Dominican Republic - Puerto Plata Tourism Project

CIRCULAT1NG COPY FILE COPY Tl RF RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-14b9a-DO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO CENTRAL DE LA REPUBLICA DOMINICANA WITH THE GUARANTEE OF THE DOMINICAN REPUBLIC FOR THE PUERTO PLATA TOURISM PROJECT October 16, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  RATE OF EXCHANGE Currency Unit Dominican Pesos (RD$) US$1.00 RD$1.00 Fiscal Year January 1 to December 31 Wi~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO CENTRAL DE LA REPUBLICA DOMINICANA WITH THE GUARANTEE OF THE DOMINICAN REPUBLIC FOR THE PUERTO PIATA TOURISM PROJECT 1. I submit the following report and recommendation on a proposed loan to the Banco Central de la Republica Dominicana (Central Bank) with the guarantee of the Dominican Republic for the equivalent of US$21.0 million to help finance a project for tourism development. The loan would have a term of 30 years, including 10 years of graces with interest at 8 percent per annum. PART I - THE ECONOMY 2. An "Updating Report on the Economy of the Dominican Republic" (R.73-91) was distributed to the Executive Directors on May 4, 1973. A further updating economic mission visited the Dominican Republic in August/ September 1974* Its report is scheduled to be distributed to the Executive Directors in March 1975. Available social and economic data are presented in Annex I. 3. During the last decade the structure of the Dominican economy has changed markedly. Although agriculture still employs over half of the economically active population, its share of GDP dropped from one-third to one-fifth as the contribution of industrial activities (mining, ranufac- turing, construction and public utilities) rose from one-fifth in 1960 to 30 percent in 1970. This change has also been reflected in the structure of foreign exchange earnings: the share of agricultural exports in current account receipts declined from 78 percent in 1966 to an estimated 64 per- cent in 1973, reflecting the initiation of ferronickel exports and rising revenues from toarism. 4. GDP is estimated to have grown by 11 percent per annum between 1970 and 1973 as agricultural production recovered from the droughts of the late 1960's, the Falconbridge ferronickel plant came into operation in 1972 and sugar export prices rose sharply. The major impact of these factors has now been absorbed and preliminary figures indicate that GDP growth in 1974 declined to a still very commendable 7.8 percent rate. Per capita GNP in 1973 reached about $530.Yv Growth was spurred by contin- ued high export prices (which have induced a rapid increase in export volume and value) and a rapidly rising public investment program. I/ World Bank Atlas basis.  -2- 50 Exports of goods and non-factor services rose from $158 million in 1966 to $613 million in 1973. Sugar continues to be the chief export as well as the most important industry in the country. Production and process- ing employ about 65!,0o0 wvrkers (about 11 percent of the agricultural labor force), contribute about 15 percent, of government revenues and about half of merchandise export receipts. The value of exports of sugar and by- products rose from $80 million in 1966 to $206 million in 1973 as average sugar export prices increased from 6.2 JAb in 1967 to 17ft/b in June 1974 and as the volume of exports of raw sugar rose from 600,000 short tons in 1966 to 1.14 million in 1973. Dominican exports of sugar and by-products will approach $400 million in 1974.o 6. Other agricultural exports, mainly coffee, cocoa and tobacco, increased from $44 million in 1966 to $126 million in 1973 as favorable world prices stimulated production. Ferronickel production added $h7.Q million and $83.5 million in 1972 and 1.973, respectively, to gross export earnings./ 7. Public investment is estimated to have increased in real terms by over 29 percent per year between 1970 and 1973 and to have corresponded to almost 7 percent of GDP in 1973. The rapid increase in public investment has been supported by a successful savings effort which raised Central Govern- ment savings in 1973 to almost 6 percent of GDP and has permitted 85 percent of Central Government investment since 1970 to be financed without borrowing. 8. Most public investment hps h-en in 'irtvre imJdng the extension of the road network and the increase of installed electricity generating capacity. There are, however, indications that the Government now intends to devote more public investment to the directliy productiive sectors, especially to agriculture and tourism and to the social sectors in order to distribute more widely the benefits of recent economic growth. 9. The rap:id growth of exports and the higher level of public invest- ment have stimulated other sectors of the economy. Encouraged by liberal industrial incentives legislation, which permits substantial reductions in import duties for capital equipment and raw materials as well as access to foreign exchange at the official rate, plus substantial protection, value added in manaufacturing has increased over 10 percent per annum since 1970. Construction has excpanded by over 23 percent per year during the same period. Private fixed investment increased in real terms by about 16 percent per year in the last three years, and in 1973 made up almost 13 percent of GD?. 10. The Dominiican economy still faces serious constraints for the longer run. A rapid rate of population increase has resulted in high levels of rural under-emplpyment while the rural exodus has contributed to maintain a high rate of urban unemployment,despite the recent increases in-public and private investmenlt. The employmnt generating effects of industrialization have been rather modest because industrial incentives tend to promote * relatively capital-intensive import substitution. ;/ An IBRD loan of $25 million helped finance the construction of the Falconbridge project.  