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Dominican Republic

1.

General trends

Economic growth in the Dominican Republic was again satisfactory in 2002, but it took place in a context of serious macroeconomic instability that worsened in the first half of 2003, with rising inflation, currency depreciation, losses in international reserves and a banking crisis. The expansionary fiscal policy applied at the beginning of the year to compensate for the weakness of external demand had to be abandoned in later months because of macroeconomic imbalances.

In contrast with the modest results achieved in the rest of Latin America and the Caribbean, activity in the Dominican Republic increased by 4.3% in 2002 and per capita GDP rose once again, despite the weakness of external demand on account of the poor performance of the United States economy. The central factor behind this development was domestic demand, which was boosted by increases in public spending and private consumption; the latter, in turn, was buoyed by a larger inflow of family remittances from abroad, which amounted to over 11% of private consumption. For the second consecutive year, increased public spending compensated for the lack of dynamism in exports, and was financed in part with resources still available from the sovereign bonds issued in 2001. In view of the worrying signs of macroeconomic instability, the authorities curbed spending and tightened monetary restrictions. Moreover, at the end of the year the government and the business sector, in an effort to support stabilization, signed a Pact for Stability and Economic Development that involved extending fiscal and monetary austerity into 2003. The most significant adjustments were undoubtedly in the areas of foreign exchange and interest rates for local-currency transactions. The increased perception of uncertainty and

risk accelerated the dollarization of loans and deposits, thereby increasing exposure to foreign-currency risk. Employment expanded in 2002, but real wages were down slightly and inflation more than doubled (10.5%). The central government accounts closed the year with a small surplus, and the balance-of-payments currentaccount deficit rose marginally. Net capital inflows from abroad slackened and there was a significant loss of international reserves, owing to the currency stabilization efforts and the outflow of private capital. In the first half of 2003 the export sector continued the recovery it had begun in the final months of 2002 with regard to both exports from the free zones and tourist arrivals, due in part to the substantial currency depreciation. The economic picture became more complicated, however, when a crisis broke out in the banking system, requiring administrative intervention in a major bank and the allocation of financial resources in an amount that could reach 15% of GDP, while exchange-rate volatility became more acute. Interest rates increased, the inflation rate went up and further capital flight appears to have taken place. Accordingly, the economic uncertainty triggered by the war in Iraq in the first quarter grew stronger in the second quarter.

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Figure 1 DOMINICAN REPUBLIC: MAIN ECONOMIC INDICATORS

CRECIMIENTO GROWTH
12 10 Tasa anual de variacin Annual growth rate 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 28 24

PRECIOS PRICES

Annual percentagesaa/ Porcentajes anuales a Annual percentages

20 16 12 8 4 0 1994 1995 1996 1997 1998 1999 2000 2001 2002

Gross domestic product Producto interno bruto

Ingreso nacional bruto Gross national income

Precios al consumidor Consumer prices cambio respecto al against the dollar Exchange rate dlar Tipo de

CUENTA CORRIENTE CURRENT ACCOUNT

0 3

CENTRAL GOVERNMENT GOBIERNO CENTRAL

-2 Percentages delGDP Porcentajes of PIB Percentages delGDP Porcentajes of PIB 1994 1995 1996 1997 1998 1999 2000 2001 2002

-4

-6

-8

-10

-1 1994 1995 1996 1997 1998 1999 2000 2001 2002

Current account balance Saldo en cuenta corriente de la balanza de pagos Balance of goods and services Balanza de bienes y servicios

Resultado primario Primary balance

b Financial balance Resultado financiero Overall balance

Source: ECLAC, on the basis of official figures. a December-to-December variation. b Includes interest.

In the face of financial and institutional fragility, the authorities redoubled their efforts to stabilize the economy by applying significant monetary restrictions and fiscal austerity measures. Negotiations with international financial institutions (the International Monetary Fund, the World Bank and the Inter-American Development Bank) to obtain about US$ 1.5 billion to alleviate the crisis culminated at the end of June with the submission of a letter of intent to the International Monetary Fund, linked to a two-year stand-by

arrangement. The announcement that the country would soon enter into such an arrangement, which would impose greater fiscal and monetary discipline, in addition to banking supervision and regulation, helped to stabilize the foreign-exchange market and reduce uncertainty. The severity of the austerity measures, however, makes it unlikely that the country will meet the goal, established early in the year, of increasing GDP growth from 2.5% to 3%. The annual inflation target, meanwhile, was already overshot in the first half of the year.

