FILE Report No. 2492-DO Current Economic Memorandum on the Dominican Republic April 30, 1979 Latin America and the Caribbean Region Country Programs Department I FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disciosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
FILEReport No. 2492-DO
Current Economic Memorandumon theDominican RepublicApril 30, 1979
Latin America and the Caribbean RegionCountry Programs Department I
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disciosed without World Bank authorization.
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Exchange Rate
Official Rate:
Dominican Peso RD$1.00 = US$1.00
Parallel Market Rate:
Fluctuating daily, but usually withina band of RD$1.15-1.25 = US$1.00
Fiscal Year
January 1 - December 31
Abbreviations
AID = Agency for International Development
CDE = Corporacion Dominicana de Electricidad(Dominican Electricity Corporation)
CEDOPEX = Centro de Promocion de Exportaciones(Export Promotion Center)
CFI Corporation for Industrial Development
EPZ = Export Processing Zone
FIDE = Investment Fund for Economic Development
GDP = Gross Domestic Product
GNP = Gross National Product
IAD = Instituto Agrario Dominicano(Dominican Agrarian Institute)
IDB = Inter-American Development Bank
IBRD = World Bank
INESPRE = Instituto Nacional de Estabilizacion de Precios(National Price Stabilization Institute)
ISA International Sugar Agreement
ONAPLAN = National Planning Bureau
FOR OFFICIAL USE ONLY
TABLE OF CONTENTS
Page No.
Data sheet
Map
Summary and Conclusions ......................................... i - vi
I. Introduction ........................................... 1
II. Recent Economic Developments, Sectoral Issues andStrategy ............................................... I
Output and Expenditure ................................. 1
Sectoral Performance and Policy ........................ 3Agriculture ........................................ 3Manufacturing ...................................... 6
III. The Stabilization of the Economy ....................... 9
The Balance of Payments - Prospects and Policies ....... 9
IV. Public Finances and the Public Investment Program ...... 13
Statistical Appendix
Project List
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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Page 1 of 2
ECONOMIC INDICATORS
GROSS NATIONAL PRODUCT INI 1977 ANNUAL RATE OF GROWTH (%, constant prices)
t BA Y 1b.~~~~~~~~~~~~~~~~~~~~~~~T, aple b eenD, prepa-d by An~
0 D ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~World Bank VW -rf ehOi--y fbr
VER~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o netCOo CBb.na,s SAAN B0Y
u I~~~~~~~~~~~~~~~~~~~.I~0
1B~~~ CU TIVABLE SOILS 0 MANCTIES~~~~~~~~~~~~cIIATI 100-
IR, a~~~~~AND TRANSITIONAL AGRICULTURE ~ ~ ~ ~ ~ C TAL I
235~~~~~~~~~~~~~ ISL0AN4D5 CISETB
MILES , NO~CUTE SIVABERSEIL PARCLSAASNTRNSITONA
0 ANMD TRANSITIONAL so AGRICULTURECORLESTA 251OTEAES
710 30' 31~ 7003071I 79' 690 30' 690 680,30'
SUMMARY AND CONCLUSIONS
1. The Dominican Republic faces a number of economic and social problemswhich have been recently exacerbated by low export prices and rising importprices. Economic growth has slowed; the balance-of-payments has experiencedan unprecedented deficit and net foreign reserves have become negative; govern-ment revenues have stagnated and the fiscal deficit has increased. In addition,the long standing problems of rural poverty, high underemployment, and un-employment continue, and further improvement in public administration is desir-able.
2. Preliminary estimates indicate a GDP growth of only 3.6 percent in1978. This means a further slowing down from the 5.3 percent average rateof growth in 1974-77, which in turn was half the average increase in GDPof 10.5 percent during 1968-74. In 1978 uncertainty due to the Presidentialelections discouraged investment; prices of sugar, coffee, and cocoa fell,the coffee crop was disappointing and ferronickel volume was substantiallyreduced in response to the slump in the international nickel market.
3. The country's balance-of-payments, like that of most energy import-ing, primary products exporting countries has deteriorated in recent years.The period 1968-74 was one of rapid expansion in exports and substantial in-flow of foreign capital resulting in a gradual buildup of foreign reserves. In1974 the cost of petroleum imports increased by over US$100 million and waslargely responsible for a fall in foreign reserves; but in 1975 steep in-creases in the price of sugar exports led to a reduction in the currentaccount deficit from an average of 6.3 percent of GDP during 1970-74 to 2.1percent of GDP and to substantial reserve accumulation. However, with fal-ling sugar prices and falling demand for bauxite and ferronickel exports thecurrent account deficit rose to 5.9 percent of GDP in 1977 and to an estimated8 percent of GDP in 1978. Last year, net foreign reserves fell by about US$95million; net foreign reserves at year-end were negative by about US$35 million.
4. Revenues of Central Government which were 15 to 16 percent of GDP inthe first half of the seventies declined to 13 percent of GDP in 1978. Con-currently Central Government savings fell from around 8 percent of GDP toless than 4 percent of GDP and Central Government capital outlays declinedfrom 6-1/2 to 4-1/2 percent of GDP. In 1978 Central Government operationsshowed an unprecedented overall deficit of RD$115 million--over 2 percent ofGDP-financed by drawdown of RD$49 million of cash reserves built up from sugarrevenues in 1975 and by loans from the Central Bank and Banco de Reservas--theGovernment's commercial bank.
5. During the record economic growth in 1968-74, employment increasedas new jobs were created through industrial, mining and tourist developmentsas well as through public works programs. However, there is little evidenceto suggest that job creation in manufacturing and tourism has kept pace withthe estimated yearly increase in labor force of over 50,000 persons. Indeedopen unemployment in Santo Domingo has been estimated at 24 percent in a1977/78 sample survey of households.
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6. The poor performance of the economy in 1978 has highlighted the
main weaknesses in the economy and emphasized the need for adjustments in a
long-term development policy and for short-term stabilization measures to
prevent further deterioration in the balance-of-payments. Development policy
based on the use of generous fiscal incentives and high tariff protection to
promote industrialization has fostered the growth of ri iufactures using
capital intensive techniques and imported inputs mainl> to supply the domestic
market. While this may have been useful in getting industriali2dtion started,
the process has been constrained by the size and growth of the domestic
market, and by the availability of foreign exchange to purchase inputs. These
constraints on production, plus the capital intensive technological bias, do
not favor adequate job creation. Also, the use of generous exonerations from
income taxes and import duties has reduced the buoyancy of government revenues
which have remained dependent on traditional production and are becoming
increasingly inadequate in the light of growing demands for public services.
The required changes in development policy include reorientation of production
toward exports, removal of the bias toward capital intensive technology, and
the introduction of new taxes. Stabilization measures must be aimed at
containing the growth of imports within a limit consistent with what the
economy can afford, preventing a resurgence of inflationary pressures, increas-ing the competitiveness of Dominican exports, encouraging the retention and
use of domestic savings within the economy, and promoting inflow of foreign
capital.
New Policies
The Government which came to office on August 16, 1978, has started
make adjustments in (.evelopment policy in order to stimulate growth and to
ensu e that the benefits of growth are shared more equitably than in the past.
