financing exceeds programmed amounts.

These performance criteria will be monitored on a continuous basis.

For the definition of external debt, see paragraph 16 of the Technical Memorandum of Understanding.

External arrears accumulated prior to the Executive Board discussion on July 25th were waived; no arrears have been accumulated since then.

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Cumulative from March 31, 2003 for period ending December 31, 2003. Cumulative from June 30, 2003, beginning January 1, 2004.

Limits will be adjusted downward (upwards) to the extent that project financing falls short of (exceeds) programmed amounts. Upward adjustments will not exceed US$1.9 million by end-July 2003, US$2.6 million by end-September 2003, and US$3.9 million by end-December 2003.

Indicative target beginning March 31st.

Limits on banking system net credit to the central government will be adjusted upward to the extent that there are shortfalls in external nonproject financing that are outside the control of the authorities. These upward adjustments will not exceed US$2.6 million by end-July 2003, US$4.0 million by end-September 2003, and US$4.0 million by end-December 2003. Limits on banking system net credit to the central government will be adjusted downward to the extent that external nonproject financing exceeds programmed amounts.

These performance criteria will be monitored on a continuous basis.

For the definition of external debt, see paragraph 16 of the Technical Memorandum of Understanding.

External arrears accumulated prior to the Executive Board discussion on July 25th were waived; no arrears have been accumulated since then.

Table 2.Dominica: Structural Performance Criteria and Structural Benchmarks for the PRGF Arrangement through December 2004
Structural Reform Measure under Original ProgramCompletion DateCategoryStatus
Tax policy
Significant reduction of discretionary tax exemptions.Prior ActionDone
Civil service reform
Study outlining the process for redcution in the wage bill for FY2004/05 by 5 percent through attrition.End-March 2004BenchmarkIn progress
Tax policy and administration
Conduct a review of all statutory tax exemptions with a view to assessing their effectiveness and justification, and to prevent abuses.End-June, 2004BenchmarkIn progress
Pension reform
Submit legislation to Parliament proposing a phased increase in the retirement age for public employees to 60 years.End-June, 2004BenchmarkIn progress
Budget approval
Approval of FY2004/05 budget, consistent with the program.End-July 2004Performance CriterionIn progress
Tax policy
Announcement in the budget for FY2004/05 the adoption of the VAT by mid-2005. Cabinet approval of key parameters such as the base, the rate, registration threshold, filing frequency, and refund system.End-September 2004BenchmarkIn progress
Institutional strengthening
Improve the regulatory framework for electricity supply, following the recommendations of technical assistance mission.End-September 2004BenchmarkIn progress
Sources: Dominican authorities and Fund staff.
Sources: Dominican authorities and Fund staff.
Table 3.Dominica: Selected Economic and Financial Indicators
Prog. 1/Est.Proj.
20002001200220032004
(Annual percent change, unless otherwise specified)
Output and prices
Real GDP (factor cost)1.4-4.2-4.7-1.00.01.0
GDP deflator (factor cost)0.61.2-0.41.51.51.5
Nominal GDP (at factor cost)2.0-3.0-5.10.51.52.6
Nominal GDP at market prices1.3-2.7-6.21.61.33.1
Consumer prices (end of period)1.11.90.52.52.91.5
Money and credit
Net foreign assets of the banking system 2/-12.86.619.94.016.9-3.7
Net domestic assets of the banking system 2/13.40.9-11.3-1.0-15.96.8
Of which
Net credit to the nonfinancial public sector 2/5.75.6-7.00.1-5.95.9
Credit to the private sector 2/7.3-3.1-1.3-0.8-2.32.4
Liabilities to the private sector (M2)0.67.48.53.01.03.1
Balance of payments
Merchandise exports, f.o.b.-2.3-18.9-3.7-6.7-6.53.0
Merchandise imports, f.o.b.7.3-11.6-12.15.010.00.9
Terms of trade-5.31.50.1
Real effective exchange rate (end-of-period; depreciation -) 3/4.83.7-6.4-5.4
(In millions of U.S. dollars)
Merchandise exports, f.o.b.54.744.442.839.940.041.2
Merchandise imports, f.o.b.130.4115.3101.4106.4111.5112.5
Current account balance 4/-52.5-47.6-37.0-42.1-42.8-39.1
Capital account balance 5/50.349.548.543.644.213.5
Overall balance-2.21.911.41.51.5-25.6
(In percent of GDP, unless otherwise specified)
Savings and investment
Gross domestic investment24.821.210.613.014.416.4
Public16.715.36.67.07.48.9
Private8.15.94.06.07.07.5
Gross national saving5.33.0-4.3-3.7-2.51.4
Public 4/-0.6-2.4-3.0-2.9-2.1-0.7
Private5.85.4-1.4-0.8-0.72.1
Central government 6/
Savings5.3-3.0-0.61.12.21.2
Of which
Primary10.72.45.17.28.27.5
Grants9.41.74.55.75.43.5
Capital expenditure and net lending16.65.75.17.08.07.0
Primary balance-5.9-3.3-1.60.20.20.5
Overall balance-10.9-8.6-7.1-5.6-5.5-5.5
Nonfinancial public sector debt (gross) 6/87.495.4111.5114.7114.6
External 7/59.171.084.189.888.1
Domestic28.224.427.425.026.5
External sector
Current account balance 4/-19.5-18.2-15.0-16.7-16.9-15.0
External public debt service 8/7.410.812.320.920.914.5
Amortization3.14.54.912.312.37.1
Interest4.36.47.58.68.67.5
Memorandum items:
Nominal GDP at market prices (EC$ millions) Calendar year726.4706.8680.5683.0689.1710.3
Net international reserves (U.S.dollars millions; end-of-period) 9/29.030.443.645.145.145.4
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates.

