Dominican Republic - Current economic position and prospects

RESTRICTED Report No. WH- 1 76b This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF THE DOMINICAN REPUBLIC April 1Z, 1968 Western Hemisphere Department  CURRENCY EQUIVALENTS U.S.$ 1.00 RD$ 1 Peso  TABLE OF CONTENTS Page No. BASIC DATA .................................... i - ii I. 'INTRODUCTION ............ , .. 1 II. OVERALL ECONOMIC GROWTH AND PROSPECTS ......1 III. SAte EnTeRS .................. . ....... SE*O R 2 IAgriculture ........... . . . . . ...... .. . 2 KVining .o....... 0.. Q*.* c .....3 Ivlanufacturing ....... 0..... SState Enterprises ........ IV. PIUBLIC FINANCE ............... 6 Overa11 Revenue Performance ............ 6 The 1967 Buidget-Revenues ...... ........ 6 Expenditures .......... . a ... * O. ... ...... 6 Budgetary Investment .................... ........ I Financing the Capital Budget .................... 7 Consolidated Public Sector ...................... 7 Iublic Finance Prospects . ......... 8 Public Investment Program....... 9 V. MONEY, PRICES AND WAGES .............. 9 VI. EXTERNAL ACCOUNTS . 1.............. . . ........ 10 Foreign Trade .... . . .. . ......... . ...... 10 Balance of Payments ....* 11 VII. CONCLUSIONS ...,... .*................. ....... 12 This Memorandum is based on the findings of a mission to the Dominican Republic in October 1967 composed of Messrs. M. Ross and T.E.B. da Costa  BASIC DATA Area: 48,700 square km. Population: (mid-1967) 3,900,000 Rate of growth 3.6 Density per square km. 80 1960 1965 1966 1967 GNP current factor costs (US$ million) 729 847 897 970 Per capita 243 235 236 249 CDP 1962 prices (US$ million) 804 842 945 1,021 of which by branch (%) Agriculture, forestry, fishing 26.6 26.3 2L.2 Mining 1.6 1.2 1.1 Manufacturing 17.5 15.0 16.5 Construction 3,0 3.1 3.9 Transport & comnnmication 4.6 5.4 5.6 Public adanin. & defense 9.9 13.7 13.8 Other 36.8 35,3 34.9 Growth rate (% p.a.) 1960-65: (Average) 1.4 12.2 8.0 Percent of Current GDP: Gross investment 10.4 9.6 13.3 15.5 Gross national savings 18.0 7.5 7.8 10.0 Balance of payment current account 2/ - 7.6 2.1 5.5 5.5 Total consumption 81.9 92.5 92.2 92.2 Government revenues 3/ * 13.1 16.0 16.2 Public Finances: (US$ million) Total Revenues * 119.6 162.6 178.2 Tax receipts * 104.1 139.6 157.6 Non-tax receipts .. 15.5 23.0 20.6 Total Expenditures ** 159.5 194.3 225.9 Current expenditure .. 142.7 160.5 141.8 Investment expenditure .. 9.1 21.4 68.6 Other expenditure . 7.7 12.4 15.5 Deficit .- -39.9 -31.7 -47.7 Public Sector External Financing .. 45.1 37.9 47.7 1/ 1967 data, where given, are preliminary. 2/ ExciudLng transfers in form of official grants to Government; minus sign refers to current account surplus. 3/ Including non-tax receipts.  1960 1965 1966 1967 Balance of Payments: (US$ million) Total exports (f.o.b.) 157.4 125.9 138.0 155.8 Total imports (f.o.b.) 90.3 120.7 160.5 165.0 Services (net) -21.5 -40.7 -44.5 -50.2 Transfer payments (net) 4/ - 3.1 73.6 16.5 10.0 Current account balance 42.5 38.1 -50.5 -49.4 Gross foreign exchange reserves 5/ 34.0 55.9 47.4 (Months' imports of goods and services) ( 3.6) ( 4.2) ( 2.8) Concentration of Commodity Exports (Percent) Sugar and by-products 51 51 58 58 Coffee 14 17 15 11 Cocoa and by-products 114 6 8 8 Tobacco 4 7 5 8 Bauxite 5 9 7 8 Bananas 7 3 1 _ Other 5 7 6 7 100 100 100 100 Terms of Trade (1958 = 100) 89 99 106 External Public Debt (US$ miLlion) (June 30 1967) Total outstanding 42.4 126.1 183.8 190.0 Of which undisbursed 24.8 22.5 76.8 62.1 Total annual debt service .. 27.8 19.8 14.9 6/ Debt service ratio (i) .. 18.6 11.8 8.4 Money and Prices: Money supply (US$ million) 129.1 188.2 185.3 Changes in % 1960-65: Average 6.1 - 1.5 Liquidity ratio (%) 7/ 18 21 18 IMF Position (Us$ million) Quota 15.0 25.0 26.4 27.8 Drawings outstanding 9.0 20.0 26.6 23.6 of which compensatory - - 6.6 6.6 Indexes (1960 = 100) Cost of Living (Santo Domingo) 100 115 115 115 Vqholesale Prices 100 120 115 115 Wages 100 195 208 I/7 Including official grants to Government. g'/ Including commercial banks' foreign assets. 4/ Full year projection. 7/ Money Supply: Current GDP.  ATLANTIC OCEAN \ _<~~~~~~~~~~~~~~~E T +e ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ an aegy L-d Asha TA~ny #~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ hug r ani, Re. .... 