The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD316-DM INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED CREDIT IN THE AMOUNT OF US$30 MILLION TO THE COMMONWEALTH OF DOMINICA FOR THE SECOND COVID-19 RESPONSE AND RECOVERY PROGRAMMATIC DEVELOPMENT POLICY CREDIT May 6, 2022 Macroeconomics, Trade and Investment Global Practice Latin America and Caribbean Region . This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Commonwealth of Dominica GOVERNMENT FISCAL YEAR July 1 – June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 21, 2022) Currency Unit US$1.00 = EC$2.70 ABBREVIATIONS AND ACRONYMS CAD Current Account Deficit CARICOM Caribbean Community CARTAC Caribbean Technical Assistance Center CBI Citizenship-by-Investment CCRIF-SPC Caribbean Catastrophe Risk Insurance Facility – Segregated Portfolio Company CERC Contingent Emergency Response Component CREAD Climate Resilience Execution Agency for Dominica CRRP Climate Resilience and Recovery Plan DDA Discover Dominica Authority DeMPA Debt Management Performance Assessment DPC Development Policy Credit DPF Development Policy Financing DPR Debt Portfolio Review DSA Debt Sustainability Assessment ECCB Eastern Caribbean Central Bank ECCU Eastern Caribbean Currency Union FAA Financial Administration Act FDI Foreign Direct Investment FRF Fiscal Responsibility Framework GDP Gross Domestic Product GoCD Government of the Commonwealth of Dominica HFPS High Frequency Poverty Survey IA Internal Audit IDA International Development Association IMF International Monetary Fund IPSAS International Public Sector Accounting Standards LDP Letter of Development Policy MIS Management Information System MOF Ministry of Finance NEP National Energy Policy NPLs Non-Performing Loans NRDS National Resilience Development Strategy OECS Organisation of Eastern Caribbean States PAP Public Assistance Program PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PFM Public Financial Management PPA Performance and Policy Action PSIP Public Sector Investment Program RPS Regional Partnership Strategy SDFP Sustainable Development Financing Policy SOE State Owned Enterprise TA Technical Assistance UWI University of the West Indies VRRF Vulnerability, Risk and Resilience Fund WB World Bank WBG World Bank Group XCD Eastern Caribbean Dollar . Regional Vice President: Carlos Felipe Jaramillo Country Director: Lilia Burunciuc Regional Director: Robert R. Taliercio and Franz Drees-Gross Practice Manager: Doerte Doemeland, Stephanie Gil Task Team Leader: David Cal MacWilliam, Vickram Cuttaree Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) COMMONWEALTH OF DOMINICA SECOND COVID-19 RESPONSE AND RECOVERY PROGRAMMATIC DPC TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3 1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................5 2. MACROECONOMIC POLICY FRAMEWORK....................................................................................7 2.1. RECENT ECONOMIC DEVELOPMENTS............................................................................................ 7 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 12 3. GOVERNMENT PROGRAM ........................................................................................................17 4. PROPOSED OPERATION ............................................................................................................18 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 18 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 19 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 34 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 35 5. OTHER DESIGN AND APPRAISAL ISSUES ....................................................................................36 5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 36 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ................................. 37 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 38 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 40 6. SUMMARY OF RISKS AND MITIGATION .....................................................................................41 ANNEX 1: POLICY AND RESULTS MATRIX ..........................................................................................44 ANNEX 1.A: CHANGES SINCE THE FIRST OPERATION..........................................................................47 ANNEX 2: FUND RELATIONS ANNEX ..................................................................................................52 ANNEX 3: LETTER OF DEVELOPMENT POLICY.....................................................................................54 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS ............................................................58 ANNEX 5: PERFORMANCE AND POLICY ACTIONS FY21-23 ..................................................................67 Preparation of the Dominica Second COVID-19 Response and Recovery Programmatic Development Policy Credit was supported by an IDA team led by Cal MacWilliam (Senior Economist) and Vickram Cuttaree (Program Leader), and which included Karlene Francis (Senior Operations Officer), Nancy Rocio Banegas Raudales (Social Protection Specialist), Katie O’Gara (LAC Climate Task Force Program Assistant), Vinicius Lima Moura (Senior Procurement Specialist), Urska Zrinski (Public Sector Specialist), Carolyn Shelton (Senior Health Specialist), Courtney Price Ivins (Health Specialist), Eliana Carolina Rubiano Matulevich (Senior Economist), Paola Buitrago Hernandez (Gender Consultant), Jacobus Joost de Hoop (Senior Poverty Economist), Mary Boyer (Disaster Risk Management (DRM) Specialist), Moad Alrubaidi (Financial Management Specialist), Maria Pia Cravero (Legal Counsel), Geraldine Mayela Alonso Ghersi (Legal Counsel), and Jose Janeiro (Senior Finance Officer). Gisele Velasquez (Program Assistant) provided production assistance. Peer reviewers were Page 1 Natasha Sharma (Senior Economist), Jeff Chelsky (Manager IEG), and Cornelius Fleischhaker (Senior Economist). The team is grateful for the guidance and supervision of Lilia Burunciuc (Country Director); Doerte Doemeland (Practice Manager); and Javier Suarez and Nataliya Mylenko (Program Leaders). The team also expresses its gratitude to the Government of the Commonwealth of Dominica for its collaboration in the preparation of this operation. Official Use The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Project ID Programmatic If programmatic, position in series P175847 Yes 2nd in a series of 2 Proposed Development Objective(s) The operation seeks to support Dominica in its COVID-19 pandemic response and recovery by: (i) saving lives, protecting livelihoods and preserving jobs; and (ii) strengthening fiscal policies, public financial management and debt transparency for a climate resilient recovery. Organizations Borrower: COMMONWEALTH OF DOMINICA Implementing Agency: Ministry of Finance PROJECT FINANCING DATA (US$, Millions) SUMMARY Total Financing 30.00 DETAILS International Development Association (IDA) 30.00 IDA Credit 30.00 INSTITUTIONAL DATA Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Overall Risk Rating Moderate . Page 3 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Results Indicator Name Baseline Target Number of persons tested for COVID-19 2019 June 30, 2021 0 12,000 Number of Accommodation facilities certified to operate under the March 2020 June 30, 2021 Health and Safety protocols. 0 50 The number of beneficiary entities benefiting from the 8 percent 2019 2022 tax reduction by retaining 80 percent of staff. 0 25 Number of social programs integrated into the Beneficiary registry 2019 2023 and Management Information System for Social Programs. 0 2 Percentage of beneficiaries in the Public Assistance Program in the 2019 2023 first two income level quintiles: est. 70 percent 5 percentage points higher than the baseline, of which female beneficiaries are 50 percent Expenditures under the Tertiary Education Grant Program reduced 2021 2023 by 40 percent. EC$30 million 40 percent reduction Cumulative amount of funds deposited into the Vulnerability Risk 2019 2023 and Resilience Fund to respond to climate-related and other 0 EC$19.5 million disasters (recognizing that deposits may be suspended during periods of disaster events). 2019 2023 Percentage reduction in Cabinet authorized discretionary EC$ 2.2 million 50 percent reduction exemptions. 2019 2023 Number of joint audits undertaken. 0 5 2019 2020-2023 Annual DPR available on a Government website. No Yes Percentage of new public investment projects funded in the 2023 2020 2023 annual budget, appraised in line with the PSIP methodology that 0 60 account for the impact of natural disasters. Percentage of new public investment projects funded in the 2023 2020 2023 annual budget, appraised in line with the PSIP methodology that 0 25 account for gender-differentiated impacts to meet the needs of women. Percentage of awarded public procurement contracts made 2019 2023 available on a dedicated Government website. 0 80 percent Percentage of goods contracts (by value) including 2019 2023 sustainability/climate considerations. 0 25 Battery storage for distributed electricity is increased by 5 MW by 2020 2023 2023 to enable the electric system to integrate new renewable 0 5 MW energy including geothermal and distributed renewable energy. . Page 4 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE COMMONWEALTH OF DOMINICA 1. INTRODUCTION AND COUNTRY CONTEXT 1. This proposed Second COVID-19 Response and Recovery Programmatic Development Policy Credit (DPC), in the amount of US$30 million, is the second in a series of two operations supporting Dominica’s COVID-19 response and recovery. The COVID-19 pandemic struck Dominica hard and triggered a sudden stop in tourism as the economy was recovering from the devastation of successive climate-related natural shocks. The series supports actions taken by the Government of the Commonwealth of Dominica (GoCD) in responding to the COVID-19 crisis and the economic recovery by: (i) saving lives, protecting livelihoods and preserving jobs; and (ii) strengthening fiscal policies, public financial management and debt transparency for a climate resilient recovery. 2. This second operation has been amended to include reforms in support of fiscal consolidation, which is critical for investment in climate adaption and building buffers to deal with recurrent climatic events. The first DPC in the series included policy reforms related to an effective economic and social response to the COVID-19 crisis, including the protection of jobs, livelihoods, and household consumption, as well as reforms laying the foundation for a robust recovery in support of Dominica’s goal of becoming the first climate-resilient nation and commitment to significantly increase the share of renewables in electricity generation. This second operation in the series builds on and deepens the fiscal and public financial management (PFM) reforms supported under the first operation. Given the deterioration of fiscal and public debt indicators in the aftermath of climate shocks, including tropical storms, this operation also supports critical GoCD efforts to build a climate-resilient economy. This operation is complemented by a CAT-DDO (P177807) which seeks to support: (a) the efforts of the Government of the GoCD to mobilize resources in the aftermath of a disaster triggered by climate-related or geophysical hazards, as well as public health-related events; and (b) the country’s reform program to build comprehensive resilience to disaster and climate risks. 3. The COVID-19 pandemic significantly affected economic activity in Dominica despite an effective response in limiting community transmission. As of May 4, 2022, a total of 12,161 positive confirmed cases and 63 deaths had been reported, while approximately 46 percent of the population has been vaccinated once and 41.9 percent fully vaccinated. From the onset of the pandemic, the Government took measures to promptly test, treat, and isolate COVID-19 patients to prevent contagion. As the pandemic intensified, the Government effectively imposed of a mandatory 14-day quarantine of nationals arriving from high-risk nations. Economic support and stimulus measures were taken to protect vulnerable households and businesses, but the pandemic revealed important gaps in the social assistance system. GDP fell by 11.0 percent in 2020 compared to a pre-COVID-19 forecast of 4.9 percent growth as disruptions in international trade and travel, as well as local containment measures, paralyzed the tourism sector and foreign direct investment (FDI) declined. The reforms supported under this second operation therefore focus on helping Dominica achieve sustainable growth, in line with the Bank’s green, resilient, and inclusive development agenda, while safeguarding public debt sustainability. 4. The pandemic also had negative impact on poverty and on employment that were at best partially offset by social assistance programs and is expected to have increased poverty rates. There are Page 5 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) no recent official poverty data for Dominica. The latest official poverty data, collected in 2008, indicated a national poverty consumption rate of 28.8 percent. Simulation exercises indicate that subsequent natural disasters led to significant increases in poverty rates. Also, a phone survey administered by the World Bank and UNDP in June 2021 suggests that the COVID-19 pandemic led to a further increase in poverty. 1 According to the survey, job losses were markedly more common for women (23 percent) than for men (12 percent). Women reported a more pronounced increase in time spent on services at home and supporting children with school after the pandemic. The survey also shows a significant decrease in formal employment (jobs in public and private enterprises) and an increase in informal jobs and self- employment. In addition, the economic contraction and drop in incomes led to reduced social insurance and pension contributions compared to pre-pandemic levels, which could have long-term effects on poverty. Hence, the active transfers programs instituted by the Government and continued reconstruction spending are unlikely to have fully offset the impacts of the pandemic on poverty. Rising food and fuel prices may exacerbate poverty concerns. 5. Dominica is a small island developing state and is one of the world’s most vulnerable countries to extreme weather events and climate change. It has a population of 71,991 (2020) and a 2022 per capita income of approximately US$8,230. Due to the rugged inland topography, 90 percent of Dominica’s residents are located near the shore, as is most of the island's infrastructure, alluding to significant vulnerability to sea level rise. Dominica’s economy is driven largely by tourism and agriculture, making the country highly vulnerable to economic shocks and climate change impacts such as hurricanes, flooding, and other natural disasters. In 2017, Category 5 Hurricane Maria caused losses and damages equivalent to 226 percent of GDP destroying large swaths of agriculture land, critical infrastructure, and an estimated 90 percent of buildings. Hurricane Maria followed tropical Storm Erika (2015), which caused damages equivalent to 96 percent of GDP. These disasters severely affected the Government’s progress on fiscal consolidation. In March 2018, the GoCD established an executive agency, the Climate Resilience Execution Agency of Dominica (CREAD), to rebuild the country as the first climate resilient nation. In this context, it is critical for Dominica to implement reforms that will help increase its financial, fiscal and physical resilience to natural disasters to minimize the economic and social costs of climate change. 6. Renewable energy, particularly from geothermal, will play a large role in supporting a green economic recovery and further strengthening fiscal resilience. Owing to a high reliance on imported diesel, Dominica has historically faced high and volatile electricity prices. This issue constrains private sector development and job creation, imposes an additional burden on consumers, and creates a negative impact on the balance of trade. Dominica has declared a national target of achieving 100 percent renewable energy by 2030. Developing local renewable energy, particularly geothermal, has the potential to significantly increase resilience by reducing dependency on fuel imports and high/volatile electricity prices. Further, given that identified geothermal resources largely exceed domestic needs, Dominica could develop this potential to export electricity to neighboring islands, primarily Guadeloupe and Martinique, which would create a new climate resilient revenue stream for the country. 7. The operation supports prior actions under two pillars that represent the main components of the Government’s response: 1The sample of interviewees for the phone survey (861 respondents) was drawn through random-digit phone dialing and is representative of all inhabitants over the age of 18 with access to a phone. Page 6 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) • Pillar 1, “saving lives, protecting livelihoods and preserving jobs”, which is a carry-over from the first operation in the series, supports better targeting of social transfers, including the direct COVID-19 response. The operation supports implementation of recommendations derived from a review of social safety programs, including approval and implementation of a Social and Beneficiary Registry and Management Information System for Social Programs, a digital registration process, a payment reconciliation mechanism, and a new intake instrument for the Public Assistance Program. • Pillar 2, “strengthening fiscal policies, public financial management and debt transparency for a climate resilient recovery”, the operation builds directly on measures under the first operation to support fiscal reforms to strengthen the fiscal framework, help steer investment focused on building resilience to natural disasters, prioritize expenditure efficiency measures, strengthen the fiscal position, improve tax administration, and broaden the tax base. The operation directly supports: (i) approval of a Fiscal Responsibility Act (FRA); (ii) approval of guidelines for the operation and management of the Vulnerability Risk and Resilience Fund (VRRF); (iii) approval of an order requiring the preparation and public disclosure of Debt Portfolio Reviews on an annual basis; (iv) a Revised Public Sector Investment Programme (PSIP) Allocation Methodology and Enhanced Public Sector Performance Management Framework; (v) approval of the Public Procurement Act and adoption of the required regulatory framework under the legislation; and (vi) the approval of a new National Energy Policy and Energy Management Guidelines. This pillar has been amended to: (i) further enhance focus on climate resilience; and (ii) reflect lessons learnt from the implementation of similar reforms in other small island developing states. 8. Given the global economic impact of the COVID-19 pandemic, the uncertainty regarding the full resumption of global and domestic economic activity, particularly tourism, and the high uncertainty around food, fuel and commodity prices, macroeconomic risk is high. In response, the Government has approved fiscal measures (including those supported by this operation) and has expressed a strong commitment to further economic and fiscal reforms. A return to primary budget surpluses over the medium term and the enshrinement of responsible fiscal targets in a Parliamentary approved Fiscal Responsibility Framework (FRF) provide confidence in an improving and sustainable macro/fiscal framework and will allow the country to build fiscal buffers which are critical to mitigate economic losses from climate change. Consistently low and stable inflation further support macroeconomic stability. The measures supported through this operation, and the associated financing, will support the economy in laying the foundations for a post-pandemic and increasingly climate-resilient recovery. As the country exits the pandemic crisis, the Government is highly cognizant of the need to strengthen climate-resilience, reinforce macroeconomic stability, safeguard debt sustainability, and has taken meaningful steps toward the achievement of these objectives as supported by this operation. 2. MACROECONOMIC POLICY FRAMEWORK 2.1. RECENT ECONOMIC DEVELOPMENTS 9. Dominica is a small, middle-income island economy that depends primarily on services and whose macroeconomic and fiscal framework has been severely disrupted by the pandemic and the Page 7 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) devastating Category 5 Hurricane Maria in 2017. Following Hurricane Maria in September 2017, growth was -6.6 percent in 2017, recovering to 3.5 percent in 2018, and picking up further to 7.5 percent in 2019 (see Table 1). The tourism sector accounts for approximately 25 percent of GDP and nearly 50 percent of total exports. 2 Agriculture and fishing are also important sources of jobs and incomes. Growth in 2021 is estimated at 3.7 percent after an 11.0 percent contraction in 2020. 10. Dominica’s economy continues to be affected by the COVID-19 pandemic, though the situation is improving. In addition to the slowdown in global growth and the sudden stop in tourism, domestic COVID-19 containment measures implemented as early as March 2020, such as lockdowns, closing of national borders, quarantines, and closing of shops and factories had a severe impact on the tourism industry, as well as those indirectly related to tourism such as transport, hotels, commerce, and services. As firms began to lay-off workers and wage payments ceased, or were reduced, this created an income squeeze for many households which is still reflected in weak demand. Tourist traffic is returning, but remains far below pre-COVID levels, and some cruise ships have resumed visits to Dominica, though not to 2019 levels. 3 Table 1 provides a summary of key economic indicators. 11. Dominica is a member of the Eastern Caribbean Currency Union (ECCU), and monetary policy and bank supervision are managed by the Eastern Caribbean Central Bank (ECCB). The ECCB focuses on price stability as a precondition for achieving sustainable growth and high employment. This policy has been successful in maintaining a low inflation rate and stable currency to support growth and investment. The ECCB has maintained a fixed exchange rate peg of EC$2.70 to US$1.00 since July 1976. Inflation has been maintained under 3.0 percent over the past decade, including in 2021. 12. Financial sector indicators deteriorated in the wake of the COVID-19 pandemic; however, the banking sector remains adequately capitalized. The ECCB took prompt action to mitigate the impact of the pandemic on borrowers, by implementing moratoria on loan servicing and fee waivers, and to enhance surveillance of the financial sector, through targeted supervisory flexibility – including additional data reporting requirements. A 2021 IMF ECCU report reports the capital adequacy ratio (CAR) for Dominica as 18.9 at end-2020, which is an increase from 13.9 at end-2019 and is substantially above the regulatory minimum of 9 percent. Dominica has a rather high CAR compared to other ECCU countries, indicating an adequately capitalized banking system. The non-performing loan (NPL) ratio decreased to 14.7 percent in Q2 2021, from 15 percent in Q4 2020, but is still higher than 12.2 percent registered in Q4 2019. This ratio remains higher than the ECCB benchmark of 5 percent. In September 2020, the ECCB moratoria covered a peak of almost 25,000 ECCU loans worth EC$ 5.2 billion (about 40 percent of outstanding ECCU loans and advances). By August 2021, a total of 3,153 loans amounting to EC$1.8 billion (about 13 percent of outstanding loans and advances) were covered by the moratoria. The take-up of bank loan moratoria in Dominica was lower than the average for the ECCU (about 30 percent of loans at the peak). As such, once the moratoria expire, NPLs in Dominica may rise, but not as sharply as in other 2 The World Travel and Tourism Council data (2019) estimates that travel and tourism account for 36.9 percent of GDP and 38.7 percent of employment in Dominica. This estimate is considered high as it includes direct, indirect, and marginally related service sector contributions. 