IMF Country Report 04/6.

Change relative to the stock of M2 at the beginning of the period.

12-month change for end-November 2003.

Includes public current transfers of 1.3 percent of GDP for the 2003 program.

Including errors and omissions.

These data are presented on a fiscal year (July–June) basis. Figures shown for a given calendar year relate to the fiscal year beginning on July 1 of that year.

Including external financing gap.

In percent of exports of goods and nonfactor services.

Imputed reserves at the ECCB.

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates.

IMF Country Report 04/6.

Change relative to the stock of M2 at the beginning of the period.

12-month change for end-November 2003.

Includes public current transfers of 1.3 percent of GDP for the 2003 program.

Including errors and omissions.

These data are presented on a fiscal year (July–June) basis. Figures shown for a given calendar year relate to the fiscal year beginning on July 1 of that year.

Including external financing gap.

In percent of exports of goods and nonfactor services.

Imputed reserves at the ECCB.

Table 4.Dominica: Summary Accounts of the Central Government 1/
Prog. 2/Rev. Proj.Prog. 2/Rev. Proj.
2000/012001/022002/032003/20042004/2005
(In millions of Eastern Caribbean dollars)
Total revenue and grants271.5209.7224.1237.2237.8233.8234.8
Current revenue200.5197.1191.9196.3198.4207.3200.2
Capital revenue3.00.91.31.51.81.62.1
Grants68.011.830.939.337.524.932.5
Total expenditure 3/350.3269.3261.3276.3276.4273.2274.5
Current expenditure230.1229.7226.6227.7220.6223.4216.7
Wages and salaries116.2116.5116.1108.6108.6103.2103.2
Interest36.036.937.640.540.343.143.2
Domestic20.219.317.818.117.815.921.0
External15.717.519.822.422.427.222.2
Others77.976.372.878.671.877.270.3
Capital expenditure and net lending120.239.634.748.655.849.857.8
Overall balance-78.8-59.5-37.2-39.2-38.6-39.5-39.7
Statistical discrepancy 4/18.78.2-11.5
Financing60.151.348.718.418.4-26.1-19.1
Net foreign financing42.725.644.928.828.8-26.1-20.2
Disbursements31.947.765.666.719.920.2
Amortization6.36.539.739.746.040.4
Other0.03.82.91.80.00.0
Net domestic financing17.425.73.8-10.4-10.40.01.1
Bank11.216.3-6.9-10.5-10.40.00.0
Nonbank6.29.510.70.10.00.01.1
Gap0.00.00.020.820.165.558.8
(In percent of GDP)
Total revenue and grants37.630.232.734.234.032.632.5
Current revenue27.828.428.028.328.428.927.7
Capital revenue0.40.10.20.20.30.20.3
Grants9.41.74.55.75.43.54.5
Total expenditure 3/48.538.838.239.839.538.138.0
Current expenditure31.933.133.132.831.531.230.0
Wages and salaries16.116.817.015.715.514.414.3
Interest5.05.35.55.85.86.06.0
Domestic2.82.82.62.62.52.22.9
External2.22.52.93.23.23.83.1
Others10.811.010.611.310.310.89.7
Other transfers3.73.13.33.12.83.02.7
Capital expenditure and net lending16.65.75.17.08.07.08.0
Overall balance-10.9-8.6-5.4-5.6-5.5-5.5-5.5
Statistical discrepancy 4/2.61.2-1.7
Financing8.37.47.12.72.6-3.6-2.6
Net foreign financing5.93.76.64.24.1-3.6-2.8
Disbursements4.67.09.59.52.82.8
Amortization0.91.05.75.76.45.6
Other0.00.60.40.30.00.0
Net domestic financing2.43.70.6-1.5-1.50.00.2
Bank1.52.3-1.0-1.5-1.50.00.0
Nonbank0.91.41.60.00.00.00.2
Gap0.00.00.03.02.99.18.1
Memorandum items:
Savings (incl. grants)5.3-3.0-0.61.12.21.22.2
Primary savings (before grants)1.30.70.61.52.84.04.0
Primary balance (incl. grants) 5/-5.9-3.3-1.60.20.20.50.5
Total debt service to government revenue24.723.736.241.442.942.0
Nominal GDP at market prices (EC$ millions)722.4693.7684.8693.5699.7716.3722.7
Sources: Ministry of Finance; and Fund staff estimates and projections.

