Dominican Republic W/TPR/S/11
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I. THE ECONOMIC AND TRADE ENVIRONMENT
(1) Major Features oftheEconomy1
1. TheDominican Republic islocated intheeastern halfoftheCaribbean island ofHispaniola
(with Haiti onthewestern half). Ithasanareaof48,442 km2.In1993, thepopulation wasaround
7.5million; population growth hasdeclined toaround 2percentinthe1990s from 2.7percentin
theearly 1970s. Theurban population isincreasing, amounting to63percentofthetotalin1993
(Table I.1). TheDominican Republic isendowed withdifferent types ofsoilsuitable foragriculture
andisrichinminerals; itstraditional production structure hasbeeninagricultural goods suchassugar,
coffee, cocoa, andtobacco andintheexploitation ofminerals suchasnickel, doré(agoldandsilver
alloy) andbauxite. Theabundance oflabour andtheproximity totheUnited States havebeenimportant
elements intherapid growth ofexports, mainly ofclothing, from freezones (Chapter V(4));
furthermore, abuoyant tourist industry hasdeveloped around themany attractive beaches
(Chapters V(5)).
Table I.1
Major features oftheDominican Republic economy (1987 prices)
1970 1975 1980 1985 1990 1991 1992 1993
Population (thousands) 4,423 5,049 5,697 6,376 7,110 7,247 7,387 7,543
urban population (percent) 40.0 45.3 50.5 55.7 60.4 61.2 62.1 62.9
Current GNP percapita (US$) 340 720 1160 760 890 1010 1170 1230
Labor force (thousands) 1,157 1,340 1,571 1,862 2,187 2,251 2,317 2,384
Female participation (percent) 11.0 11.7 12.4 13.7 15.0 15.3 15.6 15.9
GDP atconstant market prices
GDP (US$ million) 2,184 3,345 4,240 4,588 5,493 5,545 5,975 6,151
Share inGDP
Agriculture 27.6 20.9 20.0 20.3 16.0 16.5 16.2 15.8
Industry 23.7 29.2 28.4 26.2 24.6 23.5 24.6 24.2
Manufacturing 15.4 15.7 15.3 13.7 12.5 12.3 12.9 12.6
Services 48.6 49.9 51.6 53.5 59.4 60.1 59.2 60.0
School enrollment ratio
Primary 100 104 118 126 ... ... ...
Secondary 21 36 42 51 ... ... ...
... Notavailable
Note: Education ratios mayexceed 100percentwhere children outside thenormal school ageareattending school.
Source: World Tables 1994/95; andIMF, IFS.
2. TheDominicanRepublicisamiddle-incomedevelopingcountry;in1993,thecurrentpercapita
GNPwasUS$1,230. Throughout the1980s (andparticularly after1985), realGDPmovements became
1Theprincipal datareferred tointhisChapter correspond tothetables andcharts which arebased mainly
onWorldBank,IMFandUNSTATdata.OtherdatawereprovidedbytheGovernmentoftheDominicanRepublic.W/TPR/S/11
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increasingly erratic, reflecting macroeconomic instability (Chart I.1). After adownturn in1990, real
GDPgrowth recovered during 1991and1992. In1993, thegrowth ratedecreased butithasremained
positive; according tomore recent dataprovided bytheDominican authorities, GDP growth stood
at4.3percentin1994. Acomparison ofsocial indicators during theperiod 1970-75 and1987-92
demonstrates ageneral improvement inthewell-being ofthepopulation. Lifeexpectancy increased
from60to68years, while infant mortality decreased from80to41perthousand livebirths, andthe
totalfertility ratedecreased from5.8to3births perwoman.2However, access tosecondary education
remains low(although growing rapidly), which inthelongruncould become amajor constraint to
increased productivity andeconomic growth.
3. Theeconomy, traditionally based onagriculture, isnowdominated bytheservices sector
-particularly tourism -which represented 67percentofGDP in1993 (Chart I.2).3Manufacturing,
heavily dominated bythefree-trade-zone-based clothing industry, makes thesecond largest contribution
toGDP, followed byagriculture andmining. Theagricultural sector didnotperform wellduring the
1980s, itsshare inGDP declining consistently throughout theperiod. Thepoorperformance ofthe
2World Bank (1995). TheDominican authorities estimate thatlifeexpectancy increased from 55to70years,
while infant mortality decreased from 80to28perthousand livebirths.
3According toTable I.1thecontribution ofservices toGDP is60percent; thisisbased onWorld Bank
definitions under which construction andenergy areincluded inindustry. Chart I.2istaken from theBoletín
Trimestral oftheCentral Bank oftheDominican Republic. Theauthorities haveindicated thatservices accounted
for57percentofGDP in1993.Dominican Republic W/TPR/S/11
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sector canbeattributed tothenegative impact ofmacroeconomic policies, deteriorating terms oftrade,
unfavourable conditions forexports oftraditional agricultural products, andalackofentrepreneurial
skills andnewproduction technologies. However, agriculture isstillthemostimportant sector interms
ofemployment andoutput fordomestic consumption.
4. Asinmany developing economies, theinformal sector appears tobelarge. While noofficial
dataonitsshare ofGDP exist, itisestimated that35percentofthelabour force wasemployed in
agriculture, either commercial (sugar, coffee, tobacco) orfoodcrops (rice) andsubsistence farming.
Afurther 10percentisengaged inthefreezones andthetourist sector, while recorded unemployment
isestimated at22percent. Onthisbasis, theinformal sector could involve overhalfthework force
andmaymake asignificant butunrecorded addition toGDP. However, recent government estimates
show thatthesizeoftheinformal sector, including domestic staffandthose working forarelative
without pay,decreased from 65.3percentin1991 to40.1percentin1994.
