Dominican Republic WT/TPR/S/105
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. The Dominican Republic is the largest economy in the Central American-Caribbean region;
its per capita GDP is some US$2,400 and its population about 9 million.  Since its last Review, in
1996, the Dominican economy has experienced one of the fastest rates of growth in the world.  This
has been accompanied by macroeconomic stability, increased economic openness, including of theforeign trade regime, and a gradual shift towards private sector participation.  Enabled by prudent
macroeconomic management, high real growth rates were achieved with inflation averaging less than
7% a year, an increase of international reserves, and a relatively stable exchange rate.  In line with the
global economic downturn, the growth rate dropped sh arply, to 2.7%, in 2001 but is expected to pick
up again in 2002.  Activities that contributed particularly to the high growth rates includeconstruction, commerce, and communications, wherea s the share of free-trade zones in GDP has
declined, despite their continuing importance for the generation of export earnings.
2. The Dominican Republic's current account balance posted a deficit with a widening trend
between 1996 and 2000, mainly caused by an increasing deficit in the merchandise trade balance.
The slowdown of economic activity led to a narrowing of the deficit in 2001.  The current accountdeficits have been financed in part by inflows of fo reign direct investment.  In contrast to merchandise
trade, services have shown successive surpluse s, largely due to income from the booming tourism
sector.  Current transfers from Dominicans living abroad have also been rising and contributed to
keeping the current account deficit under control.  The Dominican Republic's main trading and
investment partner is the United States.
3. Per capita income has increased at a real annual average of 4.4% since 1996.  This reflects the
dampening effect on otherwise high GDP growth  of the 1.8% average annual population growth
although this has been falling.  Although all living standards indicators have similarly improved,
about 25% of the Dominican popul ation remains below the poverty line, with resilient pockets of
poverty concentrated mainly in rural areas, urban slums, and western border areas.
(2) M
AIN ECONOMIC DEVELOPMENTS
(i) Output and employment
4. Over the second half of the 1990s, the Dominican Republic has been one of the world's fastest
growing economies, with an average growth ra te of 7.6% between 1996 and 2000 (Table I.1).
Economic activity was sustained by a boom in private investment spending, while the share of
consumption and public expenditure in GDP have remained relatively stable since 1995.  Preliminary
figures for 2001 indicate a sharp deceleration in GDP growth, to 2.7%, as the boost in demand from aprogramme of public investment only partly offset the slowdown in tourism and the free-trade zones,
and in remittances from family members living abroad.  According to Central Bank estimates,
Dominican GDP grew by 4.3% in the first quarter of 2002, indicating a continuation of the recovery
process initiated in the second quarter of 2001.WT/TPR/S/105 Trade Policy Review
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Table I.1
Basic economic indicators, 1995-01
1995 1996 1997 1998 1999 2000 2001
I.     Gross domestic product (GDP)
Current GDP (RDS$ million) 162,283 183,361 214,864 241,910 278,908 321,516 359,560
Real GDP (1970 RDS$ million) 4,579 4,907 5,308 5,702 6,147 6,593.0 6,772.3
Real GDP, rate of growth (%) 4.7 7.2 8.2 7.4 7.8 7.3 2.7
Nominal GDP (US$ million) 11,994 13,335 15,068 15,873 17,347 19,629 21,200
Nominal GDP per capita (US$) 1,571 1,707 1,886 1,942 2,074 2,294 2,422
Sectoral breakdown (% of real GDP)
Agriculture 12.6 12.8 12.3 11.5 11.4 11.2 11.4
