Dominican Republic follows Puerto Rico and Venezuela on the road to fiscal unsustainability

El Nuevo HeraldBy Antonio María Delgado

[Translated by IASW]

The Dominican Republic seems to have adopted the same recipe that has led other countries to economic disaster, incurring loans at excessively high rates to finance unbridled public spending.

Experts consulted warn that the debt burden has reached alarming levels for the Caribbean nation, whose government on the other hand refuses to exercise greater controls over spending, a disastrous combination that increases the risk of default.

“Interest payments are already almost a quarter of the State’s budget,” said Ernesto Selman, executive director of the Regional Center for Economic Research for Sustainability (CREES).

“If there is no trend change in the medium term, the Dominican Republic would be running the risk of re-entering a default situation. It is not an imminent situation, and there is an opportunity to change that trend, but if in the next few years it does not change, that is what is going to happen, “he added.

CREES is part of a growing chorus of voices that have been warning that the Dominican Republic wanders along the same road of fiscal irresponsibility that have led Puerto Rico, Venezuela and Brazil to economic hardship.

“These policies are ultimately unsustainable,” Selman insists. “And we say that because the Dominican Republic has assumed fiscal deficits, year after year, with the exception of one year, from the year 2000 to date.”

And those fiscal deficits have been financed with debt.

Figures from the International Monetary Fund placed Dominican public debt at the equivalent of 48.5 percent of gross domestic product in 2015, and by 2016 it was estimated to reach 49.5 percent.

Much of the problem is the high interest rates that the country pays for these loans, said Miguel Ceara, research professor at the Pontificia Universidad Católica Madre y Maestra, a Dominican private study center.

The average interest rate is above 8 percent, and that forces the government to allocate an enormous amount of resources to pay interests.

The sum of interest paid by the central government and the central bank amount to 4.08 percent of GDP, Ceara wrote recently in a report. “That is more than what is allocated to the Ministry of Education,” he said.

Ceara said in a telephone interview that the consolidated debt, the sum of the cost of central government debt and that of the Central Bank, has led to 29 of every 100 pesos collected for taxes to be dedicated to the payment of interest.

But, as has happened in countries like Venezuela, much of the funds obtained through this debt have gone to questionable ends.

“With that debt, the Odebrecht fraud was paid, the overvaluation of works in those projects and the overvaluation of the Tucano aircraft, plus the illegal commission paid.”

According to research by The Wall Street Journal, Brazilian aeronautical company Embraer paid bribes to Dominican politicians and the military to approve a $92 million contract for the purchase of Super Tucano aircraft.

In the same way, the Dominican Republic is immersed in the corruption scandal related to Brazilian construction firm Odebrecht.

“There are items [of expenses] that are incomprehensible,” Ceara said. “There is a big problem of overvaluation of works. Works that are budgeted in 100, and appear executed not in 150 but in 300 or 400. They are multiplied by three or four. ”

But part of the Dominican Republic’s economic problems lie in the high subsidies it pays in the power sector, operated by state-owned utilities, said Selman.

“That’s a similarity to the situation in Puerto Rico, where part of the economic problems also stem from electric power and the cost of electric service,” Selman explained.

“The issue is that the distributors are from the state and are very inefficient; Lose a third of the electricity they buy, and on top of that they stop charging 3 percent of what they bill, “he added.

Click here for original article in Spanish.

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