3 Total tourism arrivals fell from 334,870 in 2019, to 144,000 in 2020, and 66,324 in 2021. This is broken down as follows: stay over arrivals in 2020 21,733 compared to 14,888 in 2021; cruise ship arrivals in 2020 117,979 compared to 50,829 in 2021; and yacht arrivals 2020 4,124 compared to 540 in 2021. Page 8 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) ECCU countries. Provisioning reached 45.8 percent at end-2020 which is lower than the ECCU overall provisioning of 50.9 at end-2020, down from 54.6 percent in 2019 and 94.6 percent in 2018. No 2021 numbers are available as this ratio is not part of standard FSIs. Current capital buffers should be sufficient to contain any near-term financial stability impact, but CAR margins may thin out significantly. Banks in Dominica have maintained their liquid positions throughout the pandemic. The liquid assets to short- term liabilities ratio was 53.6 percent in Q2 2021, compared to 56.8 percent in Q4 2020 and 53.2 percent in Q4 2019. Meanwhile the ratio of liquid assets to total assets was 45.8 percent, compared to 48.9 percent in Q4 2020 and 46.2 percent in Q4 2019. Credit unions account for over 60 percent of financial sector assets and include systemically important institutions. The insurance sector remains critical to ensuring that the country is resilient to natural disasters, but the indigenous insurer is illiquid and insolvent, and currently remains unable to pay remaining outstanding Hurricane Maria claims. Table 1: Key Economic Indicators, 2017–25 2017 2018 2019 2020 2021 2022 2023 2024 2025 Proj. Real sector (annual percentage growth) Real GDP (market prices) -6.6 3.5 7.5 -11.0 3.7 6.8 5.0 4.6 4.1 Consumer price index (avg.) 0.3 1.0 1.5 -0.7 3.0 5.0 4.2 2.0 2.0 Monetary (percent of GDP) Broad money (M2) 18.0 1.4 -6.3 -9.9 1.6 5.6 2.8 5.7 5.2 Credit to private sector -0.2 -5.3 -6.1 0.4 -1.3 1.0 1.5 1.8 3.1 Fiscal1 Revenue 58.7 49.4 44.2 38.1 55.5 49.9 46.5 45.1 43.7 Expenditure 30.4 51.6 62.1 46.2 62.7 59.3 48.4 47.2 47.0 Overall balance2 28.3 -2.2 -17.9 -8.2 -7.2 -9.4 -1.9 -2.1 -3.3 Primary balance 29.9 -0.2 -16.0 -5.8 -5.2 -7.4 0.3 0.2 -0.8 Public debt 81.9 84.6 94.2 106.0 100.9 100.3 97.5 94.3 92.0 External debt 55.5 52.4 54.7 66.7 64.2 66.5 66.7 66.0 66.0 External Current account balance -8.6 -42.4 -37.9 -30.0 -31.4 -28.7 -24.0 -18.3 -17.1 Exports (goods and services) 40.3 27.7 35.0 20.2 20.0 27.4 30.7 36.0 36.8 Imports (goods, services) 59.3 74.4 78.0 57.6 52.8 56.2 57.5 57.3 56.3 Foreign direct investment 4.2 13.6 6.1 4.5 6.7 6.6 6.5 4.8 4.6 Exchange rate (EC$/US$) 2.7 2.7 2.7 2.7 2.7 2.7 Memorandum items Nominal GDP (EC$ million) 1457 1524 1663 1469 1569 1730 1859 1983 2104 Sources: World Bank, IMF and Ministry of Finance (MOF) estimates. 1 Fiscal data refers to fiscal years, July to June, i.e., 2020 refers to fiscal year July 2019 through June 2020. 2 For years 2022 onward, the overall balance includes an additional 1.5 percent of GDP as a buffer to account for the average annual fiscal costs of disasters. 13. Dominica’s fiscal position came under increasing strain after Hurricane Maria and fiscal pressures were exacerbated by the COVID-19 pandemic. The budget deficit decreased slightly to 7.2 percent of GDP in FY2021 (July 2020-June 2021) with a primary deficit of 5.2 percent, after recording an overall deficit of 8.2 percent of GDP in FY2020. Accumulated Citizen-by-Investment (CBI) reserves were essentially depleted after being used to fund Hurricane Maria reconstruction and recovery activities. Page 9 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Nonetheless, CBI revenues remain buoyant, with receipts in 2021 totaling 29.5 percent of GDP. Future CBI revenues are largely dedicated to housing and airport construction. While the Government has taken measures to consolidate spending, as recovery efforts began to wind down, challenges remain given the pandemic and ambitions to build a fully climate resilient economy. Tax revenue remains muted given the slow recovery of the tourism sector, though budget expenditures are expected to fall modestly as post- hurricane reconstruction and COVID-19 support programs unwind. The Government is also implementing additional measures in support of fiscal consolidation and to better manage fiscal risks from climate change, such as limiting discretionary expenditures and establishing a contingency fund. Table 2 presents the fiscal position in greater detail. Table 2: Key Fiscal Indicators, 2017–251 2017 2018 2019 2020 2021 2022 2023 2024 2025 (Share of GDP) Proj. Revenue and grants 58.7 49.4 44.2 38.1 55.5 49.9 46.5 45.1 43.7 Tax revenue 24.0 22.7 27.4 23.2 21.9 21.3 23.0 23.6 24.2 Tax on income and profits 4.5 3.5 4.3 4.1 3.8 3.8 4.6 5.2 5.5 Taxes on property 0.6 0.4 0.5 0.6 0.6 0.6 0.6 0.7 0.8 Tax on international trade 5.2 5.1 7.0 5.2 4.8 4.7 4.6 4.6 4.5 Tax on domestic transact. 13.7 13.7 15.6 13.3 12.8 12.2 13.2 13.1 13.3 Non-tax revenue 33.7 22.4 16.0 13.0 31.3 26.3 21.2 19.2 17.2 Property income 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 Sales, fees and fines 0.8 0.6 1.3 0.7 0.8 1.2 1.2 1.2 1.2 Other non-Tax revenue 32.8 21.7 14.6 12.1 30.4 25.3 19.9 17.9 15.9 Of which CBI 32.6 21.2 13.1 11.6 29.5 24.5 19.0 17.0 15.0 Grants 1.0 4.4 0.9 1.9 2.3 2.3 2.3 2.3 2.3 Expenditures 30.4 51.6 62.1 46.2 62.7 59.3 48.4 47.2 47.0 Current expenditures 27.9 29.6 37.8 36.9 36.4 34.5 33.0 32.3 32.2 Wages and salaries 10.2 12.2 9.9 10.3 10.8 10.2 9.4 9.3 9.3 Interest 1.6 2.0 1.9 2.4 2.0 2.0 2.2 2.3 2.3 Transfers and subsidies 7.1 6.7 9.7 7.7 7.3 7.0 6.8 6.7 6.7 Goods and services 9.0 9.7 16.9 16.8 16.3 15.3 14.6 14.0 14.0 Capital expenditure 2.4 22.0 24.4 9.3 26.3 24.9 15.4 14.9 14.9 Natural disaster annual cost 1.5 1.5 1.5 1.5 Overall Balance (incl. ND) 28.3 -2.2 -17.9 -8.2 -7.2 -9.4 -1.9 -2.1 -3.3 Primary Balance 29.9 -0.2 -16.0 -5.8 -5.2 -7.4 0.3 0.2 -1.1 Gross public sector debt 81.9 84.6 94.2 106.0 100.9 100.0 100.3 97.5 94.3 Source: MOF, IMF, and World Bank staff estimates. 1/ Data refers to fiscal years, July to June, i.e., FY2020 is the fiscal year from July 2019 through June 2020. 14. Dominica has registered large but moderating current account deficit (CADs), balanced largely by the capital account (mainly CBI) and FDI. The CAD is expected to total 31.4 percent in 2021 due to imports related to public investment and continued weakness in tourism receipts. The CAD had been narrowing as imports of capital goods slowed from their peak in 2018 as reconstruction efforts wound down. Nonetheless, Dominica remains highly import-dependent. The vast majority of food, fuel, and consumer and capital goods are imported and, as a small island state, it is difficult to meaningfully reduce these Page 10 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) imports, though a switch from fossil fuel to renewable sources in electricity generation will help. In the long term, the export of electricity using geothermal resources could generate additional income and improve the CAD. Tourism receipts approximate 20 percent of GDP in a typical year and make a substantial contribution to financing the trade deficit, as does net remittances at approximately 4 percent of GDP. FDI also helps finance the CAD, though given the small size of the economy it can fluctuate significantly. Table 3: Balance of Payments, 2017-25 2017 2018 2019 2020 2021 2022 2023 2024 2025 (percent of GDP) proj. Current Account Balance -8.6 -42.4 -37.9 -30.0 -31.4 -28.7 -24.0 -18.3 -17.1 Exports of goods and services 40.3 27.7 35.0 20.2 20.0 27.4 30.7 36.0 36.8 Exports of goods 2.4 2.1 1.4 2.2 2.4 2.4 2.4 2.4 2.4 Tourism 29.8 15.7 23.5 8.0 7.5 15.0 18.3 23.6 24.4 Imports of goods and services 59.3 74.4 78.0 57.6 52.8 56.2 57.5 57.3 56.3 o/w fuels 5.4 6.7 5.5 4.3 6.7 7.3 7.6 6.8 6.2 o/w food 6.5 7.1 6.3 6.5 7.1 6.1 6.4 5.7 6.0 Net income 0.3 -0.1 1.1 1.4 -2.5 -3.9 -1.2 -1.0 -1.6 Net current transfers 10.1 4.4 4.1 6.0 4.0 4.0 4.0 4.0 4.o0 Capital account balance 67.9 26.1 12.3 26.6 16.1 21.0 13.9 11.3 12.1 Financial (net) -60.1 11.4 21.8 5.3 13.5 10.5 12.8 9.6 7.3 Direct investment 4.2 13.6 6.1 4.5 6.7 6.6 6.5 4.8 4.6 Public sector flows -1.4 -0.1 1.2 5.9 6.4 5.4 6.2 4.1 3.4 Commercial banks -64.1 -14.6 14.5 -5.8 0.1 -1.0 0.5 0.8 0.5 Other private flows 0.5 14.2 0.3 0.6 0.7 0.0 0.1 0.3 -0.6 Errors and omissions 43.5 -1.2 0 0 0 0 0 0 0 Overall Balance -1.8 -3.7 -3.7 1.9 -1.8 2.8 2.7 2.6 2.5 External financing gap 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Reserves (months of imports) 7.9 5.4 4.2 6.8 6.5 6.1 5.7 5.6 5.5 Sources: ECCB, IMF, and World Bank staff estimates. Page 11 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Table 4: Central Government Financing Needs (US$ millions, fiscal years June-July) 2022 2023 2024 2025 2026 2027 Gross Financing needs 36 791 69 47 44 46 Overall deficit 59 23 26 38 36 25 Primary deficit 45 13 8 20 18 7 Interest 13 14 14 16 16 16 External debt 4 6 7 8 8 8 Domestic debt 9 9 10 9 9 9 Principal repayments 13 33 46 31 29 29 External 13 21 21 20 17 16 Domestic 0 12 25 11 12 13 Other (use of deposits) -35 19 1 -20 -19 -8 Gross financing sources 36 79 69 47 44 46 External financing 36 67 50 43 40 43 Multilateral 36 67 50 43 40 43 WB 30 48 35 30 28 30 CDB 6 20 15 13 13 13 IMF 0 0 0 0 0 0 Bilateral 0 0 0 0 0 0 Commercial and other 0 0 0 0 0 0 Domestic financing 0 11 19 4 4 4 Source: IMF and World Bank staff estimates 1/ Gross financing needs are 12.5 percent of GDP in 2023 at their peak. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 15. Economic growth is forecast to increase to 6.8 percent in 2022. Growth remains driven by a rebound in tourist arrivals. The assumption is that tourism will recover to approximately 40 percent of 2019 levels in 2022, and to 80 percent in 2023, with a return to pre-COVID levels by 2024. Growth will also be driven by large public investment spending over the medium term, financed by large CBI revenues, and private investments in new hotel developments. Domestic demand is expected to recover as COVID restrictions are eased and household incomes in the tourism and tourism-related sectors rebound, though this will be dampened by inflationary pressures. Price pressures are expected to increase over the short term, with inflation approaching 5.0 percent in 2022. 16. Uncertainty around the economic outlook has increased due to potential impacts from the Russia- Ukraine war. The invasion has put upward pressures on food and fuel prices and broader global inflation. These developments have been incorporated in the current baseline assumption, primarily through higher oil prices (reflected in inflation and the current account) and through lower global growth, which affects tourism. However, ongoing developments in Ukraine could potentially further impact economic, fiscal, and other macroeconomic outcomes in Dominica. As has been experienced in other countries, rising food and fuel prices could lead to pressure to implement fuel subsidies, or other forms of household transfers, with implications on the fiscal position. Rising social pressures could also result in some recalibration of reform ambition as household conditions tighten, though the authorities remain committed to their fiscal Page 12 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) consolidation plan. Furthermore, the conflict adds to uncertainty which could depress domestic private and foreign direct investment. These recent global geopolitical events and their economic fallout have increased risk and uncertainty considerably. 17. The conflict in Ukraine is expected to have adverse negative impacts on household welfare. The conflict has disrupted crude and natural gas supplies and is leading to global inflation in the prices of food commodities. Dominica, as a small island nation, is already feeling the pinch of rising fuel costs. As of March 2022, the price of gasoline in Dominica had reached an eight-year high. Rising fuel costs will directly affect households, but also adversely impact the price of basic commodities through increasing costs of transport. Rising food prices will affect the consumption expenditure of households, particularly those at the lower income deciles. The latest (2008) poverty assessment makes clear that the implications for poverty and food insecurity can be significant. It describes shocks to international food prices as one of the most important drivers of poverty. And it shows that households at the bottom of the income distribution spend a significant percentage of their income on food consumption: the per capita food poverty line for an adult in Dominica was estimated at EC$203 per month, representing approximately 39 percent of the overall poverty line. Moreover, food security of households had already come under significant pressure because of the COVID-19 pandemic. Since the start of the pandemic, the share of households running out of food due to a lack of money had doubled to over 40 percent according to the recent World Bank-UNDP high-frequency phone survey. Increasing food prices will be a further blow to already struggling households. Inflation may also reduce broader consumption driven expenditure, deplete household savings and assets, and consequently slow the post-pandemic economic recovery. 18. The fiscal deficit is projected to widen further in 2022 before returning to a position of primary surplus in 2023. An overall fiscal deficit of 9.4 percent of GDP is projected in 2022, with a primary deficit of 7.4 percent, as pandemic-related expenses continue, and tourism receipts remain relatively weak. CBI revenues are projected to fall by 5 percent of GDP, from 29.5 to 24.5 percent of GDP. These projections err on the conservative side on CBI revenues and are based on planned/budgeted public investment levels, and thus overestimate investment. It should be recognized that public investment tracks CBI revenues extremely closely and any fall in CBI revenues is typically offset by an immediate reduction in public investment. In this regard, the 9.4 percent fiscal deficit projection for 2022 is viewed as the worst- case scenario, and the actual deficit is likely to be smaller. In addition, for 2022 onward, the overall fiscal balance includes an additional 1.5 percent of GDP as a buffer to account for the average annual fiscal costs of disasters. These projections are maintained to ensure that fiscal deficits are not underestimated given uncertainties inherent in budget projections. 19. Dominica’s CBI program has resulted in substantial fiscal revenue over the past decade, in some years reaching over 30 percent of GDP. These flows can fluctuate given global economic conditions, changes in visa and entry rules in other countries, and the attractiveness of competing citizenship programs. The authorities are committed to increased transparency and accountability around CBI revenues to ensure they are used for funding critical budgetary needs and are increasingly brought on- budget. The CBI program includes: (1) direct investments in private hotel projects, recorded as private investment; (2) investment in public projects through firms that market the CBI program, recorded as public investment; and (3) direct payments to the government budget, without use restrictions. Investment in public projects and direct payments to the budget are recorded as revenues (Table 2). Of Page 13 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) these, typically more than half are investment in public projects that flow directly to firms with whom the Government has CBI-related contracts. These firms market Dominica’s CBI program with resultant revenues generated through their marketing efforts accruing to their pre-contracted activities, in most cases public housing projects. This mechanism now includes the contract for construction of the new airport, with no need for debt-financing. These arrangements create the noted strong and direct link between CBI revenues and public investment expenditures. While CBI revenues can be large, only about 50 percent is available for discretionary budgetary use. Except post-hurricane Maria, when reconstruction spending from accumulated CBI revenues was large, annual public investment is scaled to available CBI revenues and fluctuations in CBI revenues do not necessarily translate directly into fiscal deficits, though uncertainty in CBI flows can make budget planning more difficult. CBI revenues are used to build fiscal buffers: they finance the VRRF contingencies fund (EC$500,000 monthly and currently holding a EC$9.5 million balance) and a planned debt repayment fund (EC$500,000 monthly), with the intention to increase these monthly capitalization amounts based on CBI inflows. Fiscal projections include a downward trend in CBI revenues over the medium term to maintain a conservative approach to fiscal outcomes and to reflect some uncertainty. 20. Fiscal consolidation measures on the spending and revenue side, continued buoyant CBI revenues, and a rebound in tourism are projected to lead to a primary fiscal surplus of 2.0 percent in 2023. Consolidation measures supported by this programmatic series include: the establishment of an FRF, with a specific primary fiscal surplus target of a 2.0 percent of GDP by 2026; expenditure reductions, including tertiary education transfers; public procurement reform to improve value for money; increased tax compliance measures, including auditing efforts to increase revenue; a reduction in discretionary tax expenditures and exemptions; and a rationalization of social programming expenditures, through improved targeting and avoiding duplication. Other revenue reforms include rationalization of tax incentives, property tax reform, solid waste charges, removing exemptions on water and sewage services, recovery of health care fees, reduction of diesel fuel import duty exemptions, and broadening of the base for personal income taxes, including by introducing a presumptive tax. Expenditure measures include civil service reform, further reduction in transfers, review of pension benefits, and increased property tax compliance. Furthermore, the wage bill is expected to decline over the medium term as development partners assist the authorities in implementing civil service reform measures and rationalizing contractual terms. These additional reforms are being implemented by the Government with its own resources and assistance from development partners. 21. Specific fiscal consolidation measures approved in the past few months include: • Revision of the Tertiary Education Grant Program by revising the application and eligibility criteria, reducing the amounts received by program participants, and instituting caps on total allowable amounts per applicant, which will save up to EC$20 million annually, or over 1.2 percent of GDP. • Revision of gratuity payments to individuals employed on contract by eliminating gratuities for those earning less than EC$4,000 and previously engaged civil servants and initially saving more than EC$500,000 annually and more going forward. Page 14 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) • Elimination of all duty-free exemptions on the import of goods related to CBI projects, except those associated with government projects, which will save up to EC$5 million annually, or about 0.4 percent of GDP. In addition, the establishment of a debt repayment fund is planned, with a minimum monthly capitalization commitment of EC$500,000 (EC$6.0 million annually) to be used to pay down debt at an accelerated rate. 22. The CAD is expected to decrease over the medium term as post-hurricane reconstruction efforts diminish and tourism recovers. Agriculture may also benefit from efforts to increase linkages between tourism and domestic farmers, thus reducing imports. Furthermore, growth in agriculture, as the sector recovers from Hurricane Maria and current development activities reach maturation, could stimulate increased export growth in specialized agricultural products. Current food and fuel prices are clear and present risks to the CAD and the balance of payments position. Global oil and commodity prices will have to be watched closely, though the ECCB currently maintains a backing ratio of over 94 percent in its currency board arrangement. The large CAD is financed primarily through CBI revenues, official transfers, and foreign direct investment, with the result being that external financing needs are fully covered. Reserves held by the ECCB are expected to be maintained at adequate levels. 23. Under the baseline scenario in the February 2022 DSA, public debt is assessed to be sustainable, though the country remains at a high risk of debt distress. Back-to-back natural disasters in 2015 and 2017 and the COVID-19 pandemic significantly altered the debt trajectory, leading to an increase in public debt from 72.1 percent in 2014 to 100.9 percent by end of 2021 4, inclusive of all public and publicly guaranteed debt, including State-Owned Enterprise (SOE) debt. 5 Dominica has made significant improvements in debt reporting and debt transparency through the regularization of annual debt portfolio reviews, including the incorporation of SOE debt and all publicly guaranteed debt. Dominica participated in the Debt Service Suspension Initiative and benefited from bilateral debt payment deferrals of approximately 0.5 percent of GDP, or US$2.5 million. 24. The fiscal consolidation plan, combined with continued robust CBI inflows to finance public investment projects and boost growth, result in a declining trajectory of overall public debt. Under the baseline scenario assumptions, public debt remains on a declining trajectory. However, the present value of the total public-sector debt-to-GDP ratio remains above the threshold until well into the projection period, only declining below the benchmark by 2029. Key debt sustainability metrics remain elevated over most of the horizon owing mainly to the higher initial stock and are sensitive to stress scenarios. In a scenario without progress on fiscal consolidation, public debt would exceed 140 percent of GDP by 2035. In the baseline, with the implementation of the fiscal consolidation plan, the primary surplus reaches 3.6 percent of GDP by 2029, and public debt trends downward to 60 percent of GDP by 2035. The scenario 4 Outstanding debt to Petrocaribe (Venezuela) is estimated at 8.5 percent of the total debt stock as of 2020, based on the terms under its original loan agreement. It should be noted, however, that debt service payments have been cancelled or rescheduled in recent years, a pattern that may continue in the coming years. 5 Of Dominica’s 106 percent of GDP in total PPG debt in 2020, 11.6 percent of GDP (US$59.3 million) is guaranteed debt in respect of SOE’s. Of this, US$25.6 million is domestic debt, while US$33.6 million is external debt, all of which is owed to multilateral and bilateral agencies. Page 15 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) without fiscal measures assumes that public investment remains at the high baseline level and the fiscal deficit is financed with external public debt. All shocks result in significant breaches of the benchmark. The debt service-to-revenue ratios increase in the near-term due to projected revenue losses during the pandemic and then decline. 25. The present value of external public debt-to-GDP is declining in the near term and falls below the threshold by 2025. However, the threshold is breached by a large margin in the event of a catastrophic climate event or the most extreme shock scenario of a reduction in exports to one standard deviation below its historical average. The present value of external public debt to exports falls below the threshold more rapidly and is relatively more immune to a catastrophic climate event. However, the most extreme shock scenario of a reduction in exports causes significant deterioration of this metric in the near and longer term. Both external public debt-to-GDP and debt-to-exports ratios remain close to the threshold in the medium term, implying a high risk of breaching in the event of downside shocks. The historical scenario has a more rapid decline in the debt to GDP ratio in the initial years, but a similar trajectory. Dominica has no access to international financial markets and borrows mainly from official creditors, resulting in hard constraints on external debt accumulation. Figure 1: Indicators of Public and Publicly Guaranteed External Debt Sustainability Baseline Historical scenario Most extreme shock Natural disaster Threshold Source: Joint World Bank and IMF DSA (February 2022). 