Dominican Republic has been leading Latin America in GDP growth, with an average annual rate of around 5 percent per year since the 1970s. The Caribbean nation has made great strides in reducing poverty and improving living standards. Reaching investment grade on its sovereign bonds would further accelerate progress by lowering interest rates, increasing capital flows, and broadening the investor base.
A much pending tax reform could help the country boost revenues and earn an investment grade rating. Permanently raising tax revenues by at least 2 percent of GDP would allow for sustainable increases in key public investment and social spending – helping to boost productivity and private consumption while reducing inequality and poverty.
In an all-inclusive fiscal reform, increase in taxes should include the adoption of a fiscal rule imposing long-term limits on public debt that would increase certainty and help safeguard fiscal sustainability. The autonomy of the central bank remains an important step to ensure its financial autonomy. To solve the problem the IMF has provided technical assistance in the design of a Fiscal Responsibility Law.
Another crucial reform is addressing the long-standing inadequacies in the electricity sector that result in high losses, which have averaged between 1 and 2 percent of GDP per year in the last decade. The IMF estimates suggests that cutting losses by half to a level comparable to those in advanced economies could increase GDP by 0.3 percent after 10 years as efficiency improves, costs are reduced, and blackouts are eliminated.
These improvements, along with lower non-technical losses and tariff adjustments to bring electricity prices in line with production costs, would eliminate electricity sector losses and provide further fiscal space for development needs, boosting GDP by a further 0.2 percent after 10 years and 0.75 percent after 30 years. Delaying an all-inclusive fiscal reform would not only be costly to the economy but also a missed opportunity on its journey towards investment grade.
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