He International Monetary Fund (IMF) concluded yesterday the consultation of Article IV with the Dominican Republic, in which it recognized the positive impact that the recently enacted law will have fiscal responsibility for public finances, but stressed the need for an “imperative” tax reform.
The international organization made its results public a day after President Luis Abinader announced that the Executive Branch will present the reform of the public spending and streamlining of institutions next week.
The measures, which are part of a tax reformmust be complemented with a tax reform which will be proposed “later”.
“It is imperative that tax reform comprehensive that will durably increase the tax revenues -by eliminating tax exemptions and broadening the tax base- and improve spending efficiency, especially with a reduction in subsidies to the electricity sector and non-targeted transfers,” the executive directors of the IMF in their conclusions.
They indicated that in this way the space needed for development spending will be created, which should include the construction of infrastructures resilient to natural disasters, thus promoting a growth most inclusive in the country.
The implementation of these and others potential reforms -like the educational and labor – would contribute to mitigating the risks that could impact the performance of the Dominican economy in the medium term, which is projected to close with a growth 5% by the end of 2024.
Fiscal responsibility
He IMF He acknowledged that the Dominican authorities took “important steps” with the promulgation – and expected implementation – of a law of fiscal responsibility that anchors medium and long-term policies for sustaining the debt.
According to the agency, the debt of the consolidated public sector has been above 50% compared to the GDP since 2019, and it is projected that this debt will be around 58.4% in 2024, 0.9 percentage points less than in 2023 (59.3%).
“The fiscal consolidation gradual planned by the authorities, in accordance with said law, is appropriate to position the debt on a firm downward trajectory and create fiscal space“, he valued.
The Executive Branch is preparing a tax reform that will increase tax revenues by between 1.5% and 1.7% of GDP – around 110 billion pesos annually.
To achieve this, the Government will implement measures to simplify the tax regime, broaden the tax base and reduce informality, according to unofficial information obtained by Diario Libre. With higher state revenues, authorities will have greater capital expenditure to build infrastructure and public services, also guaranteeing more financing to reduce the fiscal deficit.
This reform would seek to impact both the State, the productive sector and households, in such a way that it would include actions to manage public spending, taxes and their collection.
Recommendations
- The agency noted that in the short term, the monetary authorities must continue to maintain the macroeconomic stability and financial, including increasing exchange rate flexibility, expanding the use of hedging mechanisms and limiting foreign exchange interventions to shocks that may occur in the foreign exchange market, which “would further improve the effectiveness of the inflation targeting regime.”
- Considered the recapitalization of the Central Bank as one of the priorities that must also be taken by the Government, in order to reinforce the autonomy of the local monetary entity by freeing it from its debt quasi-fiscal.
- As regards the financial sectorrecommended maintaining careful monitoring in case of possible “interest rates higher for longer and rebounds of the growth of credit”.
- He also proposed the adoption of adaptation policies and climate mitigation to support the growth inclusive and resilient economic growth, as well as continuing to advance towards the consolidation of reforms in matter educationallabor and electrical.
