A. Structure of the Domestic Economy
The Dominican Republic is a middle-income developing country primarily
dependent on agriculture, trade, and services, especially tourism.
Although the service sector has recently overtaken agriculture as the
leading employer of Dominicans, due principally to growth in tourism and
Free Trade Zones (FTZ), agriculture remains the most important sector in
terms of domestic consumption and is in second place, behind mining, in
terms of export earnings. Tourism accounts for more than $1 billion in
annual earnings. Free Trade Zones and tourism are the fastest-growing
export sectors. Remittances from Dominicans living in the United States
are estimated to be about $1.1 billion per year.
Main Sectors / Imports and Exports
Following economic turmoil in the late 1980s and 1990, during which the
Gross Domestic Product (GDP) fell by up to 5 percent and consumer price
inflation reached an unprecendented 100 percent, the Dominican Republic
entered a period of moderate growth and declining inflation. GDP grew
during 1995 by 4.5 percent while the inflation rate was 9 percent. Data for
1996 showed inflation falling to an annualized rate of 4 percent and GDP
growth at about 7.3 percent. During 1997 GDP grew by 8.2 percent to $14.9
billion. Manufacturing represented the largest share of GDP (17%),
followed by agriculture and mining (14.9%), the retail sector (12.9%),
construction (10.9%), government services (7.9%), and hotels, bars and
restaurants (7.1%). Although all sectors of GDP showed growth in 1997,
construction showed the highest growth for the second consecutive year,
surpassing the tourism sector (hotels, bars and restaurants), which had
been leading growth since 1992.
Manufacturing grew by a mere 4.2 percent in 1997, and first quarter 1998
data shows growth of only 2.2 percent. A fall of 24.3 percent in sugar
production has been the main factor dragging down the overall sector growth
rate. Sugar production is dominated by the CEA, the state's sugar
corporation, and by the largest private producer. Domestic non-sugar
manufacturing has achieved a reasonable expansion of 4.8 percent in the
first quarter 1998, compared with 3.9 percent in the first quarter of 1997.
The free-trade zone industries have also continued to expand at a rapid
rate after last year's impressive performance. This reflects growing
levels of employment in this subsector.
Production in the agriculture sector grew only 3.4 percent in 1997 due to a
drought experienced in that year, but has made a strong recovery in the
first quarter of 1998. The main export commodities (cocoa, coffee and
tobacco), with the notable exception of sugarcane, registered outstanding
production growth in the first quarter of this year, on the back of
favorable climatic conditions and rising international prices. Domestic
food crops suffered a reduction in output, however. A few very large
private producers dominate agricultural production. The mining sector has
been declining as percentage of GDP for several years due to unfavorable
international prices for the primary export, nickel.
The first quarter of 1998 shows a continuation of these trends, although
communications became the sector with the highest growth rate (19.7%),
surpassing construction. Although the communications industry represents
just a small proportion of GDP it has become one of the leading growth
sectors since it was opened to competition at the beginning of the decade.
In April, a telecommunications law was enacted that establishes a
regulatory framework aimed at encouraging competition and fresh investment
in the sector. Construction has also expanded by 10.5 percent in the first
quarter. Most new construction projects since 1997 have been driven by the
private sector, in contrast to the ostentatious public works of the
Balaguer Administration which ended in 1996.
Finally the tourism sector has continued to grow, since it is overall
little affected by government policy. However, the government is currently
negotiating a loan for $120 million from the World Bank to improve support
infrastructure in the main tourist resorts, while the Central Bank is also
planning to submit to international bidding a major tourism project located
on the north coast of Playa Grande. The sale is aimed at relieving the
Central Bank of its prominent role in the development of tourist
facilities, allowing it to concentrate in its traditional role of monetary
supervision.
The concentration of property in the hands of the Dominican government is
the result of historical circumstances rather than an ideological
phenomenon. After 31 years of dictatorship, the government confiscated the
estate of Rafael L. Trujillo, including commercial and industrial
enterprises, which accounted for a significant share of the country's
assets. Although the commercial enterprises were subsequently liquidated,
the industrial investments of the estate formed three important
governmental organizations. The state electric company (CDE), the state
agro-industrial sugar company (CEA), and a conglomerate of the remaining
industrial enterprises (CORDE). Of 35 enterprises in which the state is a
majority shareholder and 18 in which the state controls a minority share,
several have undergone some level of privatization.
