WASHINGTON DC, Jun 27 (IPS) – 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 country has made great progress in reducing poverty improving living standards.
Achieving investment grade on its government 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.
Interest rates on government debt are high compared to those of comparable countries, especially investment grade ones. High interest rates mean fewer resources for spending on infrastructure and social services and making the economy more resilient to climate change, a key risk for the country.
Higher government debt (or interest payments) relative to low tax revenues – known as debt affordability – is a key risk that limits creditworthiness and contributes to high interest rates. Therefore, reforms, especially of the tax system, will be crucial. Comprehensive tax reform could help the country increase revenues and achieve an investment grade rating.
Increase revenue
Tax revenues are constrained by costly exemptions and a high threshold before personal income taxes kick in. Streamlining tax incentives and exemptions – which together amount to about 5 percent of GDP, or a third of all tax revenues – is also crucial to simplifying the tax system and reducing tax evasion.
By permanently increasing tax revenues by at least 2 percent of GDP, key public investments and social expenditures can be sustainably increased. This would help boost productivity and private consumption while reducing inequality and poverty.
Overall, comprehensive tax reform could increase the level of GDP by about 1 percent after ten years and 2 percent after thirty years (see chart). Additional public resources from the reform would also create room in the budget to scale up public investments in infrastructure that can mitigate losses from climate events, which are significant for the country.
The Dominican Republic is vulnerable to climate shocks, including hurricanes, storms and floods, which cause an average annual loss of about 0.5 percent of GDP in infrastructure alone. The country is also becoming increasingly vulnerable to rising temperatures and sea levels.
Climate change is expected to increase these vulnerabilities. By making public infrastructure more resilient to climate events, so that their impact is 40 percent less severe, GDP could increase further by about 0.5 percent after ten years and by 1.75 percent after thirty years.
Tax rule
In addition to the much-needed increase in tax revenues, a comprehensive fiscal reform should also include the adoption of a fiscal rule imposing long-term limits on public debt, which would increase certainty and help ensure fiscal sustainability.
Recapitalizing the central bank remains a crucial step to guarantee its financial autonomy. In this regard, the IMF provided technical assistance in drafting a law on fiscal responsibility, which remains to be approved by the lower chamber of Congress, and supported the authorities’ efforts to draft a new law on recapitalization of the central banks.
Electricity sector
Another important reform is to address the long-standing inefficiencies in the electricity sector that lead to high losses. These have averaged 1 to 2 percent of GDP per year over the past ten years.
We estimate that halving losses – to levels comparable to those in advanced economies – could increase GDP by 0.3 percent after ten years, as efficiency improves, costs are reduced and power outages are eliminated .
These improvements, together with lower non-technical losses and tariff adjustments to bring electricity prices in line with production costs, would eliminate losses in the electricity sector and provide more fiscal space for development needs, boosting GDP by an additional 0.2 percent after ten years and 0.75 percent would increase. after 30 years.
Given the Dominican Republic’s potential, the challenges the country currently faces and the uncertainty about the global outlook, delaying comprehensive fiscal reform would not only be costly but also a missed opportunity on its journey to investment grade. Implementing these important reforms could further increase GDP by about 2 and 5 percent after ten and thirty years, respectively.
Emilio Fernandez-Corugedo is deputy department head, Pamela Madrid is a senior economist at the IMF’s Western Hemisphere Department and Frank Fuentes is an advisor to the Executive Director of the IMF and represents the Dominican Republic.
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© Inter Press Service (2024) — All rights reservedOriginal source: Inter Press Service