The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Document of The World Bank FOR OFFICIAL USE ONLY Report No: 157124-DM INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED CREDIT IN THE AMOUNT OF US$25 MILLION TO THE COMMONWEALTH OF DOMINICA FOR THE FIRST COVID-19 RESPONSE AND RECOVERY PROGRAMMATIC DEVELOPMENT POLICY CREDIT February 18, 2021 Macroeconomics, Trade and Investment Global Practice Latin America and Caribbean Region This document will be made publicly available following Board approval in accordance with the Bank’s policy on Access to Information. . The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Commonwealth of Dominica GOVERNMENT FISCAL YEAR July 1 – June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of February 4, 2021) Currency Unit US$1.00 = EC$2.70 ABBREVIATIONS AND ACRONYMS CAD Current Account Deficit IFC International Finance Corporation CARICOM Caribbean Community IMF International Monetary Fund CARTAC Caribbean Technical Assistance Center LDP Letter of Development Policy CBI Citizenship-by-investment MOF Ministry of Finance CDB Caribbean Development Bank MSME Micro, small and medium-sized enterprises CERC Contingent Emergency Response Component MTEFF Medium-Term Economic and Fiscal Framework CCRIF Caribbean Catastrophe Risk Insurance Facility NPLs Non-Performing Loans CREAD Climate Resilience Execution Agency for NRDS National Resilience Development Strategy Dominica OECS Organisation of Eastern Caribbean States CRRP Climate Resilience and Recovery Plan PAHO Pan-American Health Organization DDA Discover Dominica Authority PCR Polymerase Chain Reaction DeMPA Debt Management Performance Assessment PEFA Public Expenditure and Financial Accountability DPC Development Policy Credit PER Public Expenditure Review DPR Debt Portfolio Review PFM Public Financial Management DSA Debt Sustainability Assessment PLR Program Learning Review DSSI Debt Service Suspension Initiative PPAs Performance and Policy Actions ECCB Eastern Caribbean Central Bank PSIP Public Sector Investment Program ECCU Eastern Caribbean Currency Union RCF Rapid Credit Facility EOC Emergency Operations Centre RPS Regional Partnership Strategy EHD Environmental Health Department SDFP Sustainable Development Financing Policy FAA Financial Administration Act SDR Special Drawing Rights FCDO Foreign, Commonwealth and Development TA Technical Assistance Office VAT Value Added Tax FDI Foreign Direct Investment USD United States Dollar FRRF Fiscal Rules and Responsibility Framework WB World Bank GDP Gross Domestic Product WBG World Bank Group GoCD Government of the Commonwealth of WHO World Health Organization Dominica XCD Eastern Caribbean Dollar IDA International Development Association . Regional Vice President: Carlos Felipe Jaramillo Country Director: Tahseen Sayed Khan Regional Director: Robert R. Taliercio Practice Manager: Jorge A. de Thompson R. Araujo Task Team Leader: David Cal MacWilliam The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) COMMONWEALTH OF DOMINICA FIRST COVID-19 RESPONSE AND RECOVERY PROGRAMMATIC DPC TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................2 1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................4 2. MACROECONOMIC POLICY FRAMEWORK....