The principal exports in 1997 were ferro-nickel, sugar, cocoa and coffee.
The principal imports were consumer goods, fuels, raw materials, and
capital goods. According to preliminary data released by the Central Bank,
the trade balance deteriorated slightly in the first quarter of 1998.
However, the first quarter current account surplus improved substantially,
probably due to a substantial rise in net service earnings and an increase
by almost 15 percent on current transfers (mainly remittances from
Dominican resident overseas. Overall growth of 11.8 percent in exports was
driven by a rise of almost 15 percent in free-zone sales, while other
exports remained stagnant due to declining international prices and the
drought mentioned earlier. Coffee and cocoa have recovered due to increase
in international prices. A fall in the rate of growth in capital goods may
reflect a natural peaking of investment, but the value of consumer goods
imports rose by 19.4 percent in the first quarter. Despite a widening
merchandise trade deficit, tourism earnings and remittances have helped
build foreign exchange reserves.
Degree of "Openness"
Trade as a percentage of GDP has remained more or less constant since 1990
fluctuating between 52 and 55 percent. These figures indicate that the
economy is relatively open to trade but due to high tariffs, is not one of
the most open economies in Latin America. A 1990 tariff reform, enacted by
presidential decree, reduced and simplified the tariff schedule to six
categories, with seven tariff rates ranging from 3 to 35 percent. It also
replaced some quantitative import restrictions with tariffs and transformed
all tariffs to ad valorem rates. Although it marked an improvement from the
previous regime, this reform still left the Dominican Republic with high
trade barriers. Forty percent of government revenues come from duties,
taxes and fees collected on imports.
In addition, a variety of non-tariff barriers that rested on longstanding
traditions impeded imports. Recently, in the first quarter of 1998, the
government issued a decree eliminating all non-tariff barriers with the
exception of those imposed on eight agricultural products which are the
subject of complaint to the World Trade Organization (WTO). The decree
brings the country into full compliance with all the dispositions contained
in the agreement establishing the WTO.
The Dominican government has taken other steps toward more open trade.
Following the signing in April 1998 of a free-trade agreement with Central
America, negotiations over a similar accord with the Caribbean Community
(Caricom) have continued. Although there have been some difficulties in
reaching a consensus on details such as product exemptions, rules of origin
and customs procedures, a final agreement is expected toward the end of
this year.
Until 1995, when legislation designed to improve the investment climate was
passed, government policy prohibited new foreign investment in a number of
areas, including public utilities, national defense production, forest
exploitation, and domestic air, surface and water transportation. Some
government regulations such as the process required to obtain the permits
to open new businesses tended to choke economic growth and innovation. The
difficulties in protecting intellectual property and failure to protect the
tenure of landowners have also impeded investment in modern agricultural
techniques.
The implementing regulations for the new legislation were issued by the
Fernandez administration in September 1996. Under these regulations, both
Dominican and foreign investors are entitled to equal treatment by law.
The regulations also modify the rules that govern agents and other
representatives of foreign companies operating in the Dominican Republic,
grant foreign investors complete discretion with respect to their profits
and capital, and eliminate prior restrictions requiring that direct
contributions of capital be made exclusively in freely convertible currency
or in-kind contributions. Although foreign investment must receive
approval from the Foreign Investment Directorate of the Central Bank to
qualify for repatriation of profits, the new law provides for repatriation
of 100 percent of profits and capital, and nearly automatic approval of
investments. A problem is that the legislation does not contain procedures
for settling disputes arising from Dominican government actions, which has
been the largest source of investment disputes. Seizures of foreign
investors' property, refusal to honor customs exoneration commitments, and
previous governments' refusal to consider claims for payments, much reduced
the attractiveness of the investment climate, notwithstanding passage of
the new law. However, several observers feel that the Fernandez
administration has approached its commitments to foreign investment with a
new attitude.