To encourage the reorient ition of production toward external markets, the
Government has proposed legislation to legalize and liberalize the use of the
parallel exchange market in which foreign exchange from emigrants' remittances,
most tourist expenditures, and some private capital inflows are traded at a
premium to make remittances abroad and to purchase imports not eligible for
foreign exchange at the official rate. This would allow certain non-traditionalexports and all of tourism to benefit from the premium and enhance the competi-
tiveness of local inputs against imported inputs which would have to be financed
tlhrough the parallel market. Recently, the Government extended, for a further
18 months, a prohibif-ion originally for six months on the import of automobiles
with f.o.b. values above US$4,000 and raised the retail gasoline price by
about 15 percent to RD$1.25 per gallon. Also, the Government is preparing
legislation to provide incentives to exports and to agro-industry. Withinthe public sector itself, the Government has moved to correct weaknesses in
administration, strengthen public finances, improve efficiency in the provision
of services and the use of public capital, and to change the spatial/sectoral
emphasis and the technological bias of its programs so as to reduce rural
poverty and underemployment. To address the weakness in administration it hasgiven Secretaries of State (i.e. Ministers) greater responsibility for the
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formulation and implementation of programs within their sectors, set up formalmechanisms to improve interagency coordination in such high priority areas asagro-industry, and raised the level of salaries in order to attract and retaincapable staff. The Government, beginning in the 1979 budget, has decided tochannel the plethora of earmarked revenues and special funds into a singleconsolidated fund; and is improving the administration of income taxes andcustom duties. The Congress is considering increased taxes on cigarettes andalcoholic beverages. In addition, measures are being taken to strengthen thefinances of autonomous agencies. In the case of the electricity company,commercial rates have been raised by 15 percent, and rates to the publicsector by about 20 percent; other rate increases have been scaled to usage.The state sugar corporation is being relieved of the burden of a subsidy tothe electricity company. In order to improve efficiency, more adequateprovision is being made for proper maintenance of existing facilities and forimprovement in distribution of services; e.g., maintenance of roads, andbetter distribution of irrigation water.
8. It may be useful at this stage to present in tabular form themain policy issues facing the Dominican Republic at this time, the actionplanned by the Government and or suggested by the Bank, and the status ofthese plans.
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Issue Action Planned or Suggested Status
Reorientation of 1. Legalize parallel market, and Draft law in Congress.production toward a) shift non-traditionalexternal market exports into it.
b) shift imported intermediateinputs and some raw materialsto the parallel market.
2. Export Promotion Law giving Draft ready-not yetspecial incentives to exports. submitted to Congress.
Reduce bias against 1. Modify Law 299--to remove Not yet underlabor intensive discrimination in favor of consideration.technology and fixed investment and to introduceagainst use of domestic value added as a criterionlocal inputs for exoneration.
2. Adjust FIDE interest rates. Not yet under considera-tion.
Strengthen public 1. Increase taxes on cigarettes Before Congress.finances and liquor.
2. Introduce new taxes on bases not Studies being done.subject to erosion by fiscalincentives e.g. real estate,value added.
3. Adjust electricity rates. Increase of approxi-mately 15 percentrecently announced.
4. Improve administration ofincome tax and customs duties. Being done.
Stabilization of 1. Prohibition of importation of 6 month prohibitionthe Balance-of- cars with f.o.b. value in excess extended forpayments of US$4,000. 24 months.
2. Prohibition of imports of some Now in effect.clothing and shoes.
3. Increase in price of gasoline. Increase of 15 percentrecently announced.
4. Monetary program: limiting Not yet designed.banking system credit expansionwithin the growth of deposits; andthe adjustment in deposit interestrates and Central Bank rediscountrates.
Public Sector Development Plan and its Financing, 1980-82
9. The Government has prepared a three year public sector developmentplan in which it has stated its goals, specified its priorities, and presentedits investment program. The growth goals of the program are 5.5 percent forGDP, 6.1 percent for exports, and creation of 56,000 new jobs yearly. Importsare to be constrained to 21 percent of GDP.
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10. Among economic sectors, highest priority has been given to agricul-ture, for which a sectoral growth target has been set at 4 percent per annum;and within which targets have been specified for expansion of the land reformprogram and for land under irrigation. Among the social sectors, health andeducation have been assigned highest priority. Consistent with these priorities,investment in economic and social infrastructure has also been given highpriority, with emphasis on the reconstruction of the road network, and on thedevelopment of hydroelectric resources and the improved distribution of elec-tricity. The Government has made it clear that the future spatial/sectoralemphasis of public expenditures will be rural, where most of the poor reside.
11. The project content of the investment program has been worked outin full for 1980, and largely reflects inescapable commitments arising fromprior investment programs and the present distribution of planning capabilityamong agencies. For the years 1981 and 1982 projects have been identified butsometimes only tentatively and imprecisely in some high priority areas. Theallocation of expenditure in line with the new priorities will require immediateimprovement in planning in these areas, and the articulation of criteria forselecting out projects in areas where the planning capability has identifieda total value of investment projects beyond the resources which will beavailable. Notwithstanding these concerns, an important start has been madetoward the rationalization of public sector investment programming, which ifcontinued, will reduce the risk of any significant misallocation of resources.The list of projects already identified does include most of the importantprojects which the Government wishes to undertake, and can serve as a basisfor discussion of the amount, form and content of financial support requiredfor the country's development and stabilization efforts.
12. The Government's projection of consolidated public sector fixedinvestment indicates a nominal rate of growth of 13.3 percent per annumbetween 1979 and 1982, which means a rate of growth of 7 percent per annum inreal investment given the expected behavior of costs. Public sector savingas a ratio of GDP is expected to grow form 3.8 percent in 1979 to 4.3 percentin 1982. This modest achievement reflects the emphasis on health and educationwhich involve high recurrent expenditure, and the cost of needed improvementsin salaries, and in maintenance of public facilities. Nevertheless, publicsector savings are projected to provide 41 percent of the financing requiredfor the total capital outlays of RD$2.2 billion (including amortization)during the years 1980-82. Internal borrowing is projected to provide 11percent. Thus slightly over half of the program would be financed frominternal resources, and the remainder from external sources. Of this, sourcesfor almost one third are expected from financing already assured or possibleproject loans from traditional, official lenders (IDB, IBRD and AID). About17 percent, or an average of just under US$120 million yearly would be requiredin project loans from new lenders, or nonproject loans. Because of project-preparation problems in the past, the gap in 1980 (US$128 million) may requirea relatively larger share of non project lending if it is to be filled.Attached to this memorandum is a list of projects which the Government of theDominican Republic believes are suitable for consideration by foreign lendersat this stage. While financing on a project basis will go far to achieve the
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Government's economic and social goals, it is clear some nonproject lendingwill be needed for the next year and --depending on export prices and thebalance of payments and fiscal response to new policy measures-- for furtheryears.
