Country on its knees?

posted on: Jul 8 2011 10:33 by The Reporter. Viewed 680 times.


In a dramatic statement last week, former Dominican finance Minister and current manager of the Reserve Bank, Vicente Bengoa, said that the Dominican Republic was on its knees before the International Monetary Fund.
The statement was in relation to a US$1.66 billion stand-by loan made by the IMF on November 9, 2009, as the global recession led to a sharp drop in the country’s export earnings and declines in tourism and remittances.
The money was made available to the Dominican Republic upon assurances that the Goverment would make steps to reduce subsidies to the electricity sector among other things. The IMF is now concerned that the Dominican Republic is not following these policies
Minister of Economy, Planning and Development Temistocles Montas, described Bengoa’s words as “extremist” and “populist”, and playing to the media, but said that a rise in global oil prices is complicating the efforts to reduce these hefty subsidies.
Critics have pointed out that if the Dominican Government did not want to be bound by the IMF’s policies, they were not forced to take their money.
Vicente Bengoa says they had no choice. “We went to the IMF because we were placed between a rock and a hard place,” he said.
Bengoa said the country made the agreement with the IMF in 2009 due to economic growth, which was on average 9.5% in 2005-2007, declining in 2008 to 5.3% and the trend in 2009 was zero or negative “as with all Central American countries.”
“Estimated revenue fell by approximately RD$ 24 billion, and international credit was closed as a result of the global financial crisis,” he said .
He explained that, to complicate the situation further, the IMF made ​​it a condition that US$ 350 million was approved for the Dominican Republic by the World Bank and the Interamerican Development Bank (IDB) and entered in the national budget, only be disbursed if the agreement was signed with the IMF.
Under the IMF program, the government committed to a fiscal adjustment of 1 percent of gross domestic product by trimming the subsidies and increasing state revenue.
The government budgeted around $350 million for the subsidies this year, a 50 percent reduction from 2010. However, the Dominican Republic relies heavily on oil to generate electricity.
‘If the projections hold and oil ends the year above $90 a barrel, obviously we will not be able to maintain the electrical subsidies as they are laid out in the budget,’ Montas said.
The Dominican Republic has struggled for decades to come up with a plan to repair its crisis-ridden electricity sector. Private estimates say some 40 percent of Dominicans fail to pay for electricity, with many using illegal hookups to power their homes.
The IMF recently met with Goverment ministers in Santo Domingo and released a press release in June which overall was positive regarding the Goverment’s performance, but pointed out...
“While program performance continues to be broadly satisfactory, several performance criteria for end-December 2010 and end-March 2011 were not met—especially those related to the electricity sector, where larger subsidies deteriorated fiscal performance. Most structural measures have been implemented, some with a delay.
It continued...
“The government reiterated its commitment to the objectives and policies of its economic program which envisages a tightening of policies for 2011. Economic growth is expected to be between 5 and 5.5 percent, and the end-year inflation is projected to be in the 6–7 percent range, while fiscal policy aims at a consolidated public sector deficit of 3 percent of GDP, as envisaged in the 2011 budget.
“The increase in oil prices has led to significantly larger-than-programmed electricity subsidies for 2011. The authorities have reacted by adjusting electricity tariffs 8 percent effective in June 2011 and, cutting non-social spending by 12 percent since April 2011. In addition, they have sent to Congress a number of tax measures to reverse the declining trend in tax collections.
“The Central Bank has raised the policy rate by 275 basis points since the last quarter of 2010, increasing it from 4 to 6.75 percent. The tighter stance is consistent with the economy operating at potential and needed to contain spillover effects on inflation from the higher food and fuel prices.”

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