Investors operating in the Dominican free trade zones (FTZ's) experience
far fewer problems in dealing with the government than do investors working
outside the zones. U.S. based multinationals active in the FTZ's represent
one of the principal sources of U.S. investment in the Dominican Republic.
All mineral resources belong to the state, which controls all rights to
explore or exploit them. Private investment has been permitted in selected
sites and currently, foreign investors are exploring for gold, natural gas,
and copper. The process of choosing and contracting such areas has not
been transparent.
Inflows of foreign direct investment (FDI) had been rising since the
1980s, attracted mainly by the tourism sector, but saw a sharp decline in
1994. It has been rising again since 1995, representing 2.4 percent of GDP
in 1995. In 1997 and 1998 FDI inflows have remained buoyant, however, net
flows on public-sector external debt have remained negative as a result of
organizational difficulties and domestic financial constraints, which have
limited the government's ability to implement projects with international
finance. According to the U.S. Embassy, Central Bank data underestimate
actual investment. Apparently major investments made by U.S. firms in
recent years have been omitted, since many firms have been able to bypass
what was an onerous registration process for foreign investors.
Nonetheless the U.S. Embassy identifies some large foreign investment by
several companies. Both GTE and Motorola have investments in
telecommunications providers, which have estimates worth in the hundreds of
millions of dollars. Other significant U.S. investors are Texaco, Esso,
Shell, Smith/Enron, Destec, Citibank, Colgate, Sara Lee, and Gillette.
According to local banks as of March 1997 there were more than 150
companies registered as foreign investors in the country.
B. Domestic Political Institutions
Political Regime
The Dominican Republic is a representative democracy whose national powers
are divided among independent executive, legislative and judicial branches.
It is a multi-party political system with national elections every four
years. In two rounds of presidential elections in 1996, nearly 80 percent
of eligible Dominican voters went to the polls.
The 1994 presidential elections marked a change for the Dominican political
scene. After the death in 1964 of the dictator Rafael L. Trujillo,
Dominican politics has been by a race between two leaders: Joaquin
Balaguer, from the Christian Democratic party (PRSC) and Juan Bosch from
the Socialist part (PRD). Although the Bosch and the Balaguer's
administrations, as well as others in the 30-year period can be considered
democratic in comparison to the military dictatorship, the regimes can be
described as a combination of democratic and patrimonial, with high levels
of corruption in the state bureaucracy. Following the 1994 elections, when
many irregularities were observed on the voter's lists by international
observers, an intense period of political activity followed which led to
the Pact for Democracy, a document signed by all competing parties. The
Pact for Democracy reduced the re-elected President Balaguer's term of
office from four to two years, set early elections to re-elect a President
in 1996 and reformed the constitution. A new Central Electoral Board was
named to work on electoral reform.
The 1996 elections were declared to be free and transparent, and the
transition from incumbent administration to incoming administration was
smooth. Many international observers, especially the international
financial institutions, feel that the arrival of elected young President
Leonel Fernandez, of the Dominican Liberation Party, ushered in a new,
modern era in Dominican political life. His administration's policies and
vision for the country indicate a move toward a more open and functioning
democracy, as well as a more open economy. Fernandez' political agenda is
one of economic and judicial reform, although he has also introduced
proposals for administrative reform of the State. He is enhancing
Dominican participation in hemispheric affairs, such as in the Organization
of American States and the follow up to the Miami Summit.
However, the resounding victory of the opposition PRD party in the May 1998
congressional and municipal elections has substantially altered the
political outlook for the Dominican Republic over the next two years. The
party now enjoys sufficient strength in Congress not only to defeat any
government initiative, but potentially even to push through its own
legislative agenda against the wishes of the government.
Taxation
At 15 percent of GDP in 1997, 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. Direct taxes, those
imposed on income, profits and capital gains, represent only 15.5 percent
of total taxes. In the first quarter of 1998 tax revenue increased by 26
percent despite the introduction of several revenue-reducing measures,
including customs tax exemptions from capital and intermediate goods for
the agricultural sector and the garments industry, and the elimination of
the bank license tax. With high nominal GDP growth during the same period,
the overall result suggests improved tax enforcement, but an analysis of
the performance of individual taxes shows the revenues has been boosted by
favorable economic development.