Future Growth and Balance-of-Payments Prospects
13. The growth of the Dominican economy during the next few years willbe determined initially by recovery in the mining and construction sectors inresponse to improvements in international markets and increased domesticinvestment. Subsequently, the expansion in capacity in agriculture, manufac-turing, tourism, and utilities, and the growth of internal demand will beimportant factors determining the growth of GDP. Throughout the period,however, growth will be both stimulated and constrained by the availabilityof foreign exchange. The Dominican GDP could grow at an average rate of 4 to5 percent during 1979-8L expanding slightly to 5 to 6 percent during 1981-83.Assuming that prices of exports and imports average annual rates of increaseof 7.5 percent and 6.1 percent respectively, the current account of thebalance-of-payments would likely show increasing deficits in dollar terms, -itdeclining as a ratio of GDP, from about 8 percent to about 6-1/2 percent in1982. For 1979 the deficit on current account is expected to be about RD$400million, assuming vigorous recovery in the mining sector, sugar price of 11cents per pound and finally, that the growth of merchandise imports at currentprices will be contained at 11 percent.
14. The total public external debt outstanding and disbursed includingshort-term at the end of 1978 amounted to about US$880 million according toCentral Bank estimates. During 1978 this debt had increased over 40 percent;and much of the increase came from private sources. The identified privateexternal debt was US$430 million, not including short term liabilities.During 1977 public external debt service was 7 percent of export earnings,but is estimated to have risen somewhat in 1978, with part of the increaseresulting from the fall in export earnings. Both the public external debt andthe burden of debt service are comparatively low by international standardsand can be increased without violating the tradition of prudence which hascharacterized Dominican debt policy.
15. The deterioration of the balance-of-payment can still be correctedby an export-oriented development strategy and appropriate short-term stab-ilization measures. The Government is in the process of developing thisstrategy, has recently announced some stabilization measures and has indicatedthat additional ones are forthcoming. However, if this effort is to succeed,support in the formh of quickly disbursing long-term loans is urgently re-quired. The Dominican Republic should be able to manage its external indebt-edness, provided it successfully and expeditiously carries out measures toencourage exports, maintains its international competitiveness and restrainsthe growth of imports with a minimal distortion of relative prices.
I. INTRODUCTION
1. This Economic Memorandum has been prepared for use of members of theDominican Republic Subgroup of the Caribbean Group for Economic Developmentand Cooperation. The lastest World Bank Economic Report, No. 1705-DO, entitled"Main Problems in the Economic Development of the Dominican Republic", Novem-ber 23, 1977, addressed the major development problems of the country and dis-cussed its prospects in detail. An economic mission visited the country inFebruary/March 1979 and confirmed that the analysis and conclusions of the1977 report remain valid. This memorandum incorporates the preliminary find-ings of that mission, and complements the public investment program that hasbeen prepared by the Government of the Dominican Republic for presentation tothe Subgroup. A short statistical annex of relevant social and economic dataand a list of projects suitable for consideration by official lending agenciesare attached to this memorandum.
II. RECENT ECONOMIC DEVELOPMENTS, SECTORAL ISSUES AND STRATEGY
Output and Expenditure
2. Preliminary estimates indicate that in 1978 GDP at constant pricesgrew by 3.6 percent, the lowest growth rate the country has experienced inthis decade. This continues the sequence of years of slow growth whichaveraged 5.3 percent in 1974-77 compared with 10.5 percent during 1968-74.The poor performance in 1978 was attributable mainly to a reduction in fer-ronickel production, and sluggish construction activity due to the slowdownin private and public fixed investment. In addition, the price of sugarcontinued to fall, export prices of coffee and cocoa also fell, and thecoffee crop was disappointing. Although there was some recovery in agric-ultural production after the disastrous drought of the previous year, thefall in export earnings constrained the growth of domestic demand and adverslyaffected manufacturing activity. Real income is estimated to have increasedby less than 2 percent, on account of a worsening of the terms of trade. Also,unemployment and underemployment was probably aggravated by the lay-off ofworkers in the mining and construction sectors. On the other hand, improveddomestic food supplies have contributed to a substantial slowdown in the rateof inflation.
Table 1: KEY ECONOMIC INDICATORS
Proj.1970-74 1975 1976 1977 1978 1979
Real GDP Growth (X) 10.0 5.2 6.4 4.4 3.6 4.3Current Account Balance-
of-payments/GDP (X) -6.3 -2.1 -6.2 -5.9 -7.8 -7.5Central Government
Savings/GDP (X) 6.1 10.0 6.9 6.2 3.6 2.3Central Government
Deficit/GDP (X) -0.9 +1.2 +0.4 -0.3 -2.4 -3.2
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3. Fixed investment spending stagnated in 1978. In constant 1970
prices, growth of fixed investment during 1975-78 was about 1.4 percent per
annum, while during 1970-75 it was 17.4 percent. As a percentage of GDP,
fixed investment spending rose from 16.5 percent in 1970 to 22 percent in 1975,but then fell back to 20 percent in 1977 and 1978. On one hand, investmentduring the seventies was attracted to opportunities ia mining (ferronickel
and precious metals), in manufacturing for the protected incernal market, and
to the creation of special free zones and industrial parts. The public sector
expanded the infrastructure associated with private investment in mining andmanufacturing, expanded the transport network substantially, and emphasized
urban and tourism needs. On the other hand, the behavior of fixed investmentwas affected by the availability of internally generated investible funds.This was especially true of the public sector until 1975 in that public
sector savings were adequate to finance a growing investment program withmodest recourse to external borrowing. Since then, public fixed investment
has not grown in nominal terms; in real terms it has declined. It is less
true for the private sector where fixed investment continued to grow, albeit
at a reduced rate, and with the assistance of external resources.
Table 2: INVESTMENT AND SAVINGS
Est. Proj.1975 1976 1977 1978 1979
Domestic Savings/GDP (%) 24.5 17.8 18.3 16.4 16.1
Public Savings/GDP (%) 12.1 10.2 8.1 4.9 3.8
Index of Nominal DomesticSavings (1975=100.0) 100.0 79.3 92.8 89.4 99.4
4. These observations have important implications for investment policy
in the near future. First, the prolonged slowdown in investment implies thatthere probably is only a limited expansion of productive capacity now in
gestation, and this may lead to restrained growth prospects. A resurgencein growth, therefore, will require a resurgence in investment and/or a change
in the efficiency of investment. Second, an early recovery will have to
depend on the identification and utilization of excess capacity and the
investment in short gestation projects such as marginal additions to existingprojects, e.g. full resumption of ferronickel production beyond the 66 percent
recently achieved, and irrigation networks to distribute water from existing
dams. Third, higher investment will require larger inflows from abroad tofinance capital goods imports. It may be desirable to encourage a larger
inflow of risk capital to the private sector, possibly on joint venture terms.
Fourth, policy measures to stimulate national savings should be included in
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the strategy for renewed growth. Fifth, the system of incentives should bedesigned to guide investment toward those sectors and those technologies wherethe incremental value added per unit of capital is greatest.
