INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND DOMINICA Joint Bank-Fund Debt Sustainability Analysis -2018 Update Prepared by the staffs of the International Development Association and the International Monetary Fund Approved by Paloma Anos-Casero (IDA) and Ana Corbacho (IMF) Dominica continues to be at high risk of debt distress. However, hurricane Maria in September 2017 caused severe social hardship and deterioration of fiscal and external balances, weakening sustainability. In addition, Dominica’s debt carrying capacity as measured by the three-year CPIA average declined. 1 Thus, setting public and publicly guaranteed total and external debt on a declining path would require prudent and efficient fiscal policies that safeguard fiscal space for social relief and reconstruction investment. A fiscal consolidation plan is needed after recovery takes hold to sustain reconstruction investment. Donor grant mobilization is key to minimize the debt burden. Main risks to the debt sustainability outlook include sudden stop in citizenship-by-investment (CBI) program revenues, financial instability from weakened balance sheets, and recurrent natural disasters. 1 Dominica’s performance category shifted from “strong” to “medium” based on its latest 3 -year average CPIA score (2014-16) of 2.63. As a result, the relevant policy thresholds have tightened somewhat from last DSA. Debt burden thresholds corresponding to medium policy performers are as follows: 150 for the PV of debt in percent of exports, 40 for the PV of debt in percent of GDP, 250 for the PV of debt in percent of revenue and 20 for the debt service in percent of export or revenue. 1 BACKGROUND 1. Category 5 hurricane Maria hit Dominica in September 2017, causing estimated Estimated Losses and Damages after Hurricane Maria losses and damage of (In percent of GDP) 1/ 2/ 3/ 4/ Damage Losses Recovery Cost 226 percent of GDP. About Sector Public Private Total Public Private Total Public Private Total 58 percent of losses and damage Agriculture Forestry 6.5 4.9 3.0 0.0 9.5 4.9 0.0 0.0 21.4 0.0 21.4 0.0 8.6 2.6 4.0 0.0 12.5 2.6 Fisheries 0.1 0.4 0.5 0.0 0.1 0.1 0.0 0.3 0.4 fell on the private sector, where Commerce/Microbusiness 0.0 12.1 12.1 0.0 1.2 1.2 0.0 12.6 12.6 Tourism 0.0 3.5 3.5 0.0 12.2 12.2 0.0 4.5 4.5 private housing damage was Education 8.4 4.3 12.7 0.4 0.2 0.6 10.5 5.4 16.0 Health 1.9 0.0 1.9 1.2 0.0 1.2 3.8 0.1 3.8 equivalent to 61 percent of GDP. Transport 27.9 6.6 34.6 8.5 1.4 9.9 44.8 11.0 55.8 Water and Sanitation 4.1 0.0 4.1 2.3 4.3 6.6 9.7 0.0 9.7 Main sectors – including Electricity 5.7 0.0 5.7 5.7 0.0 5.7 8.8 0.0 8.8 Telecommunications 0.1 8.1 8.2 0.0 1.4 1.4 0.1 8.2 8.2 tourism, agriculture, and Housing 0.0 60.9 60.9 0.6 4.3 4.9 44.7 44.7 89.4 Other 5/ 4.5 -3.5 1.1 12.8 -12.2 0.6 6.6 -4.5 2.1 transport – sustained significant Total 64.0 95.6 159.6 31.4 34.3 65.7 140.1 86.2 226.3 Memorandum items: losses and damage (text table). Total (in millions of U.S. dollars) 372 556 928 183 199 382 815 501 1316 Source: Commonwealth of Dominica Post-Disaster Risk Assessment, November 2017. 1/ Based on 2016 GDP. Within the public sector, 2/ Includes mainly replacement cost of structures. 3/ Includes flow losses, typically in terms of output foregone. infrastructure carried the brunt 4/ Captures the costs of reconstruction of structures with resilience to natural disasters. 5/ Includes costs for disaster-risk reduction and other cross-cutting costs. of the damage (43 percent of GDP). Prior to the worst natural disaster in Dominica’s history, the government was making progress in implementing a medium-term fiscal consolidation plan of over 6 percent of GDP in cumulative adjustment. In addition to the initial fiscal measures discussed in the context of the 2015 RCF disbursement, the government also passed additional measures, including comprehensive reforms to increase tax revenues and broaden the tax base, and contain current expenditures, to further strengthen the fiscal position. 2 2. Prior to the hurricane, Dominica was grappling with fiscal sustainability concerns while making progress on the consolidation plan it had committed to in the October 28, 2015 Rapid Total Public Sector Debt Credit Facility disbursement. Dominica’s (In percent of GDP, fiscal years 1/) overall public debt was on a declining FY2014/15 FY2015/16 FY2016/17 path with the implementation of first- Public sector debt 2/ 78.7 75.3 71.7 generation fiscal consolidation measures PPG external debt 61.0 58.1 54.7 Central government debt 44.7 42.7 40.8 committed in the 2015 RCF disbursement. Bilateral 16.4 14.9 13.4 Multilateral 19.0 19.3 18.4 As of end-FY2016/17, the stock of public Commercial 9.3 8.5 9.0 sector debt (central government and rest Government guaranteed debt 16.3 15.4 13.9 Bilateral 8.9 8.7 8.0 of the public sector, henceforth public 2 Multilateral 7.4 6.7 5.9 debt) is estimated to be around 72 percent PPG domestic debt 17.7 17.1 17.1 Central government debt 14.2 13.3 12.0 of GDP. About ¾ of the stock is external Government guaranteed debt 3.5 3.8 5.1 debt, owed largely to multilateral and Source: Dominican authorities. 