26. The macroeconomic outlook, as noted, is subject to significant risk, including financial sector risk. In addition to the ongoing impact of the pandemic on tourism and the remaining uncertainty associated with its evolution, Dominica is subject to several additional sources of risk. These include: vulnerability to climate shocks; exposure to volatile global oil prices as an import dependent economy; oil Page 16 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) price and commodity price uncertainty: other external economic shocks and global recessions as a highly open economy dependent on tourism and discretionary expenditure; and ongoing risks emanating from climate change such as floods and sea-level rise. As a small island economy, these risk sources can significantly impact economic outcomes over time, if not necessarily with immediate impact. Dominica participates in the CCRIF, has established a contingencies fund, has expanded its insurance coverage, and the Bank is preparing the CAT-DDO (P177807). These measures, among others, will mitigate some of these risks. 27. Dominica’s macroeconomic policy framework is adequate for this development policy financing (DPF) operation, despite substantial risks. This framework is supported by recently approved fiscal consolidation measures (including those supported by this operation) and a strong commitment to further economic and fiscal structural reforms. This assessment is reflected in: improving growth prospects; consistently low and stable inflation supported by sound monetary policy implemented by the ECCB; the achievement of primary budget surpluses over the medium term and the enshrinement of such targets in a Parliamentary-approved FRF; and prudent fiscal risk mitigation measures through the creation of fiscal buffers. Continued buoyant CBI revenues and their direct link to public investment, reduce the risk of large fiscal deficits emanating from an over-ambitious public investment pipeline. Furthermore, recent investments in rebuilding infrastructure post recent natural disasters, may have lowered the impact of future natural disasters and the potential fiscal and economic implications if such future climate-related disasters arise. 3. GOVERNMENT PROGRAM 28. The Government’s development vision and strategy is outlined in the National Resilience Development Strategy (NRDS) and the Climate Resilience and Recovery Plan (CRRP) 2020 - 2030. In March 2018, the Government launched the Climate Resilience Execution Agency for Dominica (CREAD) to coordinate all recovery actions and projects for building national climate resilience. CREAD is also responsible for coordinating the implementation of the NRDS and the CRRP. The NRDS articulates the high-level policy approach of the Government in its pursuit of a development agenda that will: (i) allow for the achievement of the 2030 Development Agenda, outlining 43 resilience goals; (ii) transform Dominica into the world’s first climate-resilient nation; and (iii) ensure that development is visionary and people-centered. The NRDS stipulates that, at the highest level, the CRRP should reflect three pillars of resilience, namely, and as noted previously: Pillar 1, Climate Resilient Systems; Pillar 2, Prudent Disaster Risk Management; and Pillar 3, Effective Disaster Risk Response and Recovery. 29. The CRRP expands the NRDS’ three pillars into six focused results areas for a Climate Resilient Dominica, namely: • Strong Communities, with the capacity to absorb stress or destructive forces through resistance or adaptation; the capacity to manage or maintain certain basic functions and structures during disastrous events; and the capacity to recover or ‘bounce back’. • A Robust Economy, with the ability to limit the magnitude of immediate production losses for a given amount of asset losses and the ability to reconstruct and recover quickly. Page 17 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) • Well-planned and Durable Infrastructure ensures that critical physical infrastructure can absorb shocks or fail safely. A resilient infrastructure system has redundancy, duplicating critical components allowing for back up or continuity. • Enhanced Collective Consciousness speaks to mind-sets and behaviors (spiritual, theological and culturally inclusive) that underpin respect, dignity and peace among all citizens, ensuring that no one is excluded or left behind. • Strengthened Institutional Systems, defined as the ability to effectively and efficiently deliver on the Government’s comprehensive socio-economic development mandate, and continue operating during and in the aftermath of a disaster. • Protected and Sustainably Leveraged Natural and Other Unique Assets reflects staying true to Dominica’s Nature Island “brand” by valuing its unique assets, maintaining a pristine environment, and carefully monetizing them to support the resilience agenda. 4. PROPOSED OPERATION 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 30. This operation aims to support the Government in responding to the COVID-19 pandemic and in creating conditions for the country’s climate-resilient economic recovery. The operation consists of two mutually reinforcing pillars: Pillar 1 - supporting interventions for saving lives, preserving jobs and protecting livelihoods; and Pillar 2 - strengthening policies, institutions and investments for a climate resilient recovery. 31. In response to the devastation caused by Hurricane Maria, in 2018 Dominica approved the NRDS, a climate resilience policy framework to guide its recovery and development agenda. The NDRS is implemented through the associated CRRP. The development of Dominica’s geothermal potential is one part of the country’s Low Carbon Climate Resilience Development Strategy (LCCRDS) and is expected to result in lower electricity tariffs, increasing competitiveness and the population’s resilience to fossil fuel price fluctuations and climate events. Given the NRDS, the CRRP, and the vulnerability of key sectors (tourism, agriculture, fishing) to climate change impacts, all reforms are being viewed through the lens of climate resilience, in line with Dominica’s goal of becoming the first climate-resilient nation. This approach reflects three resilience pillars, as follows: • Climate Resilient Systems require systems and processes with the capacity for adjusting to, and absorbing the impacts of, climate change - for instance, a robust fiscal and financial system that can support core elements of resilience; • Prudent Disaster Risk Management focuses on minimizing and managing risks associated with climate disasters and involves the development of a strong evidence base for decision-making; and Page 18 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) • Effective Disaster Risk Response and Recovery, speaks to the post-disaster phase, minimizing climate disaster impacts and reducing the period of recovery. 32. The prior actions supported under this series, especially under the first operation, also complement the Government’s other COVID-19 responses to poor and vulnerable households financed from other sources. The Government’s response to the pandemic included temporary cash transfers to affected workers and self-employed persons who lost jobs. The World Bank partially financed the activities through contingent emergency response component (CERC) of the World Bank-financed Housing Recovery Project (P166537); and the World Food Program financed a temporary top-up to beneficiaries of the country’s main non-contributory social assistance program and to other poor and vulnerable households. 33. Furthermore, this operation will directly support strengthening Dominica’s resilience to climate- related natural disasters. The series will strengthen Dominica’s ability to deliver services to beneficiaries during these events. The operations include measures to strengthen social safety nets for vulnerable groups, operationalize a disasters contingency fund, strengthen public investment prioritization, planning, implementation, institute low-carbon and climate resilient procurement approaches, and foster the use of renewable energy sources through the approval of a national energy policy. Social safety nets will be strengthened for populations significantly impacted by future shocks and disasters, including strengthening resilience to shocks that result from climate change impacts such as hurricanes, floods, and sea level rise. This will be supported by the establishment of a beneficiary registry, an updated intake instrument to identify the population that is more prone to risks and less resilient to shocks and better target assistance. An increased share of renewable energy in electricity generation will increase resilience by lowering electricity tariffs and mitigating the impact of fossil fuel price fluctuations on the economy and vulnerable people. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS 34. The operation’s development objective is to support Dominica in its COVID-19 pandemic response and recovery by: (i) saving lives, protecting livelihoods, and preserving jobs; and (ii) strengthening fiscal policies, public financial management and debt transparency for a climate-resilient recovery. As the pandemic subsides, this second operation in the series increasingly focuses on Pillar 2 in supporting a more climate-resilient recovery. Pillar 1: Saving lives, protecting livelihoods, and preserving jobs 35. The GoCD provided a rapid response to the COVID-19 pandemic. Dominica faced serious social and economic impacts because of the COVID-19 pandemic and the resultant global economic slowdown. The Government strengthened its health sector response by improving testing capacity and adopting health and safety protocols to allow for a gradual reopening of the country’s borders. The Dominica COVID-19 immunization plan was developed and implemented with support from the Pan-American Health Organization. The plan provides a basis for expanding access to vaccines to the population, free of charge and voluntarily, and outlines a range of distribution strategies, including vaccinations at primary health care facilities, hospitals, elderly care facilities, private clinics, fixed sites, and outreach sites. Page 19 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Notably, the plan also foresees the development of a communication strategy based on consultation with stakeholder groups to provide accurate information and encourage vaccination uptake, critical in light of related challenges of vaccine hesitancy experienced in Dominica and the region. Several measures and programs supported under the first operation were put in place to protect the vulnerable from the economic and social impact of the crisis. However, these proved insufficient and notable gaps and inefficiencies were evident in planning and delivering an effective social protection response. Cabinet ordered a review of all social safety programming, and the subsequent report highlighted several recommendations to reduce duplicities, strengthen program impacts on the poor and vulnerable populations, and enhance the efficiency of social spending. These measures will enhance the credibility and sustainability of programs over the medium to longer term. This second operation in the series supports specific measures recommended and identified in the review to improve social expenditures’ efficiency and effectiveness and particularly address issues of duplication and ineffective targeting of social assistance. Prior Action 1: The Recipient has issued a Cabinet decision to strengthen social programming and efficiency, by approving the establishment of a beneficiary registry and management information system for social programs, including a digital registration process and payment reconciliation mechanism. Revisions from the first operation: the stated prior action is directly in line with the trigger included in the first operation although has been moved to pillar 1 from pillar 2 as, while improving fiscal efficiency and effectiveness, it is more directly in line with Pillar 1 objectives of saving lives, protecting livelihoods, and preserving jobs. Additional indicators added as follows: Number of social programs integrated into a Single Beneficiary Registry and Management Information System for Social Programs: 2019: 0 programs  2023: 2 programs Percentage of beneficiaries in the Public Assistance Program in the first two income level quintiles: 2019: est. 70 percent  2023: 5 percentage points higher than the baseline, of which female beneficiaries are 50 percent 34. Rationale: Dominica’s public expenditure on social protection and labor is equivalent to 7 percent of GDP. Of this amount, 2.2 percent of GDP is spent on social assistance programs, 3.7 percent of GDP is spent on social insurance programs and 1.1 percent of GDP is spent on labor market programs. Recent analysis of Dominica’s social protection and labor market programs 6 indicate that the management and the targeting of programs to the most vulnerable segments of the population can be significantly improved. Regarding management, social assistance is fragmented among sectors and ministries. Moreover, beneficiary registries are mostly paper or excel-based and existing databases are disconnected from each other hampering information exchange and interoperability to support better coordination and policy management. All of these, limit the tracking of beneficiaries and benefits leading to duplications 6Dominica: Assessment of Social Protection, World Bank, March 2017; Process Evaluation for Post-Disaster Social Protection and Labor Support, January 2018. Page 20 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) and inefficiencies in social spending. Furthermore, there are no automated processes to support the delivery of social assistance (registration, assessment, enrollment, payments, and others), including during climate shocks such as hurricanes, which caused significant disruption and delays in the provision of assistance to affected households in the aftermath of climate shocks. It should be noted that most of the poor in Dominica are extremely vulnerable to climate-related natural disasters (being on the coast, in fragile housing, locations prone to floods, involved in climate dependent agriculture, etc.). Regarding targeting, the Public Assistance Program (PAP), a prominent social assistance program, may have significant inclusion errors while reasonably well targeted to benefit the poor. About 10 percent of beneficiaries are non-poor (recall that the poverty headcount is 28 percent) 7. However, the Government has taken the necessary steps to address these challenges. It has advanced digitizing the paper-based registries and updated the registries of the leading social assistance programs, the PAP and the National Employment Program as initial steps to develop a single Beneficiary registry database. Moreover, the Government has implemented an information system with registration, payment, and reconciliation modules to support the delivery of COVID-19 cash transfers 8 and aims to expand this experience to other programs. In terms of targeting, the Government has updated the PAP intake instrument to improve the targeting and selection of beneficiaries. 35. Substance of prior action: Through the Cabinet of Ministers, the Government has issued a decision to establish and institutionalize a Single Beneficiary registry and a management information system (MIS) as the main pillar to improve the efficiency and effectiveness of social protection delivery. This action includes, inter alia: (i) the designation of the Minister of Youth Development and Empowerment, Youth at Risk, Gender Affairs, Seniors' Security, and Dominicans With Disabilities as the responsible administrator of the Beneficiary Registry and identification of the roles and responsibilities of other key institutions involved; (ii) general protocols to feed and update the systems and exchange information to support the integration of databases and enhanced social assistance management and policy formulation; (iii) the establishment of the Beneficiary registry as the single database for the registration of all beneficiaries of social assistance programs which would include key socio-economic household information on its members, as a key source of data management to inform shock preparedness and response; (iv) the establishment of a mandatory unique intake form that will collect key socio-economic information of program applicants (to help determine the level of poverty or vulnerability of individuals or households; and (v) a provision for the expansion of the Beneficiary registry (beneficiaries) to a Social registry (potential beneficiaries) in the medium-term horizon. The Beneficiary registry will improve the continuity of social protection services during climate shocks given that it will be digital, and not dependent on paper or inaccessible records. Furthermore, the Beneficiary registry will increase the climate-relevant data in Dominica through its interoperability with disaster risk management systems and tracking of relevant socioeconomic indicators, such as age, gender, location, disability status, and poverty status. 36. Expected Outcomes: Adopting a Beneficiary registry and an MIS is expected to enhance monitoring and administration of social programs and benefits support higher effectiveness of social assistance, enhance efficiency of social spending and enable climate resilience of social protection systems. The 7 Based on latest household survey 2008/2009 LCS/HBS which is somewhat outdated and therefore its finding should be taken with caution. Dominica: Assessment of Social Protection, World Bank, March 2017. 8 Supported by the World Food Programme. Page 21 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) establishment of the Beneficiary registry, in its early phase of implementation, will follow the integration of the main social assistance programs (a total of approximately 20 programs), the PAP and the Over-70 years allowance, and potentially the National Energy Policy (NEP) as measured by the indicator number of social programs integrated into the Beneficiary registry and the MIS. Registries of beneficiaries of these programs will be cross-checked with the Dominican Social Security and among program databases to check for duplications and enhance the beneficiary selection and validation process. With the updated intake instrument beneficiaries are expected to be better targeted. Spending will focus on beneficiaries in the lower income levels, reducing inclusion errors and indicating improvement of allocation of resources to the most in need, as measured by the indicator tracking the percentage of beneficiaries in the PAP in the first two income level quintiles. The improved database, registration, and intake processes (following data protection international practices) will also help provide more timely and better targeted assistance to vulnerable households in the aftermath of natural disaster and climate-related adverse events. Pillar 2: Strengthening fiscal policies, public financial management, and debt transparency for a climate- resilient recovery 37. Creating fiscal space will enable the government to further invest in climate adaptation and resilience. There is considerable scope to support investment in climate adaptation and resilience, through creating fiscal space, addressing existing PFM weaknesses in basic budget processes, and developing and clarifying emergency-related PFM procedures, as confirmed in the findings of the World Bank’s 2019 Dominica Post-Disaster Public Financial Management Review. This operation seeks to help build fiscal buffers, improve current expenditure efficiency and effectiveness, and support increased public investment in climate adaptation and resilience that will be increasingly efficient and effective. This operation supports a coherent package of critical reforms to strengthen Dominica’s efforts to build a more climate-resilient economy and a more robust fiscal framework that can help build fiscal buffers to facilitate climate-resilient investment, reduce debt levels and borrowing costs, and enable the government to respond more efficiently and effectively to climate shocks. The reforms will contribute to maintaining fiscal and macroeconomic stability, reducing debt, and directly supporting strengthened climate-resilient fiscal measures, such as procurement and public investment planning and implementation. Prior Action 2: The Recipient: (a) through its Parliament, has adopted the Fiscal Responsibility Framework, 2021 to create fiscal space for a climate-resilient recovery by: (i) outlining fiscal responsibility principles; and (ii) establishing measurable quantitative targets for fiscal balances and public debt levels; and (b) through its Cabinet, has approved a new policy for the Tertiary Education Financial Aid Programme to reinforce the achievement of Fiscal Responsibility Framework targets, improve spending efficiency, and strengthen the composition of public expenditure by revising the application and eligibility criteria, reducing the amounts received by program participants, and instituting caps on total allowable amounts per applicant. Revisions from the first operation: (a) Prior action 2 has been modified to drop inclusion of spending and wage bill targets due to resistance from public sector unions and opposition, while retaining primary balance and public debt targets. Page 22 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) References to a fiscal council have also been removed from the prior action. While a fiscal council is still planned for, it will not be accomplished within the timeframe of this operation, largely due to capacity constraints, hence, the original triggers on staffing a fiscal council and revising the Financial Administration Act have been dropped. (b) Cabinet approved several fiscal consolidation measures to ensure demonstrable commitment to meeting fiscal targets as stated in the FRF, the most important of which, from a fiscal savings perspective, was included as a sub-action under this prior action. The original indicator, which referred to a fiscal council, has been dropped and a new indicator measuring progress in fiscal consolidation has been added. Expenditures under the Tertiary Education Grant Program reduced by 40 percent: 2021 EC$30 million  2023: 40 percent reduction 38. Rationale: Dominica’s ambitious pursuit of its climate adaptation and resilience goals requires fiscal framework that clearly places public debt on a downward track and safeguards debt sustainability. The CRRP notes: “Well-planned and Durable Infrastructure ensures that critical physical infrastructure can absorb shocks or fail safely. A resilient infrastructure system has redundancy, duplicating critical components allowing for back up or continuity. The key elements of focus include climate resilient roads and bridges, utilities (power, water, communications), houses and shelters, schools, health facilities, ports and airports, and coasts and river banks.” To enable these investments in climate adaptation, the GoCD has adopted fiscal rules through Parliament, which include the adoption of policy principles, targets, and review and compliance mechanisms to ensure consistency and adherence to fiscal responsibility. Enshrining fiscal targets through a fiscal rules framework consistent with the fiscal consolidation plan is also key to ensuring adherence to and compliance with fiscal discipline principles. 39. Substance of prior action: The FRF establishes annual primary budget surpluses and public debt targets. The FRF also includes accountability and oversight mechanisms, including remedial measures should targets not be met that require the Government to return the fiscal framework to achieving required fiscal surplus targets. The establishment of a fiscal council under the FRF was deemed inadvisable at this point given capacity constraints, legitimacy concerns, and the political cycle. Experience in the neighboring islands of Grenada and St. Vincent and the Grenadines showed that fiscal councils were only established two or three years following the introduction of their respective fiscal rules' frameworks. Still, the FRF includes the establishment of a fiscal council by a date specified directly in the FRF legislation. 