Caribbean & Central America - February 2013 (ISSN 1741-4458)

Dominica is an unusual member of the Eastern Caribbean Currency Union (ECCU) in that tourism is relatively less important to its economy, largely because it lacks sandy beaches, and agriculture remains proportionately more important. As a consequence it was less affected by the global financial crisis than many of its neighbours. Nevertheless, the authorities’ use of strong fiscal measures to boost growth has led to a deterioration of its overall debt position that the IMF is urging it to reverse.

Following Article IV consultations in 2012, in January the IMF published a new Country Report on Dominica that urges “determined policy action” to reverse the upward trend in debt even though, the IMF admits, “conditions are not ideal for unwinding fiscal policy stimulus”.

Dominica’s recent economic performance has deteriorated from the 7.9% growth recorded in 2008 through a shallow -1.3% recession in 2009 to anaemic growth of 1.2% in 2010, 1.0% in 2011, and an estimated 0.4% in 2012. Over the past 20 years, Dominica’s average annual GDP growth has been 2.3% compared with 3.5% for Caribbean and other non-Asian emerging markets.

The IMF does not believe that this year’s budget targets are attainable. For Fiscal Year 2012, the government is budgeting a primary deficit of 0.3% of GDP. The IMF, however, believes the deficit is more likely to come in at 2.3% of GDP.

Overall, debt is just over 70% of GDP, but if the primary deficit forecast remains in the 1.25%-2% range over the medium term, total debt could be heading towards 80% of GDP by 2020, which would be considerably worse than the ECCU target of 60%.

The government, however, has expressed its intention of reaching a 2.4% of GDP primary surplus within three years, and this would enable it to meet the ECCU’s 60% target by 2020. In its favour, Dominica does have a reasonable track record in this regard. Following the 2001-2 debt crisis it implemented (under the auspices of the IMF) a major fiscal retrenchment that provided average primary surpluses of 4% of GDP from 2004-09. This enabled debt to be brought down from 100% of GDP in 2002 to 63% in 2010.

The problem now is with the pace and nature of the adjustment. One of the measures the IMF is advocating is reversing the recent decision to maintain the public pension age at 60 and instead move it to 65. The government, for the moment, is sticking to its guns on this.

The other area on which the government must concentrate is boosting competitiveness and private investment as the fiscal stimulus is withdrawn. According to the IMF, “reforms should aim at narrowing the infrastructure gap, facilitating the development of property markets, improving the business environment for the private sector, and easing access to finance”. One particular hope is for the development of geothermal electricity. A plant planned for 2013-15 should have the capacity to cover domestic energy consumption, with another to be built later intended to produce energy for export. Domestic energy costs are expected to fall by about 40%, with a commensurate boost to competitiveness.