1/ Fiscal year run from July to June. bilateral creditors, and the remainder is 2/ Public sector includes Central Government, State Owned Enterprises, held domestically, mostly by commercial and staff estimate of PetroCaribe arrangement. banks and other financial institutions. The debt of the rest of the public sector (state owned enterprises and Petrocaribe debt) is about 20 percent of GDP (text table). 3. Debt sustainability is highly dependent on access to grants and concessional financing, and the continued success of the CBI program, as highlighted below under the customized scenarios. The debt sustainability analysis includes disbursement of US$115 million in commitments approved by the World Bank3; US$90 million assumed financing option from the Caribbean Development Bank (CDB); and conservative assumptions on donor grant disbursements and CBI revenues. An annualized cost of reconstruction after natural disasters of 1.5 percent of GDP per year is included in all scenarios, in line with historical costs, to ensure consistency of the projections with the recurrent nature of natural disasters. 2 Debt of the rest of the public sector also includes staff’s estimate of the Petrocaribe arrangement. The estimation is based on the Petrocaribe loan agreement. It should be noted, however, that Petrocaribe debt service payments have been cancelled or rescheduled in the last three years, a pattern that may continue into the coming years. However, this DSA includes these obligations for prudence given the uncertainty about the continuation of this practice. 3 The $115 million in World Bank support includes support to the Geothermal Risk Mitigation Project (US$17 million), the Agriculture Resilience and Livelihoods Enhancement Project (US$25 million), the Dominica Housing Reconstruction Project (US$40 million), and additional financing to the Dominica Disaster Vulnerability Reduction Project (US$31 million). 3 UNDERLYING ASSUMPTIONS 4. The baseline scenario captures expected outcomes consistent with identified financing sources and anticipated policies. Due to losses and damage sustained after hurricane Maria, the baseline scenario has been revised significantly to accommodate post-storm recovery and reconstruction. In this scenario, return of financing flows to historical norms results in a financing constraint that limits fiscal space to maintain reconstruction. The government becomes financially constrained by FY2022/23. Fiscal space becomes insufficient to sustain post- hurricane increases in public investment with the depletion of deposits, under the assumption of downwardly rigid recurrent spending. The fiscal space for public investment declines to 3 percent of GDP, insufficient for capital replacement. Public debt increases to near 90 percent of GDP. 5. Macroeconomic assumptions underlying the DSA are summarized in Box 1. The main differences relative to the DSA in the 2017 Staff Report are as follows: • The Country Policy and Institutional Assessment (CPIA) score has been revised from “strong” to “medium”, which serves to tighten policy-dependent thresholds in the context of the DSA. The long- term fiscal outlook has deteriorated due to higher capital spending and tax revenue losses, mostly related to hurricane Maria. • Observed CBI revenues have been lower than previously estimated, and hence projections have been revised down. These flows are unpredictable and subject to the risk of a sudden stop. The increased dependence on these inflows for government and external financing add to overall risks. • Grants have been revised upward in the near-term to reflect donor support post-hurricane Maria. • The longer-term external outlook has deteriorated, as imports surged, and exports collapsed following hurricane Maria, and time will be required to re-establish the momentum of exports. • In the immediate wake of the hurricane, economic growth has been revised downward significantly. But growth should increase as reconstruction spending underpins output back toward potential rates though the medium term. 4 • National Accounts, historical debt, and corresponding debt service obligations have been revised by the authorities. Key macroeconomic and fiscal assumptions (In percent of GDP, unless otherwise indicated) Projections 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Current DSA Real GDP growth (in percent) 0.2 -0.6 -1.1 -9.3 -3.2 8.0 5.1 2.9 1.9 1.5 Inflation rate (GDP deflator, in percent) 2.4 5.6 3.1 0.9 1.6 1.7 1.8 1.9 1.8 1.8 Primary balance 1/ -3.0 1.0 5.4 2.0 -3.6 -3.8 -8.1 -6.7 1.4 1.1 Current account balance -7.1 -1.9 0.8 -12.5 -31.7 -22.1 -20.4 -21.3 -14.2 -11.9 2017 DSA Real GDP growth (in percent) 4.2 -1.8 1.0 3.6 3.3 2.2 2.1 1.7 1.5 1.5 Inflation rate (GDP deflator, in percent) -0.3 -0.3 0.0 0.6 1.4 1.6 1.8 1.9 2.0 1.6 Primary balance 1/ -3.1 1.1 0.8 2.3 2.0 2.1 2.1 2.7 3.2 2.9 Current account balance -9.5 -8.0 -11.8 -12.1 -16.6 -16.0 -13.2 -10.3 -9.7 -10.6 Sources: Dominican authorities; and staff estimates and projections. 