Industry 32.5 32.3 32.9 33.5 34.2 34.2 33.4
of which:  free-trade zones 3.7 3.5 3.5 3.5 3.2 3.2 3.0
Services 54.9 54.9 54.8 55.0 54.4 54.7 55.4
Breakdown by expenditure (% of current GDP)
Total consumption 83.9 85.9 85.0 85.6 83.2 85.6 84.8
Private 78.8 80.2 77.3 77.5 75.1 77.1 75.8
Public 5.1 5.7 7.6 8.0 8.1 8.4 9.0
Gross fixed capital formation 19.2 18.7 19.5 23.2 24.0 23.7 23.1
Private 11.0 10.2 12.5 16.3 17.6 19.3 17.9
Public 8.2 8.5 7.1 6.8 6.3 4.4 5.2
Change in stocks 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Exports of goods and services 47.5 46.1 46.8 47.0 46.0 45.6 39.1
of which :  free-trade zones 24.2 23.3 23.9 25.8 25.0 24.3 21.3
Imports of goods and services 50.9 51.0 51.5 56.0 53.5 55.2 47.3
of which :  free-trade zones 16.7 16.1 16.0 17.0 16.3 15.6 13.4
II.   Fiscal indicators (% of GDP)
Revenue 15.7 14.4 16.2 15.9 15.6 16.9 16.6
Expenditure 14.9 14.5 15.3 15.5 16.2 15.0 16.3
Overall balance 0.8 -0.1 0.9 0.4 -0.6 0.9 0.3
III.  Money and prices
Consumer price index (% change) 12.5 5.4 8.3 4.8 6.5 7.7 8.9
M1 (end of period; % change) .. .. 18.7 4.9 21.4 -10.1 24.7
M2 (end of period, % change) .. .. 23.7 15.9 24.0 13.6 29.7
Official exchange rate (average of the year, RD$/US$) 12.87 12.90 14.01 14.70 15.83 16.18 16.69
Real effective exchange rate (1995 = 100) 100 102.3 107.3 106.6 105.6 110.3 116.9
Deposit rate (%, p.a.) 14.9 13.9 13.4 17.7 16.1 17.7 15.6
Lending rate (%, p.a.) 30.7 23.7 21.0 25.6 25.1 26.8 24.3
IV.  Memo items
Population (million) 7.7 7.8 8.0 8.1 8.3 8.5 ..
Gross international reserves (US$ million) 528.5 512.0 555.5 658.9 881.3 818.2 1,340.8
.. Not available.
Source: Dominican Central Bank.
5. According to Central Bank statistics, agriculture contributes just over 11% to GDP, but in
nominal value terms export earnings from agricultural goods, including their related manufactured
products, have decreased significantly since 1996.  Due to falling prices and shrinking quantities,traditional agricultural exports (coffee, sugar, to bacco and cacao,) fell to 3.2% of total exports in
2001.  The services sector, contributing about 55 % to GDP, constitutes th e main pillar of theDominican Republic WT/TPR/S/105
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Dominican economy, with tourism being a major generator of foreign exchange.1  Construction,
commerce, and communications have grown particularly fast and have thus contributed to the
Dominican Republic's rapid growth since 1996.  The share of manufacturing in GDP, despite growth
in absolute terms, has been declining, amountin g to 16% in 2001.  Encouraged by a trade policy
regime that grants extensive advantages to enterprises located in free-trade zones, the manufacturing
sector continues to be characterized by a dual structure:  while the domestically oriented sectorconcentrates on the processing and packaging of agricultural products, enterprises located in free-
trade zones engage mostly in the production of textiles, electronic goods, and jewellery for export
markets (see also Chapter IV).
6. Against the background of high GDP growth rates and a rapidly growing labour force, total
employment increased by more than 26% between 1996 and 2001 (Table I.2).  Employment growthwent hand in hand with a strong increase of female labour market participation.  However,
unemployment fell only slightly during the corresponding period.  The authorities estimated that
broad unemployment stood at 15.6% in 2001 while op en unemployment, which they suggested was a
better indicator for international comparisons, sto od at 6.5%.  While employment shifted away from
agriculture and mining, growth was particularly high in activities such as commerce, transport, andcommunications.  Some 175,000 jobs were located in the free-trade zones in 2001, up from 166,000
in 1995.