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2.

Economic policy
view of higher receipts from internal and external trade and specific taxes, but income tax receipts, which account for 26% of the governments tax revenue, remained virtually stagnant. Public expenditure rose by 8.8% in real terms as a result of increases in both operating costs and investment. Payroll expenses grew by 10.2% as new employees were hired, partly because of the establishment of three new secretariats of State. In addition, adjustments were made to real wages, in particular for lower-income employees. The elimination of the subsidy for liquefied petroleum gas and the focusing of the electricity consumption subsidy on low-income families in mid2001 brought about a welcome reduction in current contributions to decentralized institutions in 2002. In contrast, there was an increase in costs associated with public debt, namely the payment of internal liabilities (especially bank loans and amounts owed to suppliers) and external liabilities stemming from the 2001 sovereign bond issue. In early 2003 the government launched a second sovereign bond issue for US$ 600 million, which it used to pay short-term domestic debt and to build up international reserves. In the first half of the year capital expenditure rose by more than 50% in nominal terms, but the annual average increase was 16.9% in real terms, owing to cutbacks in the second half. The year-end balance of public and publicly guaranteed external debt was US$ 4.459 billion, which was US$ 282 million more than the year before, while the debt ratio was 21% of GDP, or one and a half percentage points higher than in 2001. Larger increases were observed in official liabilities, both with governments and with multilateral institutions. In mid-2002 the Congress took up the tax reform proposal, which includes fiscal changes such as corrections to the tax on the transfer of services deducted by companies, the reduction of the inheritance tax from 7% to 3%, an extension of the period of fiscal amnesty for individuals and the exemption of housing loans from tax. In line with the commitments made in the Pact concluded with the business sector, however, the government postponed the fiscal reform proposal, introduced an austere spending policy and agreed to produce a fiscal surplus and to keep a tight rein on public borrowing. The fiscal reform proposal was taken up again in the first few months of 2003, but by mid-year had not

Economic policy went through two clearly differentiated stages in 2002. At the beginning of the year public expenditure was increased to compensate for the drop in external demand. However, as external demand failed to recover to the extent hoped, income from abroad remained low and oil became more expensive, signs of unsustainable macroeconomic imbalances emerged and prompted the authorities to switch from an expansionary monetary policy to a restrictive one, with a consequent hike in interest rates. The authorities also modified their exchange-rate policy, substituting indirect measures for direct intervention in the foreign-exchange market. Moreover, an adjustment of electricity and fuel prices had a considerable impact on the rate of consumer price increases. The adoption of the Monetary and Financial Act and the introduction of a pension fund system represented significant progress in modernizing the financial sector. In the first half of 2003, in the face of exchangerate volatility and the banking crisis, the authorities intensified the stabilization measures by placing more severe restrictions on monetary liquidity. They also increased fiscal austerity in the context of the negotiations with the International Monetary Fund for a US$ 1.5-billion stand-by arrangement to shore up the banking system, which the crisis in one of the countrys major banks had seriously damaged. a) Fiscal policy The most striking aspect of fiscal policy was the considerable real increase in public spending in the first half of the year, financed in part with resources still available from the sovereign bond issue of 2001. In any case, the central governments financial accounts were practically balanced at the end of the year, while the consolidated public sector showed a deficit of nearly 1.5% of GDP, compared to 2% the previous year. The fiscal reform proposal submitted by the executive branch to the Congress, which included various tax adjustments, will be reconsidered in the context of the Pact for Stability and Economic Development. In real terms, central government receipts rose by 6.6% thanks to the expansion of domestic demand and the reforms introduced the previous year. Tax revenues were up by 5.1% owing to the increase in indirect tax receipts. The amount contributed by the tax on the transfer of goods and services increased by 11.2%, in

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Table 1 DOMINICAN REPUBLIC: MAIN ECONOMIC INDICATORS 1994 1995 1996 1997
b