5. International trade isofutmost importance fortheDominican Republic, given thesmall size
ofthedomestic market; ithasbeenoneofthemain engines ofeconomic growth. Tourism and
manufacturing inthefreezones, particularly clothing, haveovertaken agricultural exports. Asshown
inChart I.5,theshare ofagriculture asasource offoreign exchange hasdecreased since 1985, while
theshare ofservices hasincreased continuously, reaching 79percentin1994. Tourism nowaccounts
formore thanUS$1 billion inannual earnings andthefreezones account forUS$1.4 billion.
Remittances fromDominicans living abroad, mainly intheUnited States, arealsoanimportant sourceW/TPR/S/11
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offoreign exchange. During theperiod 1985-94 theaverage contribution ofremittances toexport
earnings was16percent.4
6. Amajor constraint forthegrowth inallsectors hasbeentheconstant shortage ofelectricity,
caused bythelackofgeneration anddistribution capacity. Theshortage ofelectricity haspromoted
theuseofsmall, private, electric generators thatarenoteconomically orecologically efficient.
According totheGovernment, thesupply ofelectricity hasimproved duetotechnical projects financed
bytheWorld Bank andthetechnical collaboration ofaSpanish company, Unión Eléctrica Funosa.
However, further efforts areneeded toeliminate shortages, andprivatization plans maybehelpful
(Chapter V(3)(ii)(b)).
7. Government involvement ineconomic activities iswidespread, including through direct
participation inproduction, although thishasdiminished inrecent years, including through private
participation inelectricity generation. Anumber ofState enterprises areleaders intheir sectors
(Annex IV.I), andsome benefit fromtheirmonopoly position (petroleum refining andflourmilling).
Privatization hasnotproceeded asrapidly asinsome other developing countries; butaforeign
investment bill,nowbefore theCongress, should behelpful inthisrespect.
(2) Recent Economic Developments
(i) Introduction
8. TheDominican Republic, likemany other small economies, haddifficulty inadjusting tothe
various external shocks ofthe1970s and1980s, namely, thevolatility ofexport prices, increases in
theprice ofoil,therecession inindustrialized countries, thedebtcrisis andincreases ininternational
interest rates. Atthebeginning ofthe1980s, theeconomy wasstagnating andstructural economic
problems became more evident. Asinmany other countries, theDominican authorities haddifficulties
inreconciling theimperative toresume growth fordevelopment purposes withtheneedtostabilize
andrestructuretheeconomy.Macroeconomicmanagementbecameincreasinglydifficult,andthesecond
halfofthe1980s wascharacterized bystagflation.
9. From 1986, faced withsocial unrest, theauthorities attempted toboost theeconomy withan
extensive programme ofpublic investment, combined withafreeze oncurrent expenditure including
wages andsalaries. Public investment wasfinanced through acombination offoreign debtarrears,
andmonetary creation through Central Bank andReserve Bank borrowing. Theresulting economic
expansion wascoupled withasharp increase ininflation, which reached anannual average rateof
60percentin1990 (Chart I.1;theauthorities record apeakof70percent).
10. In1990, astabilization andstructural reform programme (theNewEconomic Programme,
NEP), aimed atrestoring internal andexternal equilibrium, wasimplemented andcontinued atleast
through 1993 (Box I.1). Thefirstpriority oftheNEP wastostopinflation; keyelements ofthe
programme weretheelimination ofthefiscal deficit, creation ofaunified, market-determined exchange
rateandtightening ofmonetary policy. Inthisconnection, thebudget deficit wastobereduced by
cutting subsidies topublic enterprises andincreasing revenues, primarily byraising trade taxes. The
Central Bank cutbackmonetary expansion, reducing thesupply ofcredit. TheBank alsoexercised
closer control overinternational reserves, andservicing ofexternal debtwasresumed. Thefiscal
stringency andtightmonetary policies caused amajor slowdown oftheeconomy in1990. Reforms
4Central Bank oftheDominican Republic (preliminary data).Dominican Republic W/TPR/S/11
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werealsoinitiated inthetraderégime, thetaxsystem andtherulesandregulations governing foreign
investment. These included thetariff reform of1990, theapproval ofthenewTaxCode (Código
Tributario )in1992 (Box I.2)andthefinancial reform of1993 (Box I.3).
BoxI.1Main stabilization measures taken between 1990 and19925
Fiscal Policies:
1. Domestic petroleum prices were doubled. Thedifferential between thedomestic andimport
prices became animportant source ofrevenue, yielding about 2percentofGDP.
2. In1990, subsidies toelectricity, sugar, andwheat products were eliminated.
3. Thevaluation ofimports wasimproved duetotheunification oftheexchange rate, andtheuse
ofc.i.f. rather thanf.o.b. values.
4. A15percent temporary import surcharge wasestablished, subsequently reduced to10percent
andthen4percent, andeliminated inJune 1995. Thesurcharge affected about 40percentof
imports, including crude oil,butnotfoodstuffs.
5. In1991, tariff rates were multiplied byacoefficient of1.3,which wasreduced in1992 to1.2,
in1993 to1.1, andeliminated inSeptember ofthesame year.
6. Ataxof2.5percentwaslevied onforeign exchange transactions, reduced to2andthento
1.5percent.
Monetary Policy:
1. In1991, interest rates were liberalized. During 1991 interest rates declined, followed byan
increase in1992.
2. Tight monetary policies were adopted in1991 and1992. Domestic credit tothepublic sector
contracted
Exchange Rate Policy:
1. Aprogramme toeliminate thedifferential between theofficial andthemarket exchange rates
wasimplemented.
2 In1991, theexchange ratewasofficially unified andamanaged float exchange ratesystem was
adopted.
