Here's How Bad the Deficit Problem Is in the Dominican Republic

Nov. 13, 2012— -- Imagine thousands of protesters in a hot tropical country, meeting in a park, carrying signs that say, "there's not a lack of money here, there are just too many thieves." Or "tell me who's in jail and then we can talk about raising taxes."

Add some lively percussion to the mix, and that's essentially what's been going on in the Dominican Republic since last Wednesday, when the government said that it would raise taxes on citizens so that it could cut its massive deficit.

The pictures from the protests against the government's fiscal reform package, also known as the paquetazo, have been widely circulated on social media sites.

A bystander at one of the protests was even shot by police on Thursday. There's also a popular Facebook meme that compares the latest protest in Santo Domingo, which took place on Sunday, to a historic protest that unleashed a rebellion against military dictatorship back in 1965.

Anna Szterenfeld, the Latin America Director at the Economist Intelligence Unit, says the government's financial situation is rather critical, but it's not exactly Greece.

The Dominican government is expected to end 2012 with a deficit of $4.6 billion, an amount that represents roughly 6.8 percent of the country's GDP. This budget gap is two times larger than last year's deficit.

And if the government continues to sustain such a bloated deficit, it may not be able to secure a $2 billion IMF loan that is currently in the works, because the IMF has explicitly said it will not loan to any country that doesn't have its finances together.

So, in order to reduce the deficit for 2013, the Dominican government approved a fiscal reform package on Saturday that raises the national sales tax from 16 to 18 percent. New taxes will also be imposed on liquor, cigarettes and fuel.

Protesters who have taken to the streets of Santo Domingo and other Dominican cities say they understand that there is a debt problem. But they believe the government should cut down its own expenditures, instead of hitting citizens with new taxes.

"We pay all these taxes, and we see nothing in return," said Lillian Castillo, who attended a protest in Santo Domingo's Independence Park on Sunday, with her husband and a friend.

Like many at the protest, Castillo believes that government corruption and overspending have led to the country's bloated deficit. She mentioned Education Minister Josefina Pimentel, whose salary was raised from $4,660 to $7,500 per month, as tax increases were being discussed by the country's Congress.

"I consider myself to be apolitical," Castillo said via Facebook. "But this fiscal reform package was the drop that made the glass spill." Szterenfeld attributes the spike in the Dominican Republic's deficit to outgoing president Lionel Fernandez who spent millions in infrastructure projects, partially aimed at "securing" his legacy. Big spending programs also helped his hand-picked successor, Danilo Medina to win the presidential election in May.

Another factor that keeps the deficit large is that the government is currently spending more than $1 billion every year in electricity subsidies.

"Fiscal adjustment had to happen," Szterenfeld said. "But where the real anger comes from is that people are seeing that spending by the government is not changing."

If the Dominican Republic does not decrease its deficit, it will be more expensive for the country to borrow money from banks, and to sell bonds. These funds are crucial to jumpstarting poverty reduction programs and education initiatives that the country needs and that Medina had promised to deliver during his presidential campaign.

Szterenfeld also added that while protests against the fiscal reforms have gained some momentum in recent days, they are not likely to turn into a massive social movement that will destabilize the current government.

Protest numbers have indeed been modest, with just 6,000 people attending the protest at Santo Domingo's Independence Park, according to local media reports. Even if pictures from the crowded site look impressive, it's worth noting that more than two million people live in Santo Domingo's metropolitan area.

Another key factor is that people in the Dominican Republic are not losing their jobs at record speeds like in Spain, or Greece.

In fact, the economy of the Dominican Republic has been performing rather well. Propelled by tourism, mining and manufacturing, its economy has attained one of the fastest growth rates in Latin America over the past three years, and grew by 4.5 percent in 2011.

The country could actually be able to "grow itself out," of the deficit problem if the economy continues to work well, and if the government gets more strict with how it spends its money.

Szterenfeld said that the timing of these fiscal reforms, right at the beginning of President Medina's four-year term, is rather interesting.

"He's trying to get the painful [part] done now," she said. "Once he's able to get the public finances in order, he should be able to start doing the things he was elected for."