1998

1999

2000

2001

2002a

Annual growth rates Gross domestic product Per capita gross domestic product Gross national income Gross domestic product by sector Agriculture Mining Manufacturing Electricity, gas and water Construction Wholesale and retail commerce, restaurants and hotels Transport, storage and communciations Financial establishments, insurance, real estate and business services Community, social and personal services 4.7 2.9 6.8 -1.8 88.2 3.5 3.8 6.6 6.8 6.1 0.6 2.9 4.3 2.5 3.4 5.2 9.4 1.3 -4.1 6.9 6.6 10.1 1.2 2.0 2.5 -0.5 2.7 2.7 9.8 5.5 7.2 5.3 8.6 9.2 2.4 3.1 10.3 13.4 10.1 10.0 2.1 5.1 8.9 10.7 8.8 7.5 7.3 10.3

8.2 6.3 10.5 3.3 3.1 7.5 10.1 17.1 12.4 11.7 2.8 3.8 8.1 1.3 8.5 18.9 11.6 14.9

7.4 5.6 11.8 1.1 -15.9 5.7 13.9 19.6 9.4 13.6 3.0 4.6 9.3 6.6 9.4 29.0 11.3 21.4

8.0 6.2 6.6 8.7 -1.5 6.0 8.1 17.7 8.6 10.1 3.2 3.7 5.8 3.5 5.9 11.9 7.7 6.2

7.3 5.5 6.5 5.6 13.3 7.5 6.9 5.6 10.7 11.3 2.8 4.3 10.5 -1.0 11.0 7.4 9.3 13.4

3.0 1.3 4.8 8.1 -15.2 -1.3 18.4 0.5 -1.2 10.5 2.5 6.2 3.2 14.9 2.7 2.7 -6.8 -4.6

4.3 2.6 4.3 2.5 -3.2 4.0 7.8 3.2 3.8 10.3 2.6 3.8 5.6 8.5 5.5 2.2 -2.0 0.4

Gross domestic product by type of expenditure Consumption 7.9 General government 7.2 Private 8.0 Gross domestic investment -10.3 Exports of goods and services 5.2 Imports of goods and services 4.1

Percentages of GDP Investment and saving Gross domestic investment b Gross domestic investment c d National saving c External saving c 18.4 21.4 18.7 2.7 18.1 19.5 18.0 1.5 18.2 19.0 17.4 1.6 20.0 19.8 18.7 1.1 24.0 23.4 21.3 2.1 24.9 24.2 21.7 2.5 24.9 24.0 18.7 5.2 24.8 23.1 19.7 3.5 24.3 23.2 19.1 4.1

Millions of dollars Balance of payments Current account Goods balance Exports fob Imports fob Services balance Factor income balance Current transfers balance Capital and financial balance e Net foreign direct investment Financial capital f Overall balance Variation in reserve assets g Other financing h Other external sector indicators Real effective exchange rate (index 2000=100) i Terms of trade for goods (index 1997=100) Net resource transfer (% of GDP) Gross external public debt (millions of dollars) Gross external public debt (% of GDP) Net interest and earnings (% of exports) j -283 -1,451 3,453 -4,903 867 -682 983 -228 207 -435 -511 385 126 -183 -1,391 3,780 -5,170 985 -769 992 329 414 -85 146 -131 -15 -213 -1,674 4,053 -5,727 1,019 -725 1,168 173 97 76 -40 15 25 -163 -1,995 4,614 -6,609 1,275 -795 1,352 254 421 -167 91 -40 -51 -338 -2,617 4,981 -7,597 1,182 -890 1,987 350 700 -350 11 -98 87 -429 -2,904 5,137 -8,041 1,602 -975 1,848 581 1,338 -757 151 -194 42 -1,027 -3,742 5,737 -9,479 1,854 -1,041 1,902 978 953 25 -48 70 -22 -741 -3,503 5,276 -8,779 1,826 -1,092 2,028 1,256 1,079 177 515 -519 4 -875 -3,699 5,183 -8,883 1,771 -1,135 2,188 322 961 -639 -553 526 27

