The crisis-torn country may have turned the corner following President Fernandez’s return to power
One word seems to sum up the mood and outlook in the Dominican Republic these days: recovery. The Dominican government officially declared 2005 as the Year of Recovery, and President Leonel Fernandez uses the word to describe the goal of his administration’s economic plan.
Fernandez had no choice but to focus on recovery after taking office in August 2004 for another four-year stint as president of this Caribbean island of 8.8 million people. While GDP expanded by nearly 8% annually during his first term in office (1996-2000), Fernandez returned to the presidential palace with the economy tanking, Dominicans spending most of their days without electricity due to 18-hour rationing, and a budget deficit spinning out of control.
The government moved fast to contain the crisis, implementing measures that have paid off in the short run. The country ended 2004 with the economy growing by 1.8% – compared to a 0.4% contraction the previous year – a revaluation of the currency by nearly 50% and a big reduction in inflation. Inflation in January 2005 was 0.79%, compared to 9.23% for the same month a year earlier.
“The economic recovery taking place is a solid recovery. I think the government is making the necessary changes and following policies that should allow for steady growth,” says Marino Collante, president of the congressional Finance Commission.
Collante is extremely upbeat about Fernandez’s economic recipe, despite the fact that he represents an opposition party in Congress. “The government is doing the right things. I am extremely pleased with the plan so far,” he says. “We are political opponents, but recognize what needed to be done.”
The administration’s immediate efforts starting in August 2004 were to control inflation, get the economy growing and put the brakes on a burgeoning debt. Despite having only a handful of lawmakers, the government pushed a major tax plan through Congress to deal with a nearly $500 million fiscal deficit. Taxes were raised across the board, and new taxes were created.
The government imposed a new 10% tax on telecommunications and a 0.0015% tax on all banking transactions regardless of the amount. Tax collection in February 2005 was 196% higher than the same month last year. Apart from bringing in more cash, the administration also started shrinking bureaucracy, reducing the public payroll by 8% during its first six months in office.
Franco Ucelli, an analyst at Bear Stearns, says the Fernandez government is following a well-designed monetary policy that has reaped immediate benefits. He says the country should see solid growth this year and beat most predictions.
The changes contributed to a stronger peso and helped bring down inflation, which reached 54% in 2003. International reserves have also increased, jumping by nearly $300 million in the past three months. Fernandez also caught a break with the previous administration’s resolution of long-standing problems involving electric utilities, and daily energy rationing has almost ended. In addition, he inherited a nearly complete free-trade pact with the United States and Central America (Cafta).
Fernandez did, however, face some tricky negotiations to save the Dominican Republic from being eliminated from Cafta over a 25% tax on soft drinks made with high fructose corn syrup. The syrup is used as a substitute for sugar in soft drinks, and the tax was aimed at protecting the sugar industry, one of the Dominican Republic’s historic exports. After being told in November that his country would be excluded from Cafta before the treaty was sent to the US Congress for approval, Fernandez convinced the Dominican House and Senate to eliminate the tax. He signed legislation repealing it at the end of last year. Loss of Cafta would have been devastating to the Dominican Republic, which sends about 80% of its exports to the United States.
Milestone
Another big accomplishment of the Fernandez administration was securing a $670 million loan package from the International Monetary Fund in early February. The IMF negotiation and loan process is seen as a milestone in the Dominican economy, re-establishing relations that had faltered during the previous government of Hipolito Mejia. “The IMF agreement is extremely important, because it has rebuilt confidence among Dominicans and foreign investors that our economy is improving,” says Collante.
Conditions for the loan call for GDP growth of 2.5% and inflation between 11% and 13%, targets that most analysts believe the country should easily surpass. The government must also continue to improve revenues and trim spending to eliminate the fiscal deficit. The Dominican Republic must repay the loan, with a 2.3% interest rate, within four years.
The Fernandez administration’s next move is dealing with the country’s foreign debt, which ballooned under the Mejia government. The foreign debt nearly doubled between 2000 and 2004, increasing from $3.7 billion to $7.2 billion, not including the new IMF loan.
During an early March trip to the United States, Fernandez announced his country should have a debt restructuring plan in place by mid-year. The idea is to restructure about $1.1 billion in sovereign bonds and another $800 million in debt with foreign banks. The country has $500 million in 2006 bonds and another $600 million in bonds coming due in 2013. Also on the list is addressing the debt incurred when the state acquired shares in two electricity utilities from Spain’s Union Fenosa.
Despite fears by some sectors that the foreign debt may be unstable, Collante believes the Dominican Republic is on the right track. “The debt has had a negative impact on our economy, and this is something we will have to live with for some time. This government appears committed to reducing spending instead of borrowing, which is the right way to go,” he says.