5. The growth of private consumption spending has also decelerated inrecent years. After 1974 thie prices of imported intermediate inputs and fuelsrose rapidly and so did the prices of local agricultural food products, withthe result that the growth in private consumption at constant 1970 prices aver-aged only 5.6 percent between 1974 and 1977 compared to 8.6 percent between1970 and 1974. The decline in rate of growth of real private consumption after1974 was not compensated for by an increase in public sector consumption ex-penditures. These latter actually declined in real terms after 1974. Consumpt-ion growth has slowed, not because the growth of saving has increased, butbecause the growth of income has declined. The dilemma this poses is that anyattempt to speed up growth of internal savings to sustain higher investmentlevels may slow the growth in manufacturing if it continues to be oriented tothe internal market. The ways out of this dilemma seem to be the reorientationof manufacturing more toward exports, increased foreign participation in localinvestment, and at least initially a reduction in the price competitiveness ofimports in the domestic market.
6. Real public consumption expenditures declined by an average of 11percent per annum during 1974-77 compared with a rate of growth of 6.7 per-cent during 1970-74. These figures reflect an approach to fiscal policywhich generated unprecedented current savings by the public sector, butrestricted the expansion of public services, e.g. in education and health,with likely adverse effects on lower income groups. Consolidated publicsector savings averaged 9 percent of GDP during 1971-77, sufficient to financeon the average 95 percent of public capital outlays which peaked at 11.6percent of GDP in 1975. This remarkable effort resulted in a considerableimprovement of some primary infrastructure. Many major projects, however,such as some multipurpose dams, were carried out without adequate assessmentof their economic justification; and the expected benefits were sometimes notfully achieved. The restriction of current expenditure, achieved partly bylimiting services and partly by freezing wages and salaries, has affected theGovernment's ability to operate and maintain the economic and social infra-structure as well as attract and retain capable staff and develop an efficientadministrative apparatus.
Sectoral Performance and Policy
7. Agriculture (including livestock, forestry, and fishing) remains themost important sector of the Dominican economy in terms of the number of peopledirectly dependent on it for income and its contribution to export earnings,even though as a percentage of GDP it has been second to manufacturing (in-cluding sugar) since 1975. Real value added in agriculture grew at an averagerate of only 1.4 percent during 1974-77; a performance that is only partlyexplained by drought in 1975 and 1977 and the constraint on sugar exports dueto International Sugar Agreement (ISA) quotas. Part of the explanation must
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b; the failure of past agricultural policies to bring about more efficientuse of the country's arable land, to create marketing arrangements which en-sure producer prices high enough to make it profitable for the farmer to growthose crops in which the country has a comparative advantage, and to provideadequate credit. The effects of these failures can be seen in the continuationof land extensive production techniques. With 100 people per square kilometerof land, and over 2 people per hectare of arable land, the land in cattle hasalmost doubled in the last fifteen years, and the average grazing pattern isonly one head of cattle per hectare. Two export crops, coffee and cacao,have failed to maintain or improve their contribution to export earningsbecause marketing arrangements have led to such an erosion of profitabilityto the grower that plots have not been maintained and aging orchards have notbeen replaced. In 1978, value added in agriculture is estimated to havegrown by 7.2 percent, but only because of the recovery of food crop productionfrom the effects of drought. Livestock, which has been the most rapidly grow-ing subsector in the decade, had the benefit of better arrangements both formarketing output and acquiring inputs but its growth in the near future willbe slowed by the effects of the recent swine fever epidemic, and by theexistence of price controls and restrictions on exports.
Table 3: SECTORAL GROWTH INDICES
(1970 = 100.0)
1970-74 1975 1976 1977 1978
Agriculture 118.9 115.9 124.9 125.7 134.7
Industry 145.0 155.6 165.1 170.4 178.4
GDP 146.5 154.1 164.0 171.3 177.4
Population 111.0 114.0 117.1 120.4 123.7
8. The major thrusts of agricultural policy under the last Governmentwere in the areas of land reform and irrigation. Between the beginning ofthe land reform program in 1962 and the end of 1977 a total area of 178,602ha. have been distributed to 36,480 settlers or parceleros (or about 40 percentof applicants) within 300 settlements or asentamientos; only 12 percent ofthis land area was distributed after 1974. In order to ensure that not onlymarginal agricultural land was distributed, Congress passed legislation in1972 subjecting to expropriation farms growing rice on land irrigated by Govern-ment built canals. Also subject to expropriation is part of land newly brought
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under irrigation: -25 percent-of cropland, 35 percent of pasture land, and50 percent of undeveloped land. Although these efforts in land reform haveyielded benefits to those who have received land, the benefits have beenlimited by inadequate extension services to farmers, who have continuedin most cases to use traditional methods with extremely low yields. Furtherlimitations on the benefits derivable from the program inhere in the under-
utilization of the large percentage of land that has been acquired underthe agrarian reform program but is awaiting development and distribution, andin the uncertainty created by the agrarian reform laws among large scalefarmers. The fear of expropriation has led in some cases to the use of highquality arable land, contiguous to irrigation canals, for extensive rain-fedcattle grazing to avoid irrigation usage and hence classification as land
subject to expropriation. it has also discouraged investment by large scalefarmers in improving the productivity of their land.
9. One of the major thrusts of agricultural policy under the present
Government will be agrarian reform, emphasizing the creation of a new agra-rian structure with active participation of beneficiaries through associa-
tions or cooperatives in planning the development of asentamientos. The
development of processing enterprises by the asentamientos will form an
important part of the new agrarian strategy and is consistent with the high
priority being given to the development of agro-industry. However, thereremains the need to address the disincentive to invest resulting from un-
certainty among large scale farmers as to whether and when their lands maybe expropriated. If the authorities would more clearly identify those
estates targeted for acquisition, the remaining farmers would be able tomake plans to improve productivity and diversify output. The pace of landdistribution may not be accelerated, however, unless the administrativecapacity of the Agrarian Reform Institute (IAD) is significantly expanded.
10. Other aspects of the present Government's agricultural policy
include the restructuring of the public sector institutions serving agric-ulture, livestock, forestry, and fishing, bringing them more closely under
the direction of the Secretary of State for Agriculture. New units forsectoral planning and for administration have been set up within the Sec-retariat to improve coordination among these institutions and ensure more
efficient delivery of services to producers. Recognizing the importantrole of marketing and the importance of price incentives, the Governmentintends to establish indicative prices for agricultural products at each
stage of the marketing process, continue to intervene in the market to stab-ilize prices, guarantee prices for certain products before planting begins,and set up norms for grading products. In addition to the foregoing, theGovernment intends to reorient credit policy to give priority to particularcrops and areas, providing credit to small-scale producers through regionalcommittees which would process applications. Also a National Council will becreated to advise on the formulation of a plan for the conservation andexploitation of natural resources.
11. The importance of traditional exports like coffee and cocoa has been
recognized, and plans have been prepared for programs of rehabilitation andimprovement of these crops. The main ingredients of these programs includeloans, technical assistance, fertilizer application, and seedlings. So far
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plans for the improvement of internal marketing to ensure that growers getbetter prices have yet to be made. As in many of the above-mentioned areasof concern, objectives have been announced but the implementation of activitiesto achieve them awaits the completion of plans and the restructuring of theadministrative organs.