7. As noted in the Secretariat Report for the Dominican Republic's previous Review, the
informal sector is large:  Central Bank estimates indicate that it accounts for just over half of total
employment. In 2001, 70% or more of total employment was informal in agriculture, construction,
and transport and communications.
2
Table I.2
Employment indicators, 1996-01
(Per cent and '000)
1996 1997 1998 1999 2000 2001a
Rate of unemployment (%) 16.7 16.0 14.4 13.8 13.9 15.2
Total employment 2,524 2,652 2,889 2,979 3,200 3,177
by sector
Agriculture 502 531 494 523 519 474
M i n i n g 98886 6
Manufacturing 466 474 532 519 541 487
Electricity, gas and water 13 12 15 13 25 29
Construction 168 181 200 214 200 210
Commerce 500 529 628 651 691 686
Hotels, bars and restaurants 121 127 138 143 167 180
Transport and communications 169 186 198 218 196 241
Financial services 35 35 37 38 60 56
Public services 101 101 105 107 134 152
Other services 440 465 536 545 652 656
a Data refer to the first half of 2001.
Source: National Labour Force Survey.
                                                     
1 Services are defined here as including the following subsectors:  commerce;  hotels, bars and
restaurants;  transport;  communications;  finance;  real  estate;  public administration;  and other services.
2 Banco Central de la República Dominicana (2002a), Mercado de Trabajo 2001 , Santo Domingo.WT/TPR/S/105 Trade Policy Review
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8. Trade has an important role in the Dominican Republic's economy.  Data provided by the
Central Bank show that  Dominican merchandise exports amounted to slightly over US$5.3 billion in
2001, whereas merchandise imports reached almost US$8.8 billion.  According to the same source,
the share of exports of goods and services in GDP (in current U.S. dollars) fell from 54.6% in 1996 to
39.4% in 2001, while the equivalent share of imports decreased from 60.4% to 47.6%.
(ii) Fiscal policy
9. The share of government spending in GDP increased from 13.3% in 1995 to 14.2% in 2001.
While public investment showed a decreasing trend, public consumption has been constantly rising
since 1996.  The Government's Budget for 2002, approved in December 2001, provides for expenses
of RD$74 billion.
10. Between 1995 and 2001, the Dominican Republic posted a fiscal deficit only twice, in 1996
and 1999 (Table I.3).  This reflects not only disciplined expenditure but also considerable efforts to
boost public revenue.  Between 1996 and 2001, particularly swift increases were recorded for income
tax revenue, with significant growth also registered for indirect taxes;  customs duty revenue also rose
annually, but only until 2000.  It should be taken into account, however, that quasi-fiscal losses of the
Central Bank averaged about 0.39% of GDP during 1995 to 2001.  These losses arise from several ofthe Bank's functions that fall outside the purview of a traditional central bank and include activities
like developing and funding tourism projects as well as promoting technology and research.  The
authorities indicated that the relocation of these activities to other public institutions was under study.
11. The formulation of fiscal policy is mainly under the responsibility of the Ministry of the
Presidency.  It has been noted in this context that an increase of transparency, especially of the
execution and control of government expenditure, is crucial to enhance fiscal credibility and permit a
comprehensive assessment of the Government's financial position.
3  The authorities noted that, by
law, the budget must be in balance and any deficit should be linked to priority projects financed by
foreign loans.
12. A set of laws to reform fiscal revenue, enacted in 2000, led to significantly reduced reliance
on customs duties for government income and less distortionary resource allocation.  As a result of the
reforms, the share of customs duties in total government revenue decreased from more than 26% in2000 to below 16% in 2001.  The authorities noted that reduced fiscal revenue from lower tariffs has
been compensated by increased internal taxes (ITB IS and ISC, see also Chapter III(2)(v)).  The
foreign exchange fee, which the authorities noted was the main charge affecting the final value of
imports, should be eliminated with the adoption of the Monetary and Financial Law (section (iii)
below).