11. Progressinstabilizingtheeconomywasveryencouraging.Inflationwasreducedto4.6percent
bytheendof1992. Apublic sector deficit, including Central Bank losses, ofabout 5percentofGDP
wasconverted intoasurplus of0.1percentofGDP in1991.6Theexchange ratesystem wasalso
unified andamarket-determined system wasestablished.7RealGDPshowed aslight riseof0.9percent
in1991, compared withthedecline of4.8percentin1990. In1992, theeconomy grewinrealterms
by7.8percentandafiscal surplus of1.6percentwasachieved (Table 1.2). Theoverall balance
ofpayments showed asurplus of3.2percentofGDPin1991, inspiteofadeficit oncurrent account.
Netinternational reserves rosebyUS$380 million inthesame year. Thepositive performance ofthe
economy andthere-establishment ofrelations withtheinternational financial institutions restored
credibility, encouraged therepatriation ofcapital andbrought increased foreign direct investment.
However, in1992 theoverall balance ofpayments again became negative, showing adeficit of
US$63 million (Table I.4).
5Source: Government oftheDominican Republic
6IMF.
7Itiscalled aunified exchange ratesystem, butthere arestilltwomarkets: theofficial andtheparallel.W/TPR/S/11
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Table I.2
Economic performance oftheDominican Republic, 1980-93
(percentandUS$million; based on1987 prices)
1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Income andabsorption Average annual growth rate
RealGNP,
atmarket prices4.2 0.8 5.8 6.1 (1.1) 15.9 (3.2) 1.1 8.0 4.6 ...
RealGDP,
atmarket prices4.9 1.6 3.0 7.5 0.7 12.7 (4.8) 0.9 7.8 2.9 ...
--Private consumption 7.2 (0.6) 6.1 2.4 7.1 (1.6) (13.2) 4.6 3.5 (1.0) ...
--Government consumption 7.8 6.7 2.2 (17.7) 9.5 5.0 0.6 9.7 5.7 0.7 ...
--Gross domestic investment 4.1 (4.5) 3.9 41.6 8.2 0.1 (17.3) (10.3) 34.3 6.5 ...
--Fixed investment 4.0 (3.8) 3.3 41.0 10.4 0.7 (17.4) (12.5) 35.4 5.7 ...
Resource balance
--Imports ofgoods &non-factor
services11.7 (5.4) 7.9 7.8 (1.2) 6.3 (9.8) 2.3 23.8 (2.8) ...
--Exports ofgoods &non-factor
services8.7 0.1 1.4 6.0 (25.8) 69.6 14.5 1.3 14.3 1.6 ...
Competitiveness indicators
GDP deflator 7.8 14.3 9.7 15.1 44.1 32.6 60.7 52.8 4.2 4.2 ...
Consumer price index 9.9 16.2 9.7 15.9 44.4 45.4 59.4 53.9 4.6 5.2 ...
Interest rates Percent
-Lending ... ... ... ... ... ... ... 34.4 29.7 24.9 30.2
-Saving ... ... ... ... ... ... ... 18.5 16.7 8.3 18
Average annual growth rate
Monetary survey
Money supply (broadly defined) 9.8 16.7 56.4 19.2 44.5 28.7 35.6 38.3 27.8 24.5 ...
Money 10.6 17.1 42.9 33.4 55.9 24.3 41.2 24.5 16.9 22.7 ...
Quasi-money 9.3 16.3 67.2 9.6 35.1 32.8 30.7 51.6 36.4 25.7 ...
Central government deficit (-)or
surplusPercentofGDP
Current balance ... ... ... ... 8.1 8.1 4.4 4.6 6.5 5.9 5.2
Capital balance ... ... ... ... (9.6) (8.8) (5.3) (4.9) (7.2) (8.5) (10.1)
Grants ... ... ... ... 0.8 1.3 0.8 0.7 0.9 0.8 0.3
Overall balance ... ... ... ... (0.7) 0.6 (0.1) 0.4 0.2 (1.8) (4.6)
Public sector overall balancea... ... ... ... (6.9) (5.9) (5.0) 0.1 1.6 (0.2) ...
Balance ofpayments
Current account balance (10.9) (2.4) (3.4) (7.2) (0.4) (3.2) (1.4) (0.5) (5.1) (1.7) ...
Overall balance (1.9) 2.8 2.2 (1.6) 0.0 (3.6) (5.5) 3.2 (0.7) 0.4 ...
Memorandum:
GDI/GDP 25.2 20.4 19.7 28.4 29.0 27.4 20.7 17.0 21.1 22.4 ...
GDS/GDP 15.4 15.1 15.5 20.7 26.0 22.0 16.9 13.5 14.2 18.1 ...
a Refers toconsolidated andnon-consolidated public sector (including operating losses oftheCentral Bank) afterforeign
official grants.
... Notavailable.
Source: Government oftheDominican Republic; World Bank 1994/95; andIMF, IFS.Dominican Republic W/TPR/S/11
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12. Towards theendof1993, theGovernment again adopted anexpansionary fiscal policy; the
fiscal deficit, including losses oftheCentral Bank, reached 0.2percentofGDP. Growth ofrealGDP
declined to3percentandinflation, asmeasured bytheconsumer priceindex, increased to5.2percent.
Ontheotherhand, international reserves rosebyUS$131.8 million. Following thePresidential elections
of1994, newstabilization policies were introduced from September; theauthorities haveindicated
theirintention tomaintain fiscal andmonetary discipline asameans ofensuring sustainable growth
from 1995.
(ii) Supply anddemand
13. In1993, realGDP grew atarateof3percent, ledprincipally byservices (mainly tourism)
andmanufacturing inthefreezones; these twosectors have ledeconomic growth inthe
Dominican Republic since theearly 1970s. Onthedemand side,private consumption hasfluctuated
considerably according toeconomic cycles, peaking in1989andagain in1991afterdeclining in1990,
theyearoftheausterity programme (Chart I.3). Thecontribution ofnetexports todemand before
themid-1980s, wasnegative; however, more recently, despite thereduction ofanti-export biasin
theeconomy, thecontribution ofnetexports togrowth hasfluctuated around zero, mainly duetothe
importance offree-zone exports withahighshare ofimported inputs.
