IMF examines Dominica's CBI programme

Friday, December 22, 2017

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WASHINGTON, United States (CMC) –The International Monetary Fund (IMF) has told Dominica that a prudent management framework of its Citizenship by Investment (CBI) revenues is key, regardless of the expected duration of the windfall with priority given to capital spending, debt reduction and saving.

Dominica is among several Caribbean countries implementing a CBI through which foreign investors are granted citizenship of the country in return for making a significant investment in its socio-economic development.

In a paper which examined the CBI before the passage of Hurricane Maria in September, the Washington-based financial institution said due to the highly volatile and unpredictable nature of CBI receipts, “the policy options to allocate such revenues should be carefully examined with sufficient consideration given to potential effects on the country's medium and long-term macroeconomic fundamentals”.

The IMF had noted that the Dominica CBI inflows had reached near 10 per cent of gross domestic product (GDP), increasing the country's reliance on these revenues. It argued that given their volatile and unpredictable nature, CBI revenues should be used prudently.

“Their use should be mindful of the chances of a sudden stop in these flows. It is therefore key to prioritise investment, debt reduction, and saving in lieu of current expenditure, which is typically more difficult to reverse,” the IMF noted.

It said to avoid the need for a sharp fiscal adjustment when the windfall revenues diminish or come to a sudden stop, priority should be given to boosting infrastructure, debt reduction and saving.

It said, based on the examples used to analyse the programme, additional capital expenditure would help close the infrastructure gap and permanently raise the level of income in the economy; saving accumulation would provide for a smooth transition when or if CBI revenues come to a sudden stop.

“…debt reduction would help reduce Dominica's debt servicing burden and allow for a faster attainment of the regional debt target of 60 per cent of GDP to which Dominica subscribes.”

The IMF said that the long-term disadvantages of allocating additional CBI revenues to current expenditure outweigh the benefits and that the analysis has shown that using CBI flows to increase public consumption could lead to lower levels of output and threaten the sustainability of government finances.

The study also showed that this is the case even if a sudden stop were to happen relatively later in time after critical constraints affecting current expenditure decisions are considered.

“The social and political cost of unwinding current expenditures, given the sticky nature of wages and public transfers, would likely continue to affect the country long after the sudden stop in CBI takes place. “Thus, given the CBI unpredictability, funding current spending with the CBI revenues could potentially lead to sustainability challenges and, plausibly, to a lower level of GDP by squeezing the fiscal space for public investment.

“A strong transparency framework is therefore key to minimise risks to CBI flows and to maximise the potential revenues. This would reduce the risk of a sudden stop, and maximise the prospects for the long-term sustainability of this important revenue source,” the IMF added.




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