The Dominican Republic has continued to implement changes in its tax system
aimed at increasing revenues. The concept of taxable income has been
enlarged, marginal tax rates on individuals and companies have been reduced
and capital gains are no longer considered exempted income. The Fernandez
administration has submitted additional proposals for changes in the tax
system to the Congress as part of an economic reform package. Recently,
however, the PRD has said that it will not accept any net tax increases. At
most it may accept rate increases in some taxes such as excise duties to
compensate for a reduction in other taxes, such as customs duties.
C. Main Groups in Economic Policy-Making
Government
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. It also owns an insurance company, the
country's largest bank (Banco de Reservas), and several factories producing
a variety of items. The state also owns close to half the country's arable
land. 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. For example, U.S.
businesspersons overseas are obligated to abide by the provisions of the
U.S. Foreign Corrupt Practices Act.
The business climate is adversely affected by a regulatory and
administrative system where power is highly centralized in the presidency
and where public officials and employees have uncertain tenure and rapid
turnover. The system is also marked by a high degree of arbitrariness in
the interpretation of laws and regulations. These traits contribute to a
sometime unstable or confusing regulatory environment and have led to
criticisms that the rules of the game are constantly changing. Dominican,
as well as foreign business leaders complain of judicial and administrative
corruption, and some persons have charged that corruption affects the
settlement of business disputes.
Private Sector
In 1994 private investment as a percent of GDP was 54.1. In 1995 domestic
credit to the private sector represented 27 percent of GDP and total flows
of net private capital was $237 million. During the first quarter of 1998,
credit to the private sector grew by over 28 percent year on year, despite
rising interest rates.
Strength of Labor
The Constitution provides for the freedom to organize labor unions and also
for the right of workers to strike. It also provides for private sector
employers to lock out workers. All workers, except military or police are
free to organize and workers in all sectors exercise this right. The
government respects association rights and places no obstacles to union
registration, affiliation or the ability to engage in legal strikes. The
Labor Code stipulates that workers cannot be dismissed because of their
trade union membership or activities. Nevertheless, organized labor
represents little more than 10 percent of the workforce and is divided
among three major confederations, four minor confederations, and a number
of independent unions.
The Labor Code applies in the 36 established free-trade zones which include
288 U.S. - owned or associated companies and employ approximately 172,000
workers, mostly women. Some FTZ companies have a history of discharging
workers who attempt to organize unions.
Collective bargaining is lawful and may take place in firms in which a
union has gained the support of an absolute majority of workers. Only a
minority of companies has collective bargaining pacts.
II. Financial Sector
A. Banking System
The Dominican financial system includes commercial banks, mortgage banks,
savings and loans associations, and development banks. The Central Bank
regulates the money supply and controls official foreign exchange reserves.
There is no deposit insurance at Dominican financial institutions.
However, when Bancomercio, the country's third largest bank, failed in
early 1996, the Central Bank guaranteed deposits at Bancomercio and
supervised its sale to another Dominican bank.
Commercial banks are the main source of private sector financing. Most
commercial lending is in the form of short-term lines of credit. Some
medium and long-term financing is available principally from the Central
Bank Development Fund resources. Mortgage banks traditionally have
provided medium and long-term loans for the construction and tourism
sectors. However, due to the uncertain lending environment, medium-term
annually renegotiated loans are most common. The only services provided by
savings and loans associations are medium and long-term loans for
residential housing. Development banks, both public and private, offer
medium and long-term loans to finance projects in priority sectors,
including agriculture, tourism, industry, services and transportation.
Finance companies provide short and medium-term loans to commercial and
industrial sectors. The companies provide loans when commercial banks are
unable or reluctant to do so.
Foreign companies cannot obtain internal credit for a period greater than
one year without prior approval from the Central Bank (this is being
reviewed in the Dominican legislature). In 1992 the Central Bank issued a
resolution dictating the procedural guidelines and policies for financial
institutions to convert to multibanks, merging the commercial, development,
and mortgage banking functions into a single financial institution. This
restructuring would consolidate resources in a more efficient way offering
leasing, factoring, international services, project loans, and checking
accounts, among others, in a single operational unit.
