Dominican Republic Tax Reform to Boost Revenues, Narrowing Fiscal Deficit

• The Dominican Republic’s budget deficit is expected to narrow from 3.6% of Gross Domestic Product (GDP) in 2025 to 3.3% in 2026, with newly enacted tax reforms expected to increase revenue by 0.5% of GDP, outpacing expenditure growth. 
• Tax revenues grew 8.0% in the year through May, primarily due to stronger economic growth in the first half of the year. However, expenditures have risen sharply following the onset of the US-Iran conflict and the oil price shock, which resulted in increased fuel subsidies (0.5% of GDP for the year) to shield the public from more dramatic domestic price pressures. Furthermore, the rise in interest payments as a share of total expenditure reflects tightening global financial conditions and the country’s larger financing needs in 2026.
• Revenue strength is expected to continue through year-end on the heels of the tax reform bill, which is projected to increase revenues by 0.5% (DOP40-50Bn^[1]) of GDP annually. The government also passed the 2026 Reformulated Budget, which allocates DOP40.9Bn of this additional revenue for targeted social spending and public investment to support the economy during a period of global economic uncertainty.
• The central government debt-to-GDP ratio is expected to start falling in 2026, as GDP growth is estimated to exceed the effective interest rate for the year. The approximate average weighted interest rate for 2026 is 8.5%, compared to an estimated nominal GDP growth rate of 9.3%. The central government estimates that the debt stock at 2026-end will reach US$64.9Mn at end-2026, which BMI estimates to be equivalent to 45.1% of GDP, compared with US$61.5mn (48.3% of GDP) at end-2025.
• More than half of the debt stock remains denominated in foreign currency, and the country's currency has appreciated 8.1% against the US dollar through July, making foreign debt (the majority in USD) easier to service. Liability-management operations, including buybacks and exchanges undertaken before maturity, are intended to ease near-term debt-service pressures by replacing shorter obligations with longer-term instruments. This strategy is likely to raise current interest costs, as longer maturity bonds and tighter global financing conditions generally require higher coupons. 
• Overall, as fuel subsidy pressures fade, BMI believes the country will continue to restructure its debt in line with its 2024-2028 public debt strategy. Expenditure growth is set to remain broadly in line with the 2024 Fiscal Responsibility Law, which caps annual real growth in primary spending at 3.0% until the general government debt ratio falls to 40.0% of GDP, which is targeted for 2035. With Emerging Markets Bond Index (EMBI) spreads that continue to narrow further, an appreciating currency, and a demonstrated commitment to its fiscal discipline, BMI views the country’s macro-financial fundamentals as supportive of meeting its medium-term fiscal targets.

(Source: BMI, A Fitch Solutions Company)

 

^[1] At the time of this report, 1 USD equals 58.94 DOP