ROSEAU, Dominica — The International Financial (IMF) has issued a concluding statement describing the preliminary findings of employees on the finish of an official visit to Dominica.
1. The financial system is recovering strongly following the destruction wrought by hurricane Maria. Output progress in 2019 is estimated at 10 %, largely offsetting the cumulative decline of 10 % because the hurricane. Development has been the primary sector leading the restoration, with giant investments in infrastructure and public providers, aimed toward building resilience to natural disasters. Tourism and agriculture, key for exports and employment, are growing with help from government packages and financing, but remain significantly under potential in mild of the numerous loss of timber and gear. Output is projected to succeed in pre-hurricane ranges by 2020, and progress to rise above potential in the medium-term, owing largely to vital overseas investment in new motels expected to start out operations by end-2019. Within the context of an uptick in tourism prospects, the rise in room provide above pre-hurricane levels ought to give a fillip to financial exercise.
2. Giant-scale public funding aimed toward rehabilitation, reconstruction and resilience while contributing to progress, has worsened the fiscal outlook. The fiscal deficit is projected to remain giant in FY2019/20 at 7 % of GDP, but this can be a vital enchancment (four % of GDP) relative to the estimated outturn for FY2018/19. The narrowing of the deficit is explained by the restoration of tax revenues and extra measured execution of public investment, owing to the decline of readily-available Citizenship-by-Investment (CBI) deposits. Beyond the near-term, fiscal deficits are expected to slender steadily with financing constraints turning into binding, constraining the area to maintain elevated levels of public funding. Based mostly on conservative projections of CBI revenues and loan disbursements from multilateral and bilateral creditors, and given downwardly-rigid recurrent spending, employees tasks the fiscal area for public investment to say no to four % of GDP by 2023. This low degree of investment is inadequate to maintain resilient infrastructure needs and is a big decline from the 15 % of GDP annual funding common within the earlier 5 years. Public debt stays high at round 80 % of GDP in the medium time period.
three. External present account deficits are projected to say no over the medium term, from over 40 % of GDP in 2018 to 10 % of GDP by 2024. This goes in tandem with a restoration of exports and a depletion of CBI and insurance deposits, which would scale back domestic demand to extra sustainable ranges. The outlook is, nevertheless, topic to vital uncertainty. Particularly, higher-than-projected CBI revenues would improve external and monetary deficits and improve progress additional.
4. Reaching the ECCU public debt goal of 60 % of GDP by 2030, whereas sustaining resilient funding requires a well-designed fiscal consolidation plan. The government should put together fiscal consolidation measures expeditiously, concentrating on savings of no less than 6 % of GDP to be adopted steadily over the medium time period. Measures must be staggered over 5-6 years to clean the probably destructive influence on progress. The plan will help progress by growing fiscal area for public funding whereas decreasing authorities consumption, together with tax measures aimed toward enhancing the efficiency of useful resource allocation:
On the revenue aspect, key measures might embrace a rationalization of tax incentives, with a cap on discretionary concessions and clear prioritization in line with nationwide improvement plans; a strengthening of tax auditing, which will require further human assets; a restructuring of water and sewage service tariffs to realize financial sustainability of the general public supplier; and a broadening of the bottom for personal revenue taxes, including by introducing a presumptive tax.
On the expenditure aspect, the federal government might contemplate a assessment of public wage allowances and a containment of wage increases under inflation; an acceleration of ongoing social security reform by bringing forward the deliberate improve within the retirement age and contribution rates and assessment of circumstances for retirement eligibility–together with longer contribution period and revised guidelines for pension willpower consistent with contribution effort. The effectivity of social transfers could be improved with proxy means-testing and better monitoring system of beneficiaries to attenuate duplication and abuse.
5. Fiscal establishments could be strengthened to help the achievement of the regional debt goal. Key enhancements might embrace (i) the adoption of a fiscal rule anchored on public debt, with escape clauses for natural disasters and different specified challenges; (ii) establishing a system to watch the operations of state-owned enterprises, including for fiscal planning and identifying contingent liabilities; and (iii) setting aside CBI income in a well-governed authorities saving fund for pure catastrophe insurance, resilient investment and debt discount. These enhancements will help safeguard the fiscal area for building resilience to natural disasters, especially pricey physical infrastructure and monetary insurance coverage, the core objective within the government’s nationwide improvement plan. These measures will even help fiscal sustainability, by serving to internalize the longer term prices associated with natural disasters and include public debt accumulation.
