IMF wants Dominica to Set up Savings Fund to Deal with Natural Disasters

The International Monetary Fund (IMF) is urging the Dominica government to create a savings fund for natural disasters as it urged Roseau to continue implementing cost effective fiscal policies and reforms to support recovery while containing the expansion of the public debt.

A statement issued by the Washington-based financial institution, noted that the IMF’s executive board has concluded Article IV consultation with Dominica reviewing the island’s economy following the passage of Hurricane Maria on September 18 last year, which it said caused damage estimated at US$1.3 billion.

“Fiscal performance deteriorated sharply due to the fall in tax revenue after the hurricane, but was partially offset by a surge in grants and buoyant Citizenship-by-Investment (CBI) sales revenues. With limited revenue, drawdown of large government deposits, grants, and an insurance pay out helped meet financing needs,” the IMF said.

It said that in 2018, output is projected to decline by 14 per cent and to take about five years to recover to pre-hurricane levels.

“The fall in output and government revenue, coupled with increased expenditure for rehabilitation and reconstruction, will lead to a substantial worsening of fiscal and external deficits. However, signs of recovery, particularly in construction and the public sector, have already started to emerge.”

The IMF said that the risks to the outlook include the budget becoming financially constrained and unable to sustain adequate investment given high debt, limited buffers, weak revenue, and urgent needs for reconstruction spending.

“Other risks include financial instability stemming from undercapitalization of systemic financial institutions, recurrent natural disasters with low resilience, uncertainty regarding CBI and grant income, and external competitiveness challenges.”

The IMF executive board said while it is commending the local authorities in responding to the humanitarian crisis and significant devastation wrought by Hurricane Maria, it is nonetheless recommending that Dominica contain current spending “extraneous to recovery, and enhancing the efficiency of capital investment while protecting critical social and recovery spending.

“Given Dominica’s vulnerability to natural disasters, directors noted that investment in resilient infrastructure was appropriate, despite its higher cost. They encouraged the authorities to create a savings fund for natural disasters.”

The IMF said that once output recovers, it is recommending fiscal consolidation to sustain reconstruction while generating a primary surplus sufficient to set public debt on a downward trajectory.

The financial institution highlighted the need for stronger financial sector regulation and supervision to address vulnerabilities exacerbated by Hurricane Maria and stressed the importance of decisive action to reduce non-performing loans and capital shortfalls, as well as adequate preparedness for possible liquidity pressures in line with recommendations of Fund’s technical assistance.

The IMF also recommended maintaining a proactive stance to mitigate the risk of withdrawal of correspondent banking relationships including continued strengthening of the AML/CFT (Anti-Money Laundering/Combating the Financing of Terrorism) framework.

The IMF is supporting the phasing out of the off-shore bank sector and welcomed cessation of new license issuance.

It agreed that enhancing growth prospects requires higher private sector participation and improving the business environment and recommended identification and removal of costs and barriers that affect investment and profitability.

The IMF is also stressing the need to improve the business environment, including efforts to reduce the costs of dealing with the government and urged strict enforcement of construction and zoning regulations given vulnerability to natural disasters.

 

Source: stlucianewsonline.com

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