The government subsidy to various social sectors of the country, such as fuel, economic aid programs, financing for imports and, among other measures, the sale of products from the basic basket at low cost puts the stability of the National Budget at risk, affecting government investments.
For the economist and professor at Columbia University, Xavier Sala-I-Martinthe economic support provided by the Government to citizens is a temporary solution that could have repercussions on a long-term inflationary scale, which means continuing to face more price increases if the Central Bank (BC) does not increase its Monetary Policy Rate (TPM).
“If the government has to go into debt to help people not pay for fuel, it is helping them now, but in the long run, if this lasts a long time, it will have a deficit, which in the end will generate even more inflation,” explained Sala-I-Martin in an interview granted to Free Journal during his stay in the country to participate in several talks on economic matters.
He valued as positive the performance of government authorities to face the crisis that is being experienced worldwide by the COVID-19 pandemic, aggravated by the war between Russia and Ukraine. However, he recommended evaluating monetary interest rates to gradually make adjustments and avoid an economic slowdown.
When answering the question of how inflation can be controlled so that the country continues the pace of growth, said the only way to deal with inflation is to raise interest rates. “The degree of increase in interest rates is not determined, but the longer the country takes to readjust, the higher the rates will be and the bigger the crisis will be.”
“The Central Bank could start to act, but be careful with this because it will suffer on one side, since the currency will appreciate and this can be dangerous for the country. US tourists who are determined to come to the Republic Dominican Republic analyze the costs and say: “No. It’s too expensive, I’d better go to Mexico.”Economist and professor at Columbia University.
According to the Spanish economist, the strategy must be carried out in conjunction with other countries to prevent the national currency from appreciating and, consequently, reducing investments and the flow of remittances that are part of the engine that drives the Dominican economy.
He explained that if “the Dominican Republic raises interest rates and the other countries do not, then there is a movement of capital. People buy Dominican assets and, therefore, this appreciates the Dominican currency and if the currency is more expensive, the products that are bought with American currency are more expensive”.
What to do, he thinks, it is a coordination of all the relevant central banks so that they all increase their monetary policy rate at the same time. If this is not the case, the one who does it first loses because the exporters, the sellers, the businesses associated with tourism, the ports suffer, and in turn other negative effects are brought about.
In addition to the consequences on tourism and the drop in remittances, Sala-I-Martin argued that society would be experiencing a variation in the cost of some items and services that would raise the cost of the family basket and affect the arrival of more investors. .
Indebtedness
One of the priorities of the Dominican Government must be to control the inflationary scale that is currently being experienced with monetary policy mechanisms that allow the State not to finance the productive sectors for a long time and avoid a fiscal reform that exacerbates the economic anguish of the population, according to the economist’s approach.
For the economics expert, in a context in which people require higher incomes to meet their needs in the face of rising prices, thinking about salary increases is not the alternative to the country’s general problems.
He pointed out that any issue far from price stability and associated with distributing cash threatens the planning of public policies and investments.
To avoid over-indebtedness that affects the government’s ability to pay public debt, the expert recommends a holistic analysis of the behavior of supply and demand to achieve an adjustment in monetary policy for the benefit of the country’s budgetary and economic stability.