66; / g 0 Escond... coRaHoNa LosSsiln DOMINICAN REPUB020 40 \4~~~ ~ ~~ UANMscos X yi L.D..ie, \ X . \ Josull Urpgue;nd TR G KILOMETERS JUN.E 963 1 3RD- 1193  I. INTRODUCTION 1. This memorandum sets forth the finc'ings of a Bank economic mission which visitea the Dominican Republic curing October 16-31, 1967. The latest Bank report on that country, "Recent Economic Situation of the Dominican Republic",'WH-150, of July 19, 1965, presented and analyzed economic events prior to the April 24, 1965 revolution, which severely damaged the economy of the country. The ensuing civil war and foreign intervention culminated a period of serious Qeterioration of internal and external equilibria, the seeds of which were sown in the last years of the Trujillo regime when market forces were grossly distorted. Since 1965, evolution of a political anu social nature has been proceeding under circumstances of improving, if still equilocal, stability. President Balaguer, who was elected on June 1, 1966, has macie efforts to heal pol- i-tical wounds and reunify national encdeavor, with some success. In the economic field, one legacy of the troubled history of the country which the authorities have been facing with mixed success, has been a weak balance of payments, an inheritance by the public sector (and public finances) of a wide range of former Trujillo enterprises, acute short- ages in managerial and technical skills with which to run and develop these and other enterprises within a context of neglectecd general public e(ucation, and the costly material anci institutional rehabilitation of the dynamic areas of the econony. II. OVERALL ECON1OMIC GROWTH AflD PROSPECTS 2. The gross domestic procuct in 1966 is estimated at about RD$1 billion, or roughly RD$250 per capita. About one-quarter of the GDP stems from agriculture, livestock, forestry and fishing, while some two-thirds of the population is rural. Although the land to population ratio is favorable, by Caribbean standards, uneven land distribution anct technical backwarcness result in low productivity and low output. Manu- facturing is still in a rudimentary state but contributes almost one-fifth of the GDP. The contribution of commerce and finance is of the same order of magnitucoe. While mining seems to have great potential, it now contri- butes only about one percent to GDP. Government services play an important role in overall economic activity ancl account for nearly 15 percent of GDP.  3. With the lifting of authoritarian restrains in 1961, real GDP rose by more than one-quarter between 1962 through 1964. This growth was impelled by private investment which increased from 4 percent of GDP in 1961 to 12 percent of GDP in 1964. The advance in both consumption and investment during this period was not matched, however, by domestic savings and a serious deterioration in the current account of the balance of payments resulted. The Civil War of 1965 precipitated a sharp drop of 14 percent in GD?. Most of this decline was recovered in 1966, as both private and public inrestment activity became reactivated. GDP estimate for 1967 is some 8 percent above that for 1966. Nevertheless, unemployment remains very heavy and reputedly accounts for about one-fifth of the labor force. An officially sponsored but discreetly pitclied population control program has been initiated with a view to reducing the present high population growth of 3.6 percent annually. 4. While very considerable efforts are underway to increase output in agriculture, and industrial activity is picking up, the full consequences of these efforts will probably not be apparent until the medium term. More- over, rather obvious opportunities undoubtedly exist for development in agriculture (including livestock), primary processing industry, and light manufactured goods not requiring large markets, and in some cases are being exploited. Minerals are also showing bright potential. Given continued improvement of the investment climate, and participation by overseas interests. the present growth phase should be maintained through the medium term, when l1iited markets may in some cases intrude. It should be underscored, however, that only a continuation of the gradual improvement in the political and investment climate would catalyze these large potential developments, in view of the many turbulent events in the country's recent past. III. M4AJOR SECTORS Agriculture 5. In general, production of the main export crops except sugar, has increased from 1961. Production for domestic food consumption has remained static, or in some cases even declined until very recently. Sugar accounts for some 50 percent of total merchandise exports. Of the usual annual pro- duction of 860,000 metric tons, of which the State Sugar Corporation provides 600,000 tons, about 550,000 tons are sold in the U.S.A. (400,000 tons basic quota plus reallocations), and about 120,000 tons are consumed domestically. The remainder (about 200,000 tons) is sold in the world market. Due to favorable climatic conditions and improved efficiency in the State Corporation, about 900,000 tons total production are expected in the 1967/1968 crop year. Sugar production in the Dominican Republic is now able to more than cover its production costs in its main market. However, no expansion in size is con- templated. Indeed, a diversification program is underway with a view to re- ducing reliance on suigar and thereby limiting cyclical balance of trade swings  - 3 - 6. Coffee production is governed by the export quota established under the International Coffee Agreement. Coffee exports in recent years of 20-30,000 tons have actually slightly exceeded the quota. Unless the quota is increased substantially, production is likely to remain at