Slowest Growth Since 2004 Strikes Dominican Republic’s Economy

First quarter economic growth in the Dominican Republic was the slowest since 2004 as construction spending and internal demand decreased in the Caribbean’s largest economy.

The Dominican Republic’s economy grew 0.3 percent in the first three months of 2013, compared with 3.8 percent a year earlier. Economic expansion in the Caribbean nation, which shares the island of Hispaniola with Haiti, has averaged 6 percent annually since 2004, according to the central bank.

A series of tax changes, which included an increase in the national value-added tax to 18 percent from 16 percent, that went into effect in the first quarter diminished internal demand, the central bank said today on its website. Construction spending fell 2.9 percent in the quarter from a year earlier as the government takes measures to pare a fiscal deficit that reached 8.5 percent of GDP in 2012.

“The slowdown is due to less consumption as a result of the tax reform,” Bernardo Fuentes, an economist at Santo Domingo-based consulting company Economi-K SA, said in a phone interview. “Slower economic activity has been a result of less spending, which has been more aggressive than the central bank expected.”

The central bank cut the benchmark interest rate for the fourth time in 12 months on May 26, lowering it 75 basis points, or 0.75 percentage point, to 4.25 percent as consumer prices dipped. Consumer prices fell 0.06 percent in April and 0.18 percent last month, the first two consecutive declines since 2008.

No Pressures

Policy makers said they didn’t see any inflationary pressures in the next few months, according to a statement on the bank’s website.

“Production has been below its potential capacity and during the January-March quarter the growth rate was below the average from previous years as a result of weakened internal demand,” policy makers said. “Macroeconomic models indicate that, if measures are not taken, production would remain below potential until the end of 2014.”

The Dominican Republic government announced last month that they would free up 20 billion pesos ($480 million) to stimulate growth by lowering reserve requirements and expanding loans to companies and consumers. Funds will help boost lending in the productive sector and facilitate expansion of small and medium-sized businesses, the central bank said in a May 8 statement published on its website.

The Dominican Republic sold $1 billion in global bonds on April 11 to fund financing gaps, according to Economy Minister Temistocles Montas. The country sold $750 million in foreign bonds in 2011.

The peso has fallen 3.9 percent against the U.S. dollar this year, compared with an 8.2 percent decline by the Jamaican dollar.

To contact the reporters on this story: Eric Sabo in Panama City at esabo1@bloomberg.net; Adam Williams in San Jose, Costa Rica at awilliams111@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net; Andre Soliani at asoliani@bloomberg.net

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