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Dominican Republic: Monetary and Exchange-Rate Policies
Country Study > Chapter 3 > The Economy > Economic Policy > Monetary and Exchange-Rate Policies

MONETARY AND EXCHANGE-RATE POLICIES


The Monetary Board of the Dominican Central Bank (Banco Central de la Rep├║blica Dominicana -- BCRD) determined monetary policy and oversaw the nation's financial system. The BCRD performed typical central bank functions: it controlled the money supply, allocated credit, sought to restrain inflation, managed the national debt, allocated foreign exchange, and issued currency. The currency since 1948 had been the Dominican Republic peso, which was divided into 100 centavos and was issued in bank note denominations similar to those of the United States.

The BCRD successfully controlled prices in the Dominican Republic until the 1980s. During most of the 1970s, inflation remained below 10 percent, with the exception of 1974 and 1979, when oil prices increased substantially. During the 1980s, however, inflation afflicted the economy, eroding real wages, weakening the peso, and straining the financial system. As measured by the Dominican consumer price index, inflation had jumped from 5 percent in 1980 to 38 percent by 1985. The inflation rate reached 60 percent in 1988. Although the BCRD attempted to restrict the money supply in order to slow inflation, the central government's expansionary fiscal policies and chronic balance-of-payments deficits continued to push prices upward as the decade came to a close. The BCRD favored the use of reserve ratios, as its monetary policy tool of choice, during the 1980s. By regulating the amount in liquid reserves that financial institutions had to keep on their premises, this policy provided a check on the growth of credit. As inflation worsened in 1987, the BCRD temporarily instituted a 100 percent reserve requirement on all new loans. Credit was also restricted by regulation of the interest rate, but the BCRD fixed the rate by the imposition of legal ceilings rather than by letting rates float at market levels. High reserve ratios in the late 1980s squeezed the private sector's access to long-term credit even as its share of the credit market increased in relation to the public sector's share. As a consequence of the swift rise in the price index, real interest rates were often negative in the mid-1980s to the late 1980s as the BCRD's fixed rates failed to keep pace with inflation.

Of major concern to policy makers was the rising cost of basic consumer goods. Many prices were set by the government's National Price Stabilization Institute (Instituto Nacional de Estabilizaci├│n de Precios -- Inespre). Despite Inespre's efforts, food prices rose faster than all other prices during the 1980s. Inespre's pricing policies responded more to political concerns than to economic realities. Prices of basic foodstuffs were maintained at unrealistically low levels, in part because urban violence often resulted from efforts to bring these prices more in line with the free market. Keeping urban consumer prices low necessitated the purchase of staple crops from Dominican farmers at less than fair value, a practice that depressed the income and the living standard of rural Dominicans.

The Dominican peso, officially on par with the United States dollar for decades, underwent a slow process of devaluation on the black market from 1963 until the government enacted a series of official devaluations during the 1980s. In 1978 a Dominican law actually required that the peso be equal in value to the dollar, but as economic conditions worsened, authorities abandoned this policy. The most important change in Dominican exchange policy came in 1985 when the Jorge government, acting in accordance with the terms of an IMF stabilization program, floated the national currency in relation to the dollar, thereby temporarily wiping out the previously extensive black market. The floating peso fell to a level of US$1=RD$3.12, an official devaluation of over 300 percent that proved to be a major shock to the economy. Preferential exchange rates, however, remained in force for oil imports and parastatal transactions. The devaluation caused higher domestic prices and burdened many poorer citizens, while it boosted the country's export sector through newly competitive prices. Rising inflation, balance-of- payments deficits, and foreign debt compelled further devaluations after 1985. The peso stabilized somewhat at US$1=RD$6.35 by 1989, after bottoming out at nearly US$1=RD$8 in mid-1988. As a result of these fluctuations, the Monetary Board experimented during the 1980s with a multi-tier fixed exchange rate, a floating exchange rate, and other systems until by 1988 it had settled on a fixed rate subject to change based on the country's export competitiveness and domestic inflation. An important provision of the exchange-rate policy of 1988 prohibited currency transactions at the country's exchange banks and channeled all foreign currency transactions into the commercial banks under BCRD supervision.

Data as of December 1989




Last Updated: December 1989


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Dominican Republic was first published in 1989. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

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