Fiscal years beginning July 1.

IMF Country Report 04/6.

On a due basis.

Difference between identified financing and overall balance.

Starting from FY 2002/2003 the primary balance is computed using overall deficit measured from below-the-line.

Sources: Ministry of Finance; and Fund staff estimates and projections.

Fiscal years beginning July 1.

IMF Country Report 04/6.

On a due basis.

Difference between identified financing and overall balance.

Starting from FY 2002/2003 the primary balance is computed using overall deficit measured from below-the-line.

Table 5.Dominica: Summary Accounts of the Banking System
Prel.Prog.Rev. Proj.
20002001200220032004
(In millions of Eastern Caribbean dollars, end of period)
I. Consolidated Banking System 2/
Net foreign assets65.296.1196.7289.4225.8268.6
Net domestic assets405.8409.8352.5265.1357.5302.9
Net credit to the nonfinancial public sector75.8102.366.834.667.367.3
Of which
Central government70.392.356.238.459.859.8
Net credit to nonbank financial institutions-35.8-37.7-46.6-81.8-49.5-84.4
Credit to the private sector454.1439.6433.2420.6442.2433.7
Other items (net) 3/-88.3-94.4-101.0-108.3-102.6-113.7
Broad money 4/471.0506.0549.2554.5583.3571.6
II. Operations of the Eastern Caribbean Central Bank
Imputed net international reserves78.282.1117.8121.7126.0122.7
Net domestic assets10.910.213.44.916.34.9
Monetary base89.192.3131.2126.6142.3127.6
Currency in circulation35.434.635.534.237.735.2
Commercial bank reserves53.657.795.792.4104.592.4
III. Commercial Banks
Net foreign assets-12.914.079.0167.799.8146.0
Net claims on ECCB51.258.598.285.6104.288.2
Net domestic assets397.3398.9336.6267.0341.5302.1
Net credit to the nonfinancial public sector65.092.153.429.752.129.7
Net credit to nonbank financial institutions-35.8-37.7-46.6-81.8-49.5-84.4
Credit to the private sector454.1439.6433.2420.6442.2433.7
Other (net)-86.0-95.2-103.5-101.5-103.3-76.8
Private sector deposits 4/435.6477.4513.7520.3545.5536.3
IV. Consolidated Banking System
(Annual percentage change)
Credit to the private sector8.2-3.2-1.4-2.93.13.1
Private sector deposits0.39.67.61.33.13.1
Broad money 5/0.67.48.51.03.13.1
(Contributions to liquidity growth) 5/
Net foreign assets-12.86.619.916.91.3-3.7
Net domestic assets13.40.9-11.3-15.91.86.8
Net credit to the nonfinancial public sector5.75.6-7.0-5.90.05.9
Credit to the private sector7.3-3.1-1.3-2.32.42.4
Memorandum items:
Interest rates 6/
Deposits (3-month time-maximum rate)6.06.06.06.0
Lending: Minimum rate9.59.58.58.0
Maximum rate20.820.820.818.2
Sources: Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

IMF Country Report 04/6.

The projection for 2003 reflects actual data through October 2003.

Includes interbank float.

Including deposits denominated in U.S. dollars.

Change relative to broad money at the beginning of the period.

Commercial banks; end-of-period rates, percent per annum.

Sources: Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

IMF Country Report 04/6.

The projection for 2003 reflects actual data through October 2003.

Includes interbank float.

Including deposits denominated in U.S. dollars.

Change relative to broad money at the beginning of the period.

Commercial banks; end-of-period rates, percent per annum.

