DOMINICA
1. RECENT ECONOMIC PERFORMANCE A. Overview Dominica’s growth momentum strengthened in 2006 as the country’s principal output sectors consolidated recent gains. Enhanced macroeconomic stability particularly with respect to public sector operations provided a strong basis for a heightened level of private sector confidence and associated business activity. Preliminary estimates indicate that real GDP grew by 4.1% compared with 3% and 3.5% in 2004 and 2005, respectively. This growth was relatively broadbased as only the manufacturing sector registered a contraction in output. Government’s fiscal position also strengthened during the year due to improvements in budget administration and substantial grant receipts. A 15% Value Added Tax (VAT) was introduced on March 1, 2006 as the Government sought to reform the tax system while safeguarding revenue flows. In the external sector, the current account deficit narrowed as the growth in merchandise and service exports outpaced the growth in imports. Developments in the monetary sector were characterised by a rise in domestic credit coupled with strong deposit growth,y reflecting the outturn in the real sector. In spite of some decline in imported petroleum product prices, which served to contain imported inflation, domestic prices edged up slightly as uncertainty regarding the precise impact of VAT triggered rent-seeking behavior on the part of local firms. With respect to employment, anecdotal information suggested that the rate of unemployment fell during the year as a result of the increased demand for labour in the labour-intensive agriculture industry and higher demand for labour generated by a larger PSIP. B. Sectoral Performance Agriculture The agriculture sector remains critically important to Dominica both in terms of employment
1 This supported compliance with Fairtrade, Eurep Gap and Tesco Nature’s Choice environmental requirements.
generation and the associated impact on poverty reduction, and in terms of its foreign exchange earning capacity. Following a challenging 2005, when output contracted by 0.6%, value added in agriculture grew by an estimated 1.6% in 2006. This turnaround primarily reflected positive growth in crop production, particularly bananas. Banana production rose by 5.4% to 11,440 tonnes due to a number of factors, including some recovery in the grower base, improvements in irrigation systems, favourable weather conditions, and better and more stable fruit prices. Strong impetus was also provided by the technical support provided by the Dominica Banana Producers Limited in relation to minimum standard agronomic practices1 which facilitated better market access, particularly in the UK. Additional domestic demand was also generated by the start-up of a local ripening operation during the year. Livestock and fishing also recorded positive growth of 1.5% and 2%, respectively, reflecting the general improvement in aggregate demand and higher disposable incomes. Manufacturing Output in the manufacturing sector is estimated to have contracted in 2006 by some 3.6% following positive growth of 3.5% and 5.1% in 2004 and 2005. The outturn in the sector continued to reflect the performance of one dominant player that appears to be losing market share in its principal export markets on account of increased competition. As a result both dental cream and soap production fell marginally. Beverages production also registered a decline during the review period. Tourism Activity in the tourism industry rebounded in 2006 as both land-based and cruise tourism performed creditably. Real output in the hotels and restaurants subsector is estimated to have increased by just over
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9% for the first nine months of the year, compared with a 1% contraction for the corresponding period in 2005. Long-stay visitors rose by 4.4% to 60,657 as most source markets registered growth on account of increased airlift. Two new carriers, one from the French-speaking Caribbean (Take-Air) and the other from the Englishspeaking Caribbean (Air Taxi) commenced operations during the year. Cruise arrivals were also significantly up by some 30.7% (to 281,450 passengers) for the January to September period on account of mild hurricane season in 2006. Tourism expenditure also rose by 20.5% to $49 mn. Construction Real value-added in the construction sector increased by an estimated 10% in 2006 compared with 2.5% in 2005 as both public and private sector investment activity gained momentum. All construction sector indicators including construction starts, importation of construction materialsand cement sales recorded double-digit increases over the period. While growth in the residential mortgage market continued from the previous year, significant activity was also registered in respect of tourism-oriented facilities as well as in respect of government’s capital works programme. C. Prices, Wages and Employment The domestic price level rose for the nine-month period to September by some 3% compared with increases of 1.2% and 2.1%, respectively, recorded for the corresponding periods in 2004 and 2005. The higher inflation rate was attributed to sharp jumps in the subindices for fuel and light (9.8%) and food (4.1%) on account of high oil import prices during the first half of the year, as well from the impact of the introduction of VAT on 1 March. With respect to wages, Government and public sector labour unions commenced negotiations covering the triennium period 2006-09. While no outcome was reached, Government’s pay offer of 3% across the board was broadly consistent with the need to maintain fiscal discipline. D. Fiscal Policy and Debt Operations Government’s fiscal operations strengthened during the calendar year on account of favorable revenue growth stemming from buoyant domestic economic activity, strong grant inflows and ongoing current expenditure restraint. During the year, Government also redesigned its tax system with the introduction of the 15% VAT which replaced the 20% consumption tax, the 7.5% sales tax, the 5% hotel occupancy tax, and the entertainment tax. While the success of the new arrangements will depend on the degree of compliance and the level of