12. Manufacturing is the largest sector in terms of its share of GDP(18.6 percent in 1978). Sugar refining is by far the principal industrialactivity accounting for almost half of the sector's GDP in 1977. This sectionof the report focuses on performance and policies relating to manufacturingindustry other than sugar refining. Employment in manufacturing was estimatedat around 46,000 in 1977, having doubled since 1968. More recent data onemployment are not available but the indications are that there has been littleincrease since 1977. Value added in constant 1970 prices grew at an averageannual rate of 12 percent between 1968 and 1975, but at only about 4.5 percentbetween 1975 and 1978.
13. Structurally the manufacturing sector is highly concentrated in theproduction of light, non-durable consumer goods for the domestic market. In1977, processed food, beverages and tobacco accounted for more than 52 per-cent of value added, non-metallic minerals for 31 percent, and textiles,clothing, leather and footwear accounting for another 9 percent. Over timethe share of food processing has been falling while that of non-metallicminerals, mainly construction materials, has been increasing.
14. Manufactured exports in 1977 were about US$56 million, which was4.1 percent of manufactured output and 6.7 percent of total commodity exports.In addition, the three Export Processing Zones (EPZ) exported US$58.7 millionin 1977. Roasted coffee, leather goods, and canned food were the major categor-ies among local exports, while exports from the EPZ's were mainly electricaland electronic components, clothing, tobacco and leather goods.
15. The major elements of the Dominican Republic's industrial policiesinclude fiscal incentives, protective tariffs, subsidised medium and longterm industrial credit, subsidised industrial infrastructure, and access toforeign exchange at the official rate. Fiscal incentives include exonerationfrom income tax; exonerations of import tariffs on capital goods, intermediategoods and raw materials, and on fuels (not including gasoline); and provisionsfor accelerated depreciation and favorable tax treatment of the income fromreinvested profits. Prior to 1968 firms essentially negotiated with the Gov-ernment the package of incentives applicable to them. However, in 1968 ageneral regime of incentives was set up under Law 299. It established threecategories of industrial firms; "A" for firms exporting their total production,"B" for firms producing import substituting goods not yet being produced inthe country, and "C" for firms producing substitutes for imports of goodswhich were already being produced domestically. The level of exonerationof income taxes and tariffs depends upon the category, while the period ofexoneration depends upon location. Law 4315 (1955) as modified by law 432(1969) provides for the establishment of "Export Processing Zones" (EPZ) inwhich most category "A" firms are located, and together with Law 299 grantstax and duty exemptions, exemption from most foreign currency restrictions --except the obligation to pay in foreign exchange for goods and services pur-chased domestically.
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16. Tariff protection deriving from the cumulative effect of several
tariffs reaches a level exceeding 100 percent for goods accounting for overone-third of value added in manufacturing. At the same time the exoneration
of tariffs on intermediate goods and other inputs is widespread. The combined
effect is to provide a powerful incentive to produce final goods for the
local market and to use imported inputs rather than to develop local ones.
Tariff protection is further reinforced by a provision under Law 299 requiring
that the public sector and private institutions that receive public funds buy
the local product provided it is of similar quality to the imported product
and its price is not higher than the landed duty-paid cost of the imported,
even where the institution enjoys duty-free importation.
17. Financial incentives to the manufacturing sector have been providedin the form of medium and long term subsidised loans mainly from the Central
Bank's Investment Fund for Economic Development (FIDE) and to a small extent
from the government's industrial development finance company (CFI). Sinceits creation in 1966, FIDE has made 450 industrial loans totalling RD$77million; the funds being channelled through commercial banks, financieras
and some government development agencies. FIDE's interest rate to the finalborrowers is 9 percent, substantially below the legal ceiling of 12 percent
for commercial bank loans. CFI has an industrial loan portfolio of only
RD$8.5 million, but it has invested in two industrial parks which have hadoperating losses for several years, and also in an EPZ (San Pedro de Macoris).
In addition to funds provided by these public financial institutions, com-
mercial banks have been encouraged to lend to industry by the low cost of
resources available to them for this purpose from the Central Bank; rediscount
rates on industrial paper having been kept at 5-6 percent.
18. Foreign exchange policy has been an important component of in-
dustrial policy in the Dominican Republic. The Foreign Exchange Control
Law (Law 251 of 1964) requires that all foreign exchange revenues of ex-
porters must be surrendered to the Central Bank at the official rate, and
allows the Bank to sell foreign exchange for imported inputs at the same
rate. In July 1967, the Monetary Board published a list of imports forwhich no official foreign exchange would be provided, and established quotasat 75 percent of the previous years' importation for items on another list.
Decree 1482, which followed immediately, permitted these products whichwould not be eligible for funds from the Central Bank to be imported with the
importers own foreign exchange (divisas propias), thus institutionalizing
a parallel market which has been tolerated since 1967. The effect has beento increase the level of protection offered to local producers of items on
these lists (which include most consumer goods) as a result of the premium
at which foreign exchange is traded on the parallel market.
19. The combined effects of these policy measures has been a substan-
tial increase of industrial production for domestic consumption, and arelatively rapid increase in exports of manufactured goods originating in
the EPZs. However, the industrial incentive system has had three distinct
unfavorable consequences for Dominican industrial development. First, the
combination of cheap credit, low import duties on capital goods, access to
foreign exchange at the official rate and favorable income tax treatment has
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provided a strong incentive for the introduction of capital-intensive tech-niques of production. Second, the high degree of protection makes it ex-tremely profitable to produce for the internal market, even at high cost,and relatively unattractive to export; a tendency reinforced by the main-tenance by CEDOPEX, the export promotion agency, of a list of items forwhich export quotas are fixed or the export of which is prohibited. Third,the system favors the use of foreign inputs; many firms which mainly processagricultural products are ineligible for benefits under Law 299. Theseconsequences have meant that the development of manufacturing activity hasnot been accompanied by a comparable contribution to employment generationor foreign exchange earnings.
20. The present Government is particularly concerned about the need todeepen the process of industrial development by developing linkages to agricul-ture. In order to encourage exports, the Government has proposed legislationto legalize the use of the parallel foreign exchange market by permitting theproceeds from non-traditional exports to be sold in that market, and inaddition is drafting legislation to provide tax incentives to exporters.Besides these changes other adjustments appear necessary. As long as Law 299remains in its present form it will continue to encourage capital-intensiveindustries using imported inputs, and, since future industries will not belimited to those which may be covered under a new agroindustry promotion law,it will be necessary to modify Law 299 in order to avoid these distortions.Other distortionary aspects of industrial policy, e.g., the capital subsidyfrom the low interest rates on FIDE loans and the restrictions on exports byCEDOPEX, need to be reviewed. Finally, while import substitution may beregarded as a useful step in developing an industrial capability, experienceonfirms that countries which switch to an export expansion strategy have
generally been more successful in achieving rapid industrial growth; whilethose continuing an inward looking approach have fostered inefficient and highcost industries capable of surviving only within the highly protected domesticmarket. Now that the Dominican Republic has developed a labor force withappropriate industrial attitudes and has an entrepreneural class with a decadeof industrial experience, the need for and desirability of continuing highprotection should be reviewed. Levels of protection must be reduced if effi-ciency of domestic production is to be enhanced. This could be accomplishedwith benefit to the Government revenue base by converting "excess" importduties into consumption taxes which would fall equally on imports and localproduction.
