The economic crisis that brought the Dominican Republic to its knees between 2000 and 2004 was a textbook case of ineptitude, corruption and panic solutions.

In those four years the country was plunged into a recession that could only be described as catastrophic, even by Latin American standards.

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The Dominican Republic lost 20% of its GDP, the peso was devalued by more than 200%, the external debt doubled to $7.7bn and debt servicing soared from 18% to 43% of GDP, while repayments accounted for 40% of the 2005 state budget.

As a result of this chaotic situation, inflation skyrocketed to 44%, net foreign reserves moved into negative territory, and salaried workers’ purchasing power almost halved. The government found itself obliged to sign a stand-by agreement with the IMF in August 2003, and once again in January 2004. The IMF suspended these agreements twice due to non-payment and fiscal irresponsibility. In 2004, the country’s Paris Club obligations fell into arrears.

During this period, the government’s populist politics led to the issue of two sovereign bonds, with little thought given as to how these new debt obligations were to be serviced. The first was a $500m bond in 2001, followed by a $600m issue two years later, which was launched primarily to enable the government to keep up with domestic and foreign debt repayments.

Under the latest IMF agreement signed in January of this year, the country will receive 200% of its IMF quota, or $670m, which will be paid to the Central Bank to strengthen its reserves and the balance of payments. The application of the programme opens doors to fresh resources totalling an estimated $2.7bn over the next two years.

Funds are also expected to be forthcoming from the Inter-American Development Bank (IDB), as a result of foreign debt re-structuring and direct disbursements from the IMF. With the agreement, the Dominican Republic commits to keeping its payments up-to-date and to a friendly re-structuring of its foreign debt.

The IDB has taken the view that the country’s foreign debt is manageable and that the public-sector debt should shrink to 49% of GDP, while the total external debt will stand at 88% of exports. The agency says that the country needs to fulfil two conditions. On the one hand, the ratio of the total public-sector debt as a percentage of GDP needs to be held at 2004 levels, or roughly 50% of GDP. Also, the ratio of total foreign debt to exports must remain below the 150% level.

The country’s fiscal deficit soared to 7% of GDP in the first months of last year, during which time there were three major bank failures. The collapse of the country’s third-largest bank, Banco Intercontinental (Baninter), was followed by problems with two smaller banks, Banco Mercantil and Bancredito.

Going under

The Central Bank intervened to secure depositors’ money, which led in turn to a huge increase in the quasi-fiscal debt, sustained depreciation of the Dominican peso, sharp increases in the cost of living, and stagnation of salaries while jobs were being lost. Two large insurance companies were de-capitalised and went under in this period.

The economic crisis was aggravated by a slow collapse of governmental authority and a growing restlessness within the armed forces. Widespread protests and a lack of control on an official level led to an alarming increase in insecurity and street crime. The Dominican Republic lost its position as one of the most successful economies in Latin America and suddenly found itself struggling for survival.

The situation finally reached boiling point in mid-2004, when the country went to the polls and the Dominican Revolutionary Party (PRD), led by Hipólito Mejía, was ousted from office. The new president, Leonel Fernández of the Dominican Liberation Party (PLD) was given his second mandate to run the country. The large margin by which he was elected demonstrated the populace's hunger for a solution to the crisis.

National objective

Mr Fernández recognised that he had to get the economy back on track quite quickly in order to regain lost international confidence in the country. This government’s national objective is, first and foremost, to restore the country’s backbone of economic stability.”

Mr Fernández says the government is prepared to back up its promises with action, by taking precautions against the inevitability of economic shocks and by restoring investor confidence. “We’re tightening the belt of government, increasing transparency and cutting spending to shrink the deficit,” he says. “We’re implementing tax reforms to help bring a return to growth and job creation in the years to come.”

The groundwork for economic progress was laid in 1996, during Mr Fernández’s first term of office, when the incoming president introduced a bold reform package, including the devaluation of the peso, reduced import tariffs and increased petrol prices, in an attempt to create a market-oriented economy that could better compete internationally. Even though many reforms stalled in the legislature, and the state electricity company could not keep up with surging power demand, the economy grew vigorously at rates exceeding 7% from 1996 through 2000. Tourism, export processing zones and telecommunications led the advance while the private sector added its own power by generating assets to meet requirements.

Finance minister Vicente Bengoa points out that the government’s economic policies have earned the approval of the IMF and the IDB. “Interest rates were above 50% in the recent past and today they are hovering between 14% and 15%,” he says. “This has been an important factor in reducing the cost of goods and services. Prices may not have declined by as much as we had originally forecast, but many sectors are experiencing a new economic reality given the return to positive growth, plus the fact that there is renewed confidence and we have been able to meet our external debt obligations.”

IMF input

Mr Fernández acknowledges the support of the IMF in aiding this recovery process. The government has been working actively with IMF representatives to ensure the continuation of its $600m stand-by agreement. Citing excessive public spending by the previous administration, the IMF had halted negotiations of this arrangement last year. Mr Fernández’s team has re-initiated the process with a clear understanding of what actions need to be taken in order to move forward.

Three pillars of austerity lie at the heart of the Dominican Republic’s contract with the IMF. First are regulatory measures to renew confidence in the banking sector. Secondly, there is a commitment to public finance reform and ensuring debt sustainability. Lastly, the government has undertaken to tighten up the money supply to stabilise the national currency and create a functional, flexible exchange rate regime.

An IDB report says that the peso appreciation exposes the economy to long-term risks that could act as a brake on economic development and exports. The agency says a more realistic scenario would entail a gradual 15% to 20% depreciation, which would allow exports to flow at average historic levels.

In response to these measures José Fajgenbaum, acting director of the IMF’s Western Hemisphere Department, recently expressed his confidence that the country’s new economic team is “determined to move ahead with institutional reforms and economic policies that will bring confidence, stability and sustained economic growth back to the Dominican Republic”.

Back on the map

“The new tax reform our government sent to Congress in the very early days of our administration has now been approved,” says Mr Fernández. “We’re on our way to regaining the stability and credibility that put the Dominican Republic on the map in the first place. Looking a little further ahead past the immediate priorities, our plans focus on strengthening the quality of our workforce and our capacity to compete globally. Our human resources are undoubtedly our most valuable. Dominican workers are consistently recognised for their work ethic: the positive, can-do attitude. Our task is to mobilise these valuable natural talents to serve us well in the global economy, to equip Dominicans with the skills, through cutting-edge technical training and English language capability, that will make them competitive as a workforce at an international level.”

The government points to Santo Domingo’s CyberPark, a technology park directly connected to the Technology Institute of Las Americas (ITLA), as an example of how it plans to complement the progress it has made in education with cluster development strategies that allow for synergies between applied learning and industry.

“We’re innovating and working to create an economic powerhouse that cuts across a diverse group of industries,” says Mr Fernández. “We’re talking about an economy that serves as a source of national pride as well as a draw for foreign investors. Our long-term vision is that of the Dominican Republic as a leading regional centre of production and distribution of goods and services. With the right mobilisation of resources, our shores will eventually host not only beach resorts and golf courses, but a thriving Silicon Coast as well. In other words, we’re turning the vicious circle of mismanagement and short-sightedness that plagued us during these last few years into a virtuous circle of human capital formation, value-added economic activity and sustainable growth.”

 

Part Two

 

GDP GROWTH RATE 1996-2006*:

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Source: Central Bank of the Dominican Republic

*IMF projections