By Tom Cleveland, editor for http://www.forextraders.com
In this modern era of globalization, domestic economies are interconnected more than ever to the economic tendencies of their respective trading partners. The financial impacts related to suddenly shifting capital flows and widely fluctuating exchange rates can have detrimental effects on a domestic economy except where a proactive central bank steps in to act as a financial “buffer”, so to speak, absorbing a variety of shocks before they disrupt a local economy.
Such has been the case for the Dominican Republic, which depends heavily on exports to the United States and its other trading partners. The Dominican Republic has a long history of being an exporter of sugar, coffee, and tobacco, but recently the service sector has surpassed agriculture, becoming the nation's largest employer, due to growth in telecommunications, tourism, and free trade zones. The economy remains highly dependent upon the United States for its export trade, which accounts for nearly 60% of this trade. Foreign exchange revenue from the U.S. is equivalent to 50% of exports and 75% of tourism receipts.
Although the stability of the United States economic recovery has been questionable over the past few years, GDP growth in the Dominican Republic has averaged more than 5% for 2009 through 2011, nearly 1% higher than other Latin American economies over the same period. This dynamic growth has been offset by a growing trade imbalance since the country imports nearly $10 billion more than it exports. Public debt has grown to 36% of GDP, as a result, and the Dominican Peso (“DOP”) has also weakened versus the U.S. Dollar from 33 to 38.5 Pesos since 2007.
Managing the domestic economy within a backdrop of global uncertainty is the responsibility of the central bank of the Dominican Republic. The bank was formed in 1947, and, like many other central banking business models, it serves as a decentralized and independent organization. Its stated mission is “to guarantee the stability of prices, the appropriate regulation of the financial system and the suitable operation of the payment systems, acting as the issuer and executor of the monetary and exchange, in agreement with the duties conferred this institution by the constitution and the law.”
The main functions of the bank are as follows:
· To execute monetary and exchange policies in accordance with local law;
· To issue bills and coins;
· To offset any inflationary tendency through prudent management of interest rates;
· To efficiently manage the country’s international foreign exchange reserves;
· To supervise the clearing and settlement of local payment systems;
· To prepare statistics and complete various analyses related to the local economy;
· To regulate the national financial system by the established guarantees and limitations;
· To promote the liquidity and solvency of the Nation’s banking system;
· To undertake foreign exchange operations and create conditions necessary to maintain the external value and convertibility of the Nation’s currency.
With positive growth demographics, demand pressure typically results in price inflation. The central bank has moved aggressively to curb these tendencies by increasing interest rates in the past. These rates have declined to 6.75%, and inflation has declined from 8.6% in 2009 to just over 6% in 2011. The current target is 5.5%. The bank has also been active in the foreign exchange market to help strengthen the purchasing power of the Peso on an international basis.
Growth prospects in 2012, according to the IMF, are forecasted to be 4.5%. Actions by the central bank will surely ensure that this goal is reached.
Dominican Today welcomes Mr. Tom Cleveland as an Op-Ed contributor
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