6. The financial sector stays secure and is recovering progressively from the impression of the hurricane. Nevertheless, extra decisive motion is required to safeguard monetary stability and help progress. Bank lending is predicted to remain smooth, owing to inadequate bankable tasks, lack of monetary statements required for mortgage qualification for many micro and small entrepreneurs, and lingering difficulties in implementing lending contracts in courts, including prolonged procedures for foreclosures and the seizing of collateral. The federal government ought to discover new choices to strengthen capitalization and scale back NPLs of the indigenous banking sector. To this finish, the plan submitted to the ECCB to assess the stability sheet impression of other capitalization choices is a vital first step.
Nevertheless, decisive motion is required to evaluate banks’ capitalization requirement absolutely. On this regard, two necessary steps are wanted. First, the impression of IFRS9 requirements on banks’ investment portfolio ought to be completed. Second, absent banks’ acceptance of NPL acquisition provides by the Japanese Caribbean Asset Management Company and the Worldwide Finance Company Asset Administration Company; write-offs should begin expeditiously—NPLs remained secure, albeit elevated, at 17 % up to now yr. Progress on decreasing NPLs would improve area for personal sector financing to help progress.
7. Addressing stability sheet weak spot of credit score unions is necessary to safeguard membership financial savings, keep financial inclusion and reduce contingent fiscal value. Capital and provisioning must be elevated to satisfy the regulation requirement while doubling the trouble to scale back NPLs. Choices might embrace using retained earnings, notably by prohibiting dividend distribution if undercapitalized, capital calls to the membership, or by means of mergers to extend effectivity and scale back working value. To this finish, the federal government should approve the already-prepared laws to strengthen the enforcement power of the Monetary Providers Unit (FSU). This laws ought to be handed with out additional delay and could possibly be amended at a later stage when there’s agreement on harmonized regulation throughout the region. Additionally, the legislation ought to be reviewed to make sure the regulator has sufficient energy to watch and regulate high-interest pay-day lending, which is accelerating—it explains the bulk of the loan portfolio progress in 2018. Monetary and human assets within the FSU want strengthening and would profit from technical help from worldwide specialists. To strengthen regulation enforcement, the FSU ought to be established as an unbiased entity outdoors the ministry of finance. It also needs to be granted financial independence with the authorized energy to collect fees and challenge penalties for non-compliance.
eight. Operations of the home insurance coverage company ought to be discontinued, considering its insolvency and lack of ability to honour excellent claims following the hurricane. To this end, the government ought to approve the FSU plan recommending intervention and liquidation. Given the danger of pure disasters, robust regulatory enforcement would improve competition within the insurance market with more participation of internationally-diversified institutions and danger transfer.
9. Progress on enhancing AML/CFT legislation in the direction of international requirements will assist scale back the danger of dropping correspondent banking relationships. Ongoing actions to strengthen the AML/CFT framework, in keeping with 2018 CFATF mutual evaluation recommendations, will facilitate info access and coordination among all competent authorities whereas enhancing the FSU’s evaluation and enforcement. The phase-out of the offshore banking sector ought to continue, and approval of revisions to the Offshore Banking Act, including greater capital necessities, license software course of reform, and enactment of laws, must be expedited.
10. The personal sector must play a extra outstanding position to sustain progress in the long term:
To increase employment, legal constraints on working hours ought to be eliminated and severance payments for redundancy ought to be reviewed. Addressing instructional gaps, in session with personal employers, will assist enhance labour drive adaptability and facilitate mobility –necessary contemplating seasonal demand in key sectors. The federal government might reform present employment packages to facilitate labour market entry with on-the-job training in expanding sectors, particularly tourism and agriculture.
Ongoing efforts to evaluation development and zoning laws ought to be enforced strictly in mild of vulnerability to natural disasters. This could scale back insurance prices and help protection.
With low-cost geothermal era anticipated by mid-2021, reduction of electricity tariffs might be possible, enhancing competitiveness and decreasing dependence on imported fossil fuels.
11. Knowledge provision has shortcomings as a result of resource constraints in the statistical agency, resulting in insufficient coverage, accuracy, frequency and timeliness of knowledge. More timely and improved knowledge pertaining to the nationwide and monetary accounts, labour market, the stability of funds, and non-bank monetary institutions are wanted for improved financial monitoring, finances planning and policy formulation. Stronger incentives might be adopted for the timely provision of knowledge to the Central Statistics Office by reporting public and private entities.