21. While changes in the price system will be salutory in encouragingmore rapid, employment-generating industrial growth, non-price obstacles toexpansion must also be identified and dealt with. In this connection thequality of industrial infrastructure becomes an important issue in Dominicandeveloment. Already, the adequacy and reliability of the supply of electricityhas been identified by industrialists as a serious obstacle to cost competitive-ness of exports and to growth. Between 1973 and 1977 industrial firms boughtover 800 oil-fueled generating plants at a cost of over RD$14 million, mainlyto provide back-up supplies in order to avoid interrupting production when thereare outages in the public electricity system. This provides a powerful casefor improving the ability of the power company (CDE) to provide better service.
This will involve investments in increasing generating capacity and in up-grading the distribution network on one hand, and on the other, the furtherrestructuring of rates to make the company financially viable and to encouragemore efficient use of power. Lack of adequate transport facilities is alsoan obstacle to industrial growth and increasing exports. The road networkhas been inadequately maintained, sea transportation is slow and irregular andport facilities are inadequate. These considerations make even more urgentprojects aimed at rehabilitating roads and upgrading ports.
22. Manufacturing has a crucial role to play in the future growth of out-put and employment in the Dominican economy in part because the prospects inmost other sectors are limited and in part because many industrial opportunitiesremain untapped and the sector possesses some strengths. However, the mainopportunities lie in penetrating external markets more effectively and themain strength derives from the Dominican Republic's competitive advantage overother Caribbean countries as a result of lower wage rates and greater stabilityin industrial relations. The outstanding success of the few EPZs in rapidlyexpanding exports and employment, proves that with less distortionary policiesand adequate infrastructure industry can be very dynamic indeed. The preserva-tion of the country's advantages while satisfying the need for greater equitywill require improvements in the quality of labor through training and skilldevelopment in the light of increases in wage rates which now seem inevitable.
III. THE STABILIZATION OF THE ECONOMY
23. The Dominican Republic like many of its Caribbean neighbors, facestwo important development constraints; one imposed by the scarcity of foreignexchange, and the other imposed by the low buoyancy of public revenuesresulting from slow growth and the impact of fiscal incentives, which makeit necessary to complement sectoral development efforts with a global stabili-zation program comprised of balance-of-payments, monetary and public financemeasures.
The Balance of Payments - Prospects and Policies
24. The present difficulties in the balance-of-payments developed after1975, when sugar prices fell. They were exacerbated in 1978, when the deficiton current account amounting to $377 million could not be covered by timelyexternal borrowings and the net foreign reserves fell by US$95 million; fromUS$60 million to minus US$35 million. A decline in merchandise exports byUS$107 million largely accounted for the increase of US$113 millionin the current account deficit, but the increase of only US$8 million inimports played an important part in preventing an even larger deficit. Theoutlook for 1979 is that, with better prices for sugar and precious metals andrecovery in output of ferronickel, export earnings will be back to the 1977level. However, even if no increase in quantity occurs, the increasing priceof imports is likely to lead to a deficit in current account higher than in1978. For the period 1979-82 the outlook is that the current account deficitwill increase to about US$512 million, but that as a percentage of GDP itwill fall from about 8 percent to about 6.5 percent if the growth of the
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merchandise import bill can be contained within a limit of 11 percent perannum, and if sugar prices rise to 15 cents per pound by 1982, and earningsfrom manufactured exports grow at an average nominal annual rate of 17 per-cent (about 10 percent in volume terms). The final effect on the balance ofpayments will depend on two considerations: firstly, whether performanceof the current account equal to or better than the above can be produced,and secondly, whether the level of capital inflows implied by the need tooffset the deficit in current account can be assumed.
25. Assuming that net registered external indebtedness of the privatesector increases by US$10 million per year during 1980-82, and that directinvestment inflows(net) increase by about 10 percent each year, registeredprivate sector inflows (net) could reach US$85 million in 1982 comparedto about US$50 million expected in 1979. If other flows, mainly divisaspropias derived by under-invoicing exports, over-invoicing imports, andunregistered invisible flows, are projected to reach US$150 million, thenin order to have overall balance in the external payment account the publicsector would need gross inflows of the order of US$360-370 million per yearduring the period 1980-82. Loans already contracted and project loans fromtraditional official lenders may provide public sector inflows of aroundUS$230 million per year, but an average gap of around US$140 million remains.To fill this gap the country requires both additional net capital inflows tothe public sector as well as stabilization measures to prevent it from growingeven larger.
26. Basically, improvement in the Dominican balance of payments willrequire increased earnings from visible and invisible exports, controlledgrowth of imports and h'igh levels of private and public net capital inflows.Given the experience in other countries seeking to improve their balance ofpayments, the choice of policies available to the Dominican Republic es-sentially concerns the degree of reliance on direct controls over the priceand allocation of foreign exchange. In general those countries which re-lied more on direct controls have found that the system required an immensebureaucracy, was open to corruption, was inefficient, and introduced un-desirable price distortions into the economy. Frequently, in an effort tosustain internal markets, expansive monetary and fiscal policies were fol-lowed, and resulting inflationary pressures further eroded the competitive-ness of exports. Others, which relied more on market forces, followingapproaches oriented to the expansion of exports were more successful. Since1967 when the Monetary Board permitted imports with foreign exchange acquiredin the parallel market, the Dominican Republic has relied in part on automaticmarket forces to determine price and allocation of foreign exchange. Byproposing legislation to permit the sale of foreign exchange from non-traditional exports and tourism in the parallel market, the present Governmenthas indicated that it intends to extend the reliance on market forces to setthe price of and allocate foreign exchange. In order to use this mechanismto induce an expansion in exports and at the same time curtail the demand forimports, it will be necessary to increase the list of imports which are in-eligible for foreign exchange from the Central Bank at the official rate ofexchange. The Government's recent decision to extend the prohibition oncertain imports (particularly clothing, shoes, and automobiles with an f.o.b.
value of over US$4,000) and exports (particularly beef) is, however, notconsistent with the policy of allowing market forces to determine allocationof foreign exchange.
Monetary Policy
27. For over 60 years the Dominican Republic has had in force an usurylaw which restricts bank interest rates to lenders to 12 percent. As in-flation accelerated in the early 1970's, the banks responded by chargingcommissions and fees that slowly increased their effective lending rate toabout 15-16 percent on non-FIDE Loans. Their deposit rate is limited to4 percent, and term deposits --depending on size-- receive 4.25 to 7.5 per-cent. Reserve requirements are relatively high. Recently, however, twofactors have greatly influenced the monetary situation. U.S. interestrates were substantially increased, encouraging large Dominican depositorsto retain larger sums in the Miami banking system. Secondly, the rise ofnon-bank financial institutions, particularly private finance companies, hasgiven depositors alternative savings choices. Finance companies, for ex-ample, extend rates of 8 to 8.5 percent to domestic savers. As a result,during 1978 private deposits in the commercial banks showed no change--adrop in real terms--and much of their credit expansion during the year camefrom Central Bank loans. Deposits in non-banking financial institutions,however, rose by an estimated 20 percent.
