“The Central Bank and its Narrative Regarding Growth and Inflation”, an article by Dr. Leonel Fernández

September 13, 2022

In the construction of its narrative on the causes of inflation in the Dominican Republic, the Central Bank presents the same disinformation and manipulation techniques that it uses when referring to economic growth in the post-Covid-19 reactivation stage.

For example, the Central Bank even stated, as I have maintained on other occasions, that during 2021 the Dominican economy GDP grew by 12.3 percent. Nothing more uncertain. In reality, that was the result of a statistical rebound which started in 2020, the year of the pandemic, and when the national economy dropped to a -6.7 percent.

The Central Bank recognizes this in its official documents. In its report on monetary policy, dated January 31, 2022, the report points out:

“In the domestic environment, the process of an aggregate demand recovery has strengthened and highlighted the year-on-year growth of 12.3 percent…equivalent to a real expansion of 4.7 percent compared to 2019.”

Thus, and according to the Central Bank, the real expansion of our economy was not 12.3 percent, but only 4.7 percent.

But the monetary authorities continue to insist that growth registered at 12.3 percent, thus giving the impression not only that there is no crisis in the Dominican Republic but that we are the country with the highest levels of growth in the world.

However, when it is stated that the Dominican GDP will expand between 5.5 and 6.0 percent in 2022, no explanation is given indicating that this would represent a decrease of more than 6 percent of the GDP in relation to 2021 which, according to official data, was 12.3 percent.

On the contrary, it is now said that these numbers (5.5 or 6 percent) surpass the potential growth of our economy, highlighting its sound performance as well as its robust and resilient character.

Obviously, the sarcasm could not have been greater.

La inflación

In the same document that we have cited, the main monetary authority of the country, when referring to the phenomenon of inflation, stated:

“In an active monetary policy scenario, inter-annual inflation, which registered at 7.72 percent in October 2021, would converge to the 4+1 target range during the second half of 2022, at a more gradual pace than originally forecast.”

By arguing that convergence to the inflation target range would take place at a more gradual rate than originally expected, the Central Bank is admitting that it was wrong. This is so because it forecasted that inflation would reach 4+1 before the second half of this year.

But it was wrong again in its second prediction. Not even a miracle performed by the Virgin of La Altagracia – the Patron Saint of the country – will it be possible to reach the inflation target expected during the remaining three months of this year, September and December.

To reduce the high cost of living that is currently impacting Dominican society, the Central Bank implemented what the entity itself has described as a “gradual plan for the normalization of monetary policy.”

The plan began with an increase in the monetary policy rate by 50 basic points, from 3 to 3.50 percent, with the objective, as we have stated, of lowering the inflation rate and achieving price stability.

The Causes

For the country´s main monetary entity, the current rise in prices that impacts the national economy depends only on external factors.

Among these factors are the increase in the prices of oil and other raw materials; the disruption of global production and distribution chains; the increase in the costs of international container transport; and the geopolitical tensions generated by Russia’s invasion of Ukraine.

Undoubtedly, all these factors have contributed to the rise in prices worldwide as well as in the Dominican Republic. But it is striking that the Central Bank does not mention any of a national nature.

Is the increase in the cost of maritime freight the fundamental reason why the Central Bank has raised the monetary policy rates? Is it because there is a disruption of global value chains, or because of geopolitical conflicts? None of that. The fundamental reason is due to the application, by the Central Bank, of a monetary expansion policy to reactivate the growth of the economy, which has collapsed as a result of the Covid-19 pandemic.

In this stage of expansion of monetary policy, the Central Bank issued around RD$215 billion. Now, to reduce inflation, the Central Bank has had to reverse this particular policy of monetary expansion.

On the contrary, it has had to adopt restrictive monetary measures with which, due to the increase in the interest rate of commercial banks and a decrease in the liquidity of the financial system, there will be less money circulating in the market.

From November 2021 to August of this year, the Central Bank has increased the monetary policy rate eight times, raising it from 3 to 8.00 percent.

This restrictive monetary policy is not only being applied in the Dominican Republic. It is being applied at the global level. This is what the Federal Reserve is doing in the United States, as well as the European Central Bank and the central banks of Latin America.

By applying a restrictive monetary policy, there is a growing awareness in all these venues that a recession could occur. Or, at the very least, a decline in economic growth and an increase in unemployment.

Except, of course, in the Dominican Republic, where the Central Bank seems to have found the universal magic formula to reach its inflation target, increase growth rates and contribute to the creation of jobs. Naturally, whoever manages to simultaneously achieve all these objectives, incompatible with each other, deserves a special award in order to recognize the ability to manipulate and adulterate reality, defying the laws of logic and common sense.

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