Case Study on Regulatory Risk: The Fiscal Reform in the Dominican Republic

Regulatory risk is the potential for changes in laws and regulations that can impact a business, sector, or economy. In the Dominican Republic, recent attempts at fiscal reform illustrate the complex dynamics of regulatory risk, particularly how unexpected obstacles and insufficient stakeholder management can derail policy objectives.?

This case study examines the sequence of events around the fiscal reform proposal, the government’s rationale, key missteps, and lessons for managing regulatory risk in similar contexts.

Context

Since assuming office in 2020, President Luis Abinader and his coalition embarked on a mission to address pressing economic, social, and institutional issues in the Dominican Republic.

One of the most ambitious goals on his reform agenda was a comprehensive fiscal reform aimed at balancing public finances, addressing long-standing revenue shortfalls, and reducing the country’s growing national debt.

However, the timing of his presidency proved challenging, as the pandemic quickly escalated, bringing with it unprecedented financial strains and forcing the government to adopt emergency spending measures to support healthcare, stabilize the economy, and protect vulnerable populations.

In 2020, as the fiscal reform was first floated, economists and key social stakeholders raised concerns about the timing and potential impact on an economy already in distress. Widespread uncertainty, increased unemployment, and inflation were raising fears of a prolonged economic downturn. Although the fiscal reform was deemed essential for future stability, the government ultimately opted against it, choosing instead to delay its implementation until the economy had regained strength. Instead of implementing new taxes or cutting existing public spending, the government prioritized stimulus measures and debt management as temporary solutions.

As the country began to recover in the years following the pandemic, with GDP growth and gradual economic stability, the Abinader administration revisited the fiscal reform agenda. In preparation for the 2024 election cycle, President Abinader underscored the need for a fiscal overhaul, making it a central theme of his reelection campaign. He argued that the current system’s structural weaknesses—low tax revenue, a growing fiscal deficit, and high public debt—threatened the country's economic health and development prospects in the long term. Abinader insisted that comprehensive reform was critical to modernize the tax system, increase public sector efficiency, and channel funds into essential areas like infrastructure, healthcare, and education.

Sequence of Events

1. Announcement of Fiscal Reform

???Fiscal reform was presented by President Abinader as essential to address pressing economic issues, with national debt ballooning to $60 billion in 2023, representing approximately 57% of GDP, up from 39% just five years prior. This rapid increase has alarmed both domestic and international stakeholders, who fear the economic impact of continued borrowing at higher interest rates.

?The government proposed increased tax revenue targets of approximately $1.8 billion annually, mainly through adjustments to income tax brackets, additional excise taxes on luxury goods, and reduced corporate tax incentives. This move was intended to close a $3 billion fiscal deficit and ensure funds for critical infrastructure projects, as reported by El Caribe.

The Ministry of Finance indicated that the reform would address revenue deficiencies and establish a sustainable fiscal path, aligning with recommendations from the IMF, which stressed the importance of reducing reliance on external borrowing and ensuring domestic revenue generation.

2. Initial Reactions and Public Response

The announcement triggered immediate public backlash, especially from lower- and middle-income groups who expressed concern about higher living costs. Polls from Gallup Dominicana showed that 67% of Dominicans opposed the tax hikes, fearing they would increase inflation, which was already at 9.5% in 2023—an 18-year high.

International institutions, including the World Bank, supported the government’s intentions but warned that immediate, high taxes could dampen the investment climate, which had already seen a 15% decline in foreign direct investment (FDI) from the previous year, according to Diario Libre.??

3. Legislative and Political Challenges

In Congress, the proposal faced strong resistance from opposition parties and even factions within the ruling party, who argued that the reforms disproportionately impacted low-income populations. According to Listín Diario, opposition parties argued for progressive taxation measures that would place a greater burden on corporations and high-income earners, a sentiment echoed by prominent labor unions.

Public approval ratings for the administration fell by 11 points following the reform announcement, as reported by Hoy Digital, with inflationary fears compounding opposition to higher taxes. Legislators expressed concern that a VAT increase would lead to higher prices on essentials, intensifying poverty in rural areas where 30% of households are already classified as below the poverty line.