(iii) Labour market
14. Thelabour forceintheDominican Republic isestimated toamount tosome2.5million workers
in1995.8Theaverage growth rateofthelabour force during theperiod 1965-95 was4.2percent,
butitiscurrently growing atabout 1.9percent. Menmake up84percentofthelabour force.
15. Theoverall rateofunemployment iscurrently 22percent,withunemployment being highest
among women: 87percentofmaleworkers areemployed, compared toonly18percentofwomen.9
Women areemployed primarily inthefreezones, where female employment isabout 57percentof
thetotal. However, according toofficial estimates female employment grew atarateofmore than
8.5percentin1994, while maleemployment grew atarateof2.7percentinthesame year.
16. Wages arefreely negotiated, butmustbesetwithreference tolegalminimum levels forthe
private andpublic sectors. In1991, minimum wages inthepublic sector wereincreased by20percent
tomake upforthehighlevelofinflation. In1994minimum wages wereagain increased intheprivate
sector, including thefreezones, butasinflation increased theunions pushed foranother increase in
minimumwageswhichwasapprovedatthebeginningof1995.Accordingtotheauthorities,thisincrease
insalaries hasbeenfinanced bytheincrease oftheISC(Selective Consumption Tax,Impuesto Selectivo
alConsumo )levied oncigarettes, strong alcohol andbeer, thusimplying little ornofiscal risk.
However, theyentail some lossofcompetitiveness inthefreezones, where thesuccess oftheclothing
industry relies onverylowwages.
8"Work force" includes workers aged 15-64.
9World Bank (1995). World Development Report 1995: Workers inanIntegrating World, Oxford University
Press, Oxford.W/TPR/S/11
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(iv) Public finance
17. Thelevelofgovernment spending andofCentral Bankcredit, havebeenthemaindeterminants
ofinflation intheDominican Republic. Theoverall public sector deficit, including losses ofthe
Central Bank, declined from 6.9percentin1988 to5percentin1990; withthestabilization
programmeoftheearly1990s,anoverallsurpluswaspostedin1991and1992.TheCentralGovernment
current account hasthroughout thisperiod beenkeptinsurplus; however, considerable deficits have
occurred inthecapital account which, afterfalling tounder 5percentofGDPin1991, increased sharply
again toover10percentin1994(Table I.2).Theoverall deficits ofpublic enterprises havegenerally
declined since 1989.
18. Central Government income isbased mainly onindirect taxes. Thetwomainsources offiscal
revenue areinternal taxes ongoods andservices andoninternational trade taxes; intheperiod 1985-
1989thesetwosources accounted, onaverage, foraround 60percentoftotalfiscal income (Table I.3),
withinternal andexternal taxesequally important. Since 1990, theshare ofinternal taxeshasincreased
duetheimprovement inthetaxcollection system andtotheTaxReform of1992 (Box I.2). The
collection ofrevenues fromexport taxes wasnegligible; theywereabolished in1991. Revenue from
import taxes hasincreased since thetariff reform (1990) despite tariff reduction (Box IV.1). Import
taxcollection during 1985-1989 amounted to27percentoftotalCentral Government revenue, while
fortheperiod 1990-1994 itaccounted for37percent. Heavy reliance ontrade taxes asasource of
revenue could conflict withfurther liberalization efforts; however, themodernization ofthetaxsystem
anditsadministration should offset anydecline intheimportance oftrade taxes.
Table I.3
Central Government revenue
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994a
Total revenue
R$million1,910.4 2,515.4 3,085.4 4,910.2 7,161.8 8,042.2 13,733.7 17,774.3 20,715.2 21,961.6
Percentage 100 100 100 100 100 100 100 100 100 100
A.Current revenue 85.2 84.8 92.4 92.0 95.2 94.1 95.7 97.2 93.7 93.7
I.Taxrevenue 80.0 80.1 81.7 79.2 74.0 78.6 83.1 87.8 87.0 87.5
1.Taxes onincome 17.6 16.7 16.2 17.1 17.9 19.9 17.3 15.5 15.0 14.7
2.Taxes onproperty 0.7 0.7 0.9 0.8 0.6 0.7 0.5 0.5 0.6 0.6
3.Taxes ongoods
andservices32.4 37.8 31.9 26.3 21.6 27.0 36.7 35.4 38.7 44.2
4.Taxes on
international trade28.1 23.9 31.6 33.6 30.4 30.4 28.3 35.9 32.3 27.6
(a)Taxes on
imports26.0 19.8 29.1 29.9 28.6 30.4 28.2 35.9 32.3 27.6
(b)Taxes on
exports2.1 4.2 2.5 3.6 1.8 0.1 0.0 0.0 0.0 0.0
5.Other taxes 1.2 1.0 1.1 1.3 3.5 0.5 0.4 0.4 0.5 0.5
II.Non-tax revenue 5.3 4.8 10.7 12.8 21.2 15.5 12.6 9.5 6.7 6.2
B.Other revenue 14.8 15.2 7.6 8.0 4.8 5.9 4.3 2.8 6.3 6.3
a Preliminary data.
Source: National Treasury oftheDominican Republic.W/TPR/S/11
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BoxI.2TaxReform of199210
In1992 theGovernment oftheDominican Republic, realizing theimportance ofovercoming the
recurrent fiscal problem toattain economic stability, decided onasimpler taxcode toincrease fiscal
revenues andimprove theefficiency oftaxcollection. Thetaxreform enacted byCongress modified the
income tax,thetaxonthetransfer ofindustrialized goods andservices (Impuesto alasTransferencias de
Bienes Industrializados yServicios ,ITBIS), andtheSelective Consumption Tax(Impuesto Selectivo al
Consumo ,ISC).
