The island republic is bouncing back from a difficult 2025, and investor confidence is high; however, structural issues remain.
This article appears in the July/August issue of Global Finance Magazine.
Looking to bounce back after a disappointing 2025, the Dominican Republic’s economy still faces significant hurdles, including the conflict in the Middle East and internal challenges such as external debt, funding for old-age benefits, and the need to invest in innovation and human capital.
The Iran war and the ensuing rise in gas prices will cost the Caribbean country at least $900 million more than it had previously budgeted, according to May estimates from the Central Bank of the Dominican Republic (BCRD). A revised budget was due to be presented to Congress in late June, but rising gas prices complicated the picture.
“We are all going to have to pay for the crisis in one way or another,” Minister of Finance and Economy Magín Díaz warned last month in a television interview.
In April, year-over-year inflation reached 5.11%, the highest level since 2023 and above the BCRD’s 4% to 5% target. Market consensus and official projections expect inflation to end the year around 4.5% as international supply conditions gradually normalize.
“The geopolitical crisis in the Middle East has had an indirect yet significant impact on the Dominican economy,” says Alejandro Arredondo, an economist at the Universidad Autónoma de Santo Domingo (UASD), “primarily through international energy prices, logistics costs, and heightened global financial uncertainty.”
The Universidad Autónoma de Santo Domingo
According to the BCRD, real GDP growth in 2025 was 2.1%, less than half of the long-term potential growth, which has averaged 5% over the past six decades. The slowdown is attributed to weaker domestic demand and the postponement of private investment projects. Multiple attempts at tax reform have failed, creating uncertainty among economic actors.
The fuel crisis adds to existing pressures. Construction accounts for about 12% of total GDP, but when combined with mining, manufacturing, commerce, transportation, and informal work, the share approaches 20%. The construction sector ended 2025 with five consecutive trimesters of negative growth.
Business intelligence consultant Henri Hebrard blames expensive raw materials, high interest rates, and the return of Haitian workers to their home country for construction’s underperformance in 2025. However, in the first quarter of this year, the sector rebounded, growing by 4%, in part because delays in approving mining and construction permits eased. The Ministry of Housing, Habitat, and Buildings issued 93% more building permits in the first quarter of this year compared with the same period in 2025, enabling $3.9 billion in new construction investment.
“[Construction] is the reason for the bad performance of the Dominican Republic in 2025, and it will be the same reason that explains why there will be a rebound this year,” says Hebrard. “As Charles de Gaulle said, ‘If construction is good, everything is good.’”
Tourism has also maintained strong momentum, with value added by hotels, bars, and restaurants rising 5.9% in the first quarter. That period saw 2.6 million tourists arrive by air; March had a record 900,000-plus air passengers.
The future of tourism will not depend solely on attracting more visitors, Arredondo argues, but on evolving toward a higher-value-added business model, which means extending the average stay and strengthening high-potential segments such as luxury, ecotourism, sports, gastronomy, medical, real estate, and cruise tourism.
Growth Amid Structural Headaches
Free trade zones, or “zona francas,” have become a pillar of the Dominican economy. In 2025, exports from these enclaves exceeded $8.6 billion, representing about 67% of the republic’s total exports. Free trade zones generate more than 200,000 direct jobs across more than 850 companies in over 90 industrial parks. Growth has been driven by high-value-added industries and activities, including medical devices, pharmaceuticals, electronics manufacturing, service centers, and nearshoring.
“Projects by technology companies such as Google or Nvidia not only validate our model but also project it into the future,” Dominican President Luis Abinader told the World Free Zones Congress in May.
The republic’s vision is not only to expand as an exporter but also to become a distribution, assembly, warehousing, and re-export center serving markets in the Americas, Europe, and the Caribbean.
“There’s a lot of potential for logistics and nearshoring, but it has not been taken advantage of yet,” Hebrard says. “There’s a lack of floor and ceiling. We need more infrastructure. We have a semiconductor development agenda, and there’s a strong possibility this will be the new backbone of zona francas.”
But Hebrard warned that the window for significant labor, social security, and wage reform is closing, and any changes risk being delayed by the 2028 national election. At least three pension modernization proposals are at various stages of political discussion; adding inflation protection and health coverage are among the changes under consideration. “The numbers don’t add up,” Hebrard says. “The [pension] contributions are too small. There’s no magic money. The reality is that as people retire, they will receive very undignified pensions.”
However, the evolution of the country’s risk spread relative to Latin America as a whole, as measured by J.P. Morgan’s Emerging Markets Bond Index (EMBI), which has been generally high over the past four years, demonstrates a sustained improvement in international investors’ perception of the country’s macroeconomic and financial strength.
Risky Business Is Limited
The republic is positioned close to the economies in the region with the lowest perceived risk, based on factors including sustained economic growth, relative exchange-rate stability, inflation control, a strong financial system, increased international reserves, and continued inflows of foreign direct investment.
Scotiabank recently chose the republic as its Caribbean and Central American headquarters, highlighting investor optimism about the country’s economic model. Other beneficial factors include its macroeconomic stability; sustained growth; a strategic geographic location serving the Western Hemisphere; preferential access to major international markets through the DR-CAFTA free trade agreement; a growing logistics network; and a stable, pro-business government.
That said, structural challenges require attention on top of labor and old-age benefits funding. Observers cite a need for comprehensive tax reform that strengthens government revenues without affecting competitiveness; reducing external debt; improving the quality of public spending; and greater investment in productivity, innovation, and human capital.
Avoiding the “low-growth trap”— when the economy expands at a rate insufficient to reach higher levels of development—will be critical.
“The real challenge is no longer to grow faster,” Arredondo says, “but to grow better, with greater sustainability, inclusion, and value creation for the national economy.”
Nic Wirtz is a contributing writer based in Guatemala.
