Dominican Republic Ends Stand-by Agreement with IMF, a Credit Negative

Dominican Republic Ends Stand-by Agreement with IMF, a Credit Negative

Last Wednesday, the Dominican Republic (B1 stable) announced that the last two reviews of the $1.7 billion stand-by agreement (SBA) with the IMF will not be completed before the program expires on 27 February because of the government’s failure to meet the program’s conditionality. Consequently, the country will not receive $500 million in pending IMF disbursements upon which its 2012 budget depends, a credit negative.

The government breached the consolidated deficit target of 1.6% agreed with the IMF for 2011 because higher oil prices resulted in a higher-than-expected deficit in the electricity sector. In order to complete the pending seventh and eighth SBA IMF reviews (the former held up since September 2011), the IMF required a 20% increase of electricity tariffs, which the government refused. The fifth and sixth SBA reviews required waivers for similar reasons, and were approved 15 July last year only after the government increased electricity prices by 20%, reduced non-social primary spending and approved a tax package.

The $500 million in pending IMF disbursements equals 87% of the projected budget deficit for 2012 and 25% of the gross financing needs for the year. The government issued a $250 million bond in November last year seemingly in anticipation of the remaining SBA funds not being disbursed. Nevertheless, the end of the SBA exposes the country to greater financing risks: much of the multilateral and bilateral lending the country relies on to cover its twin current account and fiscal deficits is conditioned on the IMF program. Other agreements with the World Bank and the Inter-American Development Bank, for example, are conditioned upon the IMF agreement and their disbursements are expected to cover $280 million of the 2012 budget.
Without IMF backing, the government will have to rely on market funding, which is likely to be more expensive and shorter term.

In addition, the diminished leverage and spending discipline of IMF oversight raises the possibility that the authorities will increase government spending in conjunction with the upcoming presidential campaign and increase the fiscal deficit. During the previous presidential campaign in 2008, current expenditure rose 44% in the quarter preceding the elections. This time the president’s party, the Dominican Liberation Party (PLD), controls Congress as well, which increases their ability to spend more. As of now, polls suggest that the election result is still up in the air, which will put greater pressure on the ruling party to increase spending. While the IMF will continue to have a monitoring role until the end of June or July of 2012, it is likely to have considerably less leverage over the government, without the ability to withhold further disbursements.