Personal andcorporate income taxes were simplified. Theminimum income subject topersonal income
taxwasraised, three rates being established forpersonal income taxandoneforcorporate income tax.
Thenewlawstates thatpublic enterprises aretopaythesame income taxes asprivate enterprises. It
abolished fiscal incentives forallsectors, except forthefreezones, andnewincome taxincentives can
nowonlybegranted tofirms withfree-zone status.
TheITBIS wasincreased from 6to8percent. Thistaxwillalsobelevied onservices such asleasing;
allexports areexempt, aswellassome specific domestically produced andimported goods. Thelistof
exempt domestically produced goods includes: unprocessed agricultural andlivestock products, milk,
cheese andbutter, bread andflour, legumes, processed cereals, ground coffee, processed cocoa, rice,
poultry andeggs, meat, salt, sugar andhoneys, charcoal, books, oilandrelated products, medicines,
fertilizers, andmatches. Thelistofexempt imported goods include: books, oilandrelated products,
fertilizer, salted codandherring, milk, maize andwheat, andfungicides.
TheISCwasconverted from aspecific toanadvalorem tax.Fifty individual lawscontaining more than
100taxrates were eliminated andreplaced bythenew TaxCode which imposes rates of10to
15percentfordomestically produced goods andseven rates ranging from 5to80percentforimported
goods. Thedomestically produced goods subject toISCarealcoholic beverages andtobacco products.
Theimports aremainly motor vehicles, kitchen appliances, alcoholic beverages andtobacco products.
Theimport surcharge established in1987 wasreduced from 15to10percent, andisschedule for
elimination in1995.
Despite thistaxreform, trade taxes arestillaconsiderable source ofrevenue intheDominican Republic
asdemonstrated inTable 1.5. Inorder toincrease domestic taxcollection reforms should betaken
further. Forinstance, there isaneed tostrengthen theadministration ofthetaxcollection system and
control, tocomputerize information, andtrain personnel. Furthermore, theefficiency oftaxcollection is
essential tomeet revenue requirements duetotheplanned elimination ofthe15percent temporary
foreign exchange surcharge andthereduction to1.5percentoftheforeign exchange taxcollected bythe
Central Bank (Chapter IV,BoxIV.1).
(v) Monetary policy
19. MonetaryandfiscalpoliciesarecloselylinkedintheDominicanRepublic,sincetheCentralBank
hasbeencalled ontofinance public sector deficits. Management ofmonetary policy became easier
in1991 and1992 duetotheimprovement inthefiscal situation. Thefinancial system alsobecame
moreefficientduetoliberalizationofinterestrates,unificationofreserverequirementsandsimplification
ofthelegalframework (Box I.3).Since September 1994, theGovernment hasfollowed amorecautious
10Based onLaw 11-92 TaxCode oftheDominican Republic (Ley 11-92 Código Tributario dela
República Dominicana )Dominican Republic W/TPR/S/11
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programme ofmonetary growth, and(importantly) theuseofinternal credit bytheCentral Bank has
beenseverely limited, asshown indatafortheoverall public sector balance. Monetary discipline is
expected tobesufficient tocontain inflationary pressures during 1995.
BoxI.3Financial Reform
In1993, theGovernment introduced major reforms inthefinancial system including theauthorization of
multi-service banks andtheapproval ofnewprudential regulations. TheSuperintendency ofBanks began
tomodernize withtheaimofstrengthening banking supervision. Further reforms arecontemplated by
thedraft Monetary andFinancial Code before Congress. These reforms aimatincreasing competition
andreducing segmentation inthefinancial system, andstrengthening theautonomy oftheCentral Bank.
Thenewregulations willgovern State-owned banks aswellasprivate banks.
According totheIMF, thereform hasbeen sustained andsubstantive, since banking supervision and
regulation hasevolved from practically non-existent intoaframework consistent with international
standards.
Thereform establishes anewapproach towards banking supervision andregulation. Supervision will
focus ontheanalysis oftheportfolio quality andthefinancial position oftheinstitution. Thereform
seeks toimprove transparency inthefinancial sector regarding prudential regulations, accounting, and
disclosure ofinformation.
TheThird Resolution oftheMonetary Board ofDecember 1992 (Tercera Resolución delaJunta
Monetaria )allowed thecreation ofmulti-service banking, sothatdifferent services could beprovided by
onefinancial institution andnotonlybyspecialized banks asinthepast(Chapter V(5)(ii)). Thisshould
reduce thesegmentation ofthebanking system andmake itmore efficient. Since theendof1992, bythe
Fifth Resolution oftheMonetary Board (Quinta Resolución delaJunta Monetaria), themulti-service
banks arealsoallowed toperform transactions inU.S. dollars andanyother convertible currency.
Thefinancial system isatpresent inaprocess oftransition, moving away from asystem ofspecialized
banking andadjusting toamore strict setofrules. Infact, enforcement ofthenewregulations brought
tolight solvency problems ofsome institutions which have nowbeen liquidated.
20. Interest ratesremained highafterbeing liberalized duetothecontractionary monetary policy
andtheperceived highriskofinvesting inDominican financial institutions. Thespread between saving
andlending ratesisconsiderable; theaverage lending rateintheperiod 1991-1993 was30percent,
while thesaving ratewas18percent(Table I.2).Thisspread iscaused byconcentration inthefinancial
system; thehighcostsoffinancial intermediation duetoahighpercentage ofbadloans inthebanking
system; andtheriskinvolved ininvesting inwhathasbeenperceived asanunstable banking system.
Therefore, even though there have beenpositive realinterest rates since 1991, there hasbeen no
substantial increase insavings. Infact,there isacontinuing gapbetween savings andinvestment that
hastobemade upbyforeign resources (Chart I.3).