13. The Customs Reform Law (Law No. 146-00) of 27 December 2000 cut tariff peaks and
substantially reduced MFN tariffs.  The Tax Reform Law (Law No. 147-00) of 27 December 2000
raised the value-added tax (ITBIS) from 8% to 12% and enlarged its base to a number of services that
had previously been subject to specific taxes;  in addition, excise taxes on alcoholic beverages and
cigarettes were increased and income tax brackets were adjusted (see also Chapter III(2)(v)).
14. In September 2001, the Dominican Government issued a US$500 million international bond
in order to expand expenditure for physical and social infrastructure.  The bond resources are to be
disbursed at the rate of around US$50 million per month in order to control the expansionary impact
on the domestic economy.  Transport infrastructure projects have so far been among the main
                                                     
3 IMF (2001), p. 7.Dominican Republic WT/TPR/S/105
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beneficiaries of bond-related resources.  The authorities indicated that, as at July 2002,
US$120 million of bond resources had been spent.
Table I.3
Government finances, 1996-01
(RD$ million)
1996 1997 1998 1999 2000 2001a
Revenue 26,488 34,766 38,566 43,484 51,271 59,856
Current revenue 26,002 34,181 38,390 42,674 47,791 56,408
Taxes 24,031 31,548 36,260 40,197 44,205 53,762
Income tax 4,950 6,556 7,735 9,500 11,126 15,839
Indirect taxes (including on imports) 11,271 15,014 17,410 16,861 17,609 26,558
Customs duties 6,798 8,795 10,140 12,221 13,456 9,336
Non-tax and transfers 1,971 2,637 2,130 2,476 3,586 2,646
Capital revenue 487 585 176 810 3,480 3,448
Expenditure 26,642 32,901 37,487 45,165 48,287 58,863
Current expenditure 14,890 23,545 26,937 31,188 36,657 43,419
Personnel (wages and salaries) 6,452 10,812 12,756 14,206 18,134 21,496
Non-personnel expenditures 672 967 1,452 1,577 1,869 2,076
Supplies 1,841 2,637 2,890 3,238 3,497 4,049
Current contributions 4,697 7,869 8,192 9,917 9,682 12,157
Interest payments 1,002 1,065 1,259 1,391 2,321 2,990
Internal debt 0 20 153 211 577 727
External debt 1,002 1,045 1,105 1,180 1,744 2,263
Other 226 196 389 859 1,153 652
Capital expenditure 11,752 9,355 10,550 13,977 11,630 15,444
Machinery and equipment 500 487 488 805 638 995
Agricultural projects 8,209 5,699 4,544 6,930 6,718 7,625
Capital contributions 2,817 3,047 4,240 4,876 3,461 6,196
Other 228 122 1,272 1,365 813 629
Balance -154 1,866 1,079 -1,681 2,984 992
Financing
Grants 123 125 383 464 436 416
External financing -1,781 -2,208 -1,607 -645 -3,456 3,059
Domestic financing 1,812 218 145 1,862 36 -4,466
a Preliminary data.
Source : Central Bank of the Dominican Republic.
(iii) Monetary and exchange rate policies
15. The institutional framework for the Dominican Republic's monetary policy is laid out in
Article 111 and 112 of the Constitution and the Law Establishing the Central Bank (Law No. 1529) of
9 October 1947, modified by Law No. 6142 of 29 December 1962.  Pursuant to Article 111,
paragraph 3 of the Constitution, the Monetary Board is the foremost institution for the regulation ofthe Dominican Republic's monetary and banking system.  The Monetary Board is composed of the
Governor of the Central Bank, who presides the Board and is designated by the President, the
Minister of Finance, the Minister of Industry and Trade, and seven other members equally designatedWT/TPR/S/105 Trade Policy Review
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by the President.  It has been noted in this cont ext that the effectiveness of the Dominican Republic's
monetary policy may be affected by limited autonomy of the Central Bank.4
16. According to the authorities, price stability is the key objective of the Central Bank, but other
goals are also pursued, including real output growth, low interest rates, and reserve accumulation. In
2001, for example, the Central Bank followed a policy to propitiate low interest rates in order to
stimulate growth and to counterbalance lacking international demand.  In practice, however, the
Central Bank's policy faces a consistency problem of trying to reconcile multiple objectives.  Open-
market operations and the imposition of credit ceilings are the Central Bank's main policy
instruments.