1/ Primary balance of the central government. Box A1. Underlying Assumptions (2017-37) The baseline scenario assumes an increase in public investment for post-Maria reconstruction of public infrastructure through 2018–22, leading to a widening fiscal deficit. Increased investment spending boosts growth, while higher imports worsen the external current account. Over the medium-term, the fiscal position is projected to improve as public investment eases due to financial constraints, and gradual recovery of output and exports, and the normalization of imports. Output growth declines gradually to 1.5 percent per year. • Fiscal position. The fiscal balance sharply deteriorates in the near term as fiscal revenues decline and public investment increases in the aftermath of hurricane Maria. Over the medium term, investment spending declines to 3 percent of GDP as the government becomes financially constrained, improving the fiscal balance. • CBI revenues. The baseline scenario assumes conservative revenues from the CBI program, which are projected to decline to 2.7 percent of GDP over the medium-term. • Grants. In the near-term, grants are assumed to support reconstruction efforts, and then are expected to decline to 1 percent of GDP. This is a conservative assumption as it stands below historical averages but is justified given global trends. • Real GDP. Real GDP growth peaks at over 9 percent in the near term as output rebounds after the hurricane, underpinned by reconstruction spending, and then gradually declines towards 1.5 percent growth by 2023. • Inflation. Inflation is projected to remain near 2 percent, in line with international inflation, and consistent with the quasi-currency board arrangement of the Eastern Caribbean dollar. • Balance of Payments. The current account deficit deteriorates substantially after the hurricane, with increase in imports and a collapse in exports, mainly driven by decline in tourism services and agriculture output. The current account is financed by official debt flows, CBI revenues, grants, and FDI inflows. 5 EXTERNAL DSA 6. The risk of debt distress rating assigned to PPG external debt remains “high.” In the baseline scenario, and without further shocks, the PV of the debt-to-GDP ratio is breached over the entire projection period (see Figure 1). Other debt stock and debt service measures, however, remain at or below the policy-dependent indicative thresholds during the entire forecast period in the baseline scenario. 7. External PPG debt dynamics become unsustainable under the historical and alternative scenarios. Several risk thresholds are breached in the historical and alternative shock scenarios. Under the historical scenario – which assumes non-interest current account balance, FDI, real GDP growth, and the GDP deflator remain at their 10-year historical average – all debt stock and debt service measures take an increasing trajectory and both the PV of debt- to-GDP and the PV of debt-to-exports ratios breach the thresholds. In addition, under the alternative scenario assuming a shock to non-debt flows4, the PV of debt-to-GDP remains above the threshold for the entire forecast horizon, while other debt stock and debt service measures all breach their respective thresholds for most of the projection period. 8. The results of customized scenarios, designed to pinpoint sources of high risk, further justify the classification of “high risk of external debt distress”. Based on the main potential risks to external debt sustainability, two Dominica: External PPG Debt Developments additional customized scenarios are (In percent of GDP ) 1/ 200 included in the analysis: financially Financially unconstrained with sudden stop in CBI 3/ unconstrained and financially 150 unconstrained with a sudden stop in CBI Financially 100 inflows (text chart). First, under the unconstrained scenario financially unconstrained scenario, the 50 Baseline scenario2/ public sector is assumed to continue 0 accumulating debt to finance post-Maria 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 Sources: Dominican authorities; and staff estimates and projections. reconstruction, as capital spending 1/ In percent of fiscal year GDP. PV of debt-to-GDP ratio. 