107.3 93.7 -7.5 3,946 37.8 -13.6

102.5 98.0 -3.8 3,999 33.5 -14.1

99.4 95.8 -4.0 3,807 28.6 -12.3

98.8 100.0 -3.9 3,572 23.7 -11.9

103.6 101.1 -2.9 3,537 22.3 -12.7

104.2 101.9 -2.0 3,636 20.9 -13.4

100.0 100.0 -0.4 3,682 18.8 -13.1

96.2 101.5 0.8 4,177 19.6 -14.8

98.5 100.9 -3.7 4,459 20.9 -16.4

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Table 1 (concluded) 1994 1995 1996 1997 1998 1999 2000 2001 2002a

Percentages Employment Labour force participation rate k Unemployment rate l 53.3 16.0 51.9 15.8 52.6 16.5 54.1 15.9 52.6 14.3 53.5 13.8 55.2 13.9 54.3 15.4 55.1 16.1

Annual percentages Prices Variation in consumer prices Variation in nominal exchange rate Variation in real urban minimum wage Real deposit rate m Real lending rate n Equivalent deposit rate in foreign currency o 14.3 2.9 6.4 -0.2 ... 11.8 9.2 1.4 0.5 9.1 ... 15.5 4.0 3.0 0.6 6.6 15.7 10.7 8.4 4.2 1.4 7.8 14.7 9.1 7.8 10.6 4.3 10.2 17.2 6.8 5.1 1.0 4.9 8.6 16.9 15.1 9.0 4.2 -0.1 6.4 14.9 12.7 4.4 2.8 5.5 12.8 20.5 12.4 10.5 25.9 -0.5 2.6 10.2 -7.5

Percentages of GDP Central government Current income Current expenditure Saving Capital balance Primary balance Overall balance Public debt External Domestic Interest payments (% of current income) Money and credit p Domestic credit q To public sector To private sector 15.2 7.6 7.6 -8.3 0.3 -0.6 ... 24.2 ... 5.7 23.3 0.1 23.1 15.2 7.8 7.4 -6.4 2.1 1.1 ... 21.5 ... 6.0 22.8 0.2 22.6 14.2 8.1 6.1 -6.1 0.5 0.0 ... ... ... 3.9 25.3 1.5 23.7 15.9 11.0 4.9 -4.1 1.4 0.9 ... ... ... 3.1 25.4 1.3 24.2 15.9 11.1 4.7 -4.3 1.1 0.6 ... ... ... 3.3 28.2 1.0 27.1 15.6 11.2 4.4 -5.0 0.0 -0.5 ... ... ... 3.2 31.0 1.7 29.3 15.9 11.4 4.5 -3.6 1.8 1.1 ... ... ... 4.5 33.3 2.0 31.3 16.5 12.0 4.5 -4.2 1.2 0.4 ... ... ... 5.0 35.9 1.9 34.0 16.7 12.2 4.5 -4.6 1.2 0.1 ... ... ... 6.6 39.5 2.6 37.0

Source: ECLAC, on the basis of official figures. a Preliminary figures. b Based on constant 1995 dollars, at the official adjusted exchange rate. c Based on figures in local currency at current prices. d In the base year 1995, the difference with respect to calculation at constant prices arises from the use, for this purpose only, of an adjusted official exchange rate. e Includes errors and omissions. f Refers to the balance on the capital and financial accounts, minus net foreign direct investment plus errors and omissions. g A negative sign denotes an increase in reserves. h Includes the use of credit and loans from IMF and exceptional financing. i Annual average, weighted by the value of exports and imports of goods. j Refers to net investment income divided by exports of goods and services from the balance of payments. k Economically active population as a percentage of the working-age population, nationwide total. l Unemployed as a percentage of the economically active population, nationwide total. Includes hidden unemployment. m 30-day financial certificates, multiple banks. n 90-day loans, multiple banks. o Rate on deposits, deflated by the variation in the dollar exchange rate. p Average annual values were used for monetary figures. q Net credit to the public and private sectors extended by commercial banks and other financial and banking institutions.

yet been adopted by the Congress. In the first four months tax revenue stagnated in real terms, partly because of the reduction in imports on account of new taxes on imported luxury goods and a decline in fuel consumption. Public spending was also more tightly controlled to help stabilize the foreign-exchange market and the banking system. b) Monetary and exchange-rate policy In view of the export sectors continued weakness and the rise in oil prices, monetary policy in 2002 tended to be

restrictive and oriented towards stabilization, especially of the foreign-exchange market, which came under intense pressure. The variation in parity from December to December reached 25.3%, which represented a significant depreciation in real terms. At the close of the year the Central Banks net international reserves amounted to US$ 376 million, or US$ 586 million less than the amount posted on the same date in 2001. As the currency continued to depreciate, in the last quarter of the year significant complementary measures were taken. In addition to the above-mentioned tightening of fiscal austerity in line with the Pact for Stability and

