IMF Executive Board Assessment of Dominica’s Economy

Introduction to Dominica’s Economic Expansion

WASHINGTON, CMC – The executive board of the International Monetary Fund (IMF) says Dominica’s economy has continued its expansion and that real gross domestic product (GDP) grew by 3.5 percent last year, supported by a recovery in tourism and targeted development investment to boost economic capacity and competitiveness.

In a statement following its Article IV consultation with the Caribbean island, the IMF executive board said that inflation has eased from its 2023 peak of 7 percent, averaging 3.1 percent in 2024.

“Tourism arrivals have surpassed pre-pandemic levels by roughly 32 percent, but the composition has shifted towards cruise visitors over stayovers. The labor market recovery remains uneven, with formal employment lagging behind overall growth.”

Economic Performance and Challenges

The Washington-based financial institution said that fiscal and external imbalances have narrowed but remain large. The primary balance improved by 2¼ percentage points (ppts) to a deficit of two percent of GDP in the financial year 2023/24, reflecting declines in primary current spending that more than offset moderately lower revenues.

The IMF said public debt has steadily declined from its pandemic peak but remains elevated at 100% of GDP. It said the current account deficit narrowed by two points to 32¼ percent of GDP in 2024, reflecting higher tourism receipts.

“The financial system is liquid with a mixed credit picture and balance sheet fragilities that require monitoring. Bank credit has declined further since 2023, reflecting ongoing de-risking amid persistent balance sheet challenges, notably elevated non-performing loans (NPLs) and still fragile provisioning.

Meanwhile, the credit union (CU) sector is rapidly expanding its lending portfolio despite weak capitalization, high non-performing loans (NPLs), and limited provisioning. Modernizing the supervisory framework governing these institutions is a priority to safeguard financial sector stability given their growing systemic importance.”

Outlook and Risks

The IMF Executive Board stated that Dominica’s economic expansion is poised to continue, but risks to the outlook are elevated and tilted to the downside.

It is projected that real GDP growth will average 3.5 percent over the next three years, underpinned by ongoing investment in flagship infrastructure projects that will boost tourism capacity and facilitate a transition to lower-cost geothermal energy.

The IMF stated that the heavy import-related content of these projects has eroded the external position, which is assessed to be substantially weaker than implied by medium-term fundamentals and desirable policy settings. However, gradual improvements are expected as significant capital outlays wind down and fiscal consolidation intensifies.

Policy Recommendations

The executive board stated that more ambitious fiscal consolidation than currently envisioned under the authorities’ policies is necessary to reduce economic imbalances, mitigate disaster risks, and help reinforce prospects for resilient growth.

“The overall risk of debt distress is high, and as such, it is critical to rebuild fiscal buffers by achieving and maintaining a primary surplus of 3.5 percent of GDP from 2026 onward to reduce public debt below 60 percent of GDP by 2035 as well as adequately capitalize the Vulnerability and Resilience Fund to mitigate disaster risks.”

The executive board stated that the strategy should focus on broadening the revenue base, optimizing expenditures to preserve space for macro-critical investments, and enhancing the targeting and sustainability of social protection programs.

Financial Sector Reforms

It said reducing balance sheet vulnerabilities and strengthening regulatory oversight are critical.

“For banks, priorities include stricter enforcement of provisioning and NPL standards, managing loan loss allowances, and facilitating the disposal of impaired assets while closely monitoring sovereign and foreign investment exposures.

“For credit unions, reforms to modernize the prevailing regulatory regime is essential by reinforcing the Financial Services Unit’s operational independence, enhancing risk-based supervision, updating regulatory thresholds, strengthening provisioning and loan management frameworks, and bolstering enforcement tools.”

Structural Reforms and Institutional Frameworks

The IMF said that continued structural reforms are essential for fostering resilient and sustainable growth and that addressing structural challenges that hinder financial intermediation remains a priority.

It welcomed the upcoming launch of a regional credit bureau, adding that complementary reforms should aim at modernizing collateral, foreclosure, and bankruptcy frameworks.

“Eliminating gaps in education and training relative to economic needs is essential to improve labor market outcomes. A comprehensive approach is needed to foster innovation and allocative efficiency, including exploiting digitalization and streamlining administrative processes for tax compliance, business registration, and permitting.”

Citizenship-by-Investment Program

The IMF stated that concerted efforts to strengthen institutional frameworks and mitigate risks should continue, with a focus on supporting surveillance, economic planning, and policy implementation.

It stated that progress on regional coordination across Citizenship-by-Investment (CBI) programs to enhance due diligence and transparency is welcome.

“Proactive engagement to address evolving concerns around Dominica’s CBI regime remains critical to safeguard this essential source of development financing,” it said.

Under the CBI program, Dominica offers citizenship to foreign investors in exchange for a substantial investment in the island’s socio-economic development.

Conclusion

The IMF’s assessment of Dominica’s economy highlights the need for continued fiscal consolidation, structural reforms, and strengthening of institutional frameworks to mitigate risks and ensure resilient and sustainable growth.

Frequently Asked Questions (FAQs)

Q: What is the current state of Dominica’s economy?

A: Dominica’s economy has continued its expansion, with real GDP growth of 3.5 percent last year, supported by a recovery in tourism and targeted development investment.

Q: What are the main challenges facing Dominica’s economy?

A: The main challenges include fiscal and external imbalances, high public debt, and vulnerabilities in the financial sector.

Q: What are the IMF’s policy recommendations for Dominica?

A: The IMF recommends more ambitious fiscal consolidation, reducing balance sheet vulnerabilities, and strengthening regulatory oversight, as well as continued structural reforms to foster resilient and sustainable growth.