40. Despite COVID-19 related fiscal challenges, the Government recently took additional significant fiscal consolidation measures to create fiscal space and meet FRF targets. These include, among others: • Revision of the Tertiary Education Grant Program. The Government revised the application and eligibility criteria, reduced the amounts received by program participants, and instituted caps on total allowable amounts per applicant. These actions will save up to EC$20 million annually, or over 1.2 percent of GDP. Page 23 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) • Revision of gratuity payments to individuals employed on contract by: (i) eliminating gratuities for those earning less than EC$4,000 and previously engaged civil servants; and (ii) reducing by 5 percent the rate on all new engagements, i.e., a reduction in the gratuity amount from 20 percent to 15 percent of the contract amount. This measure will save more than EC$500,000 annually initially and more in the future. • An elimination of all duty-free exemptions on the import of goods related to Citizenship-by- Investment projects, except those associated with government projects, which will save up to EC$5 million annually, or about 0.4 percent of GDP. • The GoCD has also committed to the creation of a debt repayment fund with a minimum monthly capitalization commitment of EC$500,000 (EC$6.0 million annually) to be used to pay down debt at an accelerated rate. This debt repayment fund will be funded through CBI revenues and greater amounts could be deposited depending on CBI flows. 41. Of the above identified measures, the revision of the Tertiary Education Grant Program has been included as an additional prior action. Dominica has generous education spending levels (at 7% of GDP) which is higher than OECD and much higher than OECS region at large. The current tertiary education support program allows students to apply for university support outside of Dominica. Lately, almost all students applying for this support attend universities outside the Caribbean, i.e., US, UK, or Canada, often costing more than US$50,000 per year per student. While almost all applicants are approved, less than fifty percent return to Dominica, which is a condition for the grant. The goal of the revision is to reduce expenditures on this program from EC$30 million to EC$10 million – a saving of EC$20 million annually (over 1.2 percent of GDP). Under the revised program parameters, there will be a cap on how much a student can receive. This approach will be based on the typical cost for a student to attend a University of the West Indies campus – US$13,000 (EC$35,000) per year. Students can still receive an amount equivalent to full support at a University of the West Indies (UWI) campus, but if they prefer to study outside of the region, they will have to incur the additional costs, including available private sector loans or scholarships. This change will occur in phases in for new applicants and fiscal costs will decrease over time as current students receiving support complete their programs. Current students under the program will continue to receive their previously approved level of support until they complete their education. Note that Dominica also offers merit-based scholarships which are not affected by this reform. 42. Expected Outcomes: While the medium- to longer-term expected outcome is to improve fiscal performance, create fiscal space and reduce public debt, meaningful progress on these measures over the series’ timeframe is challenging, particularly given the current pandemic environment as related fiscal pressures continue. Furthermore, attribution of these broader measures to the specific prior action can be difficult given the range of factors that can potentially influence fiscal outcomes and measures. As such, indicators have been included to measure the direct impact of the noted fiscal consolidation measures. Prior Action 3: The Recipient, through the Minister of Finance, has issued operating regulations for the Vulnerability, Risk, and Resilience Fund to ensure its adequate capitalization and effective operation. Page 24 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Revisions from the first operation: Minor wording changes only to the prior action from the original trigger, and no changes to the indicator. 43. Rationale: Natural Disasters, primarily those caused by climate shocks, can negatively affect economic growth and development progress, and exacerbate household vulnerabilities. If additional resources are not immediately available, the Government must reallocate resources from other priorities. Intervening with rapid liquidity can prevent adverse coping actions from the Government, households, and businesses, which can have increasingly pronounced negative consequences, such as reduced food consumption, distressed productive asset sales, exacerbated environmental damage, and diversion of funds from otherwise critical development projects. Well-governed contingency reserve funds are a recommended complement to other risk retention and risk transfer instruments and to sound fiscal buffers. 44. Dominica experienced tropical storm Erika in 2015 (96 percent of GDP in losses and damages) and Hurricane Maria in 2017 (226 percent of GDP in losses and damages). Dominica utilizes a few ex- ante risk financing instruments, such as sovereign parametric insurance from Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC), parametric livelihood insurance offered to individuals, and insurance for critical public assets. However, these instruments are not designed to address all costs to the GoCD in the immediate aftermath of a disaster. Contingency funds can provide rapid and cost-effective access to financial resources, as the need for liquidity immediately following a natural disaster is paramount to address emergency recovery and reduce the likelihood of compounding losses. The GoCD has established a contingencies fund, the VRRF, to ensure funds are available when needed and reduce liquidity risk, as supported under the first operation. With the World Bank technical support, the GoCD has adopted management guidelines for the VRRF that include measures for triggering the release of the funds, and the administration and disbursement of the proceeds to ensure effective, efficient, transparent and accountable public financial management of the resources of the fund. 45. The Government has identified this contingent financing as a critical component of its fiscal strategy to address contingent liabilities associated with natural disasters. The VRRF, this operation, the Cat DDO, the CCRIF SPC, and other risk instruments provide an appropriate suite of risk transfer instruments. These other instruments complement the VRRF by supplementing gaps in financing where losses exceed the money available in the Fund, and it complements the CCRIF SPC by allowing the Government to optimize the CCRIF SPC package and premiums. Under the current subscription to the CCRIF SPC, the attachment point (the size of disaster losses that would trigger the CCRIF payout) is quite high and so the VRRF and Cat DDO can cover losses below the attachment point. Thus, this operation, the VRRF, the Cat DDO, and CCRIF SPC provide significant value for money across the risk spectrum. 46. Substance of prior action: The VRRF was established on October 13, 2020, through the opening of an account at the ECCB specifically for this purpose. The GoCD has identified CBI revenues as the source of monthly deposits, which began in October 2020. The operating guidelines include clear capitalization targets and procedures, fund investment guidelines, trigger release and disbursement mechanisms, and other sound governance and transparency practices in the operation and management of the VRRF. Explicit guidelines on the operation and management of the VRRF are now in place to ensure such funds are accessed only in the case of eligible climate shocks and emergencies, that the funds are Page 25 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) managed/invested in a responsible manner, and that disbursements are undertaken within a sound fiduciary environment. The guidelines also articulate that the objective of the VRRF is to provide liquidity for climate and natural disaster response and recovery and to support Dominica’s disaster and climate resilience. This action is also an FY22 performance and policy action (PPA) under the sustainable development financing policy (SDFP) and has been completed. 47. Expected Outcomes: The VRRF will enhance Dominica’s fiscal and climate resilience by providing a financing source to immediately address damages and losses caused by frequent, but less severe hazard events – the bottom layer in a traditional risk layering fiscal strategy. It will also be used to address emergency response expenditures of more severe events for which other sources of liquidity are not available. It is expected that deposits will total EC$6 million annually (US$2.2 million), or about 0.4 percent of GDP per annum, although the government has expressed a desire to increase this amount as finances permit. The fund’s existence and operation are expected to reduce fiscal and liquidity risks arising primarily from climate-related events. Prior Action 4: The Recipient, through its Cabinet, has taken measures to strengthen debt transparency by requiring: (a) the preparation of Debt Portfolio Reviews (DPRs) on an annual basis; (b) the inclusion of all state-owned enterprise and statutory body debt in the annual DPRs; and (c) the disclosure of DPRs by September 30th each year. Revisions from the first operation: there was no trigger in the first operation related to this prior action, though this action directly builds on the prior action included in the first operation. 48. Rationale: Regularizing public disclosure of the DPR improves transparency around debt performance, particularly when debt is increasing and there is a need for increased scrutiny regarding fiscal and debt performance. Policymakers in borrowing countries need reliable debt information to make informed borrowing decisions. Creditors, donors, analysts, and rating agencies need it to appropriately assess sovereign creditworthiness and price debt instruments. Citizens need it to hold their governments accountable. Ensuring that the annual debt report published annually is an effective way to improve transparency and reduce debt vulnerabilities. The timely publication is also important. As the practice becomes regularized, this process is expected to be accelerated and the report published in a further reduced timeframe in future years, i.e., before September 30th annually beginning in 2022. Furthermore, while capacity constraints exist, given that the content has already been broadened, the explicit inclusion of SOE debt will now result in a fully comprehensive report. This action is also an FY22 PPA under the SDFP, and has been completed. 49. Substance of prior action: Preparation of a DPR, submission to Parliament, and publication of the report are recognized by the Government as necessary to strengthen accountability and transparency in debt reporting. While DPRs had been prepared in the past, they were not always inclusive of all public and publicly guaranteed debt, nor completed annually or published. The Government, through Cabinet has now required that such reports be completed annually and made public. The report’s content had been strengthened under the first operation to include government-guaranteed debt and has been expanded to include risk analysis metrics incorporating maturity, interest rate, currency, and roll-over risks. The Page 26 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) content is further strengthened to include SOE debt explicitly. The measure also establishes a September 30 annual deadline for the report’s publication. 50. Expected Outcomes: Increased public, media, civil society, and Parliamentary oversight and review can be expected to lead to greater accountability and more informed policy and decision making on public debt issues. Debt transparency is critical for the government and the ECCB to make better informed decisions and assessing debt sustainability. The impact of this measure will be verified by actual publication of the annual DPRs and the number of site visits to the published report. Prior Action 5: The Recipient, through its Cabinet, has approved initiatives for enhanced capital investment planning, appraisal and monitoring mechanisms, including explicit incorporation of objectives for increasing environmental resilience and reducing environmental and climatic vulnerability, to strengthen budget allocations, public investment planning, prioritization, and reporting. Revisions from the first operation: Minor wording changes only. Original indicator reworded to: Percentage of new public investment projects funded in the 2023 annual budget, appraised in line with the PSIP methodology that account for the impact of natural disasters. 2020: 0  2023: 25 percent New indicator added: Percentage of new public investment projects funded in the 2023 annual budget, appraised in line with the PSIP methodology that account for gender-differentiated impacts to meet the needs of women. 2020: 0  2023: 25 percent. 51. Rationale: As noted, Dominica is among the countries most vulnerable to natural disasters and climate change, and over the period 1997-2017 it was the country that suffered the highest GDP losses to climate-related natural disasters. Understandably, the fundamental vision of building a climate-resilient Dominica is focused on climate adaptation and resilience, while facilitating the overall socioeconomic development trajectory of the country. Public investment in sustainable, resilient and inclusive infrastructure is a key component of this vision. The total cost of transforming Dominica into a disaster- resilient state over twenty years is estimated at US$2.8 billion (five times Dominica’s GDP). Model-based estimates calibrated to Dominica’s economy indicate that the return to climate-resilient investment outweighs the cost in the long term. To ensure this ambitious public investment program is effectively and efficiently implemented the GoCD has approved a revised PSIP methodology. A revised investment framework and other reforms supported under this operation, will help ensure that the costs and returns from investment in building resilience against climate-related natural disasters are consistent with a stable macroeconomic framework. These actions will also enable the identification of financing needs and public debt sustainability implications for climate-resilient investments, critical for planning, prioritizing, and identifying financing sources. The reforms are aligned with the acknowledgment that public infrastructure assets have operating lifetimes of many decades. Consequently, vulnerability and risk assets need to consider climate change impacts, such as hurricanes, flooding, and sea-level rise. Page 27 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) 52. Substance of the prior action: The PSIP methodology will address identified weaknesses of the current public investment management framework in Dominica and help strengthen the resilience of the infrastructure portfolio. It will support the implementation of the Government’s National Resilience Development Strategy and will be aligned with the Climate Resilience and Recovery Plan 2020—2030. The new methodology will allow the Government to consider vulnerability to climate shocks and impacts in public investment project design, physical placement, construction, and maintenance, including by using projections of the frequency and intensity of extreme weather events and other climate trends (e.g., sea- level rise) over the asset’s intended lifetime. This will be done by incorporating: (i) clear guidance on national and sectoral planning of public investments in line with the Government’s climate change and natural disaster resilience agenda; (ii) systematic approach to the appraisal of project proposals that, besides conducting cost-benefit analyses, also incorporates disaster/climate risks; (iii) comprehensive guidance on multiyear budgeting, including the identification of capital and recurrent costs for the project life cycle; (iv) guidelines for project selection that incorporate disaster/climate risks; and (v) approach to monitoring of public assets that ensures that critical infrastructure assets support and contribute to network resilience during extreme natural hazards. In addition to strengthening disaster and climate resilience of investment projects, the new PSIP methodology also aims to address gender equality gaps. All investment projects will be required to demonstrate how they will impact men and women through jobs, contracts, access to services, increased safety and security and improved educational opportunities or health care. 53. Climate change, disaster resilience, and gender equality are integral to the PSIP. The Government established six key clusters of criteria for the PSIP methodology. The proposed investment projects need to demonstrate that they are: (i) strategic; (ii) impactful; (iii) effective; (iv) transformative; (v) sustainable; and (vi) adequately positioned institutionally. Climate change and disaster resilience considerations are integrated throughout the six clusters. In terms of climate resilience, the methodology explicitly includes the following evaluation and assessment criteria: • Reduced Environmental and Climatic Vulnerability: Projects must demonstrate how they contribute to the protection and rehabilitation of the environment through the achievement of domestic renewable energy production, reducing the vulnerability and exposure of people, property, businesses, and government to future shocks, boosting the protective function of the blue and green infrastructure, and through an improved built environment that fosters responsible land use and modernizes waste management. • Well-planned and Durable Infrastructure: Projects must demonstrate how they contribute to improved building construction and utilities, using standards and designs that are climate-resilient and environmentally friendly. Reduced risk to life on road, land, and coastal areas. • Contribution to one or more of the 20 Climate Resilience Targets: Projects must demonstrate how they contribute to the 20 climate resilience targets developed by the Government. This criterion is scored the highest (maximum 20 points, while other criteria are scored a maximum of 3 to 8 points). • Contribution to biodiversity, eco-system protection, and forest preservation. Page 28 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) 54. The PSIP methodology also includes the requirement for project proposals to demonstrate the impact of investment projects on gender equality, a necessary foundation for a sustainable Dominica. An International Labor Organization gender country report based on the 2013 labor force survey data found that the economic participation of men exceeds that of women. Labor force participation was 70.6 percent for men and 59.5 percent for women. Unemployment rates were 15 percent and 19.5 percent, respectively and there is evidence of a gender pay gap in favor of men. Similarly, according to the latest data, 66.2 percent of males accessed consumer loans compared to 33.7 percent of females. 9 Importantly, persistent gender inequalities in access to economic opportunity represent different levels of exposure and vulnerability to natural disasters for women and men. Even though gender data are limited in Dominica, assessments 10 following recent natural disasters appear to confirm this trend. For example, following Hurricane Maria, women experienced higher levels of vulnerability as they were engaged in approximately 55 percent of the informal economic activities disrupted and they reported major losses for home-based businesses and subsistence farming. The new methodology aims to put women at the center of public sector investment and private sector employment opportunities. It seeks to unleash the potential for greater female labor participation and enhance opportunities for women-owned businesses in Dominica. Before introducing the new PSIP methodology, there was no requirement for public investment projects to demonstrate their impact on gender equality. The new PSIP methodology explicitly includes the following evaluation and assessment criteria: • Promotes Gender Equality: Projects must demonstrate how the implementation of the project will contribute towards gender equality, emphasizing women’s access to jobs, contracts, services, increased safety and security, and improved educational opportunities or health care. 55. Expected outcomes: This measure will strengthen climate adaptation and resilience and build a more climate-resilient and inclusive Dominica over the medium-term. In the immediate term, the measurable and attributable result will be the percentage of new public investment projects that have been included in the PSIP and thus have incorporated the new climate resilient methodology, including the assessment of impacts on gender equality, and subject to the new performance framework. Applying the new methodology will allow the government to verify that vulnerability to climate shocks and impacts have been adequately considered and addressed during the project preparation process. The selection of projects will undergo a comprehensive review to ensure that projects that adequately address the exposure and vulnerability to climate shocks get included in the national budget, and that projects have adequate financing over the intended lifetime and are regularly maintained so they uphold the intensity and frequency of extreme events. The measure is also expected to contribute to closing gender gaps by ensuring a more equal engagement of men and women in the design and implementation of public investments, and increased opportunity for women-owned businesses to engage in government contracts across different sectors. Prior Action 6: The Recipient: (a) through its Parliament, has enacted the Public Procurement and Disposal of Public Property Act; and (b) through its Minister of Finance, has issued Public Procurement and Disposal of Public Property Regulations 2022, to strengthen the effectiveness, efficiency and transparency of public 9CDB. 2014. Country Gender Assessment: Dominica. Barbados: Caribbean Development Bank (CDB). 10The analysis is based on available assessments and reports including Bleeker et al., 2021; Commonwealth of Dominica, 2017; Commonwealth of Dominica, 2019; ILO, 2018; WB, 2021; Erman et al, 2021; CDB, 2014; WMO, 2018. Page 29 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) procurement and to incorporate climate-resilient and sustainable procurement into the public procurement process. Revisions from the first operation: Minor wording changes only New indicator added: Percentage of goods contracts (by value) including sustainability/climate considerations: 2019: 0  2023: 25 percent. 56. Rationale: Dominica spends significant fiscal resources on goods and services through its procurement system, particularly in the aftermath of natural disasters and other climate change-induced shocks such as floods and sea-level rise. An efficient and increasingly low carbon, socially responsible, and climate-resilient procurement system enables increased competition, more transparency and better value for money, generating efficiencies and fiscal savings over the medium-term and sustainable growth. Public procurement in Dominica is currently governed by an outdated, deficient set of regulations that neither reflect sustainability or climate-resilient requirements nor the many advances that have come up regarding public procurement, including e-procurement initiatives. Dominica is still utilizing a manual procurement system and, therefore, a new procurement framework that allows the country to move to an e-procurement system will provide business continuity during climate shocks and improve efficiency in the procurement process. A new Public Procurement Act and Regulations are also necessary to align Dominica’s commitments to other OECS and CARICOM partners to modernize its public procurement system. This procurement reform will facilitate Dominica in its efforts to build a climate-resilient economy. 