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Table 2 DOMINICAN REPUBLIC: MAIN QUARTERLY INDICATORS 2001 I Gross domestic product (change from same quarter of preceding year) b Goods exports fob (millions of dollars) Goods imports cif (millions of dollars) International reserves (millions of dollars) Real effective exchange rate (2000=100) c Consumer prices (12-month variation, %) Average nominal exchange rate (pesos per dollar) Nominal interest rates (annualized percentages) Deposit rate d Lending rate e Interbank rate Sovereign bond spread (basis points) Domestic credit f (change from same quarter of preceding year) Mature bank credit as a porportion of total credit (%) g
a

2002a III 6.5 IV 6.7 I 5.1 II 7.6 III 2.0 IV 2.7 I 1.5

2003a II ... ... ... ...

II 1.1 1,356 2,201 668 95.8 10.2 16.8 17.7 24.6 15.8 ... 18.1 2.9

-1.4 1,333 2,134 554 96.5 11.1 16.9 19.1 28.2 17.9 ... 19.8 3.5

1,357 2,223 1,148 96.3 5.9 16.9 13.7 20.5 10.8 ... 21.6 2.7

1,230 1,270 1,309 1,350 2,222 2,079 2,185 2,242 1,099 884 876 578 96.4 4.4 17.1 11.8 20.6 9.4 ... 23.1 2.4 95.9 3.9 17.6 13.4 21.7 12.3 323 21.5 2.7 96.8 4.0 17.9 15.7 24.0 13.1 378 23.4 3.1 97.1 5.4 18.4 17.8 26.7 15.6 ... 16.7 6.2

1,255 1,351 2,377 1,971 468 561

104.3 109.9 117.7 10.5 20.6 19.2 27.8 17.1 504 18.7 5.9 18.7 23.2 20.3 28.9 19.7 488 17.0 6.2 26.1 25.5 20.2 28.4 23.0 826 ... ...

Source: ECLAC, on the basis of official figures. Preliminary figures. b Based on figures in local currency at constant 1970 prices. c Quarterly average, weighted by the value of exports and imports of goods. d 30-day financial certificates, multiple banks. e 90-day loans, multiple banks. f Net credit to the public and private sectors extended by commercial banks and other financial and banking institutions. g Total credit extended by the consolidated financial system.

Economic Development, limits were placed on commercial bank loans and on securities investments by financial institutions. The central bank suspended its direct intervention in the foreign-currency market in November, and international reserves recovered somewhat. Interest rates on local-currency transactions rose considerably. In December lending rates stood at 28.6% and deposit rates, at 19.4%; both rates were 7 points higher than they had been a year earlier. In contrast, rates on dollar transactions rose only slightly, to 10.3% and 6.6% for loans and deposits, respectively. The money supply (M1) grew by only 3.1% in 2002 in real terms, but broad money (M3) increased by 14%. Savings and time deposits in local currency rose by 18.6%. Credit to the private sector, which represents almost 90% of all bank loans, rose by 15% in real terms and was used mainly for commercial and service activities and for other purposes, as shown by the increase in personal loans. Meanwhile, the growth of credit to the central government sped up considerably. Lastly, international reserves contracted significantly owing to the outflow of private capital as a result of exchange-rate volatility. In May 2003, in view of the continuing instability of the foreign-exchange market and the banking crisis, the Monetary Board decided to tighten monetary restrictions.

The reserve requirement for local-currency deposits was gradually raised to 20% over an eight-month period and an additional 5% reserve requirement was established for foreign-currency deposits. The central bank substantially increased its issuance of certificates of investment (by 5 billion pesos). Interest rates, which had already risen in the second half of 2002, went up by a further two percentage points in the first quarter of 2003 for local-currency transactions. As exchange-rate volatility worsened, the dollar reached 34 pesos in June, which represented a nominal depreciation of 58% in relation to December and 89% in relation to June of the previous year. c) Trade agreements and reforms

The talks with the United States concerning a bilateral free trade agreement brought results in mid2003, when the parties agreed in principle that the agreement would be negotiated jointly with the Central American countries. Progress was also made in the negotiations for a free trade agreement with Panama, with the signing of a 10-year partial-scope agreement, renewable for another 10-year period, covering 204 products. There was also an initiative to start trade negotiations with Colombia.

