The Central Bank (BCRD) today justified the increase in the country’s public debt, stating that “this is not the first time that a crisis has caused an increase in the level of indebtedness” and stressed that it is no coincidence that global rating agencies maintain credit rating of the country’s sovereign debt.
In their Open Page entitled: “Pandemic, economic recovery and debt sustainability”, analysts from the BRCRD’s international department show the crisis experienced in 1987 in Latin America, which raised consolidated public debt (CPD) to its historical high of 83% of gross domestic product (GDP), and the one experienced in the 1990s, the Dominican financial crisis caused public debt to increase from 21.9% of GDP in 2002 to 46.9% of ‘GDP in 2004.
They argue that the coronavirus crisis (COVID-19) has caused a drop in economic activity of -7.7% which, along with fiscal measures implemented to support businesses, households, and workers, have involved budget additions that they could place the Dominican debt level at around 68.1% of GDP by the end of 2020.
In their analysis, economists state that for this reason the rating agencies agree in pointing out that the main Dominican economic challenge is the approval of a tax reform, What they indicate would result favorably in the credit rating and in guaranteeing the sustainability of the indebtedness.
refer to the fiscal pact, Convened in October by President Luis Abinader and will be addressed in 2021, it will require the sacrifice of all actors in society (Citizens, Business and Government) and will have to consider the balance between gradually returning to a path of fiscal sustainability and driving the recovery from the current economic and health crisis.
“The tax boost will require higher revenue, funding and reduced spending which they may consider unnecessary, especially if it is contemplated to stabilize the level of indebtedness, “they said in the statement.
They point out that to stabilize the debt / GDP ratio at around 70%, the Government will require a consolidated primary balance of 1.8% of GDP in the long run, while to place the level of indebtedness in a downward trajectory in the long run, at 60% of GDP, this balance could be around 2.0% to 2.3% of GDP and to reach a debt level of 50% of GDP, similar to that observed before the pandemic crisis, in a period of 25 years, a primary balance of 2.4% of GDP could be chosen.
They state that whatever the strategy and the subsequent agreement reached with the fiscal pact, the Government and the different actors in society they will need to consider the balance between the structural reforms needed for the sustainability of public finances and the need to continue to support businesses, households and workers.
After highlighting the economic indicators achieved by the country this year, the BRCRD’s economic analysts conclude that Government is aware of its fiscal and health reality, and that it is “moving in the right direction”.
They point out that it cannot be lost sight of that this is the time to continue supporting the economy, especially in sectors that have been hit hard such as tourism, offering the necessary liquidity and direct assistance to Dominican families, through a policy fiscal that implements timely and effective social programs and promotes public investment in infrastructure projects that benefit the country in the medium and long term.