recent levels. Cocoa exports at approximately 22,000 tons per annum utilize fully all available supplies. New varieties are needed to replace aging trees and to relocate them from present highly fertile land on which other crops would offer higher returns. Possibilities of increasing production will depend on these technical factors as well as on the potentialities to be offered by an international cocoa agreement now under consideration. Tobacco exports have fluctuated between 16-25,000 tons annually. In the marketing of this crop, established quality preferences, traditional markets, and commercial agreements appear to be the dominant factors. Barring successful development of Havana-type tobacco, which is now in an experimental stage, the outlook for any significant expansion in output is not very bright. 7. The Dominican Republic has large areas of underutilized land, and an intensive diversification program is underway, with comprehensive foreign technical and financial assistance. This envisages, inter alia, substituting marginal sugar lands, relocating cocoa, and most importantly increasing production of foodstuffs. If successful, the program would result in considerable iLport-substitution and in the stimulation of exports. Ample scope exists for these in view of favorable land resources and proximity tc, Puerto Rico and the U.S.A. Impressive recent results or prospects exist for rice, beans, onions, potatoes, corn, tomatoes and oleaginous crops; and in these and other operations such as livestock and poultry, the country, in the opinion of informed businessmen and technicians, is reputedly cost- competitive when proper technical methods are employed. 8. The above favorable factors might have induced in some elements within the country insufficient appreciation of the problems of translating these results into country-wide application. As the focus widens, the organizational and marketing problems, existing irregular and high-cost freight, and trade barriers, will compound the familiar supply rigidities in the production matrix of what is essentially a very underdeveloped economy'. Nevertheless, thus far quite impressive results have been demonstrated, e.g. sorghum, tomato paste and livestock, when the requisite entreprenerial, technical and financial inputs are at hand. Significant foreign interests have moved into the country, or are making overtures to do so once the contractual basis, including the issue of an industrial incentive law, has been clarified. Nining 9. Present large-scale commercial mining encompasses the exportation by a local subsidiary of Alcoa of about one million tons of wet bauxite ore yielding US$10-11 million gross foreign exchange yearly (about US$3 million net). Production has been fairly static and is determined by extra- territorial considerations.  10. The most promising mining developmient is the contemp7ated establishmen . of a ferro-nickel mining and smelting plant by Falconbridge Nickel Mines, Ltd of Toronto, to produce about 250 tons of nickel daily. It is estimated that the enterprise will generate gross annual exports of US$40 million and will provide direct employment opportunities for 1,200 people. A feasibility study has been completed and efforts are being made to secure financing. The company has already invested some US$10 million in developing the project and may now require an additional amount of up to US$100 million to place it on a com- mercial basis. The investment, in addition to a smelter, would include power facilities (about 120 megawatts at a cost of US$20 million which would double the power capacity of the island), a road and other amenities normally associated with a mining town. The construction period for the completed project is estimated at three years. In the absence of a full financial appraisal, it is difficult to estimate the likely contribution of the project to the balance of payments. However, provided satisfactory arrangements are entered into between the company and the Government, the project could contri- bute substantially to the net foreign exchange earnings of the Dominican Republic. 11. A mining project of smaller magnitude but one that is further along is the salt mining and caustic soda operation by the Pittsburgh Plate Glass Cornpany. A contract has recently been entered into between the Government and the Company. Production on a commercial scale is imminent and should contribute modestly to export earnings. 