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3.
a) Economic activity

The main variables

(23%), eggs (5.3%), beef and pork, and a decrease in that of chicken (7.1%) for the second straight year. Forestry production jumped by 33% owing to the increased consumption of firewood and coal, especially in low-income households. Fishing made substantial progress (33%), especially in farmed tilapia and carp. Mining output shrank for the second year running (3.2%) as a result of reduced salt and limestone production. Nickel production rose by 1.9% after having slid sharply the previous year, and construction inputs also increased. Manufacturing grew by 4%, recovering from its downturn of 2001. The sugar subsector increased by 6.6% thanks to the advance production of raw sugar and molasses, which also increased the output of refined sugar. At the same time, public investment gave a strong impetus to construction and its primary inputs. In addition, there was an upturn in the production of food and beverages, including evaporated milk, rum, cigarettes and beer. Activity in the free zones contracted for the second year in a row, although at a more moderate rate in the second half of the year. The slump was concentrated mainly in the footwear, tobacco and textile segments, while jewellery, electronics and pharmaceuticals, among others, showed positive results. The services included under the heading restaurants and hotels increased by scarcely 1% as the number of tourist arrivals remained low. The hotel occupancy rate went down by an annual average of 3.5%, although it made a significant recovery towards the end of the year. b) Prices, wages and employment Inflation reached 10.5% in 2002, which was more than double the 2001 rate. As a result of the significant currency devaluation and the increase in fuel prices, by the end of the first half of 2003 prices had already risen by 16.6%, far exceeding the inflation target established under the monetary programme for 2003. In 2002 increases were observed in housing (34.3%), health care and transport. The elimination of the subsidy for electric power consumption for all but the poorest sectors raised electricity rates considerably. Domestic gas also became more expensive (36.5%) owing to an increase in international prices, while rents went up by 10.4%. Transport showed an increase of 13.8% in 2002, mainly because of the currency depreciation; transport

Production activity went through two very distinct phases. In the first six months it grew briskly (by 6%), driven largely by the increase in public spending, while in the second half of the year its growth rate slowed considerably, amounting to only 2.4%. The growth of production was driven entirely by domestic demand. Consumption increased by 5.6%, with substantial upturns in both public and private consumption. Private consumption was influenced by the steady increase in family remittances, which represented 11.3% of that expenditure. Private investment, which had grown rapidly until 2000, contracted significantly for the second year in a row. The deterioration in the international environment, the interest-rate hike and the changes in fiscal policy dissuaded private investors from making new outlays. Although foreign direct investment was down slightly, it remained at its average level of recent years. In contrast, public investment rose substantially (27.6%) for the second year in a row, more than offsetting the decline in private investment, even though it was sharply reduced in the second half of the year as part of the macroeconomic stabilization effort. At the sectoral level, basic services expanded steadily (by 10%) in the areas of both electric power and communications and transport. Telecommunications continued to show robust growth (17.4%) as the expansion of mobile telephone services picked up speed. Electric power generation was up by 6.7%, with increases in both thermal and hydroelectric generation, in the latter case because of higher water levels in the reservoirs. The energy supply was still insufficient, however, and rationing was continued. The goods-producing sectors and the other services category showed a modest increase of close to 3%. The expansion of agriculture was moderate (2.5%) in comparison to the excellent 8.1% posted the previous year. Agricultural output retreated by 2% after correcting for the excess supply of some products in 2001. The cultivation of rice and sweet potatoes stalled, while that of corn, beans, tomatoes and bananas went down and that of pigeon peas, peanuts and some other products increased. There was a steady upturn in production for export, especially of leaf tobacco, coffee beans, cocoa beans and sugar cane. Livestock-raising expanded by a mere 0.7%. There were significant increases in the production of fresh milk