administrative efficiency, preliminary fiscal data suggest that revenue impact has been positive. Current revenue amounted to $43.2 mn, which represented a 16.5% increase over the performance in 2005. While revenue from domestic goods and services rose by 65% mainly on account of the introduction of the VAT, the yield from taxes on international trade registered a marked decline. Total grant inflows jumped five-fold to $16.7 mn, representing significant assistance received in support of the rehabilitation of infrastructure damaged by the December 2005 earthquake, as well in support of the construction of a sports facility and for the upgrade of the airport. Current expenditure was contained to $55.4, given ongoing efforts to realise greater efficiencies with respect to public sector employment and associated costs. These included initiatives aimed at merging the operations of the air- and sea-ports, and the outsourcing of road maintenance services. As a result, the current balance after grants moved from a deficit of $3.6 mn (1.2% of GDP) in 2005 to a surplus of $9.5 mn (3.2% of GDP) over the review period. Capital expenditure also rose by some 46% on account of significant work on the Melville Hall airport expansion project and the Windsor Park stadium. Despite the increased level of spending, the overall balance after grants moved from a deficit of $5.2 mn in 2005 to a surplus of just over $6 mn. With respect to debt operations, Government concluded negotiations with one of its larger creditors who had remained outside the 2004 exchange offer, when the authorities restructured the outstanding public sector debt. Government also continued negotiations with one of its major commercial creditors. At the end of September, the total public debt stock stood at $288.9 mn or at about 1% less than at the corresponding date in 2005. However, debt service payments fell by about 3% on account of the changed servicing terms on existing liabilities. E. Financial Sector The financial sector was characterised by buoyant credit demand as well as robust deposit growth on account of the pick-up in real sector activity coupled with stronger remittance inflows. Data for 2006 indicate that private sector credit expanded by 11.2% to $196.7 mn representing significant housing construction as well as business-related activity. Public and private sector deposit growth also continued to be strong, with the former reflecting both revenue generation and large grant receipts. Interest rates remained relatively unchanged over the period.
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F. External Sector A strong turnaround in service exports led to a narrowing of the current account deficit during the nine month period to September. This notwithstanding, the visible trade balance widened primarily on account of the lacklustre performance of merchandise exports, which fell by 6.7% to $29.9 mn. High grant inflows and reduced debt service obligations contributed to a favourable balance of payments outturn.
2.
MAJOR POLICY ISSUES
A. Private Sector Development to Support Growth Dominica, similar to other OECS countries, has a government sector that is large relative to GDP. Over the five-year period to 2004, OECS government spending as a percentage of GDP was in the order of 34.6%, ranging from just under 30% in St. Lucia to approximately 41% in Dominica. With respect to employment, the public sectors in the subregion have also played a critical role in sustaining income growth by being the principal employers. While several arguments can be advanced in support of relatively large public sectors in small economies, factors associated with this strategy could constitute an obstacle to private sector growth. Cognizant of these structural deficiencies, Government has committed to a strategy that is expected to facilitate private sector growth. This is demonstrated in recent efforts to strengthen the country’s business climate, including initiatives aimed at improving the operations of the Customs Department as well as the National Development Corporation. In addition, Government has recently appointed a Land Tenure and Administration Reform Task force to oversee the process of improving and modernising the legislative, institutional and administrative systems governing land administration and tenure in Dominica. While these initiatives represent positive steps on the part of Government, their impact on the speed and depth of private sector development will be contingent on Government’s own timeliness with respect to their completion. B. Strengthening Public Sector Capacity Empirical analyses show a strong nexus between economic growth and the quality of policies and the strength of institutions in a country. In the Dominica context, the recent episode of sharp output contraction and severe fiscal imbalance in many respects had its genesis in inappropriate policy responses to a number of structural challenges confronting the economy. Against this backdrop, a large part of the country’s recovery