17. Based on an inflation target, the Central bank formulates an annual monetary programme.
Growth and inflation targets are made public through Central Bank publications, and it has becomecustomary to announce them during the annual appearance of the Central Bank Governor before the
American Chamber of Commerce.  After estimating real money demand, a path for the monetary base
is formulated and, based on a target for the change in net international reserves, limits are set on the
growth of net domestic assets.  The annual programme is then recalculated on a quarterly basis, taking
into account seasonality factors.  Mid-course adjustments are made if it appears that the inflationtarget may be exceeded.
18. Against the background of high real growth rates, the Central Bank has been successful in
keeping inflation rates under control.  Between 1996 and 2001, the average increase of the consumer
price index was 6.9%.  According to preliminary information from the Central Bank, the inflation rate
increased to 8.9% in 2001.
5  For the year 2002, the authorities expect an inflation rate of 6.5%.
19. No long-term trend has been evident in the evolution of interest rates since 1996, with
average lending rates ranging between 21% and 27 % (Table I.1).  The spread between deposit and
lending rates in the Dominican Republic is considerable;  as at May 2002 it was 12%.  Factors
contributing to high bank spreads include a relatively small domestic market, limited competition, and
high minimum reserve requirements.
20. The Dominican Republic has three principal foreign exchange markets:  the official, the
commercial bank, and the exchange house markets.  The authorities noted that the official andcommercial rate diverged by only 0.72% betwee n November 2001 and April 2002.  Since the latter
date, the Central Bank has been setting the official exchange rate on a daily basis, equal to a weighted
average of the previous day's commercial rates, which are determined by market forces.  Before that
date, the Central Bank followed a policy of managed floating, which was characterized by deviations
of about 3% between the official and commercial exchange rates.  The official market accounts forabout 10% to 15% of the total volume of foreign exchange transactions.
21. The Dominican Republic does not maintain controls on foreign exchange transactions.  In
1995 banks were authorized to accept deposits and grant loans in foreign currency.  As a result, dollar
bank deposits had increased, to reach 20% of total deposits in 2001.
22. Capital inflows have contributed to keeping de valuations of the Dominican peso against the
U.S. dollar relatively moderate.  At of June 2002, the U.S. dollar exchange rate was RD$17.80.  The
peso's real effective exchange rate has appreciated strongly since 1992, apart from a phase of marked
depreciation in the first half of 1998.  The cumulative appreciation of the peso's real effective
exchange rate since 1990 amounts to 32%.  The authorities consider that this trend raises no concerns
                                                     
4 IMF (2001), p. 8.
5 Dominican Central Bank, press release of 6 January 2002.Dominican Republic WT/TPR/S/105
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in view of the liberalization process, structural ch anges, capital inflows, unification of the exchange
rate and possible increases in labour productivity.
23. A draft of the Monetary and Financial Law was sent by the Executive to the Congress in
July 2002.6  If the Law is adopted, price stability will be an explicit objective of Dominican monetary
policy.  The law will also prohibit the Central Bank from imposing surrender requirements on foreign
exchange transactions and provides for the establishment of a single exchange market.
24. Until November 2001, earnings from traditional agricultural exports and their related
manufactured products were subject to surrender requirements.  Currently, no such requirements exist.