12. Copper mining presents another promising but more distant development. The Mitsubishi Company, which has been prospecting in the Central Cordillera since 1965, has located high-grade ore; but conclusive findings as to the technical and economic feasibility of coi-mniercial exploitation could require a further two years. The richest copper deposits are believed to lie in government owned lands and the prospects of their exploitation over the near term will depend on the Government1s willingness to entertain an arrangement with a technically and financially competent enterprise. Manufacturing 13. Overtures on behalf of several new private initiatives are afoot in the manufacturing sector, both by foreign and by local investors who are reLiably reported (to which balance of payments data lends support) to be repatriating their capital. Ready opportunities exist for production of such unsophisticated goods as processed foods, wearing apparel, basic con- struction materials and elementary assembly work. A petroleum refinery is also a distinct possibility, with two major oil companies having tendered bids. Industrial expansion beyond these limited goals would soon be con- fronted, as elsewhere, by the limitations of the market as well as by the state of technical arts. Moreover, it would require substantial additions to the heavily taxed existing power supplies. Many of the potential new investments have been seriously retarded by the protracted delays in the enactment of industrial incentive legislation.  lis. The financing of these industrial enterprises has been greatly facilitated by USAID and IDB through the Investment Fund for Economic Development (FIDE) - a financial intermediary established in 1965 by the Central Bank to provide industry with medium- and long-term credit facilities. U'SAID and IDB made available US$10 million to FIDE to supplement the Central Bznk's contribution. While most of these funds are channeled to industry through private commercial banks, a modest proportion has been loaned out through the Government-owned Industrial Development Corporation (CFI). All of FIDE's funds are either already committed or tentatively earmarked for investments awaiting the passage of a satisfactory industrial incentive law. ThIe latter was passed by the Chamber of Deputies, is now under consideration by the Senate, and is expected to become law soon. FIDE may thus require additional financial resources in the near future if it is to continue its activities. In the meantime, an important new credit institution in the field of industrial financing is about to be launched in the form of a private development bank - Compania Financiera Dominicana, S.A. It has already obtained a US$5 million loan from USAID; ADELA Compania de Inversiones S.A. has taken a participation in the amount of US$100,000, The Royal Bank of Canada US$25,000 out of a proposed total equity of US$1 million. State Enterprises 15. The state has fortuitously inherited a mixed collection of former Trujillo enterprises, some of which have already folded-up or been eliminated. Nonetheless, the Dominican Republic has relatively the largest public sector in Latin America today. The State Sugar Corporation, the largest single business enterprise in the Dominican Republic, has had to cope with the con- sequences of technically poor location and an operational genesis which, under its former owners, could flout the requirements of conventional economic criteria. That it has made a profitable operation in the last two years out of this inheritance, after a parasitic period, is due largely to the instal- lation of efficient management which cut overhead costs, reduced payrolls from RD$52.0 million in 1966 to RD$36.0 million in 1967, improved labor productivity, increased yields, instituted better quality and operational controls and closed down some uneconomic units. 16. Some of the most dubious of the non-sugar state enterprises have wilted away, and the remaining ones, including a number of still questionable viability, have been grouped under the Co.-poracion Dominicana de Empresas Estatales (CORDE); thirty now being wholly owned or controlled and nineteen with minority state participations. Several of these, e.g., cement, flour mill, tobacco and paint factories are now showing a profit and carrying the re,st. It is principally the unprofitable ones that now pose a political quandary for the authorities and with the future of the CORDE enterprises still unresolved, this has a deleterious effect on the overall investment climate. A confidential firm-by-firm study is being carried out by consultants on the basis of which a decision as to the fate of all the state enterprises will turn. In the meantime, CORDE has entered into some agreements, such as the previously mentioned salt mining agreement with Pittsburgh Plate Glass Company, a technical agreement with  the Fabricato company of Colombia for the manufacture of textiles and a joint-venture agreement with Georgia Gypsun; discussions are also in progress with Nestle's regarding a joint venture, and other private participations are in the off'ing. The problems posed by the Trujillo enterprises are formidable indeed, but the present Government is facing up to them, has substantial accomplishments to show in the case of the Sugar Corporation and is taking positive steps to cope effectively with the remaining ones. IV. PUBLIC FINANCE Overall Revenue Performance 17. Revenue performance, which was seriously damaged by the Civil War, has been recovering and current revenues in 1967 are estimated at 16 percent of GDP as compared with less than 