(vi) Prices
21. Asnoted above, theexpansionary fiscal andmonetary policies adopted attheendofthe1980s
caused theinflation ratetoincrease tounprecedented levels. Thestrict monetary policies adopted as
partofthestabilization package helped toreduce average annual inflation to4.6percentby1992.W/TPR/S/11
Page 12Trade Policy Review Mechanism
However, in1993, inflation again started toincrease andaccording totheauthorities, roseto
14.3percentin1994, when Central Bank credit wasagain usedtofinance public expenditure. With
renewed tightening ofmonetary discipline in1995, therateofinflation wasexpected tofall.
(vii) Exchange ratedevelopments
22. Between 1967 and1980, theDominican pesowaspegged totheU.S.dollar. With prices in
theDominican Republic rising faster thanthose intheUnited States, there wasarealappreciation of
thepeso. Inthatperiod, theGovernment, instead ofallowing thenominal ratetodepreciate, permitted
theemergence ofaparallel market, usable onlybyselected sectors; thus, while thetourism sector
andthefreezones were allowed tobuyandsellforeign currency intheparallel market, allother
exporters hadtosurrender foreign currency earnings totheCentral Bank. Throughout thisperiod,
traditional exports declined while thetourism sector grew. Importers ofinputs andbasic goods were
alsoallowed tobuyforeign currency attheofficial rateattheCentral Bank, while importers offinal
goods hadtoacquire foreign currency atthehigher purchasing rateintheparallel market. Thisexchange
ratepolicy effectively increased thelevelofprotection toimport-substituting industries, while partly
offsetting costincreases forthetourist andother export sectors. Theauthorities wereabletomaintain
theover-valued pesobyborrowing abroad.
23. In1980, thepegtotheU.S.dollar could nolonger besustained andthepesowasprogressively
devalued. In1985, theCentral Bank allowed thepesotofloatfollowing trends intheparallel market;
thepesocontinued depreciating upto1988. During thisperiod, especially from 1985 to1987, the
official andparallel exchange rateswerepractically unified. In1987theCentral Bank settheofficial
rateattheprice prevailing intheparallel market. However, in1988thegapbetween theofficial and
theparallel market wasallowed towiden andthepesohassince beenappreciating inrealeffective
terms (Chart I.4).
24. In1991, aspartofthestabilization package, theexchange ratewasagain unified andtheofficial
ratesetaccording tothatoftheparallel inter-bank market. Moves havebeenmade overthepastfew
yearstoreducerestrictionsoncurrentaccounttransactions,includingsurrenderrequirements.However,
themarket isstillsomewhat segmented (Annex I.1). TheCentral Bank hasalsointervened toprevent
thepesofromappreciating under pressure fromshort-term capital inflows.11Nevertheless, thespread
between theofficial andtheinter-bank ratehasvaried overtime, reportedly amounting tosome
6.5percentinMay1995.12
11Dauhajre (1994), Sesgo Anti-exportador yPromoción deExportaciones ,Santo Domingo,
República Dominicana.
12Aspread ofover2percentgives risetoa"multiple currency practice" interms oftheIMFAgreement.Dominican Republic W/TPR/S/11
Page 13
25. Chart I.4shows thatthemovement oftherealeffective exchange ratedidnothavetheexpected
effect upon thetrade balance; bothimports andexports decreased after1980. Imports decreased in
realterms mainly because oftheelimination ofthepreferential treatment afforded tomostimporters,
whocould nolonger obtain foreign currency atasubsidized rateintheofficial market; andalsodue
tothegeneral slowdown oftheeconomy. Exports didnotrespond positively totherealdepreciation
intheperiod upto1988 because ofstructural constraints. Ontheother hand, in1989, despite the
realappreciation oftheeffective exchange rate,thevalue ofexports rose, mainly duetoasubstantial
increase intheprice offerro-nickel (Chapter V(3)(i)). Thecontinued small surplus inthebalance of
trade ingoods andservices isexplained bytheincrease intourism revenues and,toalesser extent,
thegrowth inremittances fromabroad. Thus, eventhough theexchange rateisanimportant determinant
oftrade flows, therelationship between these intheDominican economy islessclear thaninother
countries.
26. Inthepast,exchange ratepolicy intheDominican Republic wasascyclical asmonetary and
fiscal policies andappears partly responsible forexternal disequilibria. Thecurrent administration,
however, iscommitted toeliminating exchange ratedistortions, maintaining astable realexchange
ratethatwillencourage trade flows, andenforcing theexchange system reforms taken in1991.
(viii) Balance ofpayments
27. Formany years, thecurrent account hasrunadeficit, withmerchandise tradeindeficit, while
services trade hasbeeninsurplus (Table I.4). Asalready stated, revenue from traditional exports
(agriculture andminerals) hasfallen, duetobothadecline inquantity exported andinterms oftrade,W/TPR/S/11
Page 14Trade Policy Review Mechanism
while income fromtourism, thefreezones andremittances haveincreased torepresent 79.4percent
ofthetotalin1994(Chart I.5). Themostimportant source offoreign exchange isthetourism sector,
which hasbeengrowing veryrapidly, generating gross revenues ofoverUS$1 billion in1993 and
1994. Thecurrent account deficit isalsoreduced bythepositive effect ofworkers 'remittances from
abroad, amounting tooverUS$400 million inrecent years, orsome 16percentofexternal current
earnings (Chart I.5).
Table I.4
Balance ofPayments
(US$ million)
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Current
account
balance(107.9) (183.4) (364.1) (18.9) (215.7) (106.2) (35.7) (445.2) (161.0) ...
