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    RNM/OECS COUNTRY STUDIESTO INFORM TRADE NEGOTIATIONS:

    DOMINICA

    Prepared by

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    TABLE OF CONTENTS

    INTRODUCTION..............................................................................................................................1RECENT FISCAL PERFORMANCE................................................................................................. .2

    Structure of Revenues................................ ........................................................ .............................4Recent Tax Changes ................................................. ....................................................... ...........6

    MEDIUM TERM ECONOMIC PROSPECTS......................................................................................6Fiscal Prospects.............................................................................. ................................................7Policy Objectives................................................................... ....................................................... 10

    SECTORAL STRATEGIES.......................................................................... .................................... 10

    The Social Sectors......... ........................................................ ....................................................... 10The Environment ................................................ ........................................................ ..................11Agriculture Sector ........................................................ ....................................................... .........13

    Contribution and Performance..................................................... .............................................. 13Policies and Prospects...................................................................................................... .........17The Banana Industry............................................................................. .................................... 17Non-Traditional Production.. ....................................................... .............................................. 18

    Manufacturing Sector...................................................................... .............................................. 18

    Contribution and Performance..................................................... .............................................. 18Constraints to the Development of Manufacturing ...... ............................ ....................................21Policies and Prospects...................................................................................................... .........24

    Tourism.......................................................................................................................................24Constraints to Tourism........................... ........................................................ ...........................25

    Construction.................................................................................................................................25Recent Economic Developments.................................................. .............................................. 25

    Transportation .................................................... ........................................................ ..................26Opportunities and Constraints................................................................ .................................... 26

    Communications...................... ....................................................... .............................................. 26Recent Performance........................................ ........................................................ ..................27

    Financial Services..................................................................................... .................................... 28Domestic Financial Services 28

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    DOMINICA

    INTRODUCTION

    The Economy of Dominica is heavily dependent on the banana industry and is likely to be thecountry most affected by the developments in the banana regime. Although Dominica has

    reduced its dependence on agriculture in recent years, it still retains pride of place in theeconomy accounting for approximately 19% of GDP in 1998. This is an 11 percentage points

    reduction from the 30% contribution in 1986. Of the 19% of GDP contributed by the

    Agricultural sector in 1998, 46% of this contribution is attributable to banana production. Inaddition banana exports account for 60% of the merchandise exports of the country. Such a

    heavy dependence on this crop means that the international developments in the banana regimetake on critical importance. The next largest sector is Government services which contributes

    17%. The Distributive sector and Banks/Insurance round out the top four contributors - eachcontributing 12% of GDP. Transport and communications each account for approximately 10%of GDP while the contribution of the manufacturing sector averages about 7% of GDP. The

    tourism sector is a small but growing sector that contributes approximately 3% of GDP.

    The performance of the economy follows a similar pattern to the rest of the OECS countries withgrowth rates in excess of 6% being recorded during the period 1986 to 1990 and then a period ofslower growth during the 1990's. Although the growth rates in Dominica did not fall off until

    1991, for comparability with the other OECS countries three sub-periods are used, 1986-89 - aperiod of high growth, 1990-1994 - the low growth period and 1995-1999 - a period of variable

    growth as the economy adjusts to a variety of external shocks and natural disasters.

    The high growth period, which began in the early 1980's continued into the later years of the

    decade. Growth rates in Dominica exceed 6% every year except for 1989 when the economywas beset by hurricane and the economy recorded a decline of -1.12%. The average growth rate

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    economy. The deficit on the current account was financed by significant inflows on the capitaland financial account. In 1989 capital transfers amounted to $36m, and direct investment $46m,

    in a capital and financial account balance of $123m. Direct investment inflows were strongthroughout the period accounting for an average of 9% of GDP.

    The period after 1990 was marked by a period of slow growth consequent on the uncertainty ofthe banana regime. Moreover, as the British Pound fell out of the European Union exchange rate

    mechanism in the fall of 1991, the EC dollar value of the Green Market price of Bananastumbled and the levels achieved in 1991 have not been attained since that time. Thus in 1990 the

    economy recorded a growth rate of 6.3% following the decline of 1.2% in 1989. This was

    partially related to the recovery after the hurricane and since then real growth rates haveremained below 3% until the 3.45% achieved in 1998. Growth is estimated at around 1% in

    1999. The growth of the economy has largely tracked the performance of the agricultural sectorwith some offsetting changes in tourism construction and communications. The contribution of

    the tourism sector grew from 1.6% in 1990 to 2.6% in 1998, while that of communications grewfrom 6.4% to10.1% over the same period. The manufacturing sector has experienced erraticgrowth alternating between high growth and significant decline. For example, the sector grew by

    10.1% and 6% in 1988 and 1992 respectively but declined by 9.6% and 10% respectively in

    1994 and 1997.

    During this period favourable inflows on the capital and financial account resulted in a deficit onthe current account of the balance of payments. Foreign Direct Investment (FDI) averaged 9%

    of GDP in the period 1990-94 and 11% of GDP in the period 1995-98. Capital transfersaveraged about 6% of GDP during this period and government undertook foreign borrowing to

    finance the PSIP. All of these precipitated a rise in imports since almost all capital goods andconstruction material have to be imported. Even though the current account deteriorated duringthe period on account of the rise in imports and the poor performance of merchandise, the

    balance of payments recorded an overall surplus in each year except 1994 when a deficit ofapproximately 2% of GDP was recorded. This was partly due to export receipts from tourism

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    Fiscal performance was relatively strong during the period 1986 to 1989. The current accountbalance improved from a deficit of 2.3% of GDP to a surplus of 6.9% of GDP by 1989; but this

    gain declined to 3.1% of GDP by 1990 following devastation of the economy by two majorhurricanes in 1989 and 1990. Thereafter the current account declined steadily to a deficit of

    3.7% of GDP by 1994 following a trend of negative growth in the banana industry. At the end of1998 the current account was again positive at 1.4% of GDP as growth strengthened in themanufacturing sector (soap exports), tourism and non-tourism services sectors reflecting

    significant gains in governments diversification programme.

    Although the overall fiscal balance declined between 1993 and 1998, grants and concessional

    loans also declined, thus necessitating i