Three years ago, it sank into a financial crisis as severe as any witnessed in the volatile region, following the sudden collapse of the country’s third biggest bank.

And yet 18 months after Mr Fernández’s return to power following an election victory in 2004, an IMF-backed recovery is well under way. As one Santo Domingo-based ambassador puts it: “From the point of view of the IMF it doesn’t get any better.”
“Order and stability have been restored in Leonel’s first year-and-half in office,” says Bernardo Vega, a historian and former Dominican ambassador to Washington.

The recipe for revival has been relatively simple. Mr Fernández, who introduced a number of market-based reforms during the late 1990s, acted quickly when he came into office, winning congressional approval for a sharp increase in value-added tax.

Subsequently, a deal with the IMF and a restructuring of debts owed to bond holders helped maintain momentum, with the currency appreciating steadily and interest rates falling.

Even before the May 2004 elections that brought Mr Fernández back to power, action had already been taken to shore up the banking system. However, his arrival in the presidential palace has helped cement confidence. At the beginning of 2005 the Dominican Republic was expected to grow by 2.5 per cent.

In fact, the expansion was nearly four times as rapid, with GDP expanding by 9.3 per cent.

Luis Núñez, an independent economist, points to a gradual acceleration of activity through the year, culminating in year-on-year growth of 14.6 per cent in the last quarter. Government investment in construction has helped but the key appears to have been a recovery in consumption.

Spending by Dominicans who had converted their savings into cash during the crisis was partly responsible. “Many people had bought dollars and were waiting for the recovery,” says Mr Núñez. The trick will be to make growth sustainable. There are some good signs. All three pillars on which the external sector, and to a large extent the Dominican economy as a whole, are now dependent are doing reasonably well.

Remittances sent home by Dominicans living abroad, continue to grow and reached $2.7bn in 2005. Tourism is buoyant and income should rise as new developments – such as a $1.5bn project on the east coast at Cap Cana – come on stream.

Employment in the free zones dropped sharply last year, but the agreement of a free trade deal with the US should improve the prospects for inward investment in the manufacturing for export sector.

The agreement – known as DR-Cafta – comes into effect in July and makes permanent a number of trade concessions originally granted to Central America and the Dominican Republic in the 1980s as the Caribbean Basin Initiative (CBI).

Mr Fernández argues that the deal will be crucial to the country’s future economic success because it gives inward investors secure long-term access to the US market.

The arrangements also allow Dominican-based manufacturers greater freedom to source raw materials than they enjoyed under the CBI. Shoe manufacturers have already begun to take advantage by sourcing raw materials from China.

Mr Fernández, however, faces a number of very tough challenges.

The most immediate is political. At present, the president’s centrist Dominican Liberation Party has a minority of seats in the lower house and only one seat in the senate, so the president has relied on opposition support to push through legislation.

While majorities were relatively easy to assemble in the more difficult circumstances in the early part of the administration, it has been a bigger struggle of late.

Negotiations over the 2005 budget were extremely protracted, for example. Legislative elections in May offer the president an opportunity to increase his representation but, although the PLD is likely to win more seats, it is far from clear that it will win an overall majority.

The Dominican electoral system means that smaller rural provinces are disproportionately represented in the legislature.

This in turn means that the two traditional parties, the centre-left Dominican Revolutionary Party (PRD) and the right-wing Social Christian Reformist Party of the former president Joaquín Balaguer, who died in 2002, are still extremely powerful. Complicating matters from the government’s point of view is the fact that the PRD and PRSC have overcome traditionally rivalries to strike an electoral alliance.

If Mr Fernández is able to overcome these difficulties he will be in a stronger position to confront two problems that undermine the country’s long-term development. First, in spite of growth of the 1990s and the recent recovery, too many people feel they are not benefiting from expansion.

These perceptions explain Mr Fernández’s electoral defeat in 2000 but under the previous administration both open unemployment and the scale of the informal sector grew. Partly as a result, the country is faced by something of a crime wave, with violent deaths rising from 14 per 100,000 in 1999 to 26 per 100,000 in 2005.

The trauma of neighbouring Haiti – which is still in the midst of an acute political and economic crisis – is increasing flows of migrants, adding to pressures on the labour market and on hard-pressed social, education and health services.

The president is well aware of that problem and has made the creation of 500,000 jobs a priority for the second half of his administration. Among other ideas being looked at, the government is seeking to offer incentives to local businesses to take on part-time workers, for example.

Even so, it is not clear that these measures will have enough impact to bring the president an immediate electoral benefit. The second challenge is to ensure public money is spent more fairly and effectively.

Fiscal balance is slowly being restored – although the government has still to deal with $4bn in quasi-fiscal liabilities stemming from the banking crisis – but the administration is some way from adopting a framework that will guarantee transparency and accountability in the public sector.

Mr Fernández recently presented legislation to congress outlining a new more transparent approach.

But some local and international critics have attacked the way that the president has organised contracts to build an urban railway in Santo Domingo.

Indeed, there is still a widespread perception among Dominicans that – in spite of Mr Fernández’s intentions – the public sector continues to be undermined by corruption.

In a Gallup poll conducted in mid-November 2005, 57 per cent of respondents believed corruption had risen in the past year, while only 25 per cent felt it had fallen.

A local non-governmental organisation, Participácion Ciudadana, alleges in its 2005 annual report that a high number of superfluous posts exists in the government and urges a reduction in the payroll. This month – in its annual review of illegal drugs – the US state department noted that “corruption and weak government institutions remained an impediment to controlling the flow of illegal narcotics”.

These shortcomings are perhaps most apparent in the government’s surprising inability to deal with long-standing problems in the energy sector that mean both private and commercial consumers face regular blackouts.

Allowing private capital to invest directly in generation means that the country now produces enough electricity, although since much of it depends on imported oil costs have been rising.

Unfortunately though, Dominicans pay for only about half of the electricity that they use, which means that the one privately owned and two publicly owned distributors tend to be chronically short of cash.

Non-payment is an acute problem in poor neighbourhoods, where slum-dwellers connect illegally to power lines, but is even more severe in the business sector.

According to a Washington-based official at one of the multilateral agencies, only about 15 per cent of big users of electricity – a category including the the country’s business sector – regularly pay energy bills.

Not surprisingly, as a result, the sector represents a heavy burden on the public purse, with the overall subsidy for oil and gas equal to $600m in 2005. According to Mr Vega, the problem dates back to the 1960s when in the wake of the collapse of the Trujillo dictatorship “it became a custom not to pay for energy”.

Under Mr Balaguer, who ruled the country for 24 of the 42 years between 1960 and his death in 2002, these practices continued and became one of the most striking features of the cosy corporatist-style relationship that developed between the government and the local private sector.

Making businesses pay for the electricity, therefore, will do more than simply help public sector finances. It will be a critical test of the government’s ability to break decisively with the legacy of Balaguerismo, transforming the Dominican Republic into a fully modern and democratic state.