25. Purchases of foreign exchange are subject to a fee, currently at 4.75%;  since its introduction
in January 1991, the fee has varied between 1.75% and 5%.  Exchange houses are exempt from the
foreign exchange fee, allowing them to offer a more  favourable exchange rate.  Plans to eliminate the
fee in October 2001 were postponed.  Revenues from the fee, as well as expenditures paid for out of
these resources, are not included in the approved Government Budget as it is collected by the
Central Bank.  According to the authorities,  total revenue from the fee in 2001 amounted to
US$318 million.  The draft Monetary and Financial Law requires a timetable for reducing the fee to
be set within three months of congressional approval of the law;  it is not explicit on the amount of itsreduction.
(iv) Balance of payments
26. The Dominican Republic's current account has posted a deficit since 1995;  it was particularly
marked in 2000 when it just exceeded US$1 billion (Table I.4).  In 2001, the deficit fell to
US$839 million, equivalent to 3.9% of GDP.  It has been financed largely by current transfers, of
which the majority are remittances, and inflow of foreign investment capital.  In addition, the
Dominican Republic received foreign aid from various bilateral and multilateral donors totallingalmost US$690 million between 1995 and 2001.
27. In current U.S. dollars, merchandise imports  grew at an average of 9.3% between 1996 and
2001, while the average growth rate for merchandise exports was lower, amounting to 5.7%.  National
imports grew more rapidly than imports by free-tr ade zones, whereas national exports fell, even in
absolute terms, largely reflecting the declining export performance of the Dominican Republic'straditional export industries.  While the merchandise trade deficit showed a widening trend between
1996 and 2000, the balance for trade in services increased its surplus over the same period, mainly
due to growing income from tourism.  Due to th e global economic slowdown and the 11 September
events in the United States, tourism income in 2001 dropped for the first time since 1991, to
US$2.7 billion.
28. The Dominican Republic availed itself successfully of the benefits of a series of
comprehensive debt reschedulings and relief in the 1990s.  Its stock of public external debt amounted
to US$4,137 million in 2001, corresponding to 19.5% of GDP.  Creditors comprise multilaterals
(about 32% of total external debt), bilaterals (40%), and commercial banks and private suppliers
(28%).  However, it has been noted that deficiencies remain in the management of public externalborrowing with an increasing proportion falling due in the short to medium term at market
                                                     
6 The draft law is in the Central Bank's online information.  Available at:
http://www.bancentral.gov.do/.WT/TPR/S/105 Trade Policy Review
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conditions.7  The authorities noted that management of the public debt was of growing policy
importance, which has led to the establishment of a commission to study it.
Table I.4
Balance-of-payments, 1996-01
(US$ million)
1996 1997 1998 1999 2000 2001a
I.  Current account -212.7 -163.0 -338.4 -429.2 -1,026.5 -838.9
Trade in goods -1,674.2 -1,995.0 -2,616.8 -2,904.4 -3,741.8 -3,451.3
Exports 4,052.8 4,613.7 4,980.5 5,136.7 5,736.7 5,332.9
National 945.5 1,017.3 880.3 805.2 966.1 794.7
Free-trade zones 3,107.3 3,596.4 4,100.2 4,331.5  4,770.6 4,538.2
Imports -5,727.0 -6,608.7 -7,597.3 -8,041.1 -9,478.5 -8,784.2
National -3,580.7 -4,192.0 -4,896.6 -5,206.8 -6,416.0 -5,937.1
Free-trade zones -2,146.3 -2,416.7 -2,700.7 -2,834.3 -3,062.5 -2,847.1
Services 1,018.6 1,275.3 1,182.0 1,602.2 1,854.3 1,703.8
Receipts 2,140.0 2,446.6 2,501.5 2,850.3  3,227.6 2,998.8
Travel 1,780.5 2,099.4 2,141.7 2,483.3  2,860.2 2,689.8
Others 359.5 347.2 359.8 367.0 367.4 309.0
Payments -1,121.4 -1,171.3 -1,319.5 -1,248.1 -1,373.3 -1,295.0
Transport -648.8 -678.9 -781.0 -772.3 -828.0 ..