4. Delays and Modifications

Facing substantial public and political resistance, the administration postponed the introduction of certain taxes and announced modifications to soften the immediate impact on low- and middle-income households. This included scaling back on VAT increases and postponing proposed taxes on essential goods, projected to reduce expected revenue by $500 million for the fiscal year.

Economists at Banco Popular Dominicano warned that these delays would likely impact growth, estimating that missed revenue would reduce the government’s infrastructure budget by 20%, affecting projects meant to expand access to healthcare and education.

5. Stalling and Suspension of Reform

Unable to secure broad consensus, the reform’s momentum stalled, leaving much of its core fiscal adjustments unimplemented. According to Diario Libre, the government missed its revenue target by $1 billion, which exacerbated the national deficit and required emergency austerity measures to cover critical expenses.

Credit rating agencies warned of a potential downgrade, with Fitch Ratings placing the Dominican Republic on a negative outlook due to the stalling reform, which could lead to higher borrowing costs and reduced investor confidence. This downgrade risked adding an estimated 1.2% to the interest rate on future debt issuances, as noted by the Central Bank of the Dominican Republic.

Foreign investment in the Dominican Republic was notably affected by this uncertainty, with World Bank data showing a 30% drop in new infrastructure projects tied to FDI, especially in renewable energy and tourism, key economic sectors for the country. As Hoy reported, economists predicted that without reform, the country could face long-term financial instability and struggle to secure needed funding for national priorities.

In late October, after two weeks of intense debate, President Abinader announced that the complaints had been heard and that the project was being withdrawn from Congress.

What went Wrong?

The fiscal reform in the Dominican Republic highlights the complex risk landscape surrounding policy reform, especially during times of economic strain. Major challenges included insufficient public consultation, failure to assess public sentiment, and lack of legislative support. The government’s approach lacked adaptability to external conditions, exacerbating public resistance and decreasing the probability of successful implementation.

1. Insufficient Public Consultation

The reform process lacked substantial input from various societal groups, leading to opposition from both civil society and the private sector. Stakeholder groups, including labor unions and small business associations, felt sidelined by the government’s decision-making process. Many were concerned about the direct impacts on purchasing power and business costs, yet felt they had minimal voice in the policy’s formation.

"It was a top-down approach," said private sector spokesperson "Businesses and workers alike had little to no input in the final proposal, resulting in policies that could disproportionately affect the lower and middle classes."

Data from Gallup Dominicana supported this sentiment, revealing that 67% of Dominicans opposed the reform, a signal that the government had miscalculated the public’s readiness to accept short-term financial sacrifice for long-term stability.

1. Inconsistent Policy Messaging

The reform was marred by mixed messages from government officials regarding its purpose and implementation. While some officials emphasized reducing the fiscal deficit, others focused on improving public services or stabilizing debt, creating confusion among citizens as to the reform’s true goals. As a result, public trust eroded, with many Dominicans skeptical about how the additional funds would be used.

This inconsistency complicated the communication strategy, turning public opinion against the reform and highlighting the risks of failing to convey a unified, clear message on complex economic policies.

The Executive Power’s failure to effectively communicate the fiscal reform’s objectives and benefits led to widespread misinformation, allowing media outlets, pundits, and influencers to dominate the narrative with sensationalist takes. This lack of clear and direct messaging meant that critical details on the reform’s benefits were overshadowed by highly charged, selective points that drove public frustration and skepticism.

Comically, one of the most circulated and controversial points was the perceived drastic increase in alcohol taxes. The Dominican Republic has a strong cultural and economic connection to alcohol, with beer, rum, and spirits being central to social life and tourism.

1. Poor Political Strategy

Without bipartisan backing, the proposal was highly vulnerable to opposition, which quickly capitalized on public discontent to strengthen its stance against the policy. Opposition leaders argued that the reforms disproportionately targeted the working class, a point that resonated strongly among citizens already struggling with inflation and rising living costs.

?This perception of inequity further fueled political resistance, turning what could have been manageable opposition into a unified front against the reform. The administration’s inability to build consensus in advance meant that minor controversies, like the increases in alcohol and car taxes, snowballed into major points of contention, which opposition leaders amplified to stall legislative support and build political momentum.?

The fallout was clear in the 11-point drop in public approval recorded by Hoy Digital, signaling a significant erosion of trust and adding yet another obstacle to advancing the reform.