57. Substance of prior action: Aside from strengthening Dominica’s public procurement system as a whole, the new Public Procurement Act and associated regulations recognize the need for climate resilient and socially responsible public procurement processes that facilitate and encourage, among other aspects, a climate-resilient growth agenda in support of Dominica’s objective to the first climate resilient economy. The new Act and implementing regulations will also align Dominica’s public procurement system with international sound practices. It includes procurement methods appropriate to the needs of the Government, underpinned by requirements for transparency in the conduct of procurement proceedings. The proposed framework also has provisions for improving the transparency of procurement and provides the legal basis for the use of modern techniques, including framework agreements and e- procurement. It also ensures equal access to public procurement opportunities for female-owned businesses providing goods and services. The introduction of the e-procurement system not only enhances the efficiency and transparency of public procurement, but also contributes to climate resilience during climate shocks or other climate-induced shocks like floods by ensuring business continuity and access that was previously disrupted when physical access to the system was impossible, and the ability of the procurement process to respond more quickly. The approved Bill benefitted from technical assistance (TA) provided by the World Bank and particularly from the CDB. The World Bank also provided substantive TA to assist the authorities in developing and implementing the associated regulatory framework. 58. Expected Outcomes: Implementation of the new Public Procurement Act and the adoption of necessary regulations will result in several important improvements, including: increased climate Page 30 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) resilience that promotes mitigation and adaptation; greater value for money and increased public trust in the procurement system; more effective policy development and oversight of compliance; and a more robust information disclosure requirements. Moving from a manual procurement system to an e- procurement system will make the collection and publication of procurement information faster, easier, more comprehensive, more transparent, and more climate resilient because people will be able to access the system in the event of a flood, hurricane, or other climate shock. Progress will be measured by the percentage of awarded public procurement contracts published on a dedicated government website and the percentage of contracts that incorporate sustainability and climate-resilience considerations. Prior Action 7: The Recipient has: (a) through its Cabinet, approved the National Energy Policy; and (b) published the Energy Management Guidelines aligned with the Government's declared target of 100 percent renewable energy by 2030 to transition to more affordable, resilient and low-carbon energy systems and services. Revisions from the first operation: Recognizing the importance of energy services contribution to the development of a sustainable and resilient economy, this is a new prior action that was introduced subsequent to the first operation. New indicator added: Battery storage for distributed electricity is increased by 5 MW by 2023 to enable the electric system to integrate new renewable energy including geothermal and distributed renewable energy. 2020 0  2023 5MW 59. Rationale: Dominica is heavily dependent on imported oil (at around 97 percent with the remaining 3 percent from hydro) for its energy consumption resulting in high energy prices exacerbated by the volatility of the international energy market and uneven access to energy services. Energy consumption is dominated by transportation accounting for 52 percent of the total, followed by the power sector at 41 percent with the remaining from cooking (2012 data). The NEP is intended to encourage renewable energy sources, help combat increasing energy costs, and reduce Dominica’s greenhouse gas emissions in line with its plans to be a fully climate-resilient economy and its NDCs. Furthermore, the NEP recognizes that energy services are key to unlocking the potential for more sustainable environmental, social, and economic development in Dominica, providing employment opportunities in commercial and industrial activities, as well as improving social well-being. The Policy aims to enhance energy efficiency, scale up domestic renewable energy resources in all sectors mitigate climate change, reduce costs, and strengthen future economic development and resilience to external shocks. The geothermal energy investment remains among the GoCD’s highest economic priorities, aiming to build-back-better in accordance with its Climate Resilience and Recovery Plan 2020-2030. In particular, the Policy is framed to address disaster risk management, enhance resilience, lower energy services costs, and increase the competitiveness and resilience of commercial and industrial productive sectors, including tourism and hospitality sectors. 60. Substance of the prior action: The Policy reaffirms the vision and establishes the framework for an energy transition that aligns with the Government's stated target of 100 percent Renewable Energy by 2030. The transition to a more affordable, resilient, and low-carbon energy system will require phasing out of fossil fuels in power generation and transport. The NEP has a medium- to long-term perspective, until 2030, but is expected to be reviewed every 5 to 10 years. The NEP is structured around five policy Page 31 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) goals: (i) increasing access to modern energy services that are safe, affordable and reliable for all citizens; (ii) providing energy services for stimulating environmental, social and economic development; (iii) managing energy-related environmental, health and safety impacts; (iv) enhancing resilience in the electricity sector and existing and planned centralized infrastructure; and (v) improving governance in the energy economy. The NEP prioritizes energy efficiency and renewable energy (including more sustainable buildings), education and building awareness, and enables effective financing mechanisms and the introduction of innovative technologies. The goal of "Enhancing Resilience in the Electricity Sector and existing and planned centralized infrastructure" is based on ensuring resilient energy infrastructure under a least cost integrated centralized planning to optimize opportunities and minimize costs (and risks). This outcome will contribute to strengthening the economy, integrating the scale up of renewables, and mitigating the negative impacts of climate change and disasters. Specifically, the path is towards diversification and use of renewable energy resources and distributed energy storage, development of rooftop solar electricity, and centralized planning of resilient electricity generation, transmission and distribution infrastructure. For the transport sector, the NEP guides a transition to more sustainable and resilient mobility (including e-mobility) focusing on public transport, government fleets, the tourism and hospitality sector, and the use of local energy resources rather than imported fuels where possible. 61. Expected Outcomes: Given the broad parameters and high-level objectives embodied in the NEP, it was difficult to identify verifiable and quantifiable results that could be directly attributable to the policy implementation and energy management guidelines within the timeline of the operation. Nonetheless, increased battery storage for distributed electricity to enable the electric system to integrate new renewable energy including geothermal and distributed renewable energy was seen as a viable result indicator that could be measured within the operation’s timeframe. Table 5: DPC Prior Actions and Analytical Underpinnings Prior Actions Analytical Underpinnings Pillar 1: SAVING LIVES, PROTECTING LIVELIHOODS AND PRESERVING JOBS Prior Action 1: The Recipient has issued a Cabinet Marques, Jose. Dominica Social Protection Assessment. decision to strengthen social programming and World Bank (2017). This paper clearly identified areas where efficiency, by approving the establishment of a social spending could improve in terms of efficiency and beneficiary registry and management information effectiveness and will be key in evaluating measures to be system for social programs, including a digital supported through the trigger identified for the second registration process and payment reconciliation operation. mechanism. Pillar 2: STRENGTHENING FISCAL POLICIES, PUBLIC FINANCIAL MANAGEMENT AND DEBT TRANSPARENCY FOR A CLIMATE RESILIENT RECOVERY Prior Action 2: The Recipient: (a) through its Parliament, has adopted the Fiscal Responsibility Framework, 2021 Fiscal Rules and Economic size in Latin America and the to create fiscal space for a climate-resilient recovery by: Caribbean. World Bank (2020): Provides insight into the (i) outlining fiscal responsibility principles; and (ii) effective application of fiscal rules frameworks in the context establishing measurable quantitative targets for fiscal of small states, particularly Caribbean countries. balances and public debt levels; and (b) through its Cabinet, has approved a new policy for the Tertiary Dominica PD-PFM Review, World Bank 2019: Provides a Education Financial Aid Programme to reinforce the number of key PFM recommendations, including inputs for achievement of Fiscal Responsibility Framework targets, PFM bill, need for fiscal transparency via the timely Page 32 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) improve spending efficiency, and strengthen the publication of financial statements, strengthening legal and composition of public expenditure by revising the regulatory framework for managing disaster risk financing. application and eligibility criteria, reducing the amounts Review of Fiscal Rule Frameworks in place in Grenada, St. received by program participants, and instituting caps Vincent and the Grenadines, and Bahamas. on total allowable amounts per applicant. Prior Action 3: The Recipient, through the Minister of Post-Disaster Public Financial Management (PD-PFM) Review. Finance, has issued operating regulations for the June 2019. World Bank: Evaluated the current disaster risk Vulnerability, Risk, and Resilience Fund to ensure its financing mix and specifically recommended creation, adequate capitalization and effective operation. capitalization, and management rules for Contingencies Fund. Cummins, Mahul. Catastrophe Risk Financing in Developing Countries. World Bank, 2009. Identifies steps on how to mitigate the economic and fiscal impacts of disasters – including the importance of contingency funds. Clarke, D.J., Mahul, O., Poulter, R. et al. Evaluating Sovereign Disaster Risk Finance Strategies: A Framework. Geneva Pap Risk Insur Issues Pract 42, 565–584 (2017). https://doi.org/10.1057/s41288-017-0064-1 Notes potential cost savings from a risk layering approach, including from simultaneous capitalization of a contingency fund and borrowing for other purposes. Financial Protection against Natural Disasters: An Operational Framework for Disaster Risk Financing and Insurance. World Bank. 2018: Argues the importance of having national contingency reserves in place to complement risk transfer and contingent financing solutions. Prior Action 4: The Recipient, through its Cabinet, has DeMPA. World Bank 2018. Detailed information and taken measures to strengthen debt transparency by recommendations provided in the document on improving requiring: (a) the preparation of DPRs on an annual the Debt Portfolio Review, including content and publication. basis; (b) the inclusion of all state-owned enterprise and DSA. World Bank and IMF. Detailed quantitative data included statutory body debt in the annual DPRs; and (c) the on the extent of loan guarantees for inclusion in the DPR. disclosure of DPRs by September 30th each year. Annual Debt Reporting Heatmap exercises. Prior Action 5: The Recipient, through its Cabinet, has Post-Disaster Public Financial Management (PD-PFM) Review. approved initiatives for enhanced capital investment June 2019. World Bank: Global Governance Practice: Latin planning, appraisal and monitoring mechanisms, American and the Caribbean. Provides key recommendations including explicit incorporation of objectives for for integrating disaster/climate risks in the design and increasing environmental resilience and reducing implementation of public investment projects. environmental and climatic vulnerability, to strengthen budget allocations, public investment planning, Public Expenditure and Financial Accountability (PEFA) prioritization, and reporting. Assessment. 2016.IMF: Fiscal Affairs Department. Provides key recommendations on improving the approach to conducting economic analyses, selecting investment proposals, costing, and monitoring investment projects. Public Investment Management Assessment (PIMA) Methodology. 2019. IMF: Fiscal Affairs Department. A Page 33 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) framework for assessing infrastructure governance, including procedures, tools, decision-making, and monitoring processes for infrastructure assets and services to the public. Public Expenditure and Financial Accountability (PEFA) Framework for Assessing Gender Responsiveness of Public Financial Management. 2020: World Bank. Provides information on integrating gender in the design and implementation of budget policies, including public investment management. Country Gender Assessment: Dominica. 2014. Caribbean Development Bank (CDB). Provides an assessment of key gender gaps in Dominica. Prior Action 6: The Recipient: (a) through its Parliament, E-Government Procurement (e-GP) Readiness Assessment has enacted the Public Procurement and Disposal of Report of St. Lucia, Grenada, and Dominica. World Bank, Public Property Act; and (b) through its Minister of 2017: Provides direct knowledge of identified procurement Finance, has issued Public Procurement and Disposal of reform needs in Dominica. Public Property Regulations 2022, to strengthen the Post-Disaster Public Financial Management (PD-PFM) Review. effectiveness, efficiency and transparency of public June 2019. World Bank: Global Governance Practice: Latin procurement and to incorporate climate-resilient and American and the Caribbean: Provides key recommendations sustainable procurement into the public procurement for improved emergency procurement, including for process. strengthening contingency purchase planning, emergency procurement manuals and operating procedures, and standard procurement documents and templates. Prior Action 7: The Recipient has: (a) through its The Sustainable and Resilience Energy Plan (S-REP) for Cabinet, approved the National Energy Policy; and (b) Dominica. June 2019. Supported by Clinton Foundation. published the Energy Management Guidelines aligned with the Government's declared target of 100 percent Feasibility Study for resilience of the transmission network renewable energy by 2030 to transition to more and Master Plan for Resilient Electrical System. affordable, resilient and low-carbon energy systems and November 2019. Supported by AFD. services. 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 62. The World Bank Group’s (WBG) engagement in Dominica is guided by the WBG Regional Partnership Strategy (RPS) for the OECS, which was discussed by the Board of Executive Directors on November 13, 2014 (Report No. 85156-LAC). The RPS is structured around two pillars: (a) fostering conditions for growth and competitiveness and (b) enhancing resilience. The Performance and Learning Review, discussed by the Board on May 23, 2018 (Report No. 118511-LAC), reaffirmed the RPS strategic objectives and extended it to end-FY20. The Systematic Regional Diagnostic for the OECS completed in FY19 identified the following priorities for inclusive and sustainable growth: (a) build cross-cutting resilience to external shocks, (b) embed growth in the blue economy, (c) strengthen and harness human capital, (d) embrace new technologies, and (e) strengthen regional integration. A new Regional Partnership Framework for the OECS will be discussed by the Board of Executive Directors on May 17. This operation seeks to address issues of climate resiliency and disaster management, to reinforce Page 34 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) macroeconomic stability and enhance resilience to shocks. Reforms supported under this operation will contribute to the WBG’s twin goals of ending extreme poverty and promoting shared prosperity. 63. The World Bank quickly adjusted its ongoing and pipeline program in Dominica to support the county’s COVID-19 response and recovery. The reprioritized IDA program and this operation are consistent with the WBG’s COVID-19 Crisis Response Approach Paper and the transition from a COVID-19 Crisis Response to Resilient Recovery - Saving Lives and Livelihoods while Supporting Green, Resilient and Inclusive Development (GRID). In early April 2020, the CERCs of two ongoing projects—the OECS Regional Health Project (P168539) and the Emergency Agricultural Livelihoods and Climate Resilience Project (P166328)—were activated to provide US$6.6 million for urgent health-related needs and to assist farmers and strengthen food security. Subsequently, US$5.2 million was also activated from the CERC of the Housing Recovery Project (P166537) to finance social assistance for the vulnerable and those most affected by the crisis. 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 64. The proposed operation is in line with the NRDS and the CRRP 2020-2030, which were developed following a substantive consultative process. As such, the objectives and results sought through this operation are consistent with public opinion and expressions of citizens’ priorities. Feedback from consultations has guided the priority areas for interventions included in the policies. Several prior actions supported under this operation involved direct substantive public consultations and citizen engagement. As noted, the FRF required extensive consultations, and indeed negotiations with public sector unions, opposition parties, and the public. Procurement reforms benefited from formal consultation and review processes with the private sector, and both the legislation and the regulations reflect concerns raised through the consultative process. Similar consultations were held with the private sector and civil society groups around the energy policy and development of the energy guidelines. 65. The preparation of this operation has benefited from close collaboration with other development partners active in Dominica, particularly the CDB and IMF. This cooperation is especially important given Dominica’s limited capacity (due to its small size) and given that this programmatic series is Dominica’s first experience with a World Bank-financed programmatic DPC. The macroeconomic context and assessment have been undertaken in close cooperation with the IMF, which has also provided assistance to the Dominica authorities with formulation and implementation of some of the fiscal reform measures. The CDB has been similarly involved in the preparation of this series, as they provide budget support and technical assistance that is directly complementary to this operation. In particular, the CDB provided technical support in the drafting of the revised procurement legislation, a supported prior action, and has involved the Bank’s technical staff in these deliberations. Implementation of the NRDS and CRRP is coordinated by CREAD, which benefits from multi-donor support, including core funding from Canada and the United Kingdom Foreign, Commonwealth and Development Office. CREAD also provides implementation support to various donor-funded projects (World Bank, European Union, Foreign Commonwealth Development Office, and Canada). Finally, the Government of Canada funded the Post- Disaster PFM Review Framework (2019) which was developed by the World Bank to assess the extent to which disaster resiliency and gender sensitivity considerations are integrated into PFM functions and activities. Dominica does not have a program with the IMF. Page 35 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 66. The measure on strengthening social assistance programs under Pillar 1, should have direct positive impacts on poor households. The pandemic came with high social costs for poor households in Dominica and other countries in the Caribbean. Recent High Frequency Surveys (HFS) data show an increase in food insecurity among Dominican households after the pandemic. The proportion of households reporting running out of food due to lack of money increased from 18 percent to 40 percent post-COVID-19. The literature on social protection has consistently shown that social assistance programs can significantly contribute to reducing the level of poverty and shrinking the income gap in developing countries. In Dominica, social assistance programs need to be improved to allow better targeted assistance to households, especially in the aftermath of a disaster. HFS data reveal that, in Dominica, only 11 percent of households have reported receiving monetary or in-kind income due to the COVID-19 pandemic, one of the lowest percentages in the Caribbean region. The impacts of strengthened social assistance programs on poverty and vulnerability levels will depend on the expediency of design and implementation. Key reform initiatives envisioned by the government, particularly the institutionalization of a beneficiary registry and the expansion of such registry to a social registry in the future, should ease the delivery of social protection benefits and improve efficiency. Overall, improved targeting, more rapid enrollment, easier payments, and increased expenditure efficiency, are expected to impact vulnerable households in Dominica, particularly female-headed households, positively. 67. Prior actions 2 and 5 through 7 under Pillar 2 are expected to have a positive, though indirect, impact on poverty in the medium term. Improved efficiency in revenue collection and government spending through fiscal rules application, improved public investment planning, reinforced procurement practices, and a modern energy policy should allow the state to expand fiscal space and generate additional resources for public spending. To the extent that these resources enable the state to increase its level of public investment in both infrastructure and human development. In the long run, this can result in higher employment, further reduction in poverty, and overall economic growth. Furthermore, the increased use of renewables through a new energy policy should reduce the cost of electricity, a significant component of household expenditure. 68. Prior action 3, in supporting management guidelines for the VRRF, should have a direct positive impact on poverty and social outcomes. Natural disasters and climate-related shocks tend to disproportionately impact poor individuals, particularly women. The VRRF will allow the state to intervene rapidly in the aftermath of a natural disaster without fiscal consequences. Immediate access to available resources through the VRRF, should help limit the negative impact of natural disasters and allow for more prompt delivery of assistance to households in urgent need. In addition, the VRRF would support vulnerable households in keeping them from falling deeper into poverty. For many households, receiving assistance after a natural disaster serve as a buffer against shocks as it decreases the probability of using adverse coping strategies such as the selling of productive assets. However, the immediate impact of this program on the welfare of Dominican households will largely depend on the operational management of the VRRF, the Page 36 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) mechanisms of disbursement from the fund, and the design and implementation of post-disaster programs. 