World Bank issues a call to avoid “the explosive path” of the debt of the Dominican Republic
SD. In a report by the World Bank it is estimated that by December 2013, the consolidated debt of the public sector was approximately 45% of GDP, above the 33% of 2007. But after issuing this report by the World Bank this ratio has continued increasing, until it reached more than 48% of GDP in June 2014.
In order to avoid “an explosive path” of the debt of the public sector, the government should improve its surveillance of the debt and reduce the risks and vulnerabilities in the tax and external environments, according to a group of World Bank economists. “A primary deficit worse than what is expected or a shock regarding the exchange rate could result in unsustainable levels of the public debt,” they point out.
They stressed the fact that the information regarding the evolution of the consolidated debt of the public sector “is fragmented or broken up in different institutions,” which undercuts the control and the projections. For this reason, they advise bringing together all the missing data of the non-financial state enterprises, of the autonomous entities and the cities.
They also advise that they carry out an “exhaustive evaluation” of the contingent liabilities, which would permit them to obtain trustworthy information of the potential weight of the debt.
These liabilities consist in the obligations which arose in past events, with a certain degree of uncertainty they can be the results of future events. An example of a contingent liability are the state guarantees granted to favor third parties, such as were granted to 32 companies of free zones so that they could obtain loans at the Banco de Reservas for a total amount of RD $1.2 billion. This state had to pay this loan.
On an economy that does not trickle down
In the Dominican Republic, the GDP has grown at an average yearly rate of 5.58% during the 1991 – 2012. We know, because it is repeated so often, that it is one of the highest growth rates in Latin America.
Nevertheless, the “trickledown effect” of this high growth rate which lasted 20 years, “has not materialized in the reduction of poverty,” according to the report by the World Bank, published in March 2014 but not released to the press.
The group of economists contracted by the World Bank carried out an evaluation of the administration of the public expenditures and the financial responsibility of the Dominican state.
And the result is a report entitled: “The need for fiscal space and improvements in the use of public resources in the Dominican Republic.”
By April 2012, the poverty rate in the country had reached 39.7%, which while it represents an important reduction compared with the level of 49.7% registered in April is still greater than the 32.3% of April 2002. This means, that in 10 years the country could not recover the lost time.
Among the conclusions in the study, is that to attribute the relative failure in the fight against poverty, to some structural budgetary rigidity, which reduces the fiscal space necessary to promote human development through public policy. They cite the low tax collections, the persistent deficit of the electricity sector, and the deficiencies in the process of formulating and executing and controlling the budget.
These conclusions come about a posteriori of the tax reform which the government of Danilo Medina carried out in November 2012 some three months after taking office, which according to the World Bank economists, meant exhibiting “some effort in order to deal with the situation.”
From this “broad tax reform” they expect an increase in public income of 1.4 percentage points of GDP, they observe, besides the funds coming from the renegotiation of the contract with the Barrick Gold mining company.
But according to the report from the World Bank, this is not sufficient to “reach a path of sustainable growth,” so that what is needed is an agenda of complete reform of the fiscal and administrative policies of public finance.
In fact, even after the tax reform of November 2012, the Dominican Republic finds itself in a further reduced fiscal space “which they have experienced since 2006.” They explained that as a result of this, the country has registered primary deficits since 2008 (which is the balance, without including the interest of the public debt) which resulted in that the relation of the debt and the GDP has increased significantly.
They propose avoiding new debts
The World Bank councils avoiding additional indebtedness, above all refinancing of the stock that did not result in the best conditions. They suggest the government avoid what is called “seignorage” (the emission of inorganic funds) because this could prejudice macroeconomic stability, although they recognize the commitment of the authorities with an inflation goal that seeks price stability. They also propose the rationalization of expenditures and the increase in fiscal efforts. In addition they stressed the need to face the inefficiencies of the electricity sector.
Category: DR News |