The Dominican financial system is in a modernization process prompted by
multilateral organizations such as the World Bank, the IMF and the IDB.
Congress is considering the proposed reform.
Ownership of Commercial Banks
As of March 1996, Banco Popular Dominicano and La Universal de Seguros, are
the top-ranked private bank and insurance company, in terms of assets..
These are both subsidiaries of the Grupo Financiero Popular, S.A. Banco
Popular Dominicano, has assets of over $600 million, with a deposit market
share of 23.38 percent. The next largest private bank has assets of less
than half that, with a market share of only 9 percent, and the smaller
banks have assets of well under $100 million. However, the largest bank in
the country continues to be the publically owned Banco de Reservas, with
assets of $1,035,639, commanding 27% of the deposit market share. This
however, the only publically owned bank. The degree of concentration in th
eDominican banking system is high, with an HHI of .39.
Health of Private Commercial Banks
In January 1995 the Dominican banking sector underwent a bank run. While
significant improvements in bank supervision took place after that, the
bank run demonstrated the fragility of both the banking system and
government agencies tasked with ensuring its continued stability. As of
July 1995 commercial banks were considered to enjoy high liquidity, even
though interest rates were high. During the first quarter of 1998, credit
to the private sector grew by over 28 percent year on year, despite rising
interest rates.
The Superintendent of Banks, Vicente Bengoa, credits the economy's recent
growth to the increased amount of credit obtained by different economic
activities from the financial system, and the reorganization process
companies adopted to enhance their competitiveness in external and internal
markets. The banking system's regulation and supervision system continued
to strengthen in 1997, as did the regulations of financial institutions,
focusing on globalization and strengthening ties among national and
international markets, which need clear supervision standards. Financial
entities are required to have a 10% solvency index as of March 31, 1998 -
to increase and strengthen capital adequacy - and demand an efficient risk
management of assets. Entities in the financial system have continued
consolidating through mergers in order to become multiple service banks -
of which there are 13 now - and to improve their position in the market and
achieve a more significant level of competition. An important event
occurred during the first quarter of 1998: Grupo Popular, Inc. of Puerto
Rico acquired 45% of the shareholder's capital of Banco Gerencial &
Fiduciario, an entity that is authorized to offer multiple banking services
and whose operation is currently being overseen by the monetary
authorities. The Dominican financial sector has strengthened as a result of
the actions of the Superintendency of Banks in applying the rules contained
in the proposed Financial Monetary Code, currently pending in the
legislature. Since 1994 the Superintendency of Banks has moved rigorously
to increase transparency, force the use of prudential norms, enforce
regulations long ignored, and require classification of loans. The U.S.
Embassy in Santo Domingo understands the prudential norms are applied in a
manner to induce banks not to pad their assets with non-performing loans.
The authorities appear to have been successful in this regard and as of
1997 the banking system was considered healthy, albeit fragile. More
rigorous prudential norms have been phased in and applied more
consistently. These rules have allowed lenders to improve and reorganize
their credit portfolios, projected a favorable environment and resulted in
the reduction of the banking sector's intermediation, among other things.
B. Stock Markets
Size and Activity / Major Players
Although incipient capital market operations have been growing since 1992
as a result of the opening of the Dominican Stock Exchange (BVSD) and the
economic liberalization program, capital markets in the Dominican Republic
are still very underdeveloped. No market for secondary securities exists,
nor is there a market for equity shares. Legislation as of September 1996
requires that shareholders offer their shares to the issuing company at par
value (usually a nominal value) before selling them. This effectively
discourages share trading. The poor legal framework means debt obligations
of private sector companies are not usually considered to be investment
grade. Companies are therefore constrained to use short term bank financing
for all debt. These practices have prevented development of capital
markets. Government debt is also not traded since the government has
defaulted on many of its previous obligations to domestic creditors.