Table 6.Dominica: Balance of Payments
Est.Prog. 1/Rev. Proj.
20002001200220032004
(In millions of U.S. dollars)
Current account balance-52.5-47.6-37.0-42.8-40.3-39.1
Trade balance-75.6-70.9-58.6-71.6-65.4-70.4
Exports (f.o.b.) 2/54.744.442.840.041.141.2
Imports (f.o.b.)130.4115.3101.4111.5106.4112.5
Services balance37.125.025.229.732.335.7
Exports of services89.776.774.785.981.790.2
Travel48.246.344.250.848.753.4
Other41.630.430.535.033.036.8
Imports of services52.751.749.456.149.354.5
Net income-32.0-19.2-20.1-17.2-20.1-17.9
Interest payments (public sector)-6.2-7.7-8.8-8.0-11.1-10.1
Other income-25.8-11.5-11.3-9.3-9.0-7.9
Net current transfers18.117.516.416.212.914.5
Private10.611.512.013.012.914.5
Public7.45.94.43.20.00.0
Capital and financial account53.241.227.318.815.913.5
Capital account10.918.013.311.315.317.5
Public capital transfers9.615.310.58.312.314.5
Private capital transfers2.72.72.72.93.03.0
Financial account42.323.214.17.50.6-4.0
Public sector21.223.025.28.9-10.3-6.1
Budgetary flows (net)23.924.624.48.9-10.3-6.1
Disbursements28.430.030.124.010.412.8
Repayments4.55.45.715.120.718.9
Nonbudgetary flows (net)-2.7-1.60.80.00.00.0
Private sector22.70.2-11.1-1.311.02.2
Direct investment10.811.913.220.713.220.7
Commercial banks19.7-10.0-24.0-32.9-1.28.1
Other private flows-7.8-1.7-0.310.9-1.1-26.6
Errors and omissions-2.98.321.225.40.00.0
Overall balance-2.21.911.41.5-24.4-25.6
Overall financing2.2-1.9-11.4-1.524.425.6
Net international reserves2.2-1.9-11.4-1.4-1.6-0.4
Gross reserves2.2-1.9-14.3-2.8-1.6-0.4
Reserve liabilities (IMF)0.00.02.81.30.00.0
Exceptional financing0.00.00.00.026.026.0
Arrears0.00.00.00.00.00.0
Rescheduling0.00.00.00.00.00.0
Financing gap0.00.00.00.026.026.0
(In percent of GDP)
Memorandum items:
Current account balance-19.5-18.2-15.0-16.9-15.4-15.0
External public debt 3/53.764.677.487.491.590.0
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

IMF Country Report 04/6.

Includes stores and bunkers.

Includes external financing gap.

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

IMF Country Report 04/6.

Includes stores and bunkers.

Includes external financing gap.

Table 7.Dominica: Financial and External Vulnerability Indicators(In percent of GDP, unless otherwise indicated)
Prog. 1/Prel.Proj.
199920002001200220032004
Financial indicators
Broad money (percent change, 12-month basis) 2/10.40.67.48.53.01.03.1
Private sector credit (percent change, 12-month basis) 2/2.48.2-3.2-1.4-1.0-2.93.1
Unsatisfactory assets/total loans 2/17.917.422.619.222.2
General and specific provisions for loan losses/unsatisfactory assets 2/37.340.030.236.733.8
Specific provisions for loan losses/unsatisfactory assets 2/33.533.326.232.628.6
Total capital/risk weighted assets (locally incorporated banks) 2/38.230.835.434.129.3
Tier 1 capital/risk weighted assets (locally incorporated banks) 2/35.227.434.132.929.1
Three-month treasury bill rate (end of period) 3/6.46.46.46.06.46.36.3
Three-month treasury bill rate (real) 3/4/6.45.34.55.53.93.44.8
External indicators
Exports of goods and services (percent change, 12-month basis in U.S. dlrs.)3.4-7.9-16.2-3.00.27.24.4
Imports of goods and services (percent change, 12-month basis in U.S. dlrs.)4.91.4-8.8-9.74.311.2-0.4
Current account balance 5/-12.9-19.5-18.2-15.0-16.7-16.9-15.0
Capital and financial account balance 6/14.218.718.919.217.217.35.1
Net official reserves (in millions of U.S. dollars, end of period) 7/31.529.030.443.645.145.145.4
Net reserves to broad money (percent, end of period) 7/18.216.616.221.421.521.921.5
Public sector external debt48.453.764.677.488.187.4
External debt (end of period) to exports of goods and services (percent) 8/82.7100.8140.8163.20.0176.9
External interest payments to exports of goods and services (percent) 8/1.74.36.47.56.86.3
External amortization payments to exports of goods and services (percent) 8/3.33.14.54.912.812.0
Exchange rate (per U.S. dlrs, end of period)2.72.72.72.72.72.7
REER appreciation (end of period; depreciation -) 9/0.84.83.7-6.4-5.4
Sources: Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

IMF Country Report 04/6.

Data for 2003 as of September 2003.

Data for 2003 as of June 2003.

Treasury bill rate adjusted by end-of-period inflation.

Includes public current transfers for 2002 and projected public current transfers for 2003.

Includes errors and omissions.

Imputed reserves at the ECCB.

Refers to public sector debt.

12-month change for end-November 2003.

Sources: Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

IMF Country Report 04/6.

Data for 2003 as of September 2003.

Data for 2003 as of June 2003.

Treasury bill rate adjusted by end-of-period inflation.

Includes public current transfers for 2002 and projected public current transfers for 2003.

Includes errors and omissions.

Imputed reserves at the ECCB.

Refers to public sector debt.

12-month change for end-November 2003.

