Interview with Héctor Valdez Albizu, Governor of the Central Bank of the Dominican Republic

May 28, 2019

What is driving the DR’s strong economic growth?

Governor Valdez: From 2012, when the incumbent political party came to power, until 2018 economic growth averaged 6% per year, with inflation at an annual rate of 3%. 2018 was a particularly strong year, with GDP growth at 7% and inflation at 1.17%. That rate of inflation is equal or below that of dollarized economies in the region, such as Panama, which shows that we have fulfilled the Central Bank’s primary goal – controlling inflation. Historical analysis shows that the Dominican Republic has good growth fundamentals. The average annual GDP growth from 1960 to the present day is 5%.

I think the Dominican Republic’s current economic success is derived from two key achievements: reducing the monetary and fiscal deficits. This government inherited a fiscal deficit of 6.9% in 2012 and succeeded in bringing it down to 2.6% by 2018. That’s happened by gradually increasing the tax take and also by controlling public spending. Meanwhile at the Central Bank, our prudential monetary policy has helped to avoid capital flight. For example, when the US Federal Reserve began to tighten its monetary policy and raised rates twice during 2018, we responded by raising our benchmark rate to 5.50%, up from 5.25%. Essentially our monetary policy is neutral. We are not trying to use it to move other economic indicators. Rather we respond to external and internal events to ensure that the currency remains stable.

You have been a vocal proponent of raising the minimum salary; why is it so important?

GV: For 27 years there has been no real increase in the non-financial public sector minimum salary. There have been adjustments for inflation but not an actual rise. That’s wrong because the economy has grown strongly in that period and people’s salaries should reflect that. Higher salaries are needed because they help power local demand and they secure political sustainability. It’s estimated that the basket of basic goods for a family for a month costs almost 14,000 pesos ($280), but the minimum salary in the non-financial public sector is just 6,000 pesos ($120). That undermines social stability because it means families have to send their children to work or have multiple jobs.

Historical analysis shows that the Dominican Republic has good growth fundamentals. The average annual GDP growth from 1960 to the present day is 5%…

I have presented three different studies to the government on this matter. People worry that it would undermine our private sector by raising labour costs but at the very least the non-financial public sector salary could be brought up to 10,900 pesos ($220), which is the going rate in the private sector.

Generally-speaking we have a successful economy but that’s an element we need to fix. To be fair, this government has created a lot of social programmes that have improved the welfare support for people and this gives them a higher total income than is reflected in the salary statistics. However, it is still important that we get extra cash into their pockets, which will boost consumer spending.

Is the DR’s growth model not creating enough of the ‘right’ jobs?

GV: There has been lots of progress. For example, in the last six years, companies operating in free zones have created 175,000 direct jobs. In total our economy has generated 770,000 new jobs since 2012. That’s helped poverty fall to 23% from almost 40%, which is an extraordinary achievement that has few parallels in the region. That’s 1.5million people who have escaped poverty. Meanwhile extreme poverty has been cut to 2.9% from 9.9%, which is real progress.

Lots of analysts here complain that 58% of the workforce is informal but that is incorrect. It’s actually 48%, which is in line with the Latin American average. Of course, even that level of informality is a challenge because it means that not everyone is paying the right amount of tax. I think the minimum wage is key to solving the problem because a lot of the informal work is done by people who aren’t being offered enough money by the formal sector.

The country’s tax take is too low but the Treasury Minister says it’s not the right time for a fiscal reform; do you agree?

GV: I am friends with Minister Guerrero and believe that we have worked well together to manage the economy. But I don’t agree with him – we do need a reform. In the Dominican Republic a government needs to take strong measures either at the beginning of its term or the end. I believe this administration lost the timing for the fiscal reform. I think now it’s a political question, with elections coming, perhaps they will try to pass it in the period between the campaign and the start of the next government.

I think the key for any new fiscal reform is to make our system more consistent. We have a sales tax of 18% that is currently not applied to any basic foodstuffs, like plantain or rice, nor to luxury goods like salmon or imported cheese. That doesn’t make sense. Having exemptions gives people an opportunity to evade tax by misregistering sales. We need a transparent, credible reform that doesn’t punish particular sectors but rewards the economy as a whole and gets our tax take to 19% or 20%.

The DR’s capital markets are still relatively underdeveloped; will that change?

GV: The Central Bank helped to craft the new capital markets law and we are confident that it will be successful. Indeed, it’s important to recognise that capital markets here have undergone rapid growth recently. It may seem unimpressive to outsiders but in the last few years we have seen a big expansion in corporate debt issuance and peso-denominated sovereign paper. We have seen $30billion of issuances in recent years, with energy companies particularly active in raising capital in the local market. This new law allows for a variety of new financial instruments and will help attract more liquidity to the market. We are just working on the supporting regulation that will help us get the maximum benefit from the law. For example, soon we will have special investment funds to finance road construction and rehabilitation. We have been taking our time because we want to attract the right type of capital. We don’t want to attract hot flows of money that can destabilise the economy with their rapid arrival and departure. At present we are a small country but one that attracts a lot of international investment. We receive an annual average of $2.5billion in foreign direct investment, around $6.7billion in export earnings from the tourist sector and $6billion from remittances. In the coming years financial inflows to our capital markets will become more significant.