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS 69. The DPC-supported policy reforms are not expected to have significant negative environmental effects and will likely have long-term positive effects due to their support for climate change mitigation and adaptation. Supported reforms will have no significant negative environmental effects as these measures do not include policy reforms involving production decisions, regulatory matters, or any measures that could reasonably be expected to impact the environment and natural resources. Policy reforms under “Pillar 1 – Saving Lives, Protecting Livelihoods and Preserving Jobs” are likely to reduce the vulnerability of people to climate change by improving their health and socioeconomic resilience, while the climate-resilient investment and procurement policy reforms under “Pillar 2 – Strengthening Fiscal Policies, Public Financial Management and Debt Transparency for a Climate-Resilient Recovery” are likely to reduce the environmental risks of government investments over the medium term and foster the use of increased renewable energy sources. 70. PA7 is expected to have environmentally positive impacts as it supports greenhouse gas mitigation through the National Energy Policy and Energy Management Guidelines. This action will accelerate the transition from an imported fuel-based economy to one based on domestic renewable energy resources and improve energy efficiency in all economic sectors and residential use. This action will also increase the sustainability and resilience of the economy against climate change extremes. 71. Dominica has a robust regulatory framework governing investment in renewable energy infrastructure. Dominica has a series of policies and acts that set out planning and development requirements in line with international good practice. The Physical Planning Act (2002) requires the development permission before the construction of a project may commence. Applications for development of any infrastructure must be submitted to the Physical Planning Division within the Planning Authority. Part IV of the Physical Planning Act sets out Environmental Impact Assessment requirements, including the site’s physical, socio-economic and socio-cultural features of the site, and consultation activities with the immediate communities. The Geothermal Resources Development Act of 2016 provides the legal basis for developing, exploring, and using geothermal resources which is likely to serve as the backbone of Dominica’s renewable energy generation. The Act’s objectives are to: (i) enable the sustainable use of geothermal energy according to Dominica’s population needs; (ii) safeguard the environmental integrity of air, water, soil and ecosystems; and (iii) avoid remedying or mitigating to any material with adverse effects on the environment. 72. Dominica has a supporting policy framework to mitigate potential negative effects on the environment, forests, and other natural resources. As noted above, Dominica has the legislative framework and institutional capacity to prepare environmental and social impact assessments, including those related to budget policies. Further, Dominica’s Disaster Resilience Strategy aims to contain adverse environmental risks and impacts by integrating environmental planning, into its public investments. While these standards and those individual acts noted above align with international good practice in terms of regulatory requirements, there have been instances of gaps in enforcement due to limited human and financial resources to monitor enforcement of Environmental Impact Assessments, both through the Page 37 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Planning Authority and through other line ministries (notably Ministry of Environment and Ministry of Planning). A series of World Bank-financed IPFs include technical assistance activities to help build capacity, fill gaps in enforcement, and align compliance with the provisions set out in applicable national legislation. 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 73. Dominica’s PFM systems have been strengthened and the GoCD has been striving to improve the overall public administration and financial management performance. The Public Expenditure and Financial Accountability (PEFA) assessment of 2016 and the Country Fiduciary Review conducted by the World Bank in 2021 showed mixed, but encouraging, PFM performance. Overall, the PFM system in Dominica is strong in the areas of budgeting process, debt management, predictability, and control in budget execution. However, there are notable weaknesses in PFM regulations, risk management, public asset management, internal audit, financial reporting, and external audit and scrutiny. The Constitution of the GoCD covers public finance and is augmented through its Financial Administration Act, 1994 and the Finance and Audit Act, 1966. The GoCD has been drafting a new Public Financial Management Act since 2015 with assistance from the IMF. Given the date of the existing legislation the Government should move quickly to table its draft PFM legislation, which will bring it into a more modern PFM regime. In addition, the Post-Disaster PFM Review of 2019 11 identified areas of strengths and weaknesses in the PFM system to facilitate efficient and effective response to natural disasters. Main strengths include budget flexibility and resiliency of information systems, while areas that require further improvement include traceability of disaster spending, disaster responsive procurement and auditing practices. 74. Budgeting. As indicated above, the budget process has several features of a multi-year approach which are reflected in the budget calendar. There are internal processes for macro-fiscal planning, fiscal strategy formulation, and annual and medium-term budget formulation. Improvements in the budget formulation have been offset by supplementary budgets, including cuts, which impede service delivery and strategic allocation of resources. The Budget Statement and supporting details contained in the estimates of revenue and expenditure include all four of the basic elements expected of a transparent budget process 12. Notably, through prior action 2 of this operation, the GoCD adopted a Fiscal Rules and Responsibilities Framework, which outlines fiscal responsibility principles, and sets targets for spending, fiscal balances and public debt levels. This action will provide added credibility to an already reasonable budget process. The Budget Estimates book is presented to Parliament and published with detailed expenditure estimates. The procedure for the scrutiny of the budget by the Legislature is Standing Order (SO) 73 of the House of Assembly, but there are no hearings or analysis of medium-term fiscal framework or projections. The Accountant General Department (AGD) and revenue agencies have good control over budget execution. Budget formulation, execution, and reporting are based on administrative, economic and functional/sub-functional classification, using GFS/COFOG 2001 standards, with a plan to move to GFS 11 The PD-PFM Review framework was developed by the World Bank’s Governance Global Practice to assess the extent to which disaster resiliency and gender sensitivity considerations are integrated into PFM functions and activities. The Review was funded by the Government of Canada in the context of the “Supporting Economic Management in the Caribbean Externally Funded Output”. 12 Forecast of the fiscal deficit or surplus, previous year’s budget outturn, current year’s budget, and aggregated budget data for revenue and expenditure according to the main heads of classification. Page 38 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) 2014 compliant or a classification that can produce consistent documentation comparable with those standards. The public has access to annual budget documentation and year end reports via the GoCD’s website. 75. Accounting, reporting and auditing. The GoCD uses SmartStream as the Integrated Financial Management System for budget execution, monitoring, accounting and control system and provides the basis for achieving predictability with respect to budget releases and the commitment of expenditures. The GoCD is currently not International Public Sector Accounting Standards (IPSAS) Cash compliant but is moving in this direction and hopes to produce IPSAS 2020 financial statements as a model for Parliament and the Director of Audit and seek their approval. In-year monthly reports on expenditures versus budgets are prepared and reviewed by the respective line ministries. The GoCD operates adequate internal controls system supported by IT controls in SmartStream. The Internal Audit (IA) unit is operational in MoF and responsible for audit of all central government entities. However, the IA function does not have a specific charter and derives its authority from the Accountant General rather than any specific legislative provisions. Much of the daily activity of the IA function is similar to pre-audit of transactions. The IA unit has a mandate from the Accountant General to follow a more modern approach to IA, which focuses on providing advice to managers on the adequacy and effectiveness of internal controls. There is scope for improving the IA function through the adoption and implementation of IA standards, ensuring independence and expanding the scope of the IA so that it can be more valuable to the PFM system. Audited government financial statements are available on the website, but the preparation of annual financial statements is delayed. Consolidated financial statements are prepared, but the last publicly disclosed audited Public Accounts were for the year 2019, as posted on the Office of the Director of Audit’s website in February 2022. Audit reports are submitted to Parliament after a significant delay (more than 12 months) from the end of the period covered. Weaknesses in the accountability mechanisms make external audits and scrutiny ineffective as counter checks on inefficient use of resources. 76. The ECCB manages the foreign exchange reserves of the ECCU, including Dominica. An updated safeguards assessment of the ECCB, finalized in August 2021, found strong external audit and financial reporting practices that continue to be aligned with international standards, and further improvements in the capacity of the internal audit function. The safeguards assessment recommended further legal reforms to strengthen the operational autonomy of the ECCB and align its Agreement Act with leading practices. The ECCB has well-established procedures to ensure the integrity of its operations. It also has a well-functioning internal audit department, and an independent external auditor audits its accounts. The ECCB Board of Directors has an audit sub-committee, which provides additional oversight. 77. Disbursement and reporting arrangements, ineligible expenses, and audit: • Disbursement and reporting arrangements. The proposed credit will follow the World Bank’s disbursement procedures for DPF. Once the credit becomes effective, satisfactory implementation of the program (specified prior actions achieved) and maintenance of an adequate macroeconomic policy framework, and upon submission of a signed withdrawal application, the World Bank will disburse the credit proceeds, denominated in US$, into GoCD’s foreign-exchange account at the ECCB. The ECCB will then immediately credit an equivalent amount in Eastern Caribbean Dollars (EC$) to GoCD’s budget management system account, which will become available to finance budgeted Page 39 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) expenditures. Within 30 days of the funds transfer, the GoCD, through its MOF, will provide the World Bank with written confirmation of the amount deposited into GoCD’s foreign-currency account at the ECCB and that the equivalent EC$ amount, which has been accounted for in the country’s budget management system in the account used to finance budgeted expenditures; along with the exchange rate applied and date of transfer. • Ineligible expenses. The financial support provided under this operation is not intended to finance goods or services on the list of Excluded Expenditures. 13 If the proceeds of the credit or any part thereof are used for ineligible purposes, as defined in the General Conditions applicable to the Financing Agreement, the World Bank will require GoCD to refund an equal amount to the World Bank promptly. Upon such request, amounts refunded to the World Bank shall be cancelled from the credit. • Audit. No specific audit of the deposit of the credit proceeds will be required. However, the World Bank reserves the right to request such an audit at its discretion. • Closing date. The closing date of the operation will be March 31, 2023. 78. Based on the above analysis fiduciary risk is considered moderate. 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 79. The MOF will be responsible for coordinating actions by other relevant ministries and agencies, including the Ministry of Health, Wellness and New Health Investment (MoH). Annex 1 presents the results framework agreed to by the Government and the Bank. The MoH noted above will be responsible for executing various prior actions in the health sector and communicating results to the MOF, who is responsible for providing written progress report to the World Bank on an agreed upon basis. 80. Monitoring and evaluation (M&E) of the reform program will be undertaken jointly by the Government and World Bank . Result indicators have been specifically selected to reflect available data sources in Dominica and build on lessons learned from earlier policy-based lending operations that recommend the use of simple and manageable results frameworks using available secondary sources of data. The results framework presented in Annex 1 will be used as a monitoring tool by the Government and the World Bank. 81. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which 13See the General Conditions for DPF: “Excluded Expenditure” for DPF covers items such as alcoholic beverages; tobacco; radioactive and associated materials; nuclear reactors and parts thereof; jewelry of gold, silver, or platinum; goods intended for a military or paramilitary purpose of for luxury consumption; or expenditures for environmentally hazardous goods. Page 40 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.” 6. SUMMARY OF RISKS AND MITIGATION 83. The risk associated with this operation is considered “moderate”. Areas of particular concern are macroeconomic, institutional capacity, and environmental risks given exposure to climate shocks and natural disasters. Macroeconomic risks are considered high as the conflict in Ukraine leads to fuel and food price increases and increasing global growth and inflation concerns, which threaten Dominica as a highly import dependent economy. Considerable COVID-19 uncertainty also remains; growth, fiscal, and debt outcomes could be significantly impacted depending on the pandemic’s continued evolution. Bank engagement in these areas is expected to continue over the IDA-20 period. Dominica’s institutional and human resource capacity is limited as a small island state. Capacity to implement and sustain supported reforms is concentrated in the hands of a small group of individuals with decision-making and technical capabilities. Furthermore, natural disasters could seriously impact the achievement of the operation’s objectives by disrupting economic activity, such as agriculture and tourism, and generating significant fiscal costs that could affect macroeconomic stability and particularly public debt levels. Table 6: Summary Risk Ratings Risk Categories Rating 1. Political and Governance  Moderate 2. Macroeconomic  High 3. Sector Strategies and Policies  Moderate 4. Technical Design of Project or Program  Moderate 5. Institutional Capacity for Implementation and Sustainability  Substantial 6. Fiduciary  Moderate 7. Environment and Social  Substantial 8. Stakeholders  Moderate 9. Other Page 41 Official Use The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) Overall  Moderate 84. Macroeconomic risks are considered high. The Ukraine conflict has significantly increased uncertainty and heightened risks to the downside. Higher inflation, high current account deficits, and lower tourism arrivals. As a highly import dependent economy, oil price and commodity price trajectories in particular pose risks, and the conflict in Ukraine is exacerbating these risks at present. Furthermore, considerable COVID-19 uncertainty remains, which poses risk to the macroeconomic framework, as growth, fiscal, and debt outcomes could be significantly impacted depending on the pandemic’s continued evolution. These risks could have a direct and substantive impact on the achievement of operational objectives, including fiscal and debt sustainability. The measures supported under this programmatic series, including measures to address the health and economic impacts of the pandemic, and those that seek to strengthen macroeconomic and fiscal performance, should mitigate some of these macroeconomic and fiscal risks to a considerable extent. Nonetheless, residual risk remains, as the level of uncertainty around the Ukrainian conflict and the trajectory of the pandemic remains high and unpredictable. Dominica is particularly exposed to this risk as tourism is one of the first discretionary expenditures to be cut during slow growth or recession. As happened (January 2022, August 2021), a global resurgence of the pandemic could have a lingering negative economic impact on an already hard- hit tourism sector. Similarly, oil, food, and commodity price trajectories remain uncertain. Ongoing reforms supported by this operation and others, are expected to significantly enhance the resiliency of the fiscal and macroeconomic framework over time, which will help mitigate these risks, though significant residual risk remains. On the positive side, higher CBI revenue could push the economy above baseline projections especially if used to finance additional public investment. Tourism could recover more quickly than projected if the conflict in Ukraine subsides and the COVID-19 pandemic is controlled globally and domestically. 85. Existing macroeconomic risk could be compounded by significant financial stability risks. The large and undercapitalized credit union sector could result in further capital loss if the downside risks materialize and could affect connected banks. A delayed economic recovery, due to a prolonged conflict and COVID-19 developments could stress the financial sector further, straining liquidity and eroding asset quality. Disruption of correspondent bank relationships remains a threat to trade and growth, though there was no such disruption in 2020 and 2021. Consequently, the overall macroeconomic risk is assessed as high. 86. Institutional capacity risk is considered substantial. Dominica’s institutional and human resource capacity is limited as a small island state. While the few individuals responsible for decision-making and implementing reforms are capable and committed, this small cadre is stretched relatively thin and saddled with numerous responsibilities. Both time and resources to implement reforms are limited. Significant follow-up and TA support will be maintained to support reform and implementation momentum to mitigate this risk. This TA is particularly relevant in support of the fiscal rules framework, contingency fund management, public investment planning, and procurement reform. This related TA should mitigate capacity risk to a significant extent. Nonetheless, substantial residual risk remains as capacity is highly subject to unexpected staff changes, staff incapacity, or the occurrence of external shocks or events that Page 42 The World Bank Dominica Second COVID-19 Response and Recovery Programmatic DPC (P175847) require attention and can distract from the supported reform program implementation. 87. Environmental and Social risks are also substantial due to inherent vulnerability to natural disasters and climate change. Natural disasters could seriously impact the operation’s objectives by disrupting economic activity, such as agriculture and tourism, and generate significant fiscal costs that could affect macroeconomic stability, particularly public debt levels. While Dominica is actively strengthening its disaster preparedness and response capacity, with the support of the Bank and other development partners, substantial residual risk remains given the level of exposure and the sizeable potential impact that natural disasters pose. . Page 43 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 1: POLICY AND RESULTS MATRIX Dominica Second COVID-19 Response and Recovery Programmatic DPC Prior Actions Results Indicators Pillar 1 – SAVING LIVES, PROTECTING LIVELIHOODS AND PRESERVING JOBS Prior Action 1: The Recipient has issued a Cabinet decision to strengthen social programming and efficiency, by Number of social programs integrated into the approving the establishment of a beneficiary registry and management information system for social programs, Beneficiary registry and Management including a digital registration process and payment reconciliation mechanism. Information System for Social Programs: 2019: 0 programs  2023: 2 programs Percentage of beneficiaries in the Public Assistance Program in the first two income level quintiles: 2019: 70 percent  2023: 5 percentage points higher than the baseline, of which female beneficiaries are 50 percent Number of persons tested for COVID-19: 2019: 0  June 30, 2021: 12,000 Number of accommodation facilities certified to operate under the Health and Safety Protocols: March 2020: 0  June 30, 2021: 50 The number of beneficiary entities benefiting from the 8 percent tax reduction by retaining 80 percent of staff: 2019: 0  2022: 25 Pillar 2 –STRENGTHENING FISCAL POLICIES, PUBLIC FINANCIAL MANAGEMENT AND DEBT TRANSPARENCY FOR A CLIMATE-RESILIENT RECOVERY Page 44 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Dominica Second COVID-19 Response and Recovery Programmatic DPC Prior Actions Results Indicators Prior Action 2: The Recipient: (a) through its Parliament, has adopted the Fiscal Responsibility Framework, 2021 to create fiscal space for a climate-resilient recovery by: (i) outlining fiscal responsibility principles; and (ii) establishing measurable quantitative targets for fiscal balances and public debt levels; and (b) through its Cabinet, has approved a new policy for Expenditures under the Tertiary Education Grant the Tertiary Education Financial Aid Programme to reinforce the achievement of Fiscal Responsibility Framework targets, Program reduced by 40 percent: improve spending efficiency, and strengthen the composition of public expenditure by revising the application and 2021: EC$30 million  2023: 40 percent reduction eligibility criteria, reducing the amounts received by program participants, and instituting caps on total allowable amounts per applicant. Prior Action 3: The Recipient, through the Minister of Finance, has issued operating regulations for the Vulnerability, Risk, Percentage reduction in Cabinet authorized and Resilience Fund to ensure its adequate capitalization and effective operation. discretionary exemptions: 2019: EC$2.2 million  2023: 50 percent reduction Number of joint audits undertaken: 2019: 0  2023: 5 Cumulative amount of funds deposited into the Vulnerability Risk and Resilience Fund to respond to climate-related and other disasters (recognizing that deposits may be suspended during periods of disaster events): 2019: 0  2023: EC$19.5 million Prior Action 4: The Recipient, through its Cabinet, has taken measures to strengthen debt transparency by requiring: (a) the preparation of DPRs on an annual basis; (b) the inclusion of all state-owned enterprise and statutory body debt in the Annual DPR available on a government website: annual DPRs; and (c) the disclosure of DPRs by September 30th each year. 2019: no  2020 – 2023: yes Prior Action 5: The Recipient, through its Cabinet, has approved initiatives for enhanced capital investment planning, Percentage of new public investment projects appraisal and monitoring mechanisms, including explicit incorporation of objectives for increasing environmental funded in the 2023 annual budget, appraised in resilience and reducing environmental and climatic vulnerability, to strengthen budget allocations, public investment line with the PSIP methodology that account for planning, prioritization, and reporting. the impact of natural disasters: 2020: 0  2023: 60 percent Page 45 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Dominica Second COVID-19 Response and Recovery Programmatic DPC Prior Actions Results Indicators Percentage of new public investment projects funded in the 2023 annual budget, appraised in line with the PSIP methodology that account for gender-differentiated impacts to meet the needs of women: 2020: 0  2023: 25 percent Prior Action 6: The Recipient: (a) through its Parliament, has enacted the Public Procurement and Disposal of Public Percentage of awarded public procurement Property Act; and (b) through its Minister of Finance, has issued Public Procurement and Disposal of Public Property contracts made available on a dedicated Regulations 2022, to strengthen the effectiveness, efficiency and transparency of public procurement and to incorporate Government website: climate-resilient and sustainable procurement into the public procurement process. 