Over the past 25 years, the Dominican Republic (DR) has experienced a remarkable period of robust economic growth. The economy expanded by an average of 5.3 percent in 2000–19, driven primarily by capital accumulation and private consumption. The economy recovered strongly in 2021, with GDP rebounding by 12.3 percent, supported by a solid policy response to COVID-19, including fiscal, macroprudential and supervisory policies, and monetary easing. Tourism, remittances, foreign direct investment, mining revenues, free-trade zones, and telecommunications have helped make the DR the second fastest growing economy in Latin America and the Caribbean over the last decade, and as of 2019 the country was on track to realize its ambition of achieving high-income status by 2030.
The robust growth performance continues in 2022, with GDP reaching in the first half of the year a 5.6% y/y growth. However, income growth has been diluted by price inflation, which reached 9.4 percent in July 2022, outside the Central Bank’s target range of 4±1 percent. This has resulted in a fiscal deficit expansion given unexpected subsidies needed to counteract the rise in prices. Nevertheless, the war in Ukraine poses important immediate risks, primarily, through two main channels: (1) further rises in prices for goods and services (DR is a net importer of oil, natural gas, soybeans, sorghum, wheat, and corn); and (2) a reduction of tourists’ arrivals.
Meanwhile, the implementation of structural reforms on areas such as energy, water, and public-private partnerships, coupled with efforts to increase the quality of human capital and attract FDI to higher value-added industries will become increasingly important to sustain growth potential in the medium-term. Over the past decade, economic growth in the DR has substantially reduced poverty rates and supported the expansion of the middle class. However, disparities in access to economic opportunities and public services remain deep. Poverty rates are persistently high in rural areas, and women face disproportionate challenges nationwide.
Despite an increase in social expenditures to mitigate the impact of the pandemic crisis, official poverty estimates increased by 2.4 percentage points to 23.4 percent in 2020. The poverty rate kept its increasing trend during 2021, reaching 23.9 percent, representing over a 300 thousand people falling into poverty since the pandemic crisis began. The crisis has also prompted food insecurity in one in every three households by the end of 2021. This rate is almost 10 percentage points higher than the levels of food insecurity observed before the pandemic. This is explained by: (i) the informalization of the labor market, which is correlated with lower productivity and wages; (ii) higher inflation that has eroded household real income; and (iii) the downscaling of the emergency social assistance that was launched during the peak of the pandemic crisis.
The sluggish pace in poverty reduction could be partially explained by the incomplete recovery of economic activity and key labor indicators. In 2022 Q2, the employment rate (59.9 percent) remained 1.1 percentage points below pre-pandemic levels and informality (57.9 percent) 4 percentage points above. Preexistent gaps on labor participation and employment rates between women and men has widened after the pandemic crisis and little progress has been evidenced, half of women on working age are economically inactive, compared with 23 percent of their male counterparts.
Inflation has also emerged as a challenge in 2022 (reaching 9.4 percent in July) as indirect consequence of the war in Ukraine and the disruption of global supply chains. The cost of the family basket increased 23.2 percent in July compared to pre-pandemic levels, affecting the income growth of the poorest quintiles.
While policymakers are focused on the urgent challenges posed by the pandemic, the DR remains at high risk from hurricanes, flooding, and other extreme weather events. Access to adequate water and sanitation services has improved since the early 2000s, but the DR’s exposure to climate change threatens these gains. Climate change mitigation and adaptation efforts must be complemented by improved management of natural resources, especially the coastal and marine assets on which so much of the DR’s economy depends.
As the pandemic recedes, investment in human capital will be vital to the DR’s continued growth and development. The DR has made great strides in expanding access to education and healthcare, but the uneven quality of these services remains a major obstacle to broad-based economic growth and human capital development. To restart employment-intensive, pro-poor growth and enhance its economic competitiveness, the DR must strengthen productive linkages between domestic and exporting firms, reduce the administrative costs of the bureaucracy, improve the reliability of the electricity supply, and expand access to credit. How swiftly and effectively the government embraces these reforms will largely determine the pandemic’s long-term impact on poverty, employment, and economic growth.
Last Updated: Oct 11, 2022