The BVSD is trying to establish a true stock market and they are seeking a
legal framework for it. They have been staging seminars for the business
community to develop an atmosphere in which ownership of equity shares is
considered normal. The BVSD is working with NASDAQ officials on the IDB
project for regional share trading. Between 1992 and 1994 the BVSD
witnessed as average annual increase of 51 percent in value. The
transactions registered in 1995 grew by 121 percent. At present, total
funds invested in capital market instruments in the country amount to
approximately $200 million, 20 percent of which has been channeled through
the BVSD. The Dominican market is characterized as having a limited number
of instruments concentrated in short-term investments, a marginal
government participation, and a framework consisting of incomplete or
unfinished laws and regulations. Individuals, financial institutions
(investors) and corporations (issuers), constitute the main players in the
market.
The predominant investment criteria for investors are return and liquidity.
Interest rate differentials between prime rate in the commercial bank
system and average rates paid by issuers of commercial papers have
represented a 2 to 3 percent savings for the latter. The most popular
instrument by far, accounting for more than 80 percent of all investments,
has been commercial paper with tenors ranging from 30 to 360 days, with the
bulk of investments having a term of 90 days. During 1994 only 5.6 percent
of all negotiated instruments were repurchase agreements, which represent
the only derivative instrument traded through the BVSD. The number of
brokerage firms has grown steadily since the creation of the BVSD. As of
March 1995, 20 seats were registered, most of which were held by commercial
banks. Toward the end of 1994, the IDB through the IMF approved a project
of $2.2 million to coordinate a regional capital market in the Caribbean.
The first step toward this goal will be to integrate the various stock
exchange houses. The intent is to establish a regional clearing system, to
automate the buying and selling process, and to establish a system of
regional rules.
Although the Central Bank issues debt, these are handled in such a way as
to discourage trading. These debt issues are issued with 90-day maturities,
which also discourages a real market. The lack of effective dispute
settlement procedures is the final impediment to the development of any
effective market capital allocation system. In general, portfolio
investment in Dominican securities is impossible. Cross ownership of
firms, including sharing directors and ownership with banks, is common.
If the new securities law bill that is pending in Congress is approved, it
is expected that the market will continue to grow substantially, reflecting
the growing acceptance of the market as well as the increased ability of
foreign investors to make investments in the Dominican Republic. Rafael Del
Toro Gomez points out that privatization could result in increased activity
in the stock market, which would be to the benefit of the privatized
companies as well as to the general public.
C. Central Bank
Role
The Central Bank regulates the money supply and controls official foreign
exchange reserves. In January 1991 the government enacted a foreign
exchange system wherein the peso was allowed to float for most
transactions, although the float is influenced by Central Bank activity.
Except for a few official transactions such as petroleum imports, the
Central Bank ceded operational control of foreign exchange transactions to
the commercial banks. At the same time, the monetary board of the central
Bank floated the interest rate for commercial lending.
The Central Bank in general has weak mechanisms available to it to address
economic policy. Since there is no developed secondary market for
government securities and no liquid security market, the tools available to
the Central Bank are limited. The Central Bank can modify bank reserves
requirements but rarely does so. Banks resort to the Central Bank discount
window only rarely.
In August 1994, after being reelected, President Balaguer appointed Hector
Valdez Albizu as Central Bank governor. He immediately announced a series
of stabilization policies. The most important of these were to end Central
Bank financing of the government budget deficit and a commitment to a
policy of mini-devaluations of the official exchange rate to keep it in
line with the market rate. Throughout the Balaguer administration, the
government continued an expensive public works program. While no longer
financed by Central Bank money creation, the government "funded" this
construction by accumulating domestic debts to contractors and suppliers.
In the past the Central Bank has also repeatedly provided subsidies to
profligate state enterprises without regard to efficiency or production
targets. As of August 1998 Hector Valdez Albizu continues to be the
central bank governor.
The Dominican model of financial insitutions seem to fall somewhere in
between a credit-based system, with critical prices administered by
government-administered credit, and a credit-based system with bankers
oligopoly.