28. As long as some imports qualify for the official exchange rate andthere is concern about maintaining the premium in the parallel market with-in a specified range above the official rate, it will be necessary to in-fluence the level of aggregate demand to avoid too rapid a growth in thedemand for imports. This will require that the expansion of domestic creditthrough Central Bank lending be kept within narrow limits; and in turn thatmost additional commercial bank credit to the private sector be financedby additional deposits. Specific measures for meeting these requirementsmay vary but must include a relative disincentive for commercial banks toborrow from the Central Bank, an incentive for them to attract more deposits,and an incentive for savers, private and corporate, to increase their deposits.An increase in the Central Bank rediscount rate accompanied by an increasein deposit rates would meet the first and third objectives, while the secondwould also be met if the increase in rediscount rates were such that theybecame substantially higher than the rates paid on deposits. However, to theextent that there is effective competition among banks, there may be no needto specify the rates which commercial banks must pay on deposits. The modifi-cation of the usury law setting the 12 percent interest rate ceiling wouldconvert this rate into an effective tool of the Government's monetary policy.This would require Congressional action. Many rates, however, could be raisedimmediately. There seems little justification to continue to charge subborrowers less than 12 percent for FIDE or public agricultural loans.
Fiscal Policy
29. The implication for fiscal policy which flows from the short termsituation is that the public sector budget should as far as possible not befinanced through credit creation by the Central Bank. The financing of thepublic sector over the next few years will therefore require adequate growth
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in revenues from both taxation and the sale of public sector output, as wellas a greater dependence on borrowed resources. Regarding tax revenues, theGovernment recently proposed increases in taxes on cigarettes and alcoholicbeverages. Electricity rates were raised 15 percent for commercial users,20 percent for government entities, and a variable rate for other users,depending on their usage. While these measures are helpful, more will beneeded. The power company, for example, will need further rate increases ifit is to reestablish its financial viability. The Government has also beeninvestigating ways by which to improve collections through better administra-tion and enforcement of existing taxes, especially the income tax and customsduties. Also being studied are new taxes on value added, real estate andother bases which will not be subject to the erosion from the fiscal in-centives and which would grow as the economy expands. On the expenditureside the constraint on expansion required for balance of payments viabilitymay well aggravate unemployment and deter any income advance for poorerDominicans, which gives added emphasis to the need to expand social services,and to reduce inefficiency in the public sector. The Government seems tohave chosen well in its decision to expand current outlays--many of themdirected to important social and development goals--and moderate publiccapital expenditures in the face of its present public finance constraints.
IV. PUBLIC FINANCES AND THE PUBLIC INVESTMENT PROGRAM
30. During 1968-78 the public administration of the Dominican Republicbecame increasingly centralized. Virtually all decisions on the programsand projects of the Central Government and public agencies were undertaken inthe office of the Presidency. Public agencies and ministries had little res-ponsibility in preparing programs and projects; and in some cases public in-vestment projects were even implemented by the office of the Presidency.Moreover, as inflation accelerated and public wage and salary increases werefew, real wages of public employees declined substantially. Most officialsfound other employment in the private sector to supplement their officialsalaries.
31. Because of the restraint on wages and salaries and a concommitantlow level of maintenance outlays, public savings rose considerably; risingto a peak of 13 percent of GDP in 1975, and averaging over 8 percent during1970-77. Over 90 percent of public outlays during the period were financedfrom domestic resources. Nevertheless, the cost of this financing patternwas considerable. Government outlays for education, agriculture, health,and maintenance, were far below those needed. Moreover, the centralizedadministration led to a poor absorptive capacity. Not only did the govern-ment suffer from a lack of good, economically justified projects, manypublic agencies do not now understand how to prepare and implement suchprojects. Understandably, official, external project lending to the countrywas well below what official lenders were prepared to commit if projectshad been available.
32. The new government is moving to correct weaknesses in administra-tion, strengthen public finances, improve efficiency in the provision ofservices and the use of public capital, and to change the spatial/sectoral
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emphasis and the technological bias of its programs so as to reduce ruralpoverty and underemployment. To address the weakness in administration ithas given Secretaries of State (i.e. Ministers) greater responsibility forthe formulation and implementation of programs within their sectors, set upformal mechanisms to improve interagency coordination in such high priorityareas as agro-industry, and raised the level of salaries in order to attractand retain capable staff. The Government, beginning in the 1979 budget, hasdecided to channel the plethora of earmarked revenues and special funds intoa single consolidated fund; and is improving the administration of incometaxes and custom duties. Some taxes are being increased and measures arebeing taken to strengthen the finances of autonomous agencies. More revenuemeasures will be needed. In order to improve efficiency, more adequateprovision is being made for proper maintenance of existing facilities and forimprovement in distribution of services; e.g. maintenance of roads, and betterdistribution of irrigation water.
33. The Government's public expenditure strategy is becoming clearer,but the recent decentralization --long recommended by the World Bank-- hashad its short-term cost. While the Government has decided to favor current,development-oriented outlays (e.g. for education, agriculture, health, andmaintenance) over hastily-prepared capital projects, the newly decentralizedministries and agencies will require some time to prepare carefully programslinked to Government goals.
34. The Government has recently prepared a three year (1980-82) publicsector development plan in which it has stated its goals, specified itspriorities, and presented its investment program. The growth goals of theprogram are 5.5 percent for GDP, 6.1 percent for exports, and creation of56,000 new jobs yearly. Imports are to be constrained to 21 percent of GDP.
35. Among economic sectors, highest priority has been given to agric-ulture, for which a sectoral growth target has been set at 4 percent perannum; and within which targets have been specified for expansion of theland reform and irrigation programs. Among the social sectors, health andeducation have been assigned highest priority. Consistent with these priori-ties, investment in economic and social infrastructure has also been givenhigh priority, with emphasis on the reconstruction of the road network, and onthe increased generation capacity and improved distribution of electricity.The Government has made it clear that the future spatial/sectoral emphasisof public expenditures will be rural, where most of the poor reside. Thethree-year plan includes programs and projects with a total investment costof RD$2,676 million. Of this amount RD$212 million will have been spentbefore 1980 and RD$760 million will be spent after 1982; leaving the balanceof RD$1,705 to be spent between 1980 and 1982. The distribution of expendi-ture among major sectors is given in Tables 5 and 6. However, the develop-ment program includes not only fixed investment but also financial investmentand expenditures of a recurrent nature, and thus amounts to RD$5,092 millionof which RD$2,878 will be spent in 1980-82. It is the development programwhich more accurately reflects the governments priorities, but the distribu-tion of current expenditures and financial investment among major sectors isnot yet available. The distribution among implementing organizations inTable 7 can provide a crude guide. The major share of resources will go
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for agricultural development and is reflected in provisions to the Secretariat
of Agriculture, the Agricultural Development Bank, the Land Reform Institute
and partly the provisions to the Institute for Hydraulic Resources. Infrastruc-
ture development programs, mainly road network reconstruction and maintenance,
are reflected in the provisions for the Public Works Secretariat. Major
social programs have been provided for under the Secretariat of Public Health
and Social Assistance for the construction of rural clinics, and hospitals;
and under the Secretariat of Education, Fine Arts and Culture, for the construc-
tion of schools and rural training centers.