Others -472.6 -492.4 -538.5 -475.8 -545.3 ..
Investment income -724.8 -795.4 -890.1 -974.8 -1,041.3 -1,118.9
Receipts 130.3 140.4 168.2 218.3 299.7 271.2
Central Bank 28.8 24.9 26.4 35.3  39.6 38.0
Others 101.5 115.5 141.8 183.0 260.1 233.2
Payments -855.1 -935.8 -1,058.3 -1,193.1 -1,341.0 -1,390.1
Interest -844.8 -925.8 -1,039.4 -1,175.3 -1,321.7 ..
Others -10.3 -10.0 -18.9 -17.8 -19.3 ..
Current transfers (net) 1,167.7 1,352.1 1,986.5 1,847.8 1,902.3 2,027.5
Public 68.8 63.1 140.5 125.0 112.7 ..
Private 1,098.9 1,289.0 1,846.0 1,722.8 1,789.6 ..
II.   Financial account 73.8 451.8 690.2 1,072.7 1,596.6 1,722.9
Direct investment 96.5 420.6 699.8 1,337.8 952.9 1,198.4
Portfolio investment -7.3 -7.5 -21.3 -436.9 264.5 603.7
Long and medium term debt (net) -7.9 -32.4 -0.2 109.6 184.2 163.3
Public and private short-term debt (net) 34.1 37.8 -93.3 147.9 281.2 -72.7
Other investment -41.6 33.3 105.2 -85.7 -86.2 -169.8
III. Errors and omissions 108.8 -193.6 -339.1 -480.5 -618.1 -370.9
IV. Overall balance -30.1 95.2 12.7 163.0 -48.0 513.1
V.  Financing 30.1 -95.2 -12.7 -163.0  48.0 -513.1
Reserve balance (increase -) 15.2 -39.5 -98.2 -193.7  69.5 -518.5
Use of IMF credit -59.5 -62.5 27.4 .. .. ..
Exceptional financing 74.4 6.8 58.1 30.7 -21.5 5.4
.. Not available.
a Preliminary figures.
Source: Dominican Central Bank.
                                                     
7 IMF (2001), p. 27.Dominican Republic WT/TPR/S/105
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29. Gross international reserves increased strongly to US$1,341 million in 2001, mainly due to
the issuance of the US$500 million international bon d to step up investment in social and physical
infrastructure.
30. In addition to exports from free-trade zones and tourism, remittances, mostly from
Dominicans living in the United States, are a crucial source of hard currency for the Dominican
Republic.  Current private transfers increased to US$1,914 million in 2001.
(3) MERCHANDISE TRADE AND INVESTMENT FLOWS
(i) Composition of trade8
31. The Dominican Republic's main export products are manufactured goods produced in the
free-trade zones, agricultural goods and their related manufactures, and ferro-nickel (Table AI.1).
Since the Dominican Republic's last Review in 1996, exports have continued to shift from primarycommodities and their related processed products to manufactured goods processed in free-trade
zones.  Although their contribution to GDP is below 3%, free-trade zones remain crucial for the
Dominican Republic's export performance, generating more than 85% of commodity export earnings.
9
Although no disaggregated data were available, based on the number of enterprises established infree-trade zones, their exports appear to be dominated by clothing and electronic products.
32. Imports are dominated by a range of manufactured goods and agricultural and petroleum
products (Table AI.2).  Agriculture imports are led by bulk commodities, in particular corn and wheat,
and dairy products.
(ii) Direction of trade
33. The Dominican Republic's main export market by far is the United States, which absorbed
almost 52% of its "national" merchandise exports in 2000 (Table AI.3).
10  The authorities noted that,
including also exports from free-trade zones, about 87% of Dominican exports were destined to theU.S. market in 2001;  this implies that about 95% of free-trade zone exports were supplied to that
market.