2/ Financially constrained scenario. remains at historical levels. Under this 3/ Assumes sudden stop in CBI revenues in FY2019/20. scenario public debt would take an increasing trajectory. Second, financially unconstrained scenario with a sudden stop in CBI revenues in FY2019/20 highlights the downside risk of increasing reliance on unpredictable and volatile CBI revenues and exacerbates debt dynamics further. The simulations indicate that materialization of these risks would result in a permanent 4 This alternative scenario assumes net non-debt creating flows at historical average minus one standard deviation in 2018-2019. 6 breach of the PV of debt-to-GDP ratio threshold with an upward trajectory, rendering debt dynamics unsustainable. 9. Based on the threshold breaches in the baseline, alternative, and customized scenarios, Dominica’s external PPG debt is rated as “high risk of debt distress”. Given the challenges associated with post-Maria recovery, the customized scenarios, which also simulate an upward trending PV of debt-to-GDP, are attached significant weight in the risk assessment as they attempt to capture important vulnerabilities in the economy overlooked by the standardized tests. PUBLIC DSA 10. Dominica’s rating of “high risk of external debt distress” is reinforced by vulnerabilities related to PPG domestic debt. Under the baseline scenario, the PV of total public-sector debt is expected to remain above the corresponding benchmark until 2032. Both the PV of the debt-to-revenue and debt service-to-revenue ratios increase in the near term. In the long-term, while the PV of the debt-to-revenue ratio declines marginally, the trajectory of the debt service-to-revenue ratio remains flat (see Figure A2). 11. PPG debt levels also breach the benchmark under alternative shock scenarios. The most extreme shock – which assumes one-time real depreciation of 30 percent in 2018 – leads to an unsustainable and increasing PV of debt-to-GDP ratio. Under the “fixed primary balance” scenario – which assumes that the primary balance-to-GDP ratio remains at its 2017 level – the PV of debt-to-GDP ratio falls below the threshold by 2021. Similar debt dynamics are also observed under the historical scenario, where key macroeconomic variables are set at their 10- year historical averages. 12. Under the customized scenarios, total Dominica: Public Debt Developments (In percent of GDP 1/) 200 PPG debt takes on an increasing trajectory. Financially unconstrained with sudden stop in CBI 3/ Under the two customized scenarios – 150 financially unconstrained and financially Financially unconstrained with a sudden stop in CBI unconstrained scenario 100 revenues – which are included to highlight some Baseline scenario 2/ of the main risks not captured in the standard 50 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 stress tests, the PV of debt-to-GDP, debt-to- Sources: Dominican authorities; and staff estimates and projections. 1/ In percent of fiscal year GDP. PV of debt-to-GDP ratio. 2/ Financially constrained scenario. revenue, and debt service-to-revenue ratios 3/ Assumes sudden stop in CBI revenues in FY2019/20. continue to increase throughout the forecast period (text chart). 7 A. CONCLUSION 13. In light of the high debt burden and the significant risks to the debt sustainability outlook, Dominica is assessed at a “high risk of debt distress.” This assessment is based on debt dynamics presented in the baseline policies scenario and in alternative scenarios and reinforced by the risks in the customized scenarios. Under the baseline scenario, the government becomes financially constrained by FY2022/23. Under the macroeconomic projection in this DSA, and the assumption that recurrent government spending is downward rigid, Dominica would need of a fiscal consolidation of about 4 percent of GDP in order to create the fiscal space for public investment, as required for public capital replacement and to sustain the reconstruction. 14. The authorities concurred with Staff that Dominica remains at a high risk of debt distress. They agreed on the importance of grants and CBI flows to finance post-Maria reconstruction. In addition, they acknowledged the need to focus on cost-effective fiscal policies with a view to adopt a consolidation plan to restore sustainability when recovery takes hold. The fiscal consolidation measures committed to after the October 2015 RCF disbursement remain eligible, with appropriate recalibration. Finally, while Petrocaribe debt remains a gross liability of the government, the authorities continued to question the inclusion of Petrocaribe obligations in the stock of public debt. 8 Figure A1. Dominica: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2017-37 (Baseline Scenario) 1 a. Debt Accumulation b.PV of debt-to GDP ratio 12 20 160 11 140 10 9 15 120 8 7 100 6 10 5 80 4 60 3 5 2 40 1 0 0 20 2017 2022 2027 2032 2037 0 Rate of Debt Accumulation 2017 2022 2027 2032 2037 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt-to-exports ratio d.PV of debt-to-revenue ratio 400 600 350 500 300 400 250 200 300 150 200 100 100 50 0 0 2017 2022 2027 2032 2037 2017 2022 2027 2032 2037 e.Debt service-to-exports ratio f.Debt service-to-revenue ratio 40 50 35 45 40 30 35 25 30 20 25 20 15 15 10 10 5 5 0 0 2017 2022 2027 2032 2037 2017 2022 2027 2032 2037 Baseline Historical scenario Most extreme shock 1/ Threshold Financially unconstrained scenario 2/ Financially unconstrained with sudden stop in CBI 2/ 3/ Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2026. In all figures it corresponds to net non-debt creating flows at historical average minus one standard deviation in 2018-2019. Shocks are applied to baseline scenario. 2/ Customized scenarios. 3/ Sudden stop in CBI scenario assumes a complete stop of CBI inflows starting in FY2019/20. 9 Table A1. Dominica: External Debt Sustainability Framework, Baseline Scenario, 2014-37 (In percent of GDP, unless otherwise indicated) 1 7/ 7/ Actual Historical Standard Projections Average Deviation 2017-2022 2023-2037 2014 2015 2016 2017 2018 2019 2020 2021 2022 Average 2027 2037 Average External debt (nominal) 1/ 86.5 83.8 77.7 91.5 99.1 95.3 99.3 102.1 102.1 95.1 82.6 of which: public and publicly guaranteed (PPG) 61.0 58.1 54.7 66.0 71.1 68.1 72.8 75.8 75.7 67.5 56.0 Change in external debt 2.4 -2.7 -6.1 13.8 7.6 -3.8 4.1 2.8 0.0 -1.7 -1.3 Identified net debt-creating flows 2.4 -6.4 -8.0 15.7 26.6 7.8 9.3 12.6 7.8 2.1 1.6 Non-interest current account deficit 4.1 -1.1 -4.0 10.3 8.9 10.9 26.9 17.9 16.6 17.2 10.1 3.9 3.6 4.5 Deficit in balance of goods and services 11.7 8.4 5.8 26.3 47.3 38.0 30.6 26.3 17.5 10.4 8.8 Exports 51.3 48.0 49.4 45.6 31.4 39.7 43.0 42.4 43.0 42.9 42.9 Imports 62.9 56.4 55.1 71.9 78.7 77.7 73.6 68.8 60.5 53.3 51.7 Net current transfers (negative = inflow) -8.9 -9.9 -10.1 -5.6 2.8 -17.0 -17.3 -16.3 -10.4 -9.7 -9.8 -9.2 -8.1 -8.9 of which: official -2.6 -3.2 -3.2 -9.2 -8.5 -8.6 -4.2 -4.2 -4.2 -3.6 -2.6 Other current account flows (negative = net inflow) 1.3 0.4 0.3 1.6 -3.1 -3.8 -3.7 0.6 2.3 2.8 2.9 Net FDI (negative = inflow) -2.6 -4.1 -5.6 -7.7 3.5 -5.5 -6.5 -6.1 -6.0 -5.5 -4.3 -4.3 -4.1 -4.3 Endogenous debt dynamics 2/ 0.9 -1.2 1.5 10.3 6.2 -4.0 -1.3 0.8 2.0 2.4 2.1 Contribution from nominal interest rate 3.0 2.9 3.2 2.5 3.1 3.3 3.3 3.6 3.9 3.8 3.3 Contribution from real GDP growth -0.2 0.5 0.9 7.9 3.0 -7.3 -4.6 -2.8 -1.9 -1.4 -1.2 Contribution from price and exchange rate changes -2.0 -4.6 -2.5 … … … … … … … … Residual 3/ 0.0 3.6 2.0 -1.9 -18.9 -11.6 -5.2 -9.8 -7.8 -3.8 -2.8 of which: Capital transfers 4/ -19.8 -11.5 -6.8 -4.5 -3.7 -3.5 -3.3 of which: Commercial Banks and other private flows -2.5 -2.0 -2.4 -2.9 -2.9 -0.5 0.9 of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PV of external debt 5/ ... ... 66.1 78.6 85.5 82.2 86.1 88.7 89.0 84.0 71.8 In percent of exports ... ... 133.8 172.5 272.2 207.4 200.2 208.9 207.1 195.6 167.4 PV of PPG external debt ... ... 43.0 53.2 57.5 55.0 59.6 62.3 62.6 56.4 45.2 In percent of exports ... ... 87.2 116.6 183.0 138.8 138.6 146.9 145.7 131.4 105.4 In percent of government revenues ... ... 78.2 113.9 154.0 148.5 168.1 178.8 178.8 161.5 133.8 Debt service-to-exports ratio (in percent) 12.2 14.0 14.2 11.9 24.3 22.3 16.4 16.7 17.7 19.9 17.9 PPG debt service-to-exports ratio (in percent) 9.0 10.3 10.5 8.6 19.5 18.3 12.9 12.9 13.8 15.8 14.3 PPG debt service-to-revenue ratio (in percent) 13.6 13.0 9.5 8.4 16.4 19.6 15.7 15.8 16.9 19.4 18.2 Total gross financing need (Billions of U.S. dollars) 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Non-interest current account deficit that stabilizes debt ratio 1.7 1.6 2.1 -2.9 19.3 21.7 12.5 14.5 10.1 5.6 4.8 Key macroeconomic assumptions Real GDP growth (in percent) 0.2 -0.6 -1.1 1.0 2.4 -9.3 -3.2 8.0 5.1 2.9 1.9 0.9 1.5 1.5 1.5 GDP deflator in US dollar terms (change in percent) 2.4 5.6 3.1 2.5 1.8 0.9 1.6 1.7 1.8 1.9 1.8 1.6 2.0 2.0 2.0 Effective interest rate (percent) 6/ 3.6 3.6 3.8 4.4 0.9 2.9 3.4 3.7 3.7 3.8 3.9 3.6 4.1 4.1 4.1 Growth of exports of G&S (US dollar terms, in percent) 40.9 -1.8 4.9 7.9 16.0 -15.5 -32.3 38.6 16.0 3.6 5.1 2.6 3.5 3.5 3.5 Growth of imports of G&S (US dollar terms, in percent) 37.3 -6.0 -0.2 5.6 15.1 19.3 7.6 8.4 1.5 -2.0 -8.7 4.4 3.6 2.3 2.5 Grant element of new public sector borrowing (in percent) ... ... ... ... ... 