Table 5: SECTORAL DISTRIBUTION OF PUBLIC SECTOR FIXED INVESTMENT
(In millions of RD$)
Total Spending
Sector Cost 1980 1980-82 After 1982
Agricultural 612.7 44.6 281.8 286.3
Health 114.7 12.1 102.6
Education 82.1 - 82.1
Water Supply andSewerage 194.3 - 122.6 71.7
Housing 349.0 39.0 310.0
Transportation 362.3 26.9 262.4 73.0
Power 698.3 84.5 341.5 272.3
Industry 126.8 - 121.7 5.1
Tourism 112.5 5.2 56.2 51.1
Other 23.6 - 23.6
Total 2,676.3 212.3 1,704.5 759.5
Source: Onaplan
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Table 6: SECTORAL DISTRIBUTION OF PUBLIC SECTOR FIXED INVESTMENT
(in percentages)
Total Date of ExecutionSector Cost Before 1980 1980-82 After 1982
Agricultural 22.9 21.0 16.5 37.7
Health 4.3 5.7 6.0 -
Education 3.1 - 4.8
Water Supply andSewerage 7.3 - 7.2 9.4
Housing 13.0 18.4 18.2 -
Transportation 13.5 12.8 15.4 9.6
Power 26.1 39.7 20.0 35.9
Industry 4.7 - 7.1 0.7
Tourism 4.2 2.4 3.4 6.7
Others 0.9 - 1.4
Total 100.0 100.0 100.0 100.0
Source: Onaplan
36. The project content of the investment program has been worked out infull only for 1980, and reflects to some extent inescapable commitments arisingfrom prior investment programs and the present distribution of planning capab-ility among agencies. For the years 1981 and 1982 projects have been identi-fied but sometimes only tentatively and imprecisely in some high priorityareas. The allocation of expenditure in line with the new priorities willrequire immediate improvement in planning in these areas, and the articulationof criteria for selecting out projects in areas where the planning capabilityhas identified a total value of investment projects beyond the resources whichwill be available. Notwithstanding these concerns, an important start hasbeen made toward the rationalization of public sector investment programming,which if continued, will reduce the risk of any significant misallocation ofresources. The list of projects already identified does include most of theimportant projects which the Government wishes to undertake, and can serve asa basis for discussion of the amount, form and content of financial supportrequired for the country's development and stabilization efforts.
Table 7: SCHEDULE OF PUBLIC PROGRAMS AND PROJECTS BY INSTITUTIONS
(In Thousands RD$)
Total Before ExecutedSector - Amount 1979 1979 1980 1981 1982 After 1982
Central Government 1,774,514.3 93,396.6. 266,847.6 411,935.5 422,623.8 452,121.6 127.589.2
Agricuitture 610,609.4 20,370. 0 83,807.2 144,016.6 159,569.3 171,446.3 31,400.0Public Works 522,716.4 72,188.9 88,111.0 116,607.9 89,339.6 87,503.6 68,965.4Public Health and Welfare 452,606.0 - 79,485.3 102,927.1 124,972.6 145,221.0 -Education, the Arts and Culture 179,558.3 837.7 6,419.9 48,383.9 48,742.3 47,950.7 27,223.8
Others 9,024.2 - 9,024.2 - - - -
Public Sector 3,317,718.4 104,706.9 396,832.8 408,227.3 515,709.6 667,547.0 1,269,694.8
(Already Contracted and Expectedfrom Traditional Lenders) 298.3 190.5 252.1 247.9 690.5(Other, required) 10.9 127.5 80.1 147.3 354.9
37. The Government's projection of the consolidated public sector in-dicates a nominal rate of growth of fixed capital expenditures of 13.3 percentper annum between 1979 and 1982, which means a rate of growth of 7 percent perannum in real terms. It is projected that public sector savings will growfrom 3.8 percent of GDP in 1979 to 4.3 percent of GDP in 1982. This modestimprovement is expected from better tax administration, and from more efficientprovision and more realistic charges for public sector services; and isexpected notwithstanding greater emphasis on health and education, and improve-ments in salaries, all of which involve higher recurrent expenditures. Publicsector savings are projected to provide 41 percent of the financing requiredfor the total capital outlays of RD$2.2 billion (including amortization) duringthe years 1980-82. Internal borrowing is projected to provide 10 percent.Thus over half of the program would be financed from internal resources, and49 percent from external sources. Of this, sources for almost one third areexpected from financing already assured or possible project loans from tradi-tional, official lenders (IDB, IBRD and AID). About 17 percent, or an averageof just under US$120 million yearly would be required in project loans fromnew lenders, or non-project loans. Because of project-preparation problemsin the past, the gap in 1980 (US$128 million) may require a relatively largershare of non-project lending if it is to filled. Attached to this memorandumis a list of projects which the Government of the Dominican Republic believesare suitable for consideration by foreign lenders at this stage. While finan-cing on a project basis will go far to achieve the Government's economic andsocial goals, it is clear some non-project lending will be needed for the nextyear and--depending on export prices and the balance of payments response tonew policy measures--for further years.
b' Mission estimates, based partly on expected, future balance ofpayments constraint and sectorial growth prospects. Assumeslittle or no policy changes.
Table VII: LAND REFORM DATA
Area"Parceleros" distributed
Period Asentamientos Percent settled Percent (Tareas) Percent
1962-65 23 7.6 3,796 10.4 307,932 10.8
1966-70 86 28.7 7,059 19.4 542,374 19.0
1971-74 156 52.0 20,292 55.6 1,664,410 '58.3
1975-77 35 11.7 5,333 14.6 340,959 11.9
Total 300 100.0 36,480 100.0 2,855,670 100.0
Source: "Memorias" of I.A.D.
Page 1 of 2 pagesPRINCIPAL PROJECTS REQUIRING EXTERNAL FINANCING
By Sectors
(RD$ Millions)
Annual CostStage of External Financing Cost 1980 1981 1982 Others
Sector-Proiect preparation Source Status Amount Total 1980-82 Total External Total External Total External Total External
PRINCIPAL PROJECTS REQUIRING EXTERNAL FINANCING Page 2 of 2 pages
By Sectors
(RD$ Millions)
Annual CostStage of External Financing Cost 1980 1981 1982 OthersSector-Proiect preparation Source Status Amount Total 1980-82 Total External Total External Total External Total External
Housing 150.0 304.0 304.0 63.0 30.0 90.0 50.0 151.0 70.0 - -Low Income Housing Program II Design NS NS 150.0 304.0 304, 63.0 30.0 90.0 50.0 151.0 70.0 - -