2019: 0  2023: 80 percent. Percentage of goods contracts (by value) including sustainability/climate considerations: 2019: 0  2023: 25 percent Prior Action 7: The Recipient has: (a) through its Cabinet, approved the National Energy Policy; and (b) published the Battery storage for distributed electricity is Energy Management Guidelines aligned with the Government's declared target of 100 percent renewable energy by 2030 increased by 5 MW by 2023 to enable the electric to transition to more affordable, resilient and low-carbon energy systems and services. system to integrate new renewable energy including geothermal and distributed renewable energy. 2020 0  2023 5 MW Page 46 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 1.A: CHANGES SINCE THE FIRST OPERATION Changes between the First and Second COVID-19 Response and Recovery Programmatic DPCs Original trigger as stated in the First Operation Prior Action as Included in the Second Operation Results Indicators and Identified Changes Pillar 1 – SAVING LIVES, PROTECTING LIVELIHOODS AND PRESERVING JOBS Trigger 1: To ensure adequate capacity to deploy COVID- This trigger was dropped as vaccination plans were well Number of persons tested for COVID-19: 19 Vaccines, the Recipient has approved a COVID-19 developed, well implemented and hence prior action was 2019: 0  June 30, 2021: 12,000 Immunization Plan following directives from the World redundant. Health Organization. Number of accommodation facilities certified to Trigger 6 (see below) was retained and moved to Pillar 1 operate under the Health and Safety Protocols: as: March 2020: 0  June 30, 2021: 50 Prior Action 1: The Recipient has issued a Cabinet decision The number of beneficiary entities benefiting from to strengthen social programming and efficiency, by the 8 percent tax reduction by retaining 80 percent approving the establishment of a beneficiary registry and of staff: management information system for social programs, 2019: 0  2022: 25 including a digital registration process and payment reconciliation mechanism. Additional indicators added as follows: Number of social programs integrated into the Beneficiary registry and Management Information System for Social Programs: 2019: 0 programs  2023: 2 programs Percentage of beneficiaries in the Public Assistance Program in the first two income level quintiles: 2019: est. 70 percent  2023: 5 percentage points higher than the baseline, of which female beneficiaries are 50 percent Pillar 2 –STRENGTHENING FISCAL POLICIES, PUBLIC FINANCIAL MANAGEMENT AND DEBT TRANSPARENCY FOR A CLIMATE-RESILIENT RECOVERY Page 47 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Changes between the First and Second COVID-19 Response and Recovery Programmatic DPCs Original trigger as stated in the First Operation Prior Action as Included in the Second Operation Results Indicators and Identified Changes Trigger 2: The Recipient, through its Parliament, has Prior Action 2: The Recipient: (a) through its Parliament, has The following indicator was dropped: adopted a Fiscal Rules and Responsibility Framework adopted the Fiscal Responsibility Framework, 2021 to that: (i) outlines fiscal responsibility principles; (ii) create fiscal space for a climate-resilient recovery by: (i) Annual and mid-year oversight reports issued by the establishes measurable quantitative targets for spending, outlining fiscal responsibility principles; and (ii) establishing Fiscal Council: fiscal balances, wage bill ceilings and public debt levels; measurable quantitative targets for fiscal balances and 2019: 0  2023: 2 per year (iii) includes remedial mechanisms for ensuring public debt levels; and (b) through its Cabinet, has approved adherence to stated target; and (iv) establishes a Fiscal a new policy for the Tertiary Education Financial Aid Added the following additional indicators: Council and outlines its responsibilities for oversight and Programme to reinforce the achievement of Fiscal reporting. Responsibility Framework targets, improve spending Expenditures under the Tertiary Education Grant efficiency, and strengthen the composition of public Program reduced by 40 percent: expenditure by revising the application and eligibility 2021: EC$30 million  2023: 40 percent reduction criteria, reducing the amounts received by program participants, and instituting caps on total allowable amounts per applicant. Modified to drop inclusion of spending and wage bill targets due to resistance from public sector unions and opposition, while retaining primary balance and public debt targets. Also dropped item (iv) on the Fiscal Council. Included a specific fiscal consolidation reform measure. Trigger 3: The Recipient has created the Fiscal Council and Dropped nominated and appointed its members. Trigger 4: The Recipient has revised its Financial Dropped Administration Act to require, among other measures, formulation and publication of a Medium Term Economic and Fiscal Framework to strengthen the legal framework for budget planning, preparation and Public Financial Management. Page 48 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Changes between the First and Second COVID-19 Response and Recovery Programmatic DPCs Original trigger as stated in the First Operation Prior Action as Included in the Second Operation Results Indicators and Identified Changes Trigger 5: The Recipient, through its Cabinet, has Prior Action 3: The Recipient, through the Minister of Cumulative amount of funds deposited into the approved guidelines for the operation and management Finance, has issued operating regulations for the Vulnerability Risk and Resilience Fund to respond to of the disaster contingencies fund. Vulnerability, Risk, and Resilience Fund to ensure its climate-related and other disasters (recognizing adequate capitalization and effective operation. that deposits may be suspended during periods of disaster events): Minor wording changes only 2019: 0  2023: EC$19.5 million No changes Trigger 6: The Recipient has instituted a number of Measures identified and implemented as per the trigger Percentage reduction in Cabinet authorized recommendations derived from the review of social and this action is now Prior Action 1. discretionary exemptions: safety programs implemented in the Recipient’s territory, 2019: EC$2.2 million  2023: 50 percent reduction to ensure programs are: (i) meeting the needs of vulnerable citizens, (ii) meeting program objectives, and Number of joint audits undertaken: (iii) improving the efficiency and effectiveness of social 2019: 0  2023: 5 spending. (Specific measures to be identified). Additional indicators added as follows: Number of social programs integrated into the Beneficiary registry and Management Information System for Social Programs: 2019: 0 programs  2023: 2 programs Percentage of beneficiaries in the Public Assistance Program in the first two income level quintiles: 2019: est. 70 percent  2023: 5 percentage points higher than the baseline, of which female beneficiaries are 50 percent Page 49 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Changes between the First and Second COVID-19 Response and Recovery Programmatic DPCs Original trigger as stated in the First Operation Prior Action as Included in the Second Operation Results Indicators and Identified Changes No trigger was related to Prior Action 5. The original prior Prior Action 4: The Recipient, through its Cabinet, has taken Annual DPR available on a government website: action in the first operation was: measures to strengthen debt transparency by requiring: (a) 2019: no  2020 – 2023: yes the preparation of DPRs on an annual basis; (b) the inclusion The Recipient, through its Cabinet, has taken measures to of all state-owned enterprise and statutory body debt in the No changes improve coverage and timeliness of the 2019 DPR, by: (i) annual DPRs; and (c) the disclosure of DPRs by September including loan guarantees in the 2019 DPR; (ii) submitting 30th each year. the DPR to Parliament; and (iii) publicly disclosing the DPRs on the Ministry of Finance website. This new prior action builds on the prior action of the first operation and regularizes the DPR and makes it an annual commitment. Trigger 7: The Recipient has approved a Revised Public Prior Action 5: The Recipient, through its Cabinet, has Original indicator reworded from: Sector Investment Programme (PSIP) Allocation approved initiatives for enhanced capital investment Methodology and Enhanced Public Sector Performance planning, appraisal and monitoring mechanisms, including Percentage of new public investment projects Management Framework to strengthen budget explicit incorporation of objectives for increasing funded in the 2023 annual budget that were also in allocations, public investment planning, prioritisation, environmental resilience and reducing environmental and the Parliamentary approved PSIP (recognizing that and reporting. climatic vulnerability, to strengthen budget allocations, natural disaster events can impact outcome): public investment planning, prioritization, and reporting. 2019: 0  2023: 60 percent Minor wording changes only. Reworded to: Percentage of new public investment projects funded in the 2023 annual budget, appraised in line with the PSIP methodology that account for the impact of natural disasters: 2020: 0  2023: 60 percent Additional indicator added as follows: Percentage of new public investment projects funded in the 2023 annual budget, appraised in line Page 50 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Changes between the First and Second COVID-19 Response and Recovery Programmatic DPCs Original trigger as stated in the First Operation Prior Action as Included in the Second Operation Results Indicators and Identified Changes with the PSIP methodology that account for gender- differentiated impacts to meet the needs of women: 2020: 0  2023: 25 percent Trigger 8: The Recipient has approved the Public Percentage of awarded public procurement Prior Action 6: The Recipient: (a) through its Parliament, has Procurement Act, adopted the required regulatory enacted the Public Procurement and Disposal of Public contracts made available on a dedicated framework under the legislation, and promulgated the Property Act; and (b) through its Minister of Finance, hasGovernment website: legislation rendering it effective, including the adoption issued Public Procurement and Disposal of Public Property 2019: 0  2023: 80 percent. of fit-for-purpose standard procurement documents to Regulations 2022, to strengthen the effectiveness, standardize, streamline and expedite public procurement efficiency and transparency of public procurement and to Additional indicator added as follows: proceedings, especially in response to disasters and other incorporate climate-resilient and sustainable procurement Percentage of goods contracts (by value) including emergencies, as well as green procurement and gender- into the public procurement process. sustainability/climate considerations: based aspects. 2019: 0  2023: 25 percent Minor wording changes only. Prior Action 7: The Recipient has: (a) through its Cabinet, New indicator added as follows: approved the National Energy Policy; and (b) published the Energy Management Guidelines aligned with the Battery storage for distributed electricity is Government's declared target of 100 percent renewable increased by 5 MW by 2023 to enable the electric energy by 2030 to transition to more affordable, resilient system to integrate new renewable energy and low-carbon energy systems and services. including geothermal and distributed renewable energy. Recognizing the importance of energy services’ 2020 0  2023 5 MW contribution to the development of a sustainable and resilient economy this prior action was added as measure to support increased climate resilience, foster economic diversification, strengthen economic competitiveness, and contribute to fiscal resilience through better aligning fiscal incentives for renewable energy production. Page 51 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 2: FUND RELATIONS ANNEX IMF Executive Board Concludes 2021 Article IV Consultation with Dominica February 14, 2022 Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded on February 2 the Article IV consultation with Dominica. [1] The COVID-19 pandemic took a heavy toll at the Dominican economy. GDP is estimated to have contracted by 11 percent in 2020 and is expected to recover modestly to 3.7 percent in 2021. The output decline, driven by a sharp reduction in tourism and related sectors, was contained by strong growth in the construction sector stemming from the large public investment program through 2020-21, financed by exceptionally high revenue from the Citizenship by Investment (CBI) program. Despite record CBI revenue, the sharp decline in tax revenue and increase in health spending and social transfers led to large fiscal deficits in 2020 and 2021 and caused public debt to peak at an estimated 106 percent of GDP in 2020. The current account deficit estimate remained high at around 30 percent of GDP in 2020-21, owing to the loss of tourism exports and an increase in imports related to higher public investment and commodity prices—despite a decline in private demand for imports. The financial sector has remained liquid and stable during the pandemic, but Non-Performing Loans (NPLs) remain above prudential benchmarks. The loan service moratoria authorized by the banks and credit union regulators supported firms and households facing income loss, containing a deterioration in portfolio performance. In the medium term, growth is expected to recover underpinned by the return of tourism, expanding hotel capacity, and high public investment in infrastructure resilient to natural disasters financed by CBI revenue. Risks are skewed to the downside and include renewed worldwide and domestic Covid-19 contagion waves, CBI revenue and/or official financing below projected levels, which would slow public investment and economic activity. Weakness in the financial sector, particularly the credit unions, could amplify downside risks. Executive Board Assessment [2] Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for their pandemic response to support households and businesses. They noted that the outlook for medium- term growth is promising but remains subject to significant downside risks, including from the pandemic trajectory and recovery of tourism. This calls for continued efforts to contain the pandemic and support the recovery in the near term, including by addressing vaccine hesitancy. Looking ahead, Directors encouraged sustained reforms to ensure debt sustainability, strengthen the financial sector, and improve climate resilience. Given the increase in public debt during the pandemic, Directors underscored the importance of Page 52 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) maintaining momentum on fiscal consolidation. They welcomed the approval of the Fiscal Responsibility Act, which will support the reduction of public debt and the achievement of the regional debt target. Going forward, Directors recommended creating space for investment focused on building resilience to natural disasters, and prioritizing expenditure efficiency measures, including a civil service reform and better targeting of social transfers. They also encouraged measures to improve tax administration and broaden the tax base. Directors stressed the need for prudent use of Citizenship by Investment (CBI) revenue. They encouraged the authorities to save part of CBI revenue for self-insurance against natural disasters and public debt reduction. Directors also considered that securing additional insurance, as part of a layered insurance framework, would help cover losses in the case of large and extreme disasters. Directors noted that, while the financial sector remains liquid and stable, long-standing sectoral vulnerabilities persist, including high non-performing loans and capital adequacy gaps. In this regard, they welcomed banks’ plans to strengthen capital buffers to meet increasing loan-loss provisioning requirements. For the non-bank sector, Directors highlighted the importance of addressing capital and liquidity requirements and strengthening supervision. They also encouraged maintaining progress on strengthening the AML/CFT framework to minimize risk to correspondent banking relationships. Directors encouraged the authorities to implement structural reforms, aimed particularly at reducing informality in the economy and fostering inclusive, sustainable growth more broadly. They also noted that progress on structural reforms that boost competitiveness and build resilience to natural disasters, along with fiscal consolidation, would help strengthen external sustainability. It is expected that the next Article IV consultation with Dominica will be held on the standard 12-month cycle. ---------- [1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. [2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm. Page 53 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 3: LETTER OF DEVELOPMENT POLICY Page 54 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Page 55 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Page 56 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Page 57 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS Poverty and Social Impact Assessment 1. There are no recent official poverty data, but poverty remains a pressing concern in Dominica and has been accentuated by climate-related events and the pandemic. The latest official poverty data, collected in 2008, indicated a national poverty consumption rate of 28.8 percent. At the time, poverty rates were comparable among women and men, although unemployment rates were markedly higher among women (one in three) than men (one in five). Children made up a disproportionately large share of the poor population. A post-disaster needs assessment estimated that the poverty rate had increased to 42.8 percent after Hurricane Maria hit the country in 2017. The economic contraction due to the COVID- 19 pandemic, too, is expected to have significant implications for poverty. The phone survey referred to above shows that impacts of the COVID-19 pandemic continue to take a toll on household income. Moreover, they indicate that gender disparities have deteriorated. Incomes from wages, family businesses, and remittances all declined. Indeed, more than half of all households reported a reduction in overall household income after COVID-19. The share of households reporting running out of food due to a lack of money increased from 18 percent before the pandemic to 40 percent after the pandemic. 2. Lack of recent country level poverty data is a challenge to the effective implementation of social assistance reform programs. Poverty indicators are neither collected nor monitored on a regular basis. The last Country Poverty Assessment (CPA) was completed in 2008/2009 with the support of the Caribbean Development Bank. The country has made some improvements in recent years in collecting data on living conditions. A Labor Force Survey (LFS), that includes a module that will allow the computation of some poverty indicators, is under preparation. There is also a consistent effort to carry out rapid damage and need assessments following a natural disaster. These reports often provide estimates of the impact of a disaster on headcount poverty through data simulations. There is a need for more frequent and precise data on poverty trends at the national level. The paucity of data on poverty and social conditions represents a significant challenge to the effective implementation and monitoring of programs aiming at improving the targeting of social assistance in Dominica. Policy dialogue and technical assistance in the area of data scarcity is ongoing, and there are ongoing efforts aiming at addressing this issue. Pillar 1: Saving lives, protecting livelihoods, and preserving jobs Prior Action 1: The Recipient has issued a Cabinet decision to strengthen social programming and efficiency, by approving the establishment of a beneficiary registry and management information system for social programs, including a digital registration process and payment reconciliation mechanism. 3. The pandemic highlighted the need to improve social programs in Dominica to allow for better targeted assistance to households, especially in the aftermath of a disaster. The Government did implement social assistance support in response to the crisis, but this was not sufficient to help families offset the effects of the crisis. According to the phone survey implemented by the World Bank and the Page 58 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) UNDP, only 11 percent of households in Dominica received monetary or in-kind income to help them deal with the implications of the COVID-19 pandemic – the lowest percentage after Haiti (Figure 2). Lack of social assistance during the pandemic came with significant social costs for poor households. HFS data show an increase in the level of food insecurity among Dominican households; the proportion of households reporting having run out of food due to lack of money increased from 18 percent pre-COVID- 19 to 40 percent post-COVID-19 (Figure 3). Figure E.2: Percentage of respondents who have received monetary or in-kind payments due to the pandemic 100% 80% 60% 40% 20% 0% GUY BLZ JAM ATG LCA DMA HTI Percent Average Source: HFPS (June 2021) Figure E.3: Food insecurity outcomes 50% 40% 30% 20% 10% 0% Ran out of food due to lack Ran out of food due to lack Experienced at least one of money or other of money or other type of food insecurity in resources pre-Covid resources in the past 30 the past 30 days days Source: HFPS (June 2021) 4. The operation aims to support the government in additional steps to reform social assistance programs. Social programs in Dominica are fragmented and likely to exhibit exclusion and inclusion errors which render the system inefficient. Government authorities have implemented a digital registration drive to tackle the issue of inclusion errors and digitize their records. For a better management of programs, they are also working towards developing a single beneficiary registry database as well as improving the current intake instruments for better targeting. This prior action aims at further improving the efficiency Page 59 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) and effectiveness of Dominica’s social protection system, particularly addressing issues related to ineffective targeting. 