III. Politics of Liberalization
A. External Debt
Size / Debt servicing
The total external debt of the Dominican government is now approximately
$3.7 billion. Foreign debt service for 1996 was $706 million, representing
a 3 percent of GDP. The debt service as percent of GDP has been steadily
declining throughout the decade. A significant portion of the official
debt was rescheduled under the terms of Paris Club negotiations concluded
in November 1991. In August 1994 the government successfully concluded
settlement negotiations of its $1.2 billion debt with its commercial bank
creditors. The deal involved a combination of buyback schemes and
rescheduling. Payment to foreign private and public creditors in the
financial sector has generally been current since then. One exception is
the debt arrears of about $90 million to the U.S. Dept. of Agriculture
Commodity Credit Corp (CCC). Government payments to foreign non-financial
institutions are notoriously slow. Some debts are ten years old. The
Fernandez government formed a committee to evaluate the public debt
contracted by previous administrations.
On July 1, 1998, President Fernandez announced that the government would
pass on to the Central Bank the full value of revenue form the petroleum
differential, which is earmarked for payment of the external debt. Until
July the Fernandez administration had only passed on sufficient resources
for the servicing of the central government's debt. This meant that the
Central Banks was still forced to print money in order to service its own
substantial external debt, thus jeopardizing price and exchange rate
stability.
IMF Relations
The IMF Executive Board on August 21, 1997 concluded the 1997 Article IV
consultation with the DR. The Board concluded that over the period 1990 -95
much progress was made in strengthening the public finances, opening the
economy, tightening credit and wage policies, reducing exchange, price and
financial distortions, and normalizing relations with external creditors.
As a result inflation was reduced from 80 percent in 1990 to 9 percent
during 1995, real GDP after falling by almost 6 percent in 1990, grew on
average by 4.25 percent a year in 1991-95 led by strong growth in free
trade zone manufacturing, construction, energy production. communications
and tourism related services. The external current account swung from a
deficit of over 2 percent of DP in 1990 to s slight surplus in 1995. Gross
official reserves remained at the equivalent of around one and on-half
months of imports for most of this period. The external public debt as a
share of GDP was more than halved during 1990-95, to 33 percent. The
unemployment rate declined from about 20 percent in 1990-93 to about 16
percent in October 1995 despite increases in participation rate partly
associated with increased rural-urban migration. IMF Executive Board
overall commended and encouraged the present Dominican government in their
efforts. 23
B. Reform Record and Implementation Issues
Privatization
The Dominican government's program of partial privatization, or
"capitalization," should have a beneficial effect resulting not only from
private-sector purchase of stakes of up to 50 percent in public
enterprises, but also from the elimination of the hefty subsidies, which
have been necessary to restore financial viability to a number of these
enterprises. The Commission for the Reform of Public Enterprises (CREP)
initially expected the international bidding process for stakes in the
distribution, marketing and generation arms of the state electricity
company (CDE) to be concluded by the end of this year. Nineteen companies
have been selected to bid for stakes in the company. It appears that the
process may be delayed by up to two months as a result of the spate of
similar privatization occurring elsewhere in Latin America, and of
technical difficulties at the CDE. Once the CDE capitalization process is
completed, the CREP plans to move on to the state sugar council (CEA). The
management of the CDE for example has represented a significant obstacle to
the privatization of that enterprise. In May CDE management ordered the
army to intervene briefly in the operations of Dominican Power, a private
US-owned generation company, when it threatened to halt generation until
the CDE cleared payment arrears. THE CDE management has also had severe
differences of opinions with the CREP on several issues. At the beginning
of June President Fernandez was forced to intervene in the dispute, backing
the commission's mandate to proceed with the privatization process.
Even the President's stance on privatization has sometimes been unclear. In
May, Fernandez signed a decree transferring the assets of five minor public
enterprises to the state Industrial Promotion Corporation (CFI) for the
development of a new free- zone site. The same five companies had
previously been earmarked for capitalization under the provisions of the
public enterprise reform bill. Yet the privatization process in the
Dominican Republic suffers from more fundamental problems, according to a
World Bank document on the promotion of foreign direct investment in the
country. This document warns that serious investors are unlikely to be
attracted by the process while the government retains control of a 50
percent stake in capitalized enterprises. Although investors will enjoy
management control, the Bank emphasizes that legal procedures for the
resolution of conflicts between foreign investors and the government or
other areas of the private sector are inadequate. The country's judicial
system remains inefficient and corrupt, although a process of reform is
currently underway, while Dominican law prohibits the seizure of assets
belonging to public companies. The country has not yet ratified world
conventions governing international arbitrariation, and a large number of
legal disputes between the government and foreign investors remains
unresolved.
