Dominican Republic

Foreign Debt

The Dominican Republic's foreign debt had grown to nearly US$4 billion by 1989, about double the 1980 total. The country's debt skyrocketed during the 1970s, barely more than a decade after Trujillo had paid it off, an event he had proclaimed as the "financial emancipation of the nation." Subsequent indebtedness was incurred in the context of a tenfold increase in the oil import bill, increasingly unfavorable terms of trade, and volatile sugar prices. Persistent balance-of-payment shortfalls, relatively easy access to loans from foreign commercial banks, and the demand for funds occasioned by ambitious public sector projects rapidly indebted the country; from 1975 to 1980, the national debt surged from US$700 million to nearly US$2 billion. Further deterioration in the country's terms of trade, unprecedentedly high interest rates, and international recession increased the country's foreign debt in the 1980s, even in the absence of new commercial lending.

In 1988, 63 percent of the public sector external debt was owed to public institutions, including 20 percent to multilateral organizations and 43 percent to bilateral creditors; 23 percent was owed to 90 commercial banks, with the remainder classified under other categories, such as oil credits owed to Mexico and Venezuela. The structure of the country's debt, which remained rather stable during the decade, differed from the debt structure of Latin America as a whole, in that so much more of the region's foreign liabilities (57 percent) were commercial. From 1983 to 1988, Dominican debt as a percentage of GDP grew from 48 percent to 94 percent, signaling that debt was swiftly outpacing economic output. As a result of frequent rescheduling, however, debt repayments as a percentage of total exports declined from 23 percent in 1983 to 15 percent in 1988.

The BCRD, the central bank, took an activist approach to managing foreign debt. The major tool was rescheduling. Beginning with a rescheduling of US$500 million of its commercial debt in 1983, the country embarked on a series of debt negotiations that entailed a Paris Club (see Glossary) rescheduling agreement of US$270 million in 1985, another commercial bank deal of US$787 million in 1986, and a rollover of Venezuelan and Mexican oil debt in 1987. Although debt rescheduling eased the short-term debt burden and improved the government's cash flow, it did not establish long-term solvency. In an effort to reduce its actual debt, the government experimented with debt-equity swaps, a process by which investors purchased the country's United Statesdenominated debt at a discounted level in local currency, which was then applied to investments in the republic. In 1988 the Debt Conversion Unit of the BCRD's Monetary Board approved the concept of debt-equity conversions, and in 1989 the first such swap converted US$9 million in debt into a free-zone investment at a discount of 35 percent. Investors provided the BCRD with more than US$650 million in other proposals for investments in tourism, free zones, agro-industries, utilities, and mining. To restrain expansion of the money supply, the BCRD consented to a maximum of US$50 million in conversions annually. Even under the best circumstances, however, debt-equity swaps would only partially reduce the debt. As of late 1989, the government and its creditors had not agreed on a comprehensive debt strategy.

Data as of December 1989