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FY 1999: Dominican Republic |
[end of document]II. ECONOMIC TRENDS AND OUTLOOK This report was drafted in June and July 1998. Statistics were available for the period through March 1998. Major trends and outlook: In 1997 the Dominican economy grew at an 8.2 percent rate with monetary stability. The Dominican Central Bank continued to pursue policies designed to keep inflation under control, maintaining a tight monetary policy. In spite of less than complete cooperation from other elements of the Dominican Government(see below), the Central Bank has succeeded in keeping inflation under 10 percent since 1995 -- it fell to about four percent in 1996 and rebounded to 8.37 percent in 1997. In early reports, the Central Bank projects that inflation in 1998 will be approximately eight percent. In 1996, attention was focused on how the national elections might affect the economy. The elections caused no significant capital flight. On the contrary, economic stability was enhanced by the orderly manner in which the elections and transition to a new administration were carried out. President Fernandez immediately assured Dominicans and would-be investors that maintenance of macroeconomic stability would be a priority for his administration. The Government's actions since then, including the submission of privatization legislation for state-owned enterprises and the effort to modernize sector specific regulatory legislation such as the recently passed telecommunications bill, have borne this out. The Dominican Government followed its traditional policy of seeking nominal exchange rate stability. The peso/dollar exchange rate showed little variation during 1995 and was kept stable through the elections and transition in 1996. At the end of 1996, the Fernandez Administration announced unification of exchange rates based on a market determined rate. The official rate was devalued from RD$12.87=US$1 to RD$14.00=US$1 on December 23, 1996. After some minor fluctuation, the official rate was stable at RD$14.02=US$1 from March 1997 through June 1998. On July 2, 1998, the official exchange rate was devalued to RD$15.35=US$1. The unofficial, market rate for the peso has been less stable so far in 1998 reflecting uncertainty surrounding the May 1998 congressional and municipal elections. As of this writing (July 1998) the peso is trading in the range of RD$15.35 to RD$15.55 per U.S. dollar. The Balaguer Administration left a large domestic debt. But Balaguer also left a cash reserve of approximately RD$3 billion which was about 30-50 percent of the domestic debt. Within months of the inauguration, the Fernandez Administration formed a commission to review the domestic debt. This commission completed its work, and the Government is still considering payment plans. Since the last bank rescheduling, the Dominican Government has paid its debt to foreign lenders in a timely fashion (with exceptions noted below). The Balaguer Administration, however, inadequately compensated the Central Bank for foreign debt payments carried out on its behalf. This required the Central Bank to obtain the dollars needed for debt service by monetary expansion. The Central Bank compensated for this monetary expansion by issuing non-transferable "Participation Certificates." While this helped absorb excess liquidity, interest payments on the notes are also paid by money creation. President Fernandez has transferred more of the funds collected from the tax on all petroleum products to the Central Bank for payment of the foreign debt. As noted above, the Dominican Government has continued to stay current on most of its foreign debt obligations. In late 1997, the Central Bank came to an agreement with the United States Commodity Credit Corporation on a payment schedule for approximately US$140 million in arrears. The Central Bank has remained current in these payments. The Fernandez Government also resolved in 1997 a long outstanding debt to Japanese contractors. Government debts to settle other expropriation cases and overdue accounts payable amount to over US$200 million. The well respected Bank Superintendent's office continued to work for improved banking regulation and a healthier financial system. Currently, banking inspectors are inexperienced; prudential norms are not fully enforced and bank management is thin. Therefore, reasons for concern about the banking system remain. In 1996, long-standing problems at the DR's third largest bank (Bancomercio) led to a Central Bank take-over of that institution. Although the Dominican Republic has no deposit insurance, the Central Bank guaranteed deposits at Bancomercio and subsequently supervised the sale of the bank to another Dominican bank, Banco Intercontinental. There have been no major bank failures since then. Dominican import tariffs range from 3 to 35 percent. At the end of 1996, President Fernandez submitted a proposal to Congress to decrease all tariffs as part of an economic reform package. There was no congressional action on this proposal in 1997 and the Fernandez Administration is now expected to resubmit at least a tariff reduction proposal to the Congress in August 1998. Virtually all tariffs are bound in the world trade organization (WTO) at 40 percent. "Rectification" of the Dominican tariff bindings for seven agricultural commodities has been agreed at higher tariff levels, with an eighth still pending in negotiations with the European Union. Dominican imports have risen the last few years as the import regime has loosened. Nonetheless, tariffs and non-tariff barriers remain formidable. The Dominican Government has not yet fully implemented the Uruguay Round agreements, although certain aspects of implementation are proceeding slowly. A decree recently issued by President Fernandez has the stated objective of abolishing non-tariff barriers. The actual impact of this decree, especially as relates to non-tariff barriers on agricultural products, remains to be seen. Weak protection for intellectual property (trademarks, patents, and copyrights) affects investment and business practices. The government's refusal to accept the validity of commercial invoices for purposes of customs valuations or to use a WTO-approved alternative system also poses a barrier to trade. A complex system of licensing and consular approvals of invoices impedes imports. As reported in the local press, corruption and poor organization at the ports pose additional non-tariff impediments to trade. Free trade zones are exempt from most of the restrictions on international trade cited above. The growth of free trade zones demonstrates the ability of the Dominican Republic to compete in global markets when the obstacles to trade are reduced. The law specifies that free trade zone firms have the right to sell 20 percent of their output domestically, although this has not been implemented in the past. The Government has, however, reconsidered its policy restricting such sales, and some limited sales from the free trade zones into the local economy are expected.