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charges rose by an annual average of scarcely 5.1%, which reflected part of the 25% increase in gasoline prices. Health care costs (11.1%) also rose faster than the average price increase, while food, beverages and tobacco together showed an increase of 9% due to the higher cost of imports. Employment increased by 4.4%, reflecting the addition of 18,500 more jobs. The sectors that generated the most employment were services and agriculture, which accounted for 86% of the increase, and to a lesser extent commerce, the financial sector and public administration. Open unemployment fell from 6.5% to 5.9%. However, the increase in the overall rate of participation from 54.3% to 55.1% had the effect of raising the unemployment rate from 15.4% to 16.1%. The leading employers raised wages at different times during the year. Civil servants and free-zone workers received increases early in 2002. In the final quarter the remaining private firms agreed to a two-stage wage hike: an 8% increase in October followed by a 5% increase in March 2003. In real terms, however, average wages declined. c) The external sector

The balance-of-payments current-account deficit climbed to US$ 875 million in 2002, or 4.1% of output, compared to 3.5% in 2001. The deficit was offset by the rising tide of private transfers from abroad, mainly family remittances, which were equivalent to 11.6% of GDP. As a result, gross national disposable income was 9% higher than GDP. These resources covered a large proportion of the merchandise trade deficit and payments of interest and dividends, although net financial capital inflows were down from the previous year owing to the reduction in net public borrowing and the slight drop in foreign direct investment. Moreover, the errors and omissions account showed a large negative balance as a result of capital flight, which translated into a substantial loss of reserves. Total merchandise exports contracted (1.8%) to US$ 5.183 billion. Free-zone sales, which represent 84% of the total, declined by 3.3%, although they began to rebound in the final months of the year, partly because of the currency depreciation, and continued to grow in 2003. Exports from outside the free zones performed better, expanding by 6.6%, after having slid steeply the previous year (-17.7%). Increases were seen in exports of traditional products, including raw sugar and molasses, coffee, cocoa and cocoa products and nickeliron, whose international price went up. The greater buoyancy of the domestic market drove imports up by 4.8%. Growth was observed in purchases

of consumer goods (7.3%) and raw materials (4%). Sharp upturns were seen in imports of certain products, including transport vehicles (58.5%), cereals (37.5%) and fats and vegetable oils (23.3%). Imports of inputs for maquila activity, however, shrank by 6.4%, so that the total value of imports was US$ 8.883 billion, which is just 1.2% higher than the previous years figure. Although international oil prices rose sharply in the final quarter of 2002, the annual average increase was close to 3%. Accordingly, the oil bill, which represents 20.8% of the countrys imports, reached US$ 1.297 billion, exceeding the previous years figure by only 3.6%. Tourist arrivals increased in the last quarter, but the total for the year as a whole was 2.8 million, representing a 2.5% decline from the 2001 figure, while tourism revenues amounted to US$ 2.736 billion. The proportion of tourists from North America rose while the proportion from Europe (especially Germany, Spain and Italy) fell. As usual, the services account posted a surplus (of US$ 1.771 billion), but the amount was down by US$ 55 million in comparison to the 2001 surplus. Consequently, the goods and services trade deficit was 15% higher than in 2001. A key factor that continued to shore up the external accounts was the inflow of family remittances, which contrasted with the weakness of goods and services exports. Although the faltering United States economy kept remittances from growing as quickly as they had in the past, they nonetheless totalled US$ 1.939 billion, exceeding by 7.3% the amount received in 2001. Net capital inflows, excluding errors and omissions, fell by 24.3% in comparison to their 2001 level, but were still more than enough to offset the current-account deficit. Foreign direct investment was down by 10.9%, to US$ 961 million, approximately 30% of which consisted of reinvestments. The balance of medium- and long-term loans was positive and exceeded the previous years figure. However, the abundant outflow of capital recorded in the errors and omissions account on the order of US$ 997 million brought the overall total down to US$ 553 million. To a large extent, these outflows reflected private capital movements and portfolio adjustments triggered by the currency instability that became more pronounced in the second half of the year. In the initial months of 2003 the improvement in external demand observed in the final quarter of the previous year seemed to gain strength, as earnings from the free zones and tourism continued to climb. Textile exports from the free zones increased by 7.6% in the first four months, while tourist arrivals (non-resident travellers), which had slid by 14% in the first five months of 2001, surged by 18% over the same period of 2002.