The International Monetary Fund (IMF) Friday predicted that Dominica will record economic growth of five per cent next year, as the island recovers from the coronavirus (COVID-19) pandemic that has had a “heavy toll” on its economy.
The Washington-based financial institution, which has just completed a virtual Article IV Mission to the island, said gross domestic product (GDP) is projected to reach pre-pandemic levels by 2023, averaging five per cent growth per year through 2022-26.
It said tourism recovery would be supported by the ongoing construction of new hotels and the inauguration of direct flights from the United States from December 2021.
But the IMF noted that risks to the outlook are skewed to the downside. It said main risks include renewed worldwide and domestic COVID-19 contagion waves, leading to loss of tourism revenue and forcing lockdowns and mobility restrictions; a decline in the Citizenship by Investment (CBI) revenue below expectations; and insufficient progress on local vaccination due to continued hesitancy. “Weakness in the financial sector, particularly the credit unions, where four out of six institutions have thin capital buffers below the regulation requirement, could amplify downside risks and may result in contingent fiscal liabilities.
In its statement following the virtual visit, the IMF said the COVID-19) pandemic has taken a “heavy toll” on the economy GDP is estimated to have contracted by 11 per cent last year.
It said Dominica had recorded “a modest recovery of 3.7 per cent in 2021 underpinned by a sharp reduction in tourism and related sectors, plus the Covid-19 outbreak that forced a lockdown in August 2021.
“Since March 2020, the government had a swift reaction to the pandemic by carrying out health spending and social transfers. However, despite ample vaccine and testing availability, vaccination remains below 40 per cent of the population due to hesitancy.”
The IMF said that output decline was contained by strong growth in the construction sector due to the large public investment programme in housing and infrastructure resilient to natural disasters, financed with record-high Citizenship by Investment (CBI) revenue of 30 per cent of GDP.
“Despite sharp declines in tax revenue and increase in spending, large CBI revenue led to a small reduction in the fiscal balance in the financial year 2020. However, the estimated public debt increased to 106 per cent of GDP in 2020 with higher official borrowing.
“In this context, the current account deficit is estimated to have widened in to near 30 per cent of GDP, underpinned by the loss of tourism exports and increase in imports related the public investment, and the increase in commodity prices—albeit contained by a decline in private demand for imports,” the IMF said.
It said that the COVID-19 pandemic has hit Dominica hard, impacting tourism and related sectors. Recovery in the medium term is promising, underpinned by a large public investment programme to build resilience to natural disasters, largely financed by buoyant CBI revenue.
“On the fiscal front, 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 per cent of GDP after the pandemic, passing 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).”
The IMF said the financial sector has remained liquid and stable during the pandemic, but NPLs are above prudential benchmarks. 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 per cent of loans for banks and 10-17 per cent for credit unions (the prudential benchmark is five per cent in both sectors”.
The Washington-based financial institution said that to comply with the Eastern Caribbean Central Bank (ECCB) requirement, banks have prepared plans to increase provisioning to 100 per cent of NPLs by 2024, pre-COVID precautionary increase in provisions with adoption of IFRS9 standards in 2018 has facilitated this process.
“Most loans under moratoria have currently normalized. The financial sector remains liquid with an increase in deposits underpinned by prudent private spending, government transfers, the loan moratoria, and increase in foreign remittances.”
The IMF said that the growth outlook is promising, supported by the large public investment programme and the projected gradual recovery in tourism with added hotel capacity.
It said the government plans to maintain high levels of public investment into the medium term financed mainly by 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.
The IMF said that in the near term, the Roosevelt Skerrit government should continue maximizing the effort to increase vaccination, which is critical from health and economic recovery perspectives. Continuing public communication and education campaigns to address vaccine hesitancy and building additional health care centers could prove critical in possible contagion outbreaks.
It said reallocation of windfall CBI revenue to balance public investment with government financial resilience and debt sustainability would 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.
“However, the risks to the outlook justify the allocation of a portion of CBI revenue to the Vulnerability and Resiliency Fund (VRF) for self-insurance against natural disasters – at least 10 per cent of GDP plus annual savings of about 1.5 percent of GDP to ensure its long-term sustainability – and to reduce public debt with targeted net-repayments once output has recovered.”
The IMF said this would increase fiscal buffers, speed up post-disaster recovery with funding for reconstruction and rehabilitation, and create space to access external financing in the event of a large natural disaster or a prolonged pandemic.
“This strategy would better support the long-tern sustainability of the public investment plan and development agenda while protecting public finances, especially considering their long execution horizon.
“It would also support the achievement of the regional debt target of 60 per cent of GDP by 2035 by reducing the impact of natural disaster shocks on public debt, while helping avert a debt crisis after an extreme shock. This allocation, however, would come at the cost of lower public investment, which could reduce the estimated output level by about 3-4 percentage points of GDP in the medium term,” the IMF noted.
Source-CMC
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