Principal Growth Sectors Sector Percentage Real Growth in 1997 Communications 19.2 Hotels, bars & restaurants 16.7 Commerce 8.9 Construction 17.1 Agriculture 3.4 Mining 3.1 Finance 3.2 Manufacturing (non FTZ) 7.9 Free trade zones 10.6 Overall Growth 8.2 Source: Dominican Central Bank According to the Dominican Central Bank, the economy grew 8.2 percent in 1997 and 5.9 percent during the first quarter of 1998. The Central Bank estimates that the economy will continue to grow at a 7 percent annual rate for 1998. There was continued strong growth in the tourism, free trade zone, construction and telecommunications sectors. Some analysts talk of a duality in Dominican economic growth: over the last several years, those sectors relatively open to foreign investment and with close ties to international markets (i.e., the sectors listed above with the exception of construction) have grown rapidly, while domestically oriented sectors have had slower growth. Continued periodic electrical power shortages (rolling blackouts) and the high costs associated with back-up generation facilities impede the growth of industry. In the tourism sector, the number of hotel rooms increased by about ten percent in 1996 and seven percent in 1997. Hotel occupancy rates rose by almost five percent in 1997 and remain at very high levels, with the majority of tourists coming from Europe. First quarter 1998 occupancy rates are virtually the same as those for the same period in 1997. Since 1995, Dominican Government officials and free trade zone businesses have expressed acute concern about the impact of the North American Free Trade Agreement on textile businesses in the free trade zones. They have worried that the textile industry would be adversely affected by a lack of parity with Mexico. Nonetheless, Dominican firms have proven competitive. The lower growth rate and decreased investment flows into this sector can also be attributed to aggressive competition from El Salvador, Honduras and Guatemala. The Dominican Republic is experiencing a telecommunications boom which is expected to continue following the passage of a modern telecommunications bill in May 1998. Several private companies are competing to provide cellular telephones, pocket pagers, new telephone lines and Internet service. Two private firms are competing to provide local service. Construction sector output, calculated by the Central Bank to have grown by over 17 percent in 1997, was stimulated primarily by growth in private sector housing and commercial construction. The Government's public works program is also an important component. Dominican agriculture suffered through a drought in 1996 and 1997, but the sector was helped by favorable trends in world markets for traditional agricultural exports such as sugar and tobacco. The state-owned sugar mills are in poor financial and physical condition. Favorable weather conditions in early 1998 make the outlook for the agriculture sector generally more positive. Although the minerals sector grew by 3.1 percent overall in 1997, earnings in early 1998 are down reflecting the fall in world market prices for gold, silver and nickel. A failure to invest in the ore processing operation at the Government-owned Rosario mine has led to declining rates of gold recovery from the ore. Government plans to privatize Rosario's operations are moving ahead very slowly, delayed even further by extensive debt and environmental issues. Government Role in the Economy: The Dominican Government has traditionally played a large role in the country's economic life. The Government is the owner of all public utilities (except telecommunications), an insurance company, the country's largest bank (Banco de Reservas), and factories producing a variety of items. Most of the state enterprises are unprofitable. Legislation to allow the privatization or "capitalization" of state-owned enterprises was passed by the Congress in June 1997. The members of the Commission for the Reform of Public Enterprises (CREP), an entity mandated by the June 1997 law, were named in November 1997. The Commission is now pressing ahead with the privatization of the state-owned electricity company, the Corporacion Dominicana de Electricidad (CDE), which is expected to take place in the fall of 1998. Also scheduled for privatization are the State Sugar Council (CEA), the government-owned hotels held by CORPHOTEL, and the companies held under the umbrella holding company CORDE. Years of unprofitable operations, however, have effectively decapitalized many of the state-owned companies, leaving few tangible assets. At 15 percent of GDP, the overall tax burden imposed by the Government is not unusually high, but the Government depends on taxes levied on imports for 40 percent of its revenues. The large government presence in the economy and a web of complicated regulations means that many economic decisions are politicized and businesspersons spend time "lobbying" the government. Foreign businesses can be at a distinct disadvantage in this process. U.S. businesspersons operating overseas are obligated to abide by the provisions of the U.S. Foreign Corrupt Practices