The International Monetary Fund has urged Dominican Republic to implement reforms, especially to its tax system, to attract greater investment and boost its economy.
In its latest report, the IMF says permanently raising tax revenues by at least 2 percent of GDP will help the country boost public investment and social spending.
Elevated public debt
The IMF says interest rates on public debt in the country are high relative to peers, notably those with investment grade. High interest rates mean fewer resources for spending on infrastructure, social services, and making the economy more resilient to climate change, an important risk for the country.
“Elevated public debt (or interest payments) relative to low tax revenues — known as debt affordability — is a key risk constraining its credit rating and contributing to high interest rates,” the IMF said.
“That’s why reforms, especially to the tax system, will be key. A comprehensive tax reform could help the country boost revenues and earn an investment grade rating,” the IMF added.
Accelerating progress
The Dominican Republic leads Latin America in GDP growth, with an average annual rate of around 5 percent per year since the 1970s.
“The Caribbean nation has made great strides in reducing poverty and improving living standards. Reaching investment grade on its sovereign bonds would further accelerate progress by lowering interest rates, increasing capital flows, and broadening the investor base. This would also reduce private sector financing costs and boost the economy’s growth potential,” the IMF said.
Raising revenue
Tax revenues are limited by costly exemptions and a high threshold before personal income taxes apply. Streamlining tax incentives and exemptions — which together amount to about 5 percent of GDP, or a third of all tax revenues — is also crucial for simplifying the tax system and reducing evasion, the IMF observed.
“Permanently raising tax revenues by at least 2 percent of GDP would allow for sustainable increases in key public investment and social spending – helping to boost productivity and private consumption while reducing inequality and poverty,” the report added.
Overall, a comprehensive tax reform is likely to raise the level of GDP by around 1 percent after 10 years and by 2 percent after 30 years. Additional public resources from the reform would also create space in the budget to scale up public investment in infrastructure that can mitigate losses from climate events, which are sizeable for the country.
Other fiscal reforms
Beyond the much-needed increase in tax revenues, a comprehensive fiscal reform should include the adoption of a fiscal rule imposing long-term limits on public debt that would increase certainty and help safeguard fiscal sustainability.
Moreover, recapitalizing the central bank remains a crucial step to ensure its financial autonomy.
Electricity sector
Another critical reform is addressing the long-standing inefficiencies in the electricity sector that result in high losses, which have averaged between 1 and 2 percent of GDP per year in the last decade.
The IMF says cutting the losses by half — to a level comparable to those in advanced economies — could increase GDP by 0.3 percent after 10 years as efficiency improves, costs are reduced, and blackouts are eliminated.
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