Merchandise
trade balance
(f.o.b.)a(547.4) (629.6) (880.2) (718.3) (1,039.4) (1,058.3) (1,070.5) (1,611.8) (1,606.9) (1,631.8)
Exports 738.5 722.1 711.3 889.7 924.4 734.5 658.3 562.5 511.5 644.0
Imports 1,285.9 1,351.7 1,591.5 1,608.0 1,963.8 1,792.8 1,728.8 2,174.3 2,118.4 2,275.8
Services -net
balance309.8 409.8 491.6 616.0 688.0 830.2 841.0 953.4 1,261.9 939.6
Income -net
balance-226.3 -249.7 -306.1 (270.6) (248.7) (248.7) (192.7) (218.6) (257.6) ...
Netunilateral
transfers356.3 286.1 330.6 353.6 384.4 370.6 386.5 431.8 441.6 493.2
Capital
account
balance75.5 220.7 33.8 (15.6) 160.0 (17.2) (137.7) 76.3 264.4 ...
Foreign direct
investment, net36.2 50.0 89.0 106.1 110.0 132.8 145.0 179.7 182.8 189.5
Other capital,
n.i.e.39.3 170.7 (55.2) (121.7) 50.0 (150.0) (282.7) (103.4) 81.6 ...
Neterrors and
omissions155.7 82.3 248.9 35.6 (185.2) (294.1) 426.7 305.8 (69.1) ...
...
Overall
balance123.3 119.6 (81.4) 1.1 (240.9) (417.5) 253.3 (63.1) 34.3 ...
International
reserve
(increase -)(84.3) (96.6) 218.6 (238.8) 117.3 (75.8) (380.3) (123.5) (131.8) 464.1
a Merchandise trade dataarebased oncustoms books anddonotinclude trade fromfreezones. Figures therefore varyfromother
merchandise trade datainthisreport.
Source: International Monetary Fund, Internatinal Financial Statistics (to1993); andDominican authorities (1994).Dominican Republic W/TPR/S/11
Page 15
28. Thecapital account hasfluctuated throughout theperiod. Overall netcapital inflows tothe
Dominican Republic havetended tovaryaccording tothestability oftheeconomy, largely reflecting
short-term flows. Thus, astheeconomy stabilized atthebeginning ofthe1990s, short-term private
capital inflows increased rapidly, slowing in1992-93 andturning negative in1994; nonetheless, direct
foreign investment hasgrown steadily.
29. External debt hasalso played animportant rôle intheexternal accounts ofthe
Dominican Republic. External debtincreased fromUS$2 billion in1980 toUS$4.6 billion in1993,
equivalent tosome 58percentofGNP (down from apeakof93percentin1988) and194percent
ofexports ofgoods andservices (Table I.5).13Thecountry hadcontinuing difficulty inmeeting its
external debtcommitments andarrears hadaccumulated. However, since 1991, theauthorities have
beenrenegotiating theirbilateral debtwiththeParis Clubandwithnon-members; anagreement with
thecommercial banks wasachieved in1994 andarrears withmostcountries havenowbeencleared.
13WorldBankestimates.TheDominicanauthoritiesestimatethattheexternaldebtincreasedtoUS$3.9billion
in1993, equivalent tosome 47percentofGNP and175percentofexports ofgoods andservices.W/TPR/S/11
Page 16Trade Policy Review Mechanism
Table I.5
External debt, 1980-93
(US$ million)
1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Debt bycategories
(US$million):
External debt, total
(EDT)2,002 3,502 3,687 3,923 3,991 4,053 4,387 4,494 441 4,559 3922
Long termdebt(by
debtor)1,473 2,842 3,076 3,353 3,400 3,439 3,533 3,834 4,160 4,248 3599
Public andpublicly
guaranteed1,220 2,694 2,930 3,220 3,282 3,334 3,434 3,751 4,160 4,248 3599
Private
non-guaranteed254 151 146 133 118 105 99 83 0 0 0
UseofIMFcredit 49 297 304 284 218 123 72 89 123 186 190
Short termdebt 480 364 307 287 373 492 783 571 130 125 133
Memorandum:
EDT /XGS % 133.8 220.8 223.4 212.5 186.8 170.4 188.1 193.2 ... ... ...
EDT /GNP % 31.2 84.0 71.1 82.0 92.5 63.8 65.2 66.0 ... ... ...
RES/EDT % 13.9 9.9 10.4 4.9 6.5 4.2 1.6 10.0 ... ... ...
Total debtservice due/
XGS %... ... ... ... ... 18.9 19.3 19.3 ... ... ...
... Notavailable
Source: World Bank, World Tables (to1991); andDominican authorities (1992 to1994).
(3) Composition andDirection ofTrade
(i) Composition oftrade14
30. Chart I.6shows thechanges thathavetaken place inthecomposition ofmerchandise trade
since 1980. Traditional agricultural exports havediminished inimportance, while manufacturing has
become increasingly important (Table AI.1). Food products (sugar, coffee, cocoa, andtobacco) the
traditional exports oftheDominican Republic, decreased from64percentoftotalmerchandise trade
to15percentin1993. Ironandstealexports, previously animportant source ofrevenue, alsodecreased
from 12to4percent. However, according tomore recent dataprovided bytheauthorities, exports
ofmineral products grewby52percentin1994, duetotheincrease insalesofferro-nickel anddoré.
Exports ofclothing manufactured inthefreezones showed asteepincrease ofmore than40percentage
points intheirshare intotalmerchandise exports. Exports ofother manufactured goods havedeclined.
Ontheimport side,themostrelevant changes havebeenanincrease intheshare ofmanufactures imports
from54percentto74percentin1993andadecline infuelimports from25percentto10percent
(Table AI.2).
14Thetrade datausedinthisReport isfrom theComtrade database asreported bytheDominican Republic 's
trade partners; theDominican Republic ceased reporting asof1986. Anyinconsistencies between theSecretariat
dataandthose oftheGovernment reflect thisfact. Moreover, theComtrade datainclude trade ofthefreezones,
notincluded inbalance-of-payments statistics (Table I.4).Dominican Republic W/TPR/S/11
Page 17
31. Acombination ofinternal andexternal factors triggered thepoorexport performance. As
discussed above, macroeconomic andstructural problems generated aserious anti-export biasuntil
recently. Inaddition, external factors influencing theperformance ofDominican exports included heavy
protection andsubsidization bymajor trading partners, asinthecaseofsugar; declines ininternational
commodity prices forcoffee, cocoa andferro-nickel; andtheexistence ofnon-tariff barriers fornon-
traditional exports, suchasquantitative restrictions affecting bananas andphytosanitary measures on
beefexports.