5. The strengthening of social assistance programs will have a direct positive impact on poor households. The literature on social protection has consistently shown that social assistance programs can significantly contribute to reducing the level of poverty and shrinking the income gap in developing countries. Impacts of strengthened social assistance programs on poverty and vulnerability levels will depend on expediency of design and implementation. Yet, key reform initiatives envisioned by the government, particularly the institutionalization of a beneficiary registry and the expansion of such registry to a social registry in the future, are expected to ease the delivery of social protection benefits and improve efficiency. Overall, improved targeting, more rapid enrollment, easier payments, and increased efficiency in expenditures, are expected to have a positive impact on households, particularly female-headed households, and households in the first two income level quintiles. Phone survey data show that, in Dominica, female headed households are more likely to be the beneficiaries of government transfers than male headed households (Figure E.4). The reforms will allow authorities to focus spending on lower income households and those who need it the most. The new database is also expected to provide more targeted assistance after a natural disaster. Figure E.4: Percentage of households that receive government transfers by headship 30 20 10 0 Regular tansfers Regular transfers Transfers due to before Covid after Covid Covid Male headed Female headed Source: HFPS (June 2021) Note: Sample is restricted to respondents who are heads of household. Pillar 2: Strengthening fiscal policies, public financial management, and debt transparency for a climate- resilient recovery Prior Action 2: The Recipient: (a) through its Parliament, has adopted the Fiscal Responsibility Framework, 2021 to create fiscal space for a climate-resilient recovery by: (i) outlining fiscal responsibility principles; and (ii) establishing measurable quantitative targets for fiscal balances and public debt levels; and (b) through its Cabinet, has approved a new policy for the Tertiary Education Financial Aid Programme to reinforce the achievement of Fiscal Responsibility Framework targets, improve spending efficiency, and strengthen the composition of public expenditure by revising the application and eligibility criteria, reducing the amounts received by program participants, and instituting caps on total allowable amounts per applicant. Page 60 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) 6. Dominica’s fiscal stance has worsened in recent years due to pressures caused by natural disasters and the pandemic. The country’s fiscal deficit deteriorated significantly after Hurricane Maria, driven by a decline in revenue, due to lower output and tax exemptions, and an increase in expenditure due to reconstruction spending and emergency transfers to households. 14 The COVID-19 pandemic was yet another shock to the Dominican economy and caused even greater fiscal strain. During the pandemic, government priorities shifted, and public funds were reallocated to address urgent health needs and alleviate the adverse impact on households. In FY2020, the overall fiscal deficit reached 11.1 percent of GDP, its highest level since Hurricane Maria. The public debt level has also expanded in recent years due to accumulation to finance the post-maria reconstruction, and the country remains at a “high risk of debt distress” considering its underlying vulnerabilities. 7. This prior action will help the government create fiscal space and facilitate plans to invest in climate resilience. This will be achieved through the adaptation of a FRF by parliament with the goal of increasing fiscal space, reducing the gap between the budget and actual execution, and increasing expenditure efficiency and effectiveness. The FRF establishes a set of guidelines and targets aiming to generate recurring budget surpluses and reduce the level of public debt overtime. These, in turn, will generate enough budgetary resources to allow the government to pursue public investment initiatives and build a more climate-resilient economy. 8. The adoption of a fiscal rules and responsibility framework is expected to have no impact on welfare in the short run, but a positive impact, though indirect, in the medium term. There are many challenges standing in the way of fiscal reforms in the short run, particularly in the context of a global pandemic. In the medium-term, however, improved efficiency in revenue collection and government spending, through the application of fiscal rules and responsibility, should allow the state to expand fiscal space and generate additional resources for public spending. It is expected that the increased budgetary resources and additional savings will allow the state to increase its level of public investment in both infrastructure and human development. Given that public goods and transfers are more valuable to the poor, future generations could benefit from fiscal reforms if long-term surpluses are recycled into higher provision of public goods. 15 In the long run, fiscal consolidation could result in higher employment, increases in household income, further reductions in poverty, and overall economic growth. 9. The Government of Dominica is committed to reducing fiscal spending through reform of the tertiary grant program. The tertiary grant program allows Dominican students to attend a post-secondary institution tuition-free. Students often opt for the more expensive option of attending universities abroad and may not return to the Caribbean region for job opportunities. The program costs up to EC$30 million per year and the benefits in terms of a more educated workforce remain unclear. The proposed reform would limit the grant amount to the cost of studying at the UWI, thus encouraging students to attend post-secondary institutions in the Caribbean and potentially seek job opportunities in the ECCU region post-graduation. 14IMF Country Report No. 18/265 15Jensen, S. E. H., & Rutherford, T. F. (2002). Distributional effects of fiscal consolidation. Scandinavian Journal of Economics, 104(3), 471-493. Page 61 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) 10. The poverty and social impacts of the proposed reform to the tertiary grant program are undetermined and depend on the distributional effects of the allocation of fiscal savings. The proposed reform is expected to bring down fiscal costs. The government is expected to save up to EC$20 million per annum (approximately 1.2 percent of GDP). Implications will depend on the distributional effects of the allocation of these savings. Although students will still be able to afford an education at the UWI under the reform, opportunities for academic exchange beyond the Caribbean will be reduced. Prior Action 3: The Recipient, through the Minister of Finance, has issued operating regulations for the Vulnerability, Risk, and Resilience Fund to ensure its adequate capitalization and effective operation. 11. Dominica is one of the countries that are most vulnerable to climate change and natural disasters. It is also the country with the highest GDP losses related to climate disasters. Hurricane Maria, a category 5 storm, hit the island nation in September 2017, while it was still recovering from tropical storm Erika. The damages caused by Hurricane Maria were estimated at 226 percent of GDP.16 Natural disasters often put significant strain on Dominican households and have devastating impact on important economic sectors such as tourism and agriculture. In light of recent events, Dominica has set the goal of becoming the first climate-resilient country, with the specific objective of building a climate-resilient infrastructure system while adopting policies to strengthen adaptation, mitigation, and risk management measures. 12. Contingency reserve funds, such as the VRFF, are useful complements to other risk transfer instruments. The negative consequences of recent climate disasters have put natural disaster preparedness at the forefront of Dominican consciousness. Dominica is insured against adverse natural events through the Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC). However, this ex-ante risk financing instrument, often aimed at insuring critical public assets, cannot address the complete need of the government in the event of a natural disaster. The VRFF, which was established in October 2020, provides emergency funds to the government following a disaster and reduces liquidity risk and the likelihood of deepening losses. While the prior operation supported the establishment of such funds, this present operation helps the government establish a set of guidelines to promote its effective financial management. 13. Prior action 3, in supporting management guidelines for the VRRF, is expected to have a direct positive impact on poverty and social outcomes. Natural disasters and climate-related shocks tend to have a disproportionate impact on poor individuals, particularly poor women. A better management of the VRRF will allow the state to intervene rapidly in the aftermath of a natural disaster without fiscal consequences. Immediate access to available resources through the VRRF, should help limit the negative impact of natural disasters and allow for more prompt delivery of assistance to households in urgent need. As such, the VRRF would support vulnerable households in keeping them from falling deeper into poverty. For many households, receiving assistance after a natural disaster serves as a buffer against shocks as it decreases the probability of using adverse coping strategies such as the selling of productive assets. The immediate impact of this program on the welfare of Dominican households however will largely depend 16 IMF Country Report No. 18/265 Page 62 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) on the operational management of the VRRF, the mechanisms of disbursement from the fund, and the design and implementation of post-disaster programs. Prior Action 4: The Recipient, through its Cabinet, has taken measures to strengthen debt transparency by requiring: (a) the preparation of DPRs on an annual basis; (b) the inclusion of all state-owned enterprise and statutory body debt in the annual DPRs; and (c) the disclosure of DPRs by September 30th each year. 14. Dominica’s debt performance was not always transparent. In the past, the government had published debt portfolio reviews but not in a consistent manner. Moreover, in past reports, state-owned enterprises’ debt was not included; this provided a less comprehensive picture of the debt situation, particularly the state of domestic debt. The systematic publication of debt performance is important for transparency purposes and could be useful to policy makers, foreign credit institutions, and donors. 15. This prior action will require the government to publish a DPR to be submitted to parliament for approval and publication on September 30 of every year. From the first operation, this report is now required to be more comprehensive, with added details on debt performance and risk analysis metrics. The report will also now include the debt of state-owned enterprises, whose size is significant with assets estimated at 16 percent of 2016 GDP. 17 For the purpose of transparency, the annual DPRs are expected to be available to the general public on a government website. 16. This prior action is expected to have no direct impact on the welfare of Dominicans in the short run but a positive effect on fiscal performance in the medium run. In the long run, the increased transparency in debt reporting is expected to lead to better informed decisions on debt matters which will in turn reduce the overall debt burden of the country. Enhanced transparency on state owned enterprises will also have an immediate effect on domestic debt and might contribute to increased efficiency of these enterprises. Funds freed by debt reduction could go into tax reductions or improving health, education, infrastructure, and other social investments which will contribute to reducing poverty and inequality. Prior Action 5: The Recipient, through its Cabinet, has approved initiatives for enhanced capital investment planning, appraisal and monitoring mechanisms, including explicit incorporation of objectives for increasing environmental resilience and reducing environmental and climatic vulnerability, to strengthen budget allocations, public investment planning, prioritization, and reporting. 17. Dominica opted for a new PSIP methodology that supports its vision of a climate-resilient infrastructure system. The new methodology will detect existing problems in the current framework and help strengthen the infrastructure portfolio by integrating climate resilience into every step of an infrastructure project, from conception to maintenance. It will also focus on identifying financial needs and fiscal implications of proposed investments while also assuring alignment with the country’s macroeconomic framework. The aim is to enhance gender equality by ensuring that women have an equitable opportunity to benefit from investments both during design and implementation of investments. 17 IMF Country Report No. 18/265 Page 63 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) 18. This prior action is expected to have limited social impact in the short run, but can have an important beneficial impact in the long run. The increase in public investment projects that align with the new PSIP methodology is not expected to have a direct impact on the welfare of households. However, in the long run, this prior action can have positive impacts on social outcomes. New infrastructure projects built under this investment plan will be more resilient to climate disasters and will thus save resources and potentially lives in the event of a climate disasters. These additional savings could be transferred to households through reduced taxes, additional public investment, and social projects. The plan also necessarily implies the creation of more high paying green jobs, which have the potential to boost household income post-pandemic. To the extent that it enhances the inclusion of women in the design of investments and the ability of women-owned enterprises to take part in public procurement, the prior action can contribute to a reduction in gender gaps in economic opportunities (outlined earlier in this document). Prior Action 6: The Recipient: (a) through its Parliament, has enacted the Public Procurement and Disposal of Public Property Act; and (b) through its Minister of Finance, has issued Public Procurement and Disposal of Public Property Regulations 2022, to strengthen the effectiveness, efficiency and transparency of public procurement and to incorporate climate-resilient and sustainable procurement into the public procurement process. 19. To remain consistent with its climate resilience goals, Dominica needs a new procurement policy. In part due to its vulnerability to climate disasters and recurring infrastructure losses, a considerable part of Dominica’s public expenditure is allocated to the purchase of goods and services through its procurement system. The country’s procurement system is outdated, with a set of regulations that are neither climate-aware nor reflective of the needs of today’s economy. In line with its goal of a climate-resilient economy, Dominica needs public procurement policies that encourage social responsibility and are aligned with international best practices. The new plan should also focus on transparency of procurement procedures and provide equal access and opportunity to all groups. 20. The modernization of the procurement process can have a direct impact on households, particularly small business owners. To the extent that small businesses rely on government contracts as a source of revenue, increased transparency in the procurement system will allow small firm owners to better compete for these contracts. The requirement of putting the procurement contracts on a government website will guarantee that all individuals will be able to access it, even during a natural disaster. This could be particularly important for women and other minority-owned businesses. The additional income could serve to boost the capacity of these small firms and contribute to a closing of the income gap. Prior Action 7: The Recipient has: (a) through its Cabinet, approved the National Energy Policy; and (b) published the Energy Management Guidelines aligned with the Government's declared target of 100 percent renewable energy by 2030 to transition to more affordable, resilient and low-carbon energy systems and services. Page 64 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) 21. Dominica’s goal to become the first climate-resilient nation encompasses a reform in the energy sector and greater investment in Renewable Energy. The government has approved a National Energy Policy with associated energy guidelines with the goal of making electrical grids more resilient to natural disasters and reduce greenhouse gas emissions. The plan comprises an effort to scale up the use of domestic renewable energy in all sectors to strengthen future economic development and build resilience to external shocks. It also aims to increase competitiveness and resilience in productive and industrial sectors of the economy. 22. This prior action can have direct benefits for the welfare of households in Dominica and a positive impact on businesses. There is potential for households and businesses to benefit through lower electricity costs, especially given that Dominica has the highest electricity cost in the Caribbean region. 18 A lower cost of electricity will both directly and indirectly lower the price of the consumption basket and thus have direct benefits for households. It also has the potential to drive economic growth and employment creation which, in turn, can result in an improvement in the quality of life and reduction in poverty in the long run. 23. This prior action also has the potential to enhance resilience to climate related disasters. The energy sector is particularly vulnerable to natural disasters and other climate shocks. After hurricane Maria, at least 75 percent of the country’s power distribution network was severely impacted. 19 A more resilient energy grid will reduce energy-related challenges experienced by households during and after major natural disasters. It also has the potential to result in opportunity cost savings during disasters, which leaves enhanced room for a focus on health, education, and other social aspects. 18 IMF Country Report No. 18/265 19 Post-Disaster Needs Assessment: Hurricane Maria September 18, 2017. A Report by the Government of the Commonwealth of Dominica Page 65 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Significant positive or negative Significant poverty, social or Prior Actions environment effects distributional effects positive or negative Pillar 1 – SAVING LIVES, PROTECTING LIVELIHOODS AND PRESERVING JOBS This measure is expected to have a Prior Action 1: The Recipient has issued a Cabinet positive impact on poverty and social decision to strengthen social programming and outcomes. Well-designed social efficiency, by approving the establishment of a assistance programs can significantly beneficiary registry and management information No significant effects contribute to reducing the level of system for social programs, including a digital poverty and shrinking the income gap, registration process and payment reconciliation including for women and workers who mechanism. lost their employment post-COVID-19. Pillar 2 –STRENGTHENING FISCAL POLICIES, PUBLIC FINANCIAL MANAGEMENT AND DEBT TRANSPARENCY FOR A RESILIENT RECOVERY Prior Action 2: The Recipient: (a) through its Parliament, has adopted the Fiscal Responsibility Framework, 2021 to create fiscal space for a climate- resilient recovery by: (i) outlining fiscal responsibility principles; and (ii) establishing measurable quantitative targets for fiscal balances and public debt levels; and (b) through its Cabinet, has approved a This measure is expected to have a new policy for the Tertiary Education Financial Aid No significant effects positive, though indirect, impact on Programme to reinforce the achievement of Fiscal poverty in the medium term. Responsibility Framework targets, improve spending efficiency, and strengthen the composition of public expenditure by revising the application and eligibility criteria, reducing the amounts received by program participants, and instituting caps on total allowable amounts per applicant. This measure is expected to have a direct Positive environmental effects positive impact on poverty and social are expected as available outcomes as natural disasters and shocks resources in the immediate Prior Action 3: The Recipient, through the Minister of tend to hit the poorest households aftermath of natural disasters Finance, has issued operating regulations for the hardest. Access to available resources can limit environmental Vulnerability, Risk, and Resilience Fund to ensure its with which to respond rapidly following damage and ongoing adequate capitalization and effective operation. such an event should help limit the environmental deterioration negative impact of such disasters and and its impact through a more allow for more prompt delivery of timely response. assistance to poor households. Prior Action 4: The Recipient, through its Cabinet, has taken measures to strengthen debt transparency by requiring: (a) the preparation of DPRs on an annual This measure is expected to have a basis; (b) the inclusion of all state-owned enterprise No significant effects positive, though indirect, impact on and statutory body debt in the annual DPRs; and (c) the poverty in the medium term. disclosure of DPRs by September 30th each year. Page 66 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Prior Action 5: The Recipient, through its Cabinet, has Potential positive effects as approved initiatives for enhanced capital investment public investment decisions planning, appraisal and monitoring mechanisms, are increasingly made with the This measure is expected to have a including explicit incorporation of objectives for explicit intention of positive, though indirect, impact on increasing environmental resilience and reducing strengthening environmental poverty in the medium term. environmental and climatic vulnerability, to strengthen and climate resilience and budget allocations, public investment planning, reduce environmental and prioritization, and reporting. climatic vulnerability. Prior Action 6: The Recipient: (a) through its Parliament, has enacted the Public Procurement and Disposal of Potential positive effects as Public Property Act; and (b) through its Minister of green and climate-resilient Finance, has issued Public Procurement and Disposal of procurement policy reforms This measure is expected to have a Public Property Regulations 2022, to strengthen the are likely to reduce the positive, though indirect, impact on effectiveness, efficiency and transparency of public environmental risks of poverty in the medium term. procurement and to incorporate climate-resilient and government investments over sustainable procurement into the public procurement the medium term. process. Prior Action 7: The Recipient has: (a) through its Potential positive effects, Cabinet, approved the National Energy Policy; and (b) including climate change published the Energy Management Guidelines aligned impact, in terms of both with the Government's declared target of 100 percent mitigation and adaption, as This measure can have a positive impact renewable energy by 2030 to transition to more the new energy policy fosters on poverty in the medium term. affordable, resilient and low-carbon energy systems and the use of renewable energy services. sources and reduces dependence on oil products. ANNEX 5: PERFORMANCE AND POLICY ACTIONS FY21-23 Table F.7. Performance and Policy Actions FY21-23 DSPE Area By March 2022 Analytical underpinning Supported by Improving PPA1: The Government of the DeMPA (2016) DPC2 debt Commonwealth of Dominica, through its DSA TA transparency Cabinet, approves an order requiring: (i) TA Reports Policy dialogue the preparation of DPRs on an annual Article IV basis; (ii) the inclusion of state-owned enterprise and statutory body debt in the annual DPRs; and (iii) the disclosure of DPRs by September 30th each year). Strengthening PPA2: The Government of the Post-Disaster Public Financial DPC2 fiscal Commonwealth of Dominica, through its Management (PD-PFM) Review. TA sustainability Cabinet, has approved operating guidelines June 2019. Policy dialogue for the Vulnerability Risk and Resilience Fund (VRRF) to ensure adequate Cummins, Mahul. Catastrophe Risk capitalization and operation of the VRRF). Financing in Developing Countries. World Bank, 2009. Page 67 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Clarke, D.J., Mahul, O., Poulter, R. et al. Evaluating Sovereign Disaster Risk Finance Strategies: A Framework. Geneva Pap Risk Insur Issues Pract 42, 565–584 (2017). Financial Protection against Natural Disasters: An Operational Framework for Disaster Risk Financing and Insurance. World Bank. 2018. Page 68