Table 8.Dominica: Medium-Term Projections
Est.Projections 1/
200120022003200420052006
(Annual percentage change)
National income and prices
GDP at constant (1990) prices-4.2-4.70.01.02.02.0
Implicit GDP deflator (factor cost)1.2-0.41.51.51.51.5
(In percent of GDP, unless otherwise stated)
Saving and investment
Gross domestic investment21.210.614.416.416.917.9
Public15.36.67.48.97.98.9
Private5.94.07.07.59.09.0
Gross national saving3.0-4.3-2.51.44.78.7
Public-2.4-3.0-2.1-0.70.41.4
Private5.4-1.4-0.72.14.37.3
Central government finances 2/
Central government saving (excluding grants)-4.7-5.1-3.2-2.3-1.0-0.1
Current revenue28.428.028.428.927.727.7
Current expenditure33.133.131.531.228.727.8
Overall balance (after grants)-8.6-5.4-5.5-5.5-4.2-3.3
Grants1.74.55.43.53.53.5
Capital spending5.75.18.07.07.07.0
Primary balance-3.3-1.60.20.52.03.0
Balance of payments
External current account-18.2-15.0-16.9-15.0-12.2-9.2
Of which
Exports of goods and services46.346.649.349.951.151.9
Imports of goods and services63.859.865.763.561.760.7
Capital and financial account 3/18.919.217.35.14.82.4
Overall balance0.74.30.4-9.9-7.3-6.8
Identified financing-0.7-4.5-0.6-0.2-0.6-0.6
Financing gap 4/5/0.00.00.09.97.87.3
Public sector debt and debt service
Public sector debt 2/95.4111.5114.6
External71.084.188.1
Domestic24.427.426.5
External debt/exports 6/153.5180.6178.7
External debt service/exports 6/10.812.320.914.513.413.7
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Projections assume an adjustment scenario.

These data are presented on a fiscal year (July–June) basis. Figures shown for a given calendar year relate to the fiscal year beginning on July 1 of that year.

Including errors and omissions.

Excludes projected public current transfers for 2003–08. Gaps are expected to be filled by a combination of sustained fiscal adjustment, stuctural reform, privatization, exceptional donor financing and implementation of a comprehensive debt strategy.

Excludes US$10.2 million in debt assumed to be rolled over.

Exports of goods and services.

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Projections assume an adjustment scenario.

These data are presented on a fiscal year (July–June) basis. Figures shown for a given calendar year relate to the fiscal year beginning on July 1 of that year.

Including errors and omissions.

Excludes projected public current transfers for 2003–08. Gaps are expected to be filled by a combination of sustained fiscal adjustment, stuctural reform, privatization, exceptional donor financing and implementation of a comprehensive debt strategy.

Excludes US$10.2 million in debt assumed to be rolled over.

Exports of goods and services.

Table 9.Dominica: Nonfinancial Public Sector Debt Structure at End-December 2003
Debt Stocks
In millionsIn millionsIn percentShare of
of EC$of US$of GDPTotal Debt
Domestic debt182.467.526.522.0
Commercial banks112.041.516.313.5
NCB77.428.711.29.3
Others34.712.85.04.2
ECCB16.26.02.31.9
Private54.120.17.96.5
External debt646.8224.988.178.0
Multilateral309.4114.644.937.3
CDB192.571.327.923.2
World Bank71.826.610.48.7
IMF20.07.42.92.4
Others 1/25.19.33.63.0
Bilateral138.851.420.116.7
France31.111.54.53.7
Taiwan32.111.94.73.9
United Kingdom 2/27.610.24.03.3
Others 3/48.117.87.05.8
Commercial182.452.820.722.0
Citicorp45.516.96.65.5
Royal Merchant Bank82.630.612.010.0
Intercommercial Bank5.42.00.80.7
Others9.23.41.31.1
Arrears16.26.02.42.0
Total829.2292.4114.6100.0
Memorandum item:
Enlarged debt of the NFPS 4/911.2337.5132.2
Of which
Domestic debt304.1112.644.1
Sources: Dominican authorities; and Fund staff estimates.

Includes EIB, IFAD and OPEC.

Loan provided by Societe Generale and guaranteed by the U.K. government. The guarantee has been exercised.

Includes Barbados, Belize, Grenada, Kuwait, St. Vincent and the Grenadines, Trinidad and Tobago and Venezuela.

This definition of the debt adds Dominica Social Security’s claims on the central government to the public sector debt.

Sources: Dominican authorities; and Fund staff estimates.

Includes EIB, IFAD and OPEC.

Loan provided by Societe Generale and guaranteed by the U.K. government. The guarantee has been exercised.

Includes Barbados, Belize, Grenada, Kuwait, St. Vincent and the Grenadines, Trinidad and Tobago and Venezuela.

This definition of the debt adds Dominica Social Security’s claims on the central government to the public sector debt.

