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Dominican Republic Monetary and Exchange-Rate Policies
The Monetary Board of the Dominican Central Bank (Banco
Central de la República 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
Estabilización 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
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