1. Ideological Inconsistencies

The Abinader Administration has positioned itself as a champion of liberal economic and political ideology; however, the Fiscal Modernization Bill reveals significant inconsistencies that undermine its potential for success.?

From a liberal economic perspective, which emphasizes minimal state intervention, free-market principles, and individual economic freedoms, the bill exhibits glaring contradictions.

It promotes increased government intervention through large-scale public sector investments, such as RD$176,358 million in transportation over five years, diverging from the expectation of market-driven growth. Additionally, the centralization of fiscal power—allocating RD$11,000 million annually to local governments for public services—reduces private sector participation and contradicts the liberal preference for decentralization.?

Protectionist elements appear in the selective exemption of basic goods from VAT, distorting market dynamics and fostering dependency on government support. Furthermore, extensive regulatory measures, including stricter fiscal compliance and progressive tax rates, create a burdensome environment for businesses, particularly small and medium enterprises, at odds with the liberal ethos of minimal regulation.?

Ultimately, while the Fiscal Modernization Bill aimed for economic modernization, its approach leans more toward social welfare and redistributive policies, reflecting ideological tensions that position it closer to a social-market economy than a strictly liberal economic framework.

5. Lessons in Regulatory Risk

The lessons learned from the Dominican Republic’s fiscal reform process are equally applicable to organizations and private companies navigating regulatory changes or implementing significant policy shifts. Here are key insights focused on managing reputational risk and fostering positive stakeholder relations:

1. Comprehensive Stakeholder Engagement: Organizations must prioritize engaging a diverse range of stakeholders—including employees, customers, investors, and community members—early in the decision-making process. This proactive approach fosters a sense of ownership and collaboration, reducing the likelihood of opposition. By addressing stakeholder concerns and incorporating feedback into policy design, companies can mitigate reputational risks associated with perceived exclusion or disregard for stakeholder interests.
2. Responsive Communication Strategy: A transparent and adaptive communication strategy is essential for organizations facing regulatory changes or public scrutiny. Clear messaging that explains the rationale behind policy shifts, anticipated benefits, and responses to stakeholder concerns can prevent misunderstandings. Companies should actively monitor public sentiment and be prepared to adjust their messaging in real-time to address emerging issues. By doing so, they can enhance their reputation and maintain trust during transitions.
3. Adaptive Policy Design: Organizations should implement flexible policy frameworks that can adapt to changing external conditions, such as economic fluctuations or shifts in regulatory landscapes. This flexibility not only helps align organizational goals with current realities but also showcases a commitment to responsible governance. By demonstrating a willingness to revise policies in response to stakeholder feedback or economic pressures, companies can protect their reputational capital and foster goodwill among stakeholders.
4. Legislative and Political Preparation: For organizations, particularly those in regulated industries, securing support from relevant political or regulatory bodies before announcing major policy changes is crucial. This preparation reduces the risk of regulatory gridlock or backlash, ensuring smoother implementation. By fostering relationships with key influencers and stakeholders, organizations can enhance their credibility and demonstrate a commitment to collaborative governance, ultimately reinforcing their reputation.
5. Timing and Economic Sensitivity: Organizations must be acutely aware of the broader economic context when introducing significant changes. Timing policy announcements during favorable economic conditions or when stakeholders are better positioned to absorb changes can minimize backlash. Companies that take into account current economic challenges—such as inflation, supply chain disruptions, or rising costs—are better positioned to communicate the necessity of their reforms. By demonstrating sensitivity to these factors, organizations can strengthen their reputation and build stronger relationships with stakeholders.

THE TEDCAP APPROACH

The case study on fiscal reform in the Dominican Republic underscores essential lessons in regulatory risk management that are broadly applicable to both public and private sectors. Effective management of regulatory risks demands a holistic approach that goes beyond policy development, encompassing stakeholder engagement, transparent and clear communication, adaptability to changing circumstances, political readiness, and a nuanced understanding of economic impacts.

By integrating these principles, public and private entities can proactively address regulatory challenges, building resilience against unforeseen policy shifts and fostering greater trust and cooperation with stakeholders. This approach not only facilitates smoother implementation of reforms but also contributes to a stable and equitable environment that can drive sustainable growth and social progress. In the face of complex regulatory landscapes, these insights serve as a foundation for developing robust strategies that balance institutional objectives with public interest, ensuring a balanced path forward for all sectors.