Table 10.Dominica: Schedule of Purchases Under the Stand-By Arrangement and the Poverty Reduction and Growth Facility
Purchases (in millions)As Percent
DateUS$ 1/SDRof QuotaConditions
20022.9732.05025.0
August 282.9732.05025.0Board approval of SBA (first credit tranche)
20034.7573.28140.0
July 280.4460.3083.8First review under the SBA; and adoption of prior actions
September 150.4460.3083.8End-July 2003 performance criteria
Decemeber 190.4460.3083.8Second review under the SBA; and end September 2003 performance criteria
Decemeber 193.4192.35828.8Board approval of PRGF; and adoption of prior actions
20041.7861.23215.0
March 240.4470.3083.8First review under the PRGF; and end-December 2003 performance criteria
June 150.4470.3083.8Second review under the PRGF; and end-March 2004 performance criteria
September 150.4470.3083.8Third review under the PRGF; and end-June 2004 performance criteria
December 150.4470.3083.8End-September 2004 performance criteria
20053.5672.46030.0
March 150.8920.6157.5Fourth review under the PRGF; and end-December 2004 performance criteria
June 150.8920.6157.5End-March 2005 performance criteria
September 150.8920.6157.5Fifth review under the PRGF; and end-June 2005 performance criteria
December 150.8920.6157.5End-September 2005 performance criteria
20062.3781.64020.0
April 301.1890.82010.0Sixth review under the PRGF; and end-December 2005 performance criteria
October 311.1890.82010.0Seventh review under the PRGF; and end-June 2006 performance criteria
Total15.4610.66130.0
SBA4.312.9736.3
PRGF11.157.6993.8
Memorandum item:
Quota (in millions)11.898.20100.0
Source: Fund staff estimates.

For illustrative purposes only, SDR amounts have been coverted into U.S. dollars at an US$/SDR exchange rate of 1.45.

Source: Fund staff estimates.

For illustrative purposes only, SDR amounts have been coverted into U.S. dollars at an US$/SDR exchange rate of 1.45.

Table 11.Dominica: Indicators of Capacity to Repay the Fund, 2003-08
Projections
200320042005200620072008
Fund repurchases and charges 1/
In millions of SDRs0.10.10.41.21.30.4
In millions of U.S. dollars0.10.10.61.82.00.6
In percent of exports of goods and services0.10.10.41.21.30.4
In percent of debt service0.60.51.95.66.11.9
In percent of quota1.21.24.914.615.94.9
In percent of imputed net official reserves0.30.31.33.73.91.1
Fund credit outstanding1/
In millions of SDRs5.36.68.79.38.17.7
In millions of U.S. dollars7.59.813.113.912.111.5
In percent of exports of goods and services5.97.59.49.58.07.3
In percent of debt service32.433.841.743.537.937.0
In percent of quota65.080.0106.4113.098.393.4
In percent of imputed net official reserves16.521.627.828.524.022.0
Memorandum items:
Exports of goods and services (millions of U.S. dollars)125.9131.4139.1146.4151.8157.4
Debt service (millions of U.S. dollars)1/23.029.031.332.032.031.2
Quota (millions of SDRs)8.28.28.28.28.28.2
Quota (millions of U.S. dollars)11.512.212.312.312.312.3
Imputed net official reserves (millions of U.S. dollars)45.145.447.148.850.652.4
GDP (millions of U.S. dollars)255.2263.1272.2281.9291.8302.1
U.S. dollars per SDR 2/0.7150.6700.6670.6660.6650.665
Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Including hypothetical purchases under Stand-By Arrangement and PRGF, not shown in the BoP projections.

For the projection period: WEO assumptions of January 2004.

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Including hypothetical purchases under Stand-By Arrangement and PRGF, not shown in the BoP projections.

For the projection period: WEO assumptions of January 2004.

Figure 1.Dominica: Performance Under the Program

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Figure 2.Dominica: Macroeconomic Performance

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

Figure 3.Dominica: Recent Economic Developments

Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections.

APPENDIX I Dominica: Fund Relations

(As of January 31, 2004)

I. Membership Status Joined 12/12/78; Article VIII

II. General Resources Account

SDR MillionPercent of Quota
Quota8.20100.00
Fund holdings of currency11.16136.15
Reserve position in Fund0.010.11

III. SDR Department

SDR MillionAllocation
Net cumulative allocation0.59100.00
Holdings0.023.73

IV. Outstanding Purchases and Loans:

SDR MillionPercent of Quota
PRGF Arrangements2.3628.76
Stand-by arrangements2.9736.25

V. Latest Financial Arrangements:

TypeApprovalExpirationAmountAmount
DateDateApprovedDrawn
(SDR Million)
PRGF12/29/0312/28/067.692.36
Stand-By08/28/0201/02/042.972.97
SAF11/26/8611/25/892.802.80
Stand-By07/18/8407/17/851.400.97
EFF02/06/8102/05/848.558.55

VI. Projected Obligations to the Fund3:

Forthcoming
20042005200620072008
Principal0.000.261.101.230.38
Charges/Interest0.080.080.070.050.03
Total0.080.341.171.280.41
* Less than SDR 50,000.