11. Despite an impressive export performance, the net foreign reserve position improved less significantly in the past three years. Ex-ports of goods and services increased by $258 million between 1970 and 1973 but imports rose by almost the same amount The $26 million increase in net foreign reserves in the same period resulted largely from a greater inflow of long-term foreign capital. This situation, however, improved signifi- cantly in the first half of 1974, when net foreign reserves increased by an additional $40 million, to a level of $54 million, equivalent to more than one monthts imports. 12. Equipment and raw material imports have been stimulated by the industrial incentives legislation. Imports of a wide variety of consumer goods are not controlled by the authorities when the foreign exchange is acquired by imorters on the "parallel" market. There has also been a marked increase in imports of food, attributable in part to domestic price controls which may have discouraged production of some food staples, and to uncertainty associated with the Agrarian Reform Law, which had an initial negative impact on production. Rice imports, which in 1972 amounted to only 9,000 tons, are expected to reach 60,000 tons in 1974. 13. Since it is unlikely that the price of sugar will continue to increase at the same rate as in the past two years, and may even decline, and since production of ferronickel is now reaching installed capacity, export growth from these two products is likely to slow down after 197h. The Government is therefore emphasizing export diversification primarily through the development of tourism, agro-industries, livestock and mining of precious minerals. Gross foreign exchange earnings from tourism in 1973 are estimated at $38 million as compared to $14 million in 1970. As explained in Part III of this Report, prospects for continued expansion of tourism are favorable. 14. The Central Bank has recently given priority to financing industries for processing domestic agricultural products. It is still too early to judge whether private investors will find it attractive to invest in export-oriented industries given the fact that nresenrt in- dustrial incentives favor importaubstitution. Exports -of beef increased from 7.5 million pounds in 1970 to 15 million pounds in 1972, although a termporary ban on beef exports held their growth in 1973 to only one miMlion pounds. Gold and silver mining is expected to start in late l971 or early 1975. At current prices, exports of these precious metals could amount to about $50 million per year when the mines are operated at full capacity. 15. Higher petroleum prices are estimated to increase imports of petroleum and petroleum products to about $160 million in 1974, or about $110 million more than in 1973. Since fuel purchases by the Falconbridge plant represent nearly 25 percent of total petroleum imports, the increased foreign exchange requirements are likely to be partially offset by smaller transfers of profits or possibly higher export prices for ferro- nickel* Given favorable export prospects and the low public debt service ratio, the balance of payments impact of the energy crisis should be manageable in the foreseeable future. 16. Higher fuel costs will nonetheless have an impact on the Dominican economy. -Over 90 percent of power generated by the publicly- owned Dominican Electricity Corporation (CDE) is from thermal sources  -4- and the scope for expanding hydro-electric power generation capacity is limited. In 1974, CDE's fuel costs are expected to increase to RD$34 million as compared to only RD$5 million in. 1973. To partly off- set higher fuel costs, CDE expects to extend the fuel cost adjustment, which now applies only to industrial rates, to residential consumtion later this year. 17. As the econonxy strengthened in the last three years there has been a substantial decrease in the flows of concessionary official bilateral assistance. Commitments of bilateral assistance from the UJ.S. declined from an average of $41 million per ann-um in 1966-69, to $20 million per anrum in 1970-73. Average annual commitments of multilateral assis- tance on the other hand, remained unchanged at around $15 rillion. Despite the decline in official external aid, the Government has not re- sorted much to coumercial credit and the debt profile continues to be favorabld. At the end of 1973, total medium and long-term public and publicly-guaranteed external debt, outstanding, disbursed and repayable in foreign currencies, amounted to $282 million., a:bout 87 percent of which represented o'bligations to governments and muzltilateral agencies. The ratio of debt siervice on public debt to earnings from exports of goods and non-factor services declined from 5*. percent in 1970 to 4 .5 percent in 1973. 18. The Dominican Republic has followed soumd fiscal and external debt policies over the last three years and prospects for its balance of payments are reasonably favorable. It therefore no longer needs to receive external assistance on concessionary terms alore, and is credit- worthy for Bank lending. PART II - BAIIK GTRO?_ O)PELA'i:T-S_I,3 TE DOMD.ICIA RSPUBLIC 19 'The World Bank Gro-co has naade one loan and three credits for projects in the Dominrican, Republic. A $215 million loar was madec by the Batk in FY70 for a ferronickel mining project (T7'alconbridge), which was comrpleted on sched-ul-. T,No IDA credits were made i-n fY.*, I; f4 -*11s.on Cor an education project and $5 mir1'