Dominican Republic: Half way back

The Economist

Last August, when Leonel Fernández took office as the Dominican Republic's president, he faced an unenviable task. Four years of profligacy under his predecessor, Hipólito Mejía, including a dubious bank bail-out, had doubled the public debt and wrecked what was one of the Caribbean's success stories of the 1990s. The currency collapsed, inflation surged and capital fled. Now Mr Fernández, who in a first term from 1996-2000 presided over the economy's miracle growth, has laid a base for recovery.

His first job was to restore confidence in the currency by pushing through an austerity programme involving cuts in public-sector jobs, tax rises and tighter monetary policy. That was enough to secure a $665m loan from the IMF in February. This month, the government completed the restructuring of two sovereign bonds with a face value of $1.1 billion. In contrast to Argentina's rough treatment of its bondholders, Mr Fernández's approach was “market-friendly”; creditors holding 93% of the bonds signed up to the deal, which extends the term of the bonds by five years.

As a result of these measures, capital flight has abated and inflation has fallen. In the first quarter of this year, the economy grew by 4% compared with the same period last year.

The next tasks for Mr Fernández if he is to remain popular are to tackle corruption and poverty. Stop-start investigations into past scandals have tested public patience. But the president needs the support of Mr Mejía's party in Congress, and is treading cautiously. According to the World Bank, an extra 1.3m people (out of a total of 8.7m) slipped below the poverty line in 2002-04. The problem is that the formula which delivered rapid growth in the 1990s may not be repeatable.

The Dominican Republic has joined the Central American Free Trade Agreement. But even if this is approved by the United States' Congress, its clothing exports face difficulties. Its share of America's market has fallen as China's has surged. One in ten of the workers in the free-trade zones where the clothing factories are based has been laid off since December. The tourism industry is flagging too. Mr Fernández has nursed his country out of intensive care, but has work to do to restore its former vigour.

Source: The Economist