34. The Dominican Republic's trading partners have benefited from a rapidly growing market and
a more open foreign trade regime;  most have seen their exports to the Dominican Republic rise in
recent years (Table AI.4).  The United States is by far the Dominican Republic's largest supplier,providing 52% of its imports.  As main suppliers of petroleum, Venezuela and Mexico are particularly
important on the import side, supplying 10.7% and 5.4% of Dominican imports respectively.  The
shares of the Dominican Republic's imports by trading partner did not show major changes between
1998 and 2001.
                                                     
8 The discussion in this and the following section reflects trade data provided by the Dominican
authorities in the context of this Review rather than on statistics from the UN COMTRADE database, as is thepractice in most Secretariat's reports for Trade Policy Reviews.  For the Dominican Republic, the latter containsinformation only up to 1997.  Furthermore, the description of the Dominican Republic's trade flows focuses on"national" exports and imports, as no detailed breakdown  for free-trade zone trade was available, either by
product or by trading partner.
9 According to the information provided by the Ce ntral Bank, only labour costs are included for the
calculation of the free-trade zones' value-added.  Thus, the actual contribution of free-trade zones to GDP, aswell as GDP itself, are likely to  be higher than recorded.
10 The analysis is based on values for 2000 because the destination is declared as "unknown" for a large
share of exports in 2001.WT/TPR/S/105 Trade Policy Review
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35. Trade under the two free-trade agreements the Dominican Republic has concluded, with the
Central American Common Market and with CARI COM, accounts only for a combined share of just
over 2% of exports and less than 2% of imports.11
(iii) Foreign direct investment
36. Since the last Review of the Dominican Republic in 1996, foreign investment has continued
to play a crucial role in promoting growth and fo reign trade.  According to Central Bank data, the
accumulated inflow of foreign investment capital into the Dominican Republic between 1995 and
2001 amounted to US$4.7 billion.  Apart from enterprises located in free-trade zones, foreign
investment is concentrated in (percentage of total between parentheses):  electricity (30), commerce
(20), communications (17) and tourism (22).  Th e main sources of FDI in the Dominican Republic
over 1995-01 were:  the United States (32), European Union (38) and Canada (12).
37. The Dominican Republic's regime of free-trade zones (FTZ) appears to have strongly
encouraged foreign direct investment (Chapters III (3)(iv) and IV(4)(ii)).  According to the National
Council for Free Trade Zones, of the 512 enterprises operating in Dominican FTZs in 2001, 344
enterprises were owned by foreigners12;  262 enterprises came from the United States, 24 from Korea,
and 7 from Chinese Taipei.  In 2001, total accumulated investment of enterprises located inDominican FTZs amounted to more than US$1.3 billion.  The main investor was the United States,
with US$728 million, followed by the Dominican Republic with US$376 million. Production in
Dominican FTZs is concentrated in textiles, but other goods such as electronic products and jewellery
have increased their share in exports.
38. The enactment of the Foreign Investment Law in 1995 abolished virtually all exceptions to
national treatment, while new legislation on telecommunications and electricity opened up these
subsectors to foreign capital and private competition.  In addition, the Government's privatizationpolicy, initiated by the Public Enterprise Reform Law of 1997, significantly increased the
participation of foreign enterprises in sectors such as electricity generation and distribution, mining,
and air transport (Chapter III(4)(iii)).
(4) O
UTLOOK
39. For 2002, the Central Bank expects a GDP growth rate of around 4% and an inflation rate of
about 6%.  In particular, the timing and pace of recovery in tourism and free-trade zones is crucial to
the short-term outlook of the Dominican economy.  Available data for the first quarter of 2002
indicate a growth rate of 4.3% over the first quarter of 2001 with particularly high rates for
communications, local manufacturing, and construction.
                                                     
11 The FTA with CARICOM does not govern trade wi th Haiti, which joined CARICOM only after
negotiations between the Dominican Republic and CARICOM's other members had already begun.
12 Consejo Nacional de Zonas Francas de Exportación (2002).