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| Volume No. 1 Issue No. 42 - Wednesday May 07, 2003 |
Dominica and the IMF
 Reprinted from Issue no.2 The Dominican.net June 30, 2001
Much concern has been expressed by Dominicans following the recent publication of a report by the International Monetary Fund (IMF) on Dominica�s economic situation.
Among other things, the report urged the Dominica government to immediately raise the price of fuel, and to cut back on public expenditure. To many Dominicans, this could not have come at a worse time given the current economic crisis, and the rising rates of unemployment in the country.
To some these recommendations were viewed as proof that the IMF was not working in the interest of the country and any such implementation would only lead to more hardship and suffering.
When Dominica became an IMF member on December 12, 1978, joining over 180 other countries around the world, it effectively gave the IMF the right to conduct periodic surveillance of its economic affairs.
Article IV of the IMF�s Articles of Agreement states �The Fund shall oversee the international monetary system.., and shall oversee the compliance of each member with its obligations��
It is important to stress that these recommendations were made by the IMF in the context of its consultations with Dominica. The government can however choose not to implement those recommendations.
Contrary to common belief, the IMF does not simply stay in Washington and give recommendations. Economists spend countless hours carefully studying data, trends, getting to know local conditions, and liaising with the various government and business leaders.
More important than the recommendations is what it points to. Clearly, Dominica is on the verge of economic crisis, which if left unchecked could easily spill over into social unrest.
During the cold war as the communists and capitalist jockeyed for position and influence in the Caribbean, there was an endless flow of �grant aid� from the Americans. The Dominican government for the most part was able to fund its various projects.
In the early nineties, the monies dried up forcing the current government to confront these stark choices: (a) increase tax revenues; (b) borrow and (c) reduce expenditures. Lets examine these choices in turn.
Increase tax revenues
For several years, government has been forced to operate on revenues from a very narrow tax base, made up principally of government workers and a few in the commercial sector (mainly banks). Why is this of such crucial importance?
For one thing, government workers are not considered to be in the �productive� sector. By that I mean their increased output does not translate to increased tax revenues.
Compare for instance a government worker and a factory employee. If in a given year the factory worker is successful in doubling his output, he may very well contribute more to government tax revenues, not so the government worker.
Clearly, the existing tax-base is already overtaxed, and further increasing the tax burden on so few would be counter productive. Indirect taxes like sales tax have a disproportionate effect on the poor, and unless its administration is full proof, the costs usually outweigh the benefits.
Borrow
To many in government, this is not an option. Dominica is struggling under close to half a billion US dollars in external debt, and the servicing of this debt is proving to be a serious drain on the already meager resources.
The former UWP government has been accused of borrowing heavily, and often at commercial rates. Not only is this ill-advised, but when these resources are used in paying salaries or simply frittered away, it makes an already bad situation worse.
In the absence of grant financing and the seeming indifference of our traditional allies, any large-scale borrowing would only exacerbate the situation.
Reduce government spending
Although I initially framed this in the context of a choice, given the current situation, the only practical scenario the government could embark upon is reducing the size of government spending.
This takes us back to the recommendations put forward by the IMF. Reduction in government spending is bitter medicine. There is often a political price to pay. It may very well cost the government an election.
For Dominica it would mean the laying off of government workers, and stopping work on the construction of some capital projects such as the Windsor Park Stadium. All bitter choices and if acted upon could have severe political and social ramifications for the country.
Structural Adjustment
While I may sympathize with the governments position of being hesitant to take such drastic measures, the cost of doing nothing will be far worse than taking some of the bitter medicine now.
If the current situation persists, the government will eventually run out of money, and will be forced, by circumstance, to take on an IMF structural adjustment program. For many governments running low on cash, the temptation to print money to meet salary obligations and to pay for goods and services is often hard to resist. This attempt at a solution is infinitely worse than taking measures aimed at reducing spending.
The economies of Latin America, Guyana, and Africa all attest to that. Fortunately for Dominica, because of its union with the Eastern Caribbean Central Bank (ECCB), it is not able to pursue an independent monetary policy, and therefore printing money to pay bills is not an option.
If Government were to resort to an IMF structural adjustment program, it would have to take the bitter medicine. Countries accepting structural programs are supposed to meet several stringent conditions in exchange for financial relief.
This may not be as bad as it sounds. The Freedom Party government under Prime Minister Charles opted for a Structural Adjustment Facility Arrangement with the IMF from November 1986 to November 1989, and a Standby Arrangement from July 1984 to July 1985.
Some observers have credited this program for having helped usher Dominica into arguably its best economic times since independence.
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