Dominican Republic - Economy

The economy, once heavily dependent on sugar and other agricultural exports, continues to diversify; tourism, telecommunications, and free trade zones (FTZ's) are major sources of income and employment. Remittances from abroad, estimated to exceed $1.5 billion, are equivalent to approximately 10 percent of the $2,000 per capita gross domestic product.

In 2015, the Dominican economy grew an estimated 7 percent, according to the Central Bank, making it the fastest-growing country in Latin America. Growth was led by public and private sector construction, with 18.2% growth, financial services, with 9.2% growth, and by commerce, education, remittances, and increased tourism receipts. The fiscal deficit, at 1.6% of GDP in 2015, was down somewhat from the previous year. While the macroeconomic situation has stabilized, the investment climate in the coming years will largely depend on sustaining the political will to make and to implement reforms necessary to promote competitiveness, transparency, and attract further foreign investment.

After a decade of little to no growth in the 1980s, the Dominican Government initiated a program of economic reform in the early 1990s, adopting sound macroeconomic policies and opening the country to foreign investment. The economy grew at an average rate of 7.6% annually from 1996 to 2000. Growth faltered in the early 2000s as several of the Dominican Republic’s main trading partners suffered recessions, reducing demand for manufactured goods. The economy contracted in 2003 (-0.3%) in the wake of a domestic banking crisis.

The Mejía administration negotiated an IMF standby agreement in August 2003, though failed to comply with fiscal targets. The Fernández administration signed the agreement in January 2005, after securing required tax legislation. Fernández successfully renegotiated official bilateral debt with Paris Club member governments, commercial bank debt with London Club members, and sovereign debt with a consortium of lenders. Growth recovered, averaging 7.8% from 2004 to 2007. The standby agreement concluded in January 2008 with fiscal and financial targets largely met but reform in the electricity sector and financial markets unrealized.

The global economic crisis, and in particular the U.S. recession, started to impact the Dominican economy in 2008. Remittances, exports, and tourism fell, and continued to fall throughout 2009, driving down government revenue. In October 2009, seeking to shore up dwindling revenues and improve its ability to secure more favorable rates with private lenders, the Fernández administration negotiated a new 28-month, U.S. $1.7 billion standby agreement with the IMF. Among other goals, the agreement aims to address the unrealized reform from the previous agreement by addressing electricity sector inefficiencies and improving fiscal management.

Trade

The Dominican Republic's most important trading partner is the United States. Other markets include Haiti, Western Europe, and China. The country exports goods manufactured in free trade zones (FTZs), such as textiles, electronic products, jewelry, tobacco, and pharmaceuticals, as well as cocoa, sugar, coffee, and tobacco. Aside from inputs into FTZs, it imports fuels, miscellaneous consumer goods, automobiles and other lasting goods, and food and foodstuffs. On September 5, 2005, the Dominican Congress ratified a free trade agreement with the U.S. and five Central American countries, known as CAFTA-DR. The CAFTA-DR agreement entered into force for the Dominican Republic on March 1, 2007. U.S. direct investment in the Dominican Republic is primarily in the manufacturing sector. Remittances were close to $3 billion in 2008.

FTZs accounted for an estimated U.S. $3.784 billion in Dominican exports for 2009 (69.3% of total exports). However, FTZ exports are roughly 20% lower than they were at their peak in 2000, whereas overall exports are down 4.8% since 2000. The textiles sector--which constituted 53.6% of FTZ exports in 2000--has increasingly played a smaller role in the FTZ sector. It experienced an estimated 19.5% drop since 2008 (and a 63.3% drop since 2000) due in part to the appreciation of the Dominican peso against the dollar, Asian competition following expiration of the quotas of the Multi-Fiber Arrangement, and a government-mandated increase in salaries. In 2009, the largest category of FTZ exports was the aggregate of non-traditional FTZ exports (26.1%) followed by textiles (24.8%) and electric products (13.1%).

Electricity

An ongoing concern in the Dominican Republic is the inability of participants in the electricity sector to establish financial viability for the system. Three regional electricity distribution systems were privatized in 1998 via sale of 50% of shares to foreign operators; the Mejía administration repurchased all foreign-owned shares in two of these systems in late 2003. The Fernández administration purchased the third distributor, which serves the eastern provinces, in June 2009. In 2010, the current head of the state electricity company called for the re-privatization of the electricity distributors.

The World Bank records that electricity distribution losses for 2009 totaled about 40%, a rate of losses exceeded in only two other countries. Due to low collection rates, theft, infrastructure problems, and corruption, distribution losses remain high. Subsidies to the electricity sector exceeded U.S. $1 billion in 2008. Congress passed a law in 2007 that criminalized the act of stealing electricity; it entered into force in February 2009. The 2009 IMF standby specifically targets six areas of improvement for the electricity sector. Debts in the sector, including government debt, amount to close to U.S. $500 million. Some generating companies are undercapitalized and at times unable to purchase adequate fuel supplies.

The Dominican Republic may have the most advanced telecommunications system of all Latin American nations. The principal telecommunications companies market the latest industry technologies. As a result, the public has access to a variety of telecommunications devices and services, including mobile cellular phones, beepers, data transmission, wireless internet, and web-based television. The country has 1,655 kilometers (1,028 miles) of track in five gauges. The tracks are used almost exclusively to transport sugarcane from the fields to the sugar mills. These railroads are short, single-track lines and do not comprise a countrywide system. The use of different gauge tracks limits rail functionality; lines are poorly maintained and subject to disruption due to bed erosion.