VII. Exchange Rate Arrangement: Dominica is a member of the Eastern Caribbean Currency Union, which has a common central bank (the Eastern Caribbean Central Bank) and currency (the Eastern Caribbean dollar). Since July 1976, the Eastern Caribbean dollar has been pegged to the U.S. dollar at the rate of EC$2.70 per U.S. dollar.

VIII. Safeguards Assessment: Under the Fund’s safeguards assessment policy, the Eastern Caribbean Central Bank (ECCB), of which Dominica is a participating government, is subject to a full safeguards assessment.

The on-site safeguards assessment was completed on February 20, 2003, and concluded that the ECCB has in place appropriate mechanisms to manage resources, including Fund disbursements and that the vulnerabilities that remain do not present an undue risk. The safeguards assessment proposed specific measures to address these vulnerabilities and implementation by the ECCB is currently in progress.

IX. Article IV Consultation: The last Article IV consultation was concluded by the Executive Board on August 28, 2002 (IMF Country Report No. 02/223); the relevant documents are IMF Country Report Nos. 02/223 and 02/224. Dominica is on the standard 24-month cycle.

X. Technical Assistance: FAD missions visited Roseau to provide technical assistance on tax policy and administration, with special emphasis on VAT implementation (2002 and 1999), on urban property taxation (1997), and on tax policy and administration, and expenditure control (1995).

XI. FSAP: A joint IMF/World Bank team performed an assessment of the financial sector of the member states of the ECCB, in two missions—September 1–19 and October 20–31, 2003. The principal objective of the missions was to assist the authorities in assessing the development needs and opportunities for the financial sector and identifying potential vulnerabilities of financial institutions and markets to macroeconomic shocks, as well as the risks to macroeconomic stability from weaknesses and shortcomings in the financial sector.

APPENDIX II Dominica: Relations with the Caribbean Development Bank (CDB)

(As of January 31, 2004)

The CDB has approved loans and grants for Dominica totaling approximately US$140.1 million. Of this amount US$136.5 million represented loans aimed at boosting real sector activity, particularly in agriculture, manufacturing and tourism. Significant resources were also dedicated towards improving road access, sea defenses and other physical infrastructure. A large portion of loans to the productive sector was channeled to the private sector through the Dominica Agricultural, Industrial and Development Bank (DAIDB).

In 2003, CDB completed a detailed poverty assessment in Dominica. Inter alia, this will serve to inform Government strategic interventions aimed at sustained poverty reduction. Moreover, CDB in collaboration with other development partners, has provided critical budget support to Dominica through an Economic Stabilization Loan. This intervention seeks to facilitate an orderly adjustment process in Dominica and will also allow for the formulation of a longer-term structural adjustment strategy.

Ongoing capital projects financed by CDB include the Fourth Consolidated Line of Credit, Roseau Water and Sewerage Project, Seventh Consolidated Line of Credit, OECS Solid Waste Project, and Eco-tourism project, and the Seventh Consolidated Line of Credit to DAIDB for on-lending to the productive sectors and to students.

Dominica: Financial Relations with CDB(In millions of U.S. dollars)
ITEM19992000200120022003
Cumulative Total Credit Approved96.21113.20118.63128.01136.18
Cumulative Disbursements72.7982.7394.56101.54110.58
Disbursements5.519.9411.836.989.04
Outstanding Debt44.6951.4160.3965.0271.50
Amortization2.732.732.702.592.79
Interest1.141.351.611.892.01
APPENDIX III Dominica: Relations with the World Bank4

(As of January 31, 2004)

The World Bank role in Dominica: The Bank will continue to collaborate with the Fund and other donors in supporting the authorities efforts in stabilizing macroeconomic conditions and in restarting economic growth and reducing poverty. The Bank will lead the policy dialogue on key structural reforms, including public expenditure, public sector reform, social protection, and on the environment for private sector development.

Bank-Fund collaboration in specific areas: The World Bank and the IMF will continue to collaborate on the financial sector, on the medium-term structural reform agenda and in providing a wide range of technical assistance to Dominica on macroeconomic management issues jointly with the Caribbean Regional Technical Assistance Center (CARTAC).

Bank Group strategy: The World Bank’s strategy for Dominica is a part of the Country Assistance Strategy (CAS) for the Eastern Caribbean (OECS) sub-region, presented to the Bank Board on June 4, 2001. The CAS which covers FY 2002–06, proposes new commitments of around US$110 million for the five borrowing member states of the OECS (Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines). The main goals of the strategy are to reduce income insecurity and vulnerability at the national and household levels, and build human and institutional capacity to meet the challenging economic and social environment facing these small states.

Ongoing projects: There are currently three ongoing World Bank projects in Dominica (as well as other OECS borrowing countries) with total commitments of approximately US$7.5 million.

(i) The OECS Telecommunications Reform Program, approved in FY 1998 seeks to introduce pro-competition reforms in the telecommunications sectors and increase the supply of informatics-related skills in the OECS borrowing countries. The project has helped these countries establish a regional regulatory authority, negotiate with the sub-regional telecommunications monopoly, and lower telephone rates. Dominica’s share of the US$6.0 million loan is US$1.2 million.

