WASHINGTON DC, Jun 27 (IPS) – The Dominican Republic leads Latin America in GDP progress, with a mean annual price of round 5 p.c per yr for the reason that Seventies. The Caribbean nation has made nice strides in decreasing poverty and improving living standards.
Reaching funding grade on its sovereign bonds would additional speed up progress by reducing rates of interest, rising capital flows, and broadening the investor base. This may additionally cut back personal sector financing prices and increase the economic system’s progress potential.
Rates of interest on public debt are excessive relative to friends, notably these with funding grade. Excessive rates of interest imply fewer sources for spending on infrastructure, social companies, and making the economic system extra resilient to local weather change, an necessary danger for the nation.
Elevated public debt (or curiosity funds) relative to low tax revenues—often called debt affordability—is a key danger constraining its credit standing and contributing to excessive rates of interest. That’s why reforms, particularly to the tax system, will probably be key. A complete tax reform might assist the nation increase revenues and earn an funding grade ranking.
Income elevating
Tax revenues are restricted by pricey exemptions and a excessive threshold earlier than private revenue taxes apply. Streamlining tax incentives and exemptions—which collectively quantity to about 5 p.c of GDP, or a 3rd of all tax revenues—can be essential for simplifying the tax system and decreasing evasion.
Completely elevating tax revenues by at the very least 2 p.c of GDP would enable for sustainable will increase in key public funding and social spending – serving to to spice up productiveness and personal consumption whereas decreasing inequality and poverty.
General, a complete tax reform might elevate the extent of GDP by round 1 p.c after 10 years and by 2 p.c after 30 years (see Chart). Extra public sources from the reform would additionally create area within the funds to scale up public funding in infrastructure that may mitigate losses from local weather occasions, that are sizeable for the nation.
The Dominican Republic is weak to local weather shocks together with hurricanes, storms, and floods which already trigger common annual losses of round 0.5 p.c of GDP to infrastructure alone. The nation can be more and more weak to rising temperature and sea ranges.
Local weather change is anticipated to extend these vulnerabilities. Making public infrastructure extra resilient to local weather occasions in order that their influence is 40 p.c much less extreme might additional increase GDP by round 0.5 p.c after 10 years and by 1.75 p.c after 30 years.
Fiscal rule
Past the much-needed enhance in tax revenues, complete fiscal reform ought to embody the adoption of a fiscal rule imposing long-term limits on public debt that may enhance certainty and assist safeguard fiscal sustainability.
Recapitalizing the central financial institution stays an important step to make sure its monetary autonomy. On this regard, the IMF has offered technical help within the design of a Fiscal Duty Legislation, which is pending approval by the decrease chamber of Congress, and has supported the authorities’ efforts to draft a brand new central financial institution recapitalization regulation.
Electrical energy sector
One other important reform is addressing the long-standing inefficiencies within the electrical energy sector that lead to excessive losses, which have averaged between 1 and a pair of p.c of GDP per yr within the final decade.
We estimate that reducing losses by half—to a stage akin to these in superior economies—might enhance GDP by 0.3 p.c after 10 years as effectivity improves, prices are decreased, and blackouts are eradicated.
These enhancements, together with decrease non-technical losses and tariff changes to deliver electrical energy costs consistent with manufacturing prices, would eradicate electrical energy sector losses and supply additional fiscal area for growth wants, boosting GDP by an extra 0.2 p.c after 10 years and 0.75 p.c after 30 years.
Contemplating the Dominican Republic’s potential, the challenges it at present faces and the uncertainty of the worldwide outlook, delaying a complete fiscal reform wouldn’t solely be pricey but additionally a missed alternative on its journey in direction of funding grade. Endeavor these key reforms might additional increase the extent of GDP by round 2 and 5 p.c after 10 and 30 years respectively.
Emilio Fernandez-Corugedo is a Deputy Division Chief, Pamela Madrid is a Senior Economist within the IMF’s Western Hemisphere Division and Frank Fuentes is an Advisor to the IMF Govt Director representing the Dominican Republic.
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