Economic Reform
An attempt to reform economic policies in the mid-1980s was abandoned in
the aftermath of disturbances that accompanied a large devaluation and
reduction of subsidies. The government reverted to expansionary fiscal and
monetary policies, repression of the foreign exchange market, accumulation
of arrears, and money creation in an attempt to engineer a recovery. This
approach continued with stops and starts until it culminated in severe
crisis. In 1990 capital flight reached 6.5 percent of GDP, inflation
skyrocketed to 100 percent, arrears rose to $1.4 billion, and foreign
creditors suspended disbursements. There was scarcity of petroleum,
electricity production teetered on the brink of collapse, and six
commercial banks and hundreds of informal financial institutions failed.
The performance of the economy during the past 15 years clearly
demonstrates both its ability to compete effectively in the international
market and the inability of tourism and the free trade zones alone to
revive sustainable growth. According to the World Bank a renewal of growth
in line with the economy's potential hinges on increasing outward
orientation and improving the business climate. During the transition to a
more open and private sector driven economy, however, the country's
medium-term growth prospects will continue to depend heavily on the
dynamism of tourism and the free trade zones.
Domestic Political Conflicts
The final results of the May congressional and municipal elections give the
opposition party PRD, 85 out of 149 seats in the chamber of deputies and 24
in the 30-member Senate. The President's party, the PLD, remained one seat
short of the one third needed to veto congressional proceedings, although
PRD congressmen will not be able to override a presidential veto. They are
likely however, to continue to block the president's reform program,
including several bills that move the economy toward liberalization (tariff
reform and full legislation regulating financial markets). The minority
government's inability to press ahead with fiscal reforms has forced a
devaluation of the peso by nearly 8 percent in July to 15.35 pesos = 1 U.S.
dollar after almost two years at 14.02 pesos per dollar. With little
changes expected in the attitudes of the PRD, president Fernandez is likely
to win approval for necessary economic reforms until the expiration of his
tem in the year 2000. He announced that he would not seek re-election,
which leaves all three major political parties scrambling to choose new
leaders for the next election. The PRD's veteran Pena Gomez died in May and
the PRSC remains in disarray since ex-president Balaguer stood down in
1996. Such political uncertainties will cloud the business-operating
environment over the next two years.
C. Other Pressures to Liberalize
NAFTA, Uruguay Round
NAFTA poses a challenge to the Dominican Republic, as the largest
beneficiary of the Caribbean Basin Initiative, Mexico's enhanced access and
physical proximity to the US market may make it more attractive to foreign
investors and US importers than the Dominican Republic. The US Congress has
been considering legislation to provide a transition period of "NAFTA
parity" for CBI countries, including the Dominican Republic, until 2005,
when the Uruguay accords will be fully implemented and a new hemispheric
trade area should become a reality. Without this legislation and saddled
with rising costs in a fixed exchange rate regime, some firms will shift
production from the Dominican Republic to Mexico or other low cost
producers in the region which have good access to the US market.
Following a recent June meeting with President Clinton, president Fernandez
received assurances that the DR would be included in NAFTA-parity
legislation expected to go before the US congress later this year. The
textile industry has suffered from competition from both Mexico and Aisin
countries. In the first two months of 98 the Dominican Republic textile
exports actually declined 4 percent.
The difficulties of importing goods have encouraged development of a series
of protected industries in the Dominican Republic, which could suffer
serious dislocations in a free trade environment. These threatened sectors
can be counted upon to defend their position against free trade. The
political difficulties that may arise as threatened sectors struggle to
maintain their position in the existing economy may delay the transition to
full implementation of the Uruguay Round Agreements.
Works Cited
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Aristy, Esther L. "Dominican Republic: Privatization in Latin America
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