Dominican Republic: Government announces contractionary 2021 budget
October 1, 2020
On 1 October, the government submitted to Congress its 2021 budget proposal—the first under new President Luis Abinader. Relative to 2020, the budget contemplates notably higher revenue and a significant contraction in spending, which could weigh on the expected economic recovery next year.
Total spending is seen at DOP 1038 billion (USD 18 billion) next year, down sharply from the DOP 1210 billion figure estimated for 2020 following the second supplementary budget approved in September. This likely reflects a reduced need for stimulus spending as economic activity picks up, and the government’s efforts to rein in a gaping budget deficit. Meanwhile, the government sees revenues totaling DOP 746 billion, up from DOP 610 billion this year, as the likely reactivation of more areas of the economy will bolster public coffers. However, some suggested new taxes, such as those on Christmas pay and payments in foreign currency, have been met with public opposition. As such, revenues could undershoot estimates if these taxes are finally withdrawn and no new measures are put in their place.
The budget should lead to a notable narrowing of the fiscal deficit next year, but it will remain sizable nonetheless. The government will rely on external financing to cover roughly two thirds of the fiscal shortfall. External financing has been forthcoming recently: In mid-September for instance, the government tapped markets for a record USD 3.8 billion (DOP 222 billion). The assumptions underpinning the budget appear realistic: GDP growth is estimated at 5.0%, more conservative than our panelists’ estimate of 5.6%, while inflation is seen averaging 4.0%, slightly above our projections of 3.1%.
Author: Oliver Reynolds, Economist