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Public debt exposes country to a higher risk of an external shock. A 30% devaluation would increase the debt by 10% of GDP

SANTO DOMINGO. The Dominican Republic should avoid certain scenarios, if it wants to maintain the fiscal stability of its consolidated public debt. Fatal elements of those scenarios are deficit of the electric sector which is superior to what is expected, which is estimated to be about 0.5% of GDP, or that the government finds itself faced with the impossibility of reducing current expenditures, such as that of the public payrolls and of the electricity subsidy. If this were to happen, “there would be a marked upward tendency of the public debt,” explains a report from the World Bank.

In addition, as a result of the rate of external indebtedness superior to the internal rate, which has been observed since 2008, the country has become seriously exposed to the risks of external shocks.

This means that in the “improbable case” of an external shock on the exchange rate, which results in a depreciation of the peso by 30%, for the end of 2015, the relation of the debt versus GDP would shoot up by nearly 10 percentage points in just one year, “which would constitute a severe load on the public finances,” estimates a group of World Bank economists.

These conclusions are the result of this study “Dominican republic: the need for fiscal space and improvement in the use of public resources”, carried out by a group of economists contracted by the World Bank, and headed by Blanca Moreno – Dodson.

The consolidated debt of the public sector was estimated at 41.7% of GDP as of December 2012, “and could be reaching levels of approximately 45% of GDP in 2013,” they say. But the information on Public Credit (Ministry of Hacienda) and from the Central Bank note that as of July 2014, the consolidated public debt represents 51% of GDP (38.9% for the nonfinancial public sector, and 12.1% of GDP corresponds to the securities in circulation by the Central Bank).

In the World Bank report, published in March 2014 but unknown to the press, the economist considered that time, the path of the debt – GDP was sustainable, but they call the government’s attention to paying attention to other ratios, and they mention specifically that of debt service on the total tax income, which they estimated in 2014 would reach 45.3% of GDP.

Likewise, they stress a study by Jimenez and Ovalle, from 2013, in which they estimate at 56.7% “the maximum threshold” of the debt – GDP relation “which the investors consider sustainable for the Dominican Republic in 2013.”

An “extended patronage system

The “extended patronage system” causes public investment projects in infant structure to receive priority over the expenditure in public goods, since “they can frequently be used to compensate (faithful) members of the party and contributors,” says a report from the World Bank in 2004. In the context of the presidential elections of 2012, capital expenditure increased to 5.8% of GDP, from 3.6% of GDP in 2011. If this is repeated in 2016, they estimate that the debt will go by two percentage points of GDP.

Source: DiarioLibre

Category: DR News |

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Last updated October 26, 2016 at 10:54 PM
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