(ii) The OECS Emergency Recovery Project: This project was approved in FY 2002 to help mitigate the impact of the September 11 attack on the tourism sector. The project supports improvements to airport and sea port security arrangements. The World Bank’s assistance for this sub-regional program is US$21 million, including US$3.2 million for Dominica.

Upcoming projects: The Bank is currently preparing two projects for Dominica.

(iii) The Economic Recovery Support Operation— an adjustment operation for US$3.1 million—supporting reforms in the areas of public expenditure, financial and debt management, financial sector, and port operations, petroleum pricing and the design and implementation of a broad public sector reform strategy. This operation was approved by the Board of Directors on January 29, 2004.

Upcoming projects:

The Bank is currently preparing the Dominica component of the Caribbean HIV/AIDS Prevention and Control Project, which is expected to presented for approval in FY 2005.

Analytical and Advisory Services: During FY 2003, the Bank prepared a Dominica-specific Country Financial Accountability Assessment, Country Procurement Assessment Report and Social Protection Review. A public expenditure review for Dominica, is underway in the context of the ongoing OECS Analysis of Fiscal Issues. The Bank is also providing technical assistance to support reforms in the petroleum, electricity and financial sectors.

Key aspects of the Bank’s Caribbean research and technical assistance program include:

(i) a Bank-wide program on small states and providing research and technical assistance on key vulnerability issues in the Caribbean—such as macroeconomic volatility and income security, catastrophic insurance, natural hazard risk mitigation strategies, institutional arrangements for environmental management in the OECS, and on the measurement of poverty and social welfare;

(ii) a study of Growth and Competitiveness in the OECS, scheduled for completion during FY 2005; and

(iii) an ongoing Financial Sector Assessment Program (FSAP) in collaboration with the IMF.

Financial Relations(In millions of U.S. dollars)Gross Disbursements and Debt Service During Fiscal Year
19971998199920002001200220032004
Total disbursements0.51.91.42.10.51.72.73.1
Repayments0.10.10.10.10.10.10.30.6
Net disbursements0.51.81.31.90.41.62.32.5
Cancelled0.00.00.00.00.01.02.30.0
Interest and fees0.10.10.10.20.30.30.30.4
ATTACHMENT

Roseau, Dominica

March 8, 2004

Ms. Anne Krueger

Acting Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Krueger:

1. The economic program had a good start. There are indications that the sharp economic decline of the last few years has been arrested and that an incipient recovery is underway. Our tax collections remain stronger than anticipated and our expenditures were kept in check, allowing us to regain control over the budgetary situation. Market sentiment has strengthened, liquidity in the financial system remains adequate, and deposits continue growing. Exports in several industries are recovering while imports remain strong. All performance criteria for end-December 2003 under the PRGF-supported program have been observed. We request completion of the first review under the PRGF.

2. We made further progress in implementing our debt strategy. A road show was conducted in January to seek creditors’ support for our restructuring plans. We exchanged views with creditors on the possible features of a debt restructuring. We are in contact with our official bilateral creditors. We have engaged the Caribbean Development Bank with a specific debt restructuring proposal. We expect to present to our creditors concrete restructuring proposals by mid-March, trying to preserve to the extent possible, inter-creditor equity. Given the severe financing constraints we face, we expect to finalize our debt restructuring exercise by early-April.

3. A donors’ meeting took place in Roseau in early-February 2004. Donors were briefed on the status of the program and project execution. The meeting served to coordinate the necessary technical assistance to implement our ambitious structural reform agenda. We reiterated to the donor community, our commitment to implement the investment program approved in the budget. Given the need to accommodate future projects within the fiscal and borrowing limits established by the program, we will scrutinize projects to ensure that only those with the highest social benefit are carried out.

We strongly reiterate our commitment to the policies described in our letter and memorandum of economic policies of December 10, 2003. The Government will continue the usual close and fruitful dialogue with the Fund and stands ready to adopt the necessary measures to achieve the objectives of the program. We have authorized the Fund to use this letter to signal the seriousness of our commitment to the program, to our creditors and the entire international community.

Sincerely yours,

/s/
Honorable Roosevelt Skerrit

Prime Minister and Minister of Finance and Planning
1The government sold 2 percent of its NCB shares in December, reducing its ownership from 51 to 49 percent and the number of government-appointed Directors from 4 to 3 (while the number of Directors increased from 7 to 8). The bank was renamed the National Bank of Dominica.
2In fact there were only a few discretionary tax exemptions given under the narrow program definitions (see the Technical Memorandum of Understanding, IMF Country Report No. 04/6). This is in line with the measure adopted in December 2003 to comply with the prior action for the approval of the PRGF.
3Obligation basis.
4Source: World Bank. Contact person: Ms. Camille Nuamah 473-2195

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