14 percent during the preceeding year. The revenue collecting machinery still has serious shortcomings, but its improved efficiency has been given tangible expression in a notable reduction in smuggling and by the more vigorous income tax collecting, which, during January-October 1967, was one-sixth above the equivalent period of 1966. Total revenue collections for January-September 1967 performed at less than 4 percent below budgeted estimates, for which modest shortfall and adverse revenue impact of import restrictions is probably entirely responsible. It is this essential dependence of budget revenues on import tariffs, constituting usually around 45 percent of total ordinary revenues, which imposes stringent restraints on fiscal policy. The 1967 Budget-Revenues ].8. The Central Governmentts budget for 1967 estimates current revenues to rise to RD$178 million, compared to RD$163 million in 1966, and RD$120 miMitcn in 1965. This target was almost attained - RD$172.5 million. Import duties were budgeted to generate 43 percent of the above total, followed by income and business taxes (18 percent), production taxes (13 percent) and sales taxes (10 percent). Property tax is still a conspicuous absentee, regrettably so in view not only of its potential budgetary contribution, but also in its possible: capacity as a stimulus to production. Expenditures 19. The total 1967 expenditures contemplated of RD$226 million broke down into current and capital components of RD$152 and RD$74 million (including debt amortization), respectively. Transposing this into classifications approximat- ing those of previous years (see Table 2), current expenditures were to be nearly 13 percent below those of 1966 and approximate the depressed 1965 level. Actually, current expenditures were held down to RD$145 million in 1967 ref'lecting economies of lower wages and salaries.  - 7 - 20. The composition of total budgetary expenditures highilights the still weighty, though substantially decreasing, allocation required for internal security. In both absolute and relative terms, this type of expenditure has been declining since 1965, although it still accounts for between 25 and 30 percent of total budgetary expendituires. More emphasis is also being placed in the budget on agriculture (16 percent), education (14 percent), and public works (10 percent) which supports the Goveinment's avowed intention to use a maximum possible of available resources for desvelopment objectives. Budgetary Investment 2:L. The investment budget for 1967 contains not onLly a seven-fold invest- ment increase over 1965, but has moved up to one-third of total expenditures, compared to only one-seventh in 1964. Of the somewhat ambitious investment expenditures of RD$69 million (including capital transfers), some 40 percent was allocated to direct investment, principally in road construction and maintenance. The remaining 60 percent consists of capital transfers, including RD$L0 million to the Agricultural Bank, RD$4 million to the Institute of Hydraulic Resources, and about RD$3 million each to the Housing Bank and to the State Sugar Council. Financing the Capital Budget 22. The Central Government investment program for 1967 was approximately one-third financed by current savings of about RD$27 million, in contrast to the negative or negligible savings of the previous two years. The remainder was to be covered by loans from the Government of the United States of RD$44 million and loans from the IDB of RD$4 million. No net financing of the budget was contemplated from the domestic banking system, thus perpetuating a three-year tradition in this respect. The large float- ing debt of about RD$25 million must await validation by a current invest- igating coimmittee of the many claims arising from the return of Trujillo interests to their former owners. Consolidated Public Sector 23. Turning to the consolidated public sector, General Government savings (i.e., Central Government plus Autonomous Institutions plus Municipalities) which were negative in 1965, became positive in 1966 and are estimated at about RD$32 million in 1967. The finances of the public sector (including the state economic enterprises) have been seriously debilitated in the past by the financial drain contingent on the sudden acquisition of former Trujillo enterprises. Resources have been particularly sapped by the State Sugar Corporation which suffered sizeable cash losses in the crop years 1964/65 and 1965/66. This situation has now been reversed and after extensive internal surgery the State Sugar Corporation achieved operating cash surpluses of RD$6.2 million in 1966/67, with RD$6.3 million estimated for the calendar year 1967. The other state-owned enterprises, groupecd under CORDE, are also now alleged to have attained viability as a group.  24. The still somewhat diffused and previously capricious structure of the public sector precludes exact comparisons on a consolidated basis prior to 1965. It is clear, however, that the consolidated public sector, inclu&