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effort has been targeted towards building institutional capacity to support growth and sustain development. This is particularly evident in the management of public finances. Within the recent past Government has introduced measures designed to strengthen treasury management and has been exercising effective budget control. Among other things, this has contributed to a significant improvement in government’s fiscal position. While these are significant developments which will help to improve the country’s fiscal position going forward, there are still factors that may serve to undermine the country’s long term development objectives. Principal among these is the apparent dearth of appropriately skilled personnel in core ministries. In the past, this has stymied the development process by slowing the rate of project implementation and has also led to weak macro-economic planning, budgeting, and debt management. Going forward, Government will have to pay urgent attention to building and sustaining the requisite capacity in these critical areas. C. Financial Sector Reform Financial institutions in Dominica, similar to those in other ECCU countries, are relatively well developed. Depositors and borrowers have access to a diversified range of financial services, although money and capital markets are in their early development stages. The banking sector is relatively deep and, together with cooperative credit unions, has provided access to formal financial services for a significant share of the population. This level of monetisation has had a catalytic effect on the country’s pace of growth and development. This notwithstanding, recent assessments of the financial sector point to the existence of relatively large spreads between lending and deposit rates, particularly given the low inflationary environment that persists. In this situation,the welfare costs associated with a high interest rate regime may be significant with strong potential for adverse impact on real sector development. Often time, large spreads are symptomatic of oligopolistic market conditions, perceived market risks as well as high fixed and operating costs, due to both scale diseconomies and to the existence of regulatory constraints. Against this backdrop, setting the stage for a more competitive environment and well as seeking to enhance the regulatory environment are two positive first steps that can be taken in an effort reduce borrowing costs as a means of spurring further investment activity. With specific regard to the regulatory environment, Dominica has to give urgent attention to amending the real estate security realisation procedures under the Title by Registration Act. Over time, cumbersome legal procedures have led to weak enforcement of contracts
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and have also undermined operational efficiency within the banking sector.
3. PUBLIC SECTOR INVESTMENT PROGRAMME The Public Sector Investment Programme broadly translates Governments policy objectives into tangible projects aimed at reducing poverty and increasing income levels by seeking to spur private sector investment, increase educational opportunities and by the enhancement of basic health care services. The size of the PSIP for FY 2006/07 is estimated at $31.5 mn or about 3.3% higher than the estimate in fiscal year 2005/06. The majority of the projects are designed to strengthen and/or modernise the country’s economic infrastructure, particularly in the roads subsector. Some of these included the widening of a number of critical roadways in the Roseau Valley area under the CDB-funded Road Improvement and Maintenance Programme; initial feasibility and design work on the rehabilitation of the West Coast Road; the Roseau to Melville Hall road upgrade, and the Roseau road reinstatement project. Further works associated with expansion and upgrade of the Melville Hall Air Access project was also undertaken. In the education sector, Government has focused on the rehabilitation of several primary schools, while at the tertiary level, resources were deployed to upgrade the physical plant at the State College. In the productive sector, particularly with respect to agriculture and tourism, public sector investment has been aimed at strengthening extension services and boost destination marketing as well as visitor-site development. Substantial resources have also been targeted towards the completion of the Windsor Park stadium. Financing the PSIP continues to be primarily through grant resources. In the current programme, Government has projected a financing mix of 76.5% from grant sources, 13.4% through loan funding and some 10.1% from government revenues. Dominica’s emphasis
on grant resources to fund its capital spending, while inherently ‘good’ from a debt perspective, reflects limitations on the country’s capacity to borrow resulting from inappropriate fiscal policy action in the recnt past. However, as has been the case in the recent past, regardless of the sourcing of finances, the country’s lack of capacity at various stages of the project cycle often imposes delays with respect to project disbursement and ultimately project execution.
4. MEDIUM-TERM PROSPECTS Dominica’s medium-term prospects should be informed by optimism but tempered by past realities and current challenges. The country has demonstrated maturity, resilience and the capacity to successfully grapple with difficult macroeconomic circumstances. The immediate future will offer both opportunities as well as challenges. In the agriculture sector, recent developments in banana production in terms of the replanting drive, product diversification, and higher environmental standards can potentially provide the sector with a new lease on life. But the approach to the sector must embrace new and more productive business processes. Labour productivity must be significantly enhanced. Government must also move with greater alacrity to respond to the apparent shifts in the economy. This is particularly so with respect to shortage of skilled and semi-skilled labour requirements in the services sector. Large-scale grant financed capital project should sustain buoyant economic over the near term. As such, real economic growth is projected to average around 3%. The VAT should ensure better tax compliance and lead to favourable revenue positions on the back of positive real sector growth. However, Government must wean itself off of grant-funded development to genuine private sector led growth. This is the essential challenge. Assuming ongoing tight budget control and negligible debt accumulation, the fiscal outturn should continue to be favourable. The monetary sector is expected to track activity in the real sector.
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