Act. Institutional difficulties common to developing countries are also present. Businesses often find that the labor force is good but untrained. Although a judicial reform effort is underway, it can be difficult and time-consuming to obtain an equitable result in the antiquated justice system. The banking system is expensive (unsecured business loans currently carry interest rates of over 30 percent) and, as noted above, there is no deposit insurance. In addition, the banking system is weak and a modern regulatory framework for banks is only now being put in place. Balance of Payments Situation: Since the mid-1970's the Dominican Republic has had a merchandise trade deficit financed by a growing surplus in tourism, now the country's leading foreign exchange earner. Earnings from the free trade zones also are an important contributor. The trade deficit is also financed by remittances of over US$1.1 billion sent by the Dominican Republic's expatriate population (approximately one million Dominicans reside in the U.S. alone). Dominican authorities expressed concern in 1997 that the flow of remittances from the Dominican community in the United States would be affected by changes in U.S. immigration laws as well as by the imposition of a U.S. Treasury Geographic Targetting Order (GTO) which temporarily imposed certain remittance regulations on businesses operating out of New York and new Jersey. This concern seems not to have been borne out, as the Central Bank reports that family remittances grew in 1997. After several years of balance of payments surpluses, in 1994, 1995 and 1996 the Dominican Republic suffered balance of payments deficits. In 1997, the Dominican Republic had a balance of payments surplus with a US$224.9 million deficit in the current account financed by a US$457.7 million surplus in the capital account. The merchandise trade balance continues to deteriorate. Exports of manufactured goods (exclusive of free trade zone activities) continue to decline while imports rise. Unless there is a significant change in the cost structure which Dominican manufacturers face, prospects for their competitiveness will worsen. A static exchange rate and solid economic growth have led to surging imports. Infrastructure Situation: Infrastructure is very good apart from electricity. -- Compania Dominicana de Electricidad (CDE), the state-owned electrical energy supplier, does not have enough capacity to supply the country's electricity demand. Foreign private producers have added over 450 megawatts of capacity since 1990. However, in given soaring demand, poor maintenance of CDE's transmission and distribution facilities, and the lack of incentive for energy conservation, this increased capacity is insufficient to resolve the problem. Load shedding is a common practice and virtually all industrial enterprises have their own back-up power. Some large firms maintain completely independent electricity supplies. As noted above, legislation to allow the privatization of CDE and other state-owned enterprises was passed in June 1997. CDE's privatization, headed by the Commission for the Reform of Public Enterprises, is now expected to take place in the fall of 1998. -- Roads and Highways: The Dominican Republic has a well developed road network, which the Government continues to improve. Nevertheless, as in most developing countries, some of the roads and highways are considered to be in poor and dangerous condition. Truckers belong to syndicates that regulate prices, increasing the price of haulage. -- There are seven international airports in the Dominican Republic: they are in Santo Domingo (2), Puerto Plata, La Romana, Punta Cana, Santiago, and Barahona. A new international airport in Samana (Arroyo Barril) is under construction. -- Major ports: Santo Domingo and other major cities are serviced by modern port facilities. Haina, located just outside the capital city, has a 2,600 foot long, 35 foot draft wharf, a 40 ton container crane and a 60 acre container yard. Transportation to more than a dozen U.S. ports is available on a weekly basis. There is also daily freight service to Puerto Rico. Other ports are located in the cities of La Romana, Boca Chica, San Pedro de Macoris and Puerto Plata. A passenger car ferry initiated service between Santo Domingo and Mayaguez, Puerto Rico, in June 1998. -- The Dominican Republic has one of the most advanced telecommunications networks in Latin America. Services offered by the telephone companies (Codetel, Tricom, All American Cables and Radio, Inc.) include: direct distance dialing, international direct distance dialing, line 800, electronic mail, telenet, cellular mobile phones, facsimile, national paging services, and Internet services. -- Major business newspapers and business or specialized magazines can be purchased locally, and several are available on the Internet. Cable television is also available locally in most large cities. Cable systems generally transmit some U.S. and European services. Radio and television are the communication vehicles reaching the largest numbers of Dominicans.Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.