32. Services andtransfers havebecome themostimportant sources offoreign exchange earnings
(Chart I.5). Income from these sources increased from 53to80percentoftotalexports ofgoods
andservices between 1985 and1994. Tourism andnetproceeds oftheforeign companies operating
infreezones constitute mostofnon-factor services (NFS) exports. Remittances fromabroad arealso
animportant source ofrevenue; remaining constant ataround 15percentthroughout theperiod.
(ii) Direction ofmerchandise trade
33. Themain trading partner oftheDominican Republic istheUnited States, andthislinkis
becoming evermore concentrated. Theshare ofmerchandise exports totheUnited States increased
from68to90percentbetween 1980 and1993 (Chart I.7andTable AI.3). Interms ofimports, the
United States isalsothemost important supplier, followed byLatin American countries. However,
thelattergroup haslosttheirrelative importance, theirshare ofimports decreasing byalmost 14percent
between 1980 and1993, while imports from theUnited States increased by13percent, reaching
59percent(Table AI.4). Theconcentration intradeisduetothepreferential treatment ofDominican
exports under theCBIandtheexistence offreezones which export clothing almost exclusively tothe
U.S.market (Chapter V(4)(i)). Trade withtheEuropean Union hasnotbeenasimportant inrelative
terms, decreasing since 1980, eventhough Dominican exports aregranted preferential access under
theLomé Convention. Recent dataprovided bytheGovernment, which donotchange theessential
pattern oftrade, show Dominican exports totheUnited States, including free-zone exports, at
84.45 percentin1993and84.4percentin1994, andexports totheEuropean Union at7.94percent
in1993 and8.63percentin1994. Theauthorities notethatexports totheEuropean Union are
increasing, especially exports ofbananas.
(4) Outlook
34. TheDominican Government 'sexpectations areforrealGDP tocontinue togrow atarateof
4percent. Itsobjectives aretobalance public finances, tokeepinflation low,andtomaintain a
sustainable balance-of-payments position. These targets canbeattained onlyifmacroeconomic stability
issustainedandgrowthinsomesectorsrestored.However,fiscaldisciplineisakeyelementinachieving
andmaintaining stable growth; central tothisisthecontinuation oftaxreforms andreforms ofpublic
enterprises.
35. While itisexpected thatbothtourism andoutput inthefreezones willcontinue toexpand,
growth intherestoftheeconomy depends onfurther liberalization sothatresources canbeallocated
where theywillbemostproductive. Suchstructural adjustment, combined witharealistic, stable real
exchange ratewould ensure thatpastsuccess canbecontinued andcompetitiveness maintained.W/TPR/S/11
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Dominican Republic W/TPR/S/11
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W/TPR/S/11
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Annex I
Foreign Exchange Régime15
Thecurrency oftheDominican Republic istheDominican peso(R$). Theofficial exchange rateof
theR$issetdaily based ontheprevious day'sinter-bank rate. Theinter-bank market rateissetby
market forces. TheDominican Republic formally accepted theobligations ofArticle VIIIoftheIMF
inAugust 1953.
Exchange control policy isdetermined bytheMonetary Board andisadministered bytheCentral Bank
(Banco Central delaRepública Dominicana ).Commercial banks areallowed tooperate intheforeign
exchange market.
Settlements withcertain Latin American countries (Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico,
PeruandUruguay) maybemade through special accounts established under reciprocal credit agreements
within theframework oftheLatin America Integration Association (Asociación Latinoamericana de
Integración ,ALADI). Settlements under reciprocal credit agreements withArgentina andVenezuela
havebeensuspended. Allpayments must beinvoiced inU.S.dollars.
Most imports aretransacted through thefreeinter-bank market andaresubject onlytoverification
ofappropriate documentation. Importers areabletoobtain foreign currency from thecommercial
banks. Payments foroilimports fortheuseoftheelectric company aretransacted through the
Central Bank attheofficial rate16;allother imports aretransacted atthefreeinter-bank rate,except
forimports onadocuments-against-payments basis, which mustbedenominated inU.S.dollars and
forwhich foreign currency certification isrequired forcustoms clearance. Acommission onforeign
exchange sales equivalent to3percentofthef.o.b. value ofimports, collected byCustoms, and
deposited intheCentral Bank fortheservicing oftheexternal debtisscheduled forgradual elimination
intheTaxCode (Law 11-92); ithasnotbeencollected since June1994.
Allpayments forinvisibles maybemade freely through commercial banks, subject todocumentation
requirements. Annual profit remittances cannot exceed theequivalent of25percentofthenetvalue
oforiginal andadditional investment plusreinvestment minus repatriation, dulyregistered withthe
Central Bank (Chapter III). There arenorestrictions ontheinward movement ofcapital byeither
residents ornon-residents.
Exporters ofsugar, coffee, cacao, tobacco andtheirproducts, andminerals other thanferro-nickel
must surrender totheCentral Bank through thecommercial banks theentire proceeds from exports
within 30daysofthedateofbilloflading; other exports, including from freezones, arefreefrom
anysuchrequirement. Minimum export prices established bytheDominican Centre forExport
Promotion (Centro Dominicano deExportaciones ,CEDOPEX) forcertain exports wereabolished in
September1995;firmsoperatingintheindustrialfreezoneswerenotsubjecttoexportpricerestrictions.
15This annex isbased onIMF(1995).
16Dominican Government.