Fiscal Reform Can Help Dominican Republic Attract Greater Investment — Global Issues

Opinion by Emilio Fernandez-Corugedo – Pamela Madrid – Frank Fuentes (washington dc)Thursday, June 27, 2024Inter Press Service

Reaching funding grade on its sovereign bonds would additional speed up progress by decreasing rates of interest, rising capital flows, and broadening the investor base. This could additionally cut back personal sector financing prices and increase the financial system’s development potential.

Rates of interest on public debt are excessive relative to friends, notably these with funding grade. Excessive rates of interest imply fewer sources for spending on infrastructure, social providers, and making the financial system extra resilient to local weather change, an necessary danger for the nation.

Elevated public debt (or curiosity funds) relative to low tax revenues—often called debt affordability—is a key danger constraining its credit standing and contributing to excessive rates of interest. That’s why reforms, particularly to the tax system, might be key. A complete tax reform might assist the nation increase revenues and earn an funding grade ranking.

Income elevating

Tax revenues are restricted by expensive exemptions and a excessive threshold earlier than private revenue taxes apply. Streamlining tax incentives and exemptions—which collectively quantity to about 5 % of GDP, or a 3rd of all tax revenues—can be essential for simplifying the tax system and lowering evasion.

Completely elevating tax revenues by not less than 2 % of GDP would permit for sustainable will increase in key public funding and social spending – serving to to spice up productiveness and personal consumption whereas lowering inequality and poverty.

General, a complete tax reform might increase the extent of GDP by round 1 % after 10 years and by 2 % after 30 years (see Chart). Extra public sources from the reform would additionally create area within the price range to scale up public funding in infrastructure that may mitigate losses from local weather occasions, that are sizeable for the nation.

The Dominican Republic is weak to local weather shocks together with hurricanes, storms, and floods which already trigger common annual losses of round 0.5 % of GDP to infrastructure alone. The nation can be more and more weak to rising temperature and sea ranges.

Local weather change is anticipated to extend these vulnerabilities. Making public infrastructure extra resilient to local weather occasions in order that their impression is 40 % much less extreme might additional increase GDP by round 0.5 % after 10 years and by 1.75 % after 30 years.

Fiscal rule

Past the much-needed improve in tax revenues, complete fiscal reform ought to embrace the adoption of a fiscal rule imposing long-term limits on public debt that might improve certainty and assist safeguard fiscal sustainability.

Recapitalizing the central financial institution stays an important step to make sure its monetary autonomy. On this regard, the IMF has supplied technical help within the design of a Fiscal Accountability Legislation, which is pending approval by the decrease chamber of Congress, and has supported the authorities’ efforts to draft a brand new central financial institution recapitalization legislation.

Electrical energy sector

One other important reform is addressing the long-standing inefficiencies within the electrical energy sector that lead to excessive losses, which have averaged between 1 and a couple of % of GDP per yr within the final decade.

We estimate that chopping losses by half—to a degree similar to these in superior economies—might improve GDP by 0.3 % after 10 years as effectivity improves, prices are diminished, and blackouts are eradicated.

These enhancements, together with decrease non-technical losses and tariff changes to carry electrical energy costs according to manufacturing prices, would get rid of electrical energy sector losses and supply additional fiscal area for growth wants, boosting GDP by an additional 0.2 % after 10 years and 0.75 % after 30 years.

Contemplating the Dominican Republic’s potential, the challenges it at present faces and the uncertainty of the worldwide outlook, delaying a complete fiscal reform wouldn’t solely be expensive but additionally a missed alternative on its journey in direction of funding grade. Endeavor these key reforms might additional increase the extent of GDP by round 2 and 5 % after 10 and 30 years respectively.

Emilio Fernandez-Corugedo is a Deputy Division Chief, Pamela Madrid is a Senior Economist within the IMF’s Western Hemisphere Division and Frank Fuentes is an Advisor to the IMF Govt Director representing the Dominican Republic.

IPS UN Bureau

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