18.0 18.7 17.5 14.2 16.2 15.0 16.6 15.0 15.9 15.5 Government revenues (excluding grants, in percent of GDP) 34.0 38.0 55.0 46.7 37.3 37.1 35.4 34.9 35.0 34.9 33.8 34.6 Aid flows (in Billions of US dollars) 8/ 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 of which: Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 of which: Concessional loans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Grant-equivalent financing (in percent of GDP) 9/ ... ... ... 10.8 9.7 7.8 2.7 2.5 1.9 1.7 1.8 1.7 Grant-equivalent financing (in percent of external financing) 9/ ... ... ... 58.8 58.6 51.5 19.8 23.2 25.4 27.3 27.7 27.4 Memorandum items: Nominal GDP (Billions of US dollars) 0.5 0.6 0.6 0.5 0.5 0.6 0.6 0.6 0.7 0.8 1.1 Nominal dollar GDP growth 2.6 5.0 2.0 -8.4 -1.7 9.9 7.0 4.9 3.8 2.6 3.5 3.5 3.5 PV of PPG external debt (in Billions of US dollars) 0.2 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.5 (PVt-PVt-1)/GDPt-1 (in percent) 5.6 3.4 3.0 8.7 5.8 2.6 4.9 0.5 0.7 0.7 Gross workers' remittances (Billions of US dollars) … … … … … … … … … … … PV of PPG external debt (in percent of GDP + remittances) ... ... 43.0 53.2 57.5 55.0 59.6 62.3 62.6 56.4 45.2 PV of PPG external debt (in percent of exports + remittances) ... ... 87.2 116.6 183.0 138.8 138.6 146.9 145.7 131.4 105.4 Debt service of PPG external debt (in percent of exports + remittances) ... ... 10.5 8.6 19.5 18.3 12.9 12.9 13.8 15.8 14.3 Sources: Dominican authorities; and staff estimates and projections. 0 1/ Includes public and private sector external debt. In percent of fiscal year GDP. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Public and private capital transfers include CBI inflows and insurance payments. 5/ Assumes that PV of private sector debt is equivalent to its face value. 6/ Current-year interest payments divided by previous period debt stock. 7/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 8/ Defined as grants, concessional loans, and debt relief. 9/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 10 Table A2. Dominica: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2017-37 Projections 2017 2018 2019 2020 2021 2022 2027 2037 PV of debt-to GDP ratio Baseline 53 58 55 60 62 63 56 45 A. Alternative Scenarios A1. Key variables at their historical averages in 2017-2037 1/ 53 39 32 31 26 23 31 67 A2. New public sector loans on less favorable terms in 2017-2037 2/ 53 59 59 66 71 72 73 77 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2018-2019 53 56 59 64 67 67 61 49 B2. Export value growth at historical average minus one standard deviation in 2018-2019 3/ 53 48 49 54 57 57 52 44 B3. US dollar GDP deflator at historical average minus one standard deviation in 2018-2019 53 58 56 61 64 64 58 46 B4. Net non-debt creating flows at historical average minus one standard deviation in 2018-2019 4/ 53 72 83 87 89 90 79 51 B5. Combination of B1-B4 using one-half standard deviation shocks 53 54 66 70 73 74 66 49 B6. One-time 30 percent nominal depreciation relative to the baseline in 2018 5/ 53 82 78 85 88 89 80 64 PV of debt-to-exports ratio Baseline 117 183 139 139 147 146 131 105 A. Alternative Scenarios A1. Key variables at their historical averages in 2017-2037 1/ 117 124 80 71 61 54 73 156 A2. New public sector loans on less favorable terms in 2017-2037 2/ 117 189 148 153 167 169 169 180 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2018-2019 117 183 139 139 147 146 131 105 B2. Export value growth at historical average minus one standard deviation in 2018-2019 3/ 117 112 138 139 148 147 134 114 B3. US dollar GDP deflator at historical average minus one standard deviation in 2018-2019 117 183 139 139 147 146 131 105 B4. Net non-debt creating flows at historical average minus one standard deviation in 2018-2019 4/ 117 230 208 201 210 209 185 118 B5. Combination of B1-B4 using one-half standard deviation shocks 117 121 149 147 155 153 138 103 B6. One-time 30 percent nominal depreciation relative to the baseline in 2018 5/ 117 183 139 139 147 146 131 105 PV of debt-to-revenue ratio Baseline 114 154 148 168 179 179 162 134 A. Alternative Scenarios A1. Key variables at their historical averages in 2017-2037 1/ 114 104 85 86 74 66 89 198 A2. New public sector loans on less favorable terms in 2017-2037 2/ 114 159 158 186 203 207 208 229 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2018-2019 114 151 160 181 192 192 174 144 B2. Export value growth at historical average minus one standard deviation in 2018-2019 3/ 114 128 133 152 162 162 149 131 B3. US dollar GDP deflator at historical average minus one standard deviation in 2018-2019 114 155 151 171 182 182 165 136 B4. Net non-debt creating flows at historical average minus one standard deviation in 2018-2019 4/ 114 193 223 244 256 256 228 150 B5. Combination of B1-B4 using one-half standard deviation shocks 114 146 178 199 210 211 190 146 B6. One-time 30 percent nominal depreciation relative to the baseline in 2018 5/ 114 219 211 239 254 254 229 190 11 Table A2. Dominica: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2017-37 (concluded) Projections 2017 2018 2019 2020 2021 2022 2027 2037 Debt service-to-exports ratio Baseline 9 20 18 13 13 14 16 14 A. Alternative Scenarios A1. Key variables at their historical averages in 2017-2037 1/ 9 19 17 11 11 11 8 15 A2. New public sector loans on less favorable terms in 2017-2037 2/ 9 20 17 12 13 13 18 20 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2018-2019 9 20 18 13 13 14 16 14 B2. Export value growth at historical average minus one standard deviation in 2018-2019 3/ 9 14 19 14 14 15 16 15 B3. US dollar GDP deflator at historical average minus one standard deviation in 2018-2019 9 20 18 13 13 14 16 14 B4. Net non-debt creating flows at historical average minus one standard deviation in 2018-2019 4/ 9 20 20 15 15 16 23 16 B5. Combination of B1-B4 using one-half standard deviation shocks 9 13 17 13 13 14 17 14 B6. One-time 30 percent nominal depreciation relative to the baseline in 2018 5/ 9 20 18 13 13 14 16 14 Debt service-to-revenue ratio Baseline 8 16 20 16 16 17 19 18 A. Alternative Scenarios A1. Key variables at their historical averages in 2017-2037 1/ 8 16 18 14 13 13 10 19 A2. New public sector loans on less favorable terms in 2017-2037 2/ 8 16 19 15 16 16 22 26 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2018-2019 8 16 21 17 17 18 21 20 B2. Export value growth at historical average minus one standard deviation in 2018-2019 3/ 8 16 19 15 15 16 18 18 B3. US dollar GDP deflator at historical average minus one standard deviation in 2018-2019 8 17 20 16 16 17 20 19 B4. Net non-debt creating flows at historical average minus one standard deviation in 2018-2019 4/ 8 16 21 19 19 20 28 21 B5. Combination of B1-B4 using one-half standard deviation shocks 8 16 20 17 17 19 23 20 B6. One-time 30 percent nominal depreciation relative to the baseline in 2018 5/ 8 23 28 22 22 24 28 26 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 12 12 12 12 12 12 12 12 Sources: Dominican authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 12 Table A3. Dominica: Public Sector Debt Sustainability Framework, Baseline Scenario, 2014-37 (In percent of GDP, unless otherwise indicated) Actual Estimate Projections 5/ Standard 5/ 2017-22 2023-37 Average 2014 2015 2016 Deviation 2017 2018 2019 2020 2021 2022 Average 2027 2037 Average Public sector debt 1/ 78.7 75.3 71.7 82.7 87.7 83.3 86.1 87.8 87.1 75.4 58.9 of which: foreign-currency denominated 61.0 58.1 54.7 66.0 71.1 68.1 72.8 75.8 75.7 67.5 56.0 Change in public sector debt -1.4 -3.5 -3.5 11.0 5.0 -4.4 2.8 1.7 -0.7 -2.4 -1.2 Identified debt-creating flows -5.7 -2.9 -5.3 6.4 7.0 -2.3 4.4 4.5 -2.7 -1.9 -2.8 Primary deficit -5.8 -0.9 -5.9 -2.3 4.1 -2.1 2.8 2.7 7.0 5.6 -2.5 2.3 -2.0 -2.8 -1.8 Revenue and grants 36.0 40.1 55.9 55.8 45.4 43.3 36.3 35.8 35.9 35.8 34.7 of which: grants 2.0 2.1 0.9 9.1 8.1 6.2 0.9 0.9 0.9 0.9 0.9 Primary (noninterest) expenditure 30.2 39.2 50.1 53.7 48.3 46.0 43.3 41.3 33.4 33.8 31.9 Automatic debt dynamics 0.2 -2.0 0.6 8.5 4.2 -5.0 -2.5 -1.0 -0.2 0.1 0.1 Contribution from interest rate/growth differential 0.6 0.2 1.7 8.3 4.0 -5.6 -3.0 -1.1 -0.3 0.2 0.1 of which: contribution from average real interest rate 0.8 -0.3 0.9 0.9 1.2 0.9 1.1 1.4 1.4 1.3 1.0 of which: contribution from real GDP growth -0.1 0.5 0.8 7.3 2.8 -6.5 -4.1 -2.5 -1.6 -1.1 -0.9 Contribution from real exchange rate depreciation -0.5 -2.2 -1.2 0.2 0.2 0.6 0.4 0.0 0.1 ... ... Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual, including asset changes 4.2 -0.5 1.8 4.6 -2.0 -2.1 -1.7 -2.8 2.0 -0.5 1.6 of which, use of deposits 4.2 -2.5 -2.4 -1.9 -3.0 1.8 -0.6 0.0 Other Sustainability Indicators PV of public sector debt ... ... 60.1 69.9 74.1 70.3 72.8 74.4 74.1 64.3 48.0 of which: foreign-currency denominated ... ... 43.0 53.2 57.5 55.0 59.6 62.3 62.6 56.4 45.2 of which: external ... ... 43.0 53.2 57.5 55.0 59.6 62.3 62.6 56.4 45.2 PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ... Gross financing need 2/ 0.2 5.0 0.3 5.4 11.5 15.0 16.0 14.2 6.5 8.0 7.2 PV of public sector debt-to-revenue and grants ratio (in percent) … … 107.4 125.3 163.0 162.3 200.4 208.0 206.2 179.5 138.5 PV of public sector debt-to-revenue ratio (in percent) … … 109.2 149.8 198.4 189.5 205.5 213.4 211.5 184.1 142.2 of which: external 3/ … … 78.2 113.9 154.0 148.5 168.1 178.8 178.8 161.5 133.8 Debt service-to-revenue and grants ratio (in percent) 4/ 16.8 14.7 11.0 13.4 19.1 28.3 24.7 24.0 25.2 28.0 28.9 Debt service-to-revenue ratio (in percent) 4/ 17.8 15.4 11.2 16.0 23.3 33.1 25.3 24.7 25.8 28.8 29.7 Primary deficit that stabilizes the debt-to-GDP ratio -4.4 2.6 -2.4 -13.1 -2.1 7.1 4.2 3.8 -1.8 0.4 -1.6 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 0.2 -0.6 -1.1 1.0 2.4 -9.3 -3.2 8.0 5.1 2.9 1.9 0.9 1.5 1.5 1.5 Average nominal interest rate on forex debt (in percent) 2.3 2.0 2.3 2.7 1.3 1.6 2.5 2.7 2.8 2.9 3.0 2.6 3.1 3.3 3.2 Average real interest rate on domestic debt (in percent) 2.0 -2.0 1.0 1.9 2.6 3.9 4.6 5.6 5.9 5.5 5.5 5.2 5.7 7.9 6.3 Real exchange rate depreciation (in percent, + indicates depreciation) -0.7 -3.6 -2.0 -0.6 1.7 0.4 ... ... ... ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) 2.4 5.6 3.1 2.5 1.8 0.9 1.6 1.7 1.8 1.9 1.8 1.6 2.0 2.0 2.0 Growth of real primary spending (deflated by GDP deflator, in percent) -3.0 29.1 26.3 5.3 11.9 -2.7 -12.9 3.0 -1.1 -1.8 -17.7 -5.5 1.7 -2.0 1.2 Grant element of new external borrowing (in percent) ... ... ... … … 18.0 18.7 17.5 14.2 16.2 15.0 16.6 15.0 15.9 ... Sources: Dominican authorities; and staff estimates and projections. 1/ Public sector includes Central Government, State Owned Enterprises, and staff estimate of PetroCaribe arrangement. In percent of fiscal year GDP. 2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 3/ Revenues excluding grants. 4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt. 5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 13 Table A4. Dominica: Sensitivity Analysis for Key Indicators of Public Debt, Baseline Scenario, 2017-37 (In percent of GDP) Projections 2017 2018 2019 2020 2021 2022 2027 2037 PV of Debt-to-GDP Ratio Baseline 70 74 70 73 74 74 64 48 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 70 67 63 60 55 56 46 25 A2. Primary balance is unchanged from 2017 70 70 62 56 51 51 41 20 A3. Permanently lower GDP growth 1/ 70 75 72 75 78 78 77 91 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2018-2019 70 72 78 83 87 89 91 98 B2. Primary balance is at historical average minus one standard deviations in 2018-2019 70 73 69 71 73 73 63 46 B3. Combination of B1-B2 using one half standard deviation shocks 70 69 68 73 76 77 75 74 B4. One-time 30 percent real depreciation in 2018 70 98 92 94 95 95 88 80 B5. 10 percent of GDP increase in other debt-creating flows in 2018 70 83 79 81 83 82 73 57 PV of Debt-to-Revenue Ratio 2/ Baseline 125 163 162 200 208 206 179 139 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 125 147 145 164 154 155 127 73 A2. Primary balance is unchanged from 2017 125 153 142 155 143 142 113 57 A3. Permanently lower GDP growth 1/ 125 164 165 206 217 218 215 261 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2018-2019 125 159 177 227 242 247 253 284 B2. Primary balance is at historical average minus one standard deviations in 2018-2019 125 161 159 196 204 202 175 134 B3. Combination of B1-B2 using one half standard deviation shocks 125 153 157 200 212 215 209 214 B4. One-time 30 percent real depreciation in 2018 125 216 213 258 265 264 245 231 B5. 10 percent of GDP increase in other debt-creating flows in 2018 125 183 182 223 231 229 203 164 Debt Service-to-Revenue Ratio 2/ Baseline 13 19 28 25 24 25 28 29 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 13 18 28 23 21 19 26 21 A2. Primary balance is unchanged from 2017 13 19 28 21 19 17 23 18 A3. Permanently lower GDP growth 1/ 13 19 29 25 25 26 32 42 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2018-2019 13 19 30 26 28 29 35 46 B2. Primary balance is at historical average minus one standard deviations in 2018-2019 13 19 28 24 23 25 28 28 B3. Combination of B1-B2 using one half standard deviation shocks 13 19 29 24 23 27 30 37 B4. One-time 30 percent real depreciation in 2018 13 22 36 32 33 35 41 52 B5. 10 percent of GDP increase in other debt-creating flows in 2018 13 19 29 30 25 27 31 32 Sources: Dominican authorities; and staff estimates and projections. 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period. 2/ Revenues are defined inclusive of grants. 14 Figure A2. Dominica: Indicators of Public Debt Under Alternative Scenarios, 2017-37 (Baseline Scenario) Most extreme shock One-time depreciation Baseline Fix Primary Balance Most extreme shock 1/ Historical scenario Public debt benchmark Financially unconstrained with sudden stop in CBI scenario 3/ 4/ Financially unconstrained scenario 3/ 180 160 PV of Debt-to-GDP Ratio 140 120 100 80 60 40 20 0 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 500 PV of Debt-to-Revenue Ratio 2/ 450 400 350 300 250 200 150 100 50 0 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 70 Debt Service-to-Revenue Ratio 2/ 60 50 40 30 20 10 0 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 Sources: Dominican authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2027. 2/ Revenues are defined inclusive of grants. 3/ Customized scenarios. 4/ Financially unconstrained scenario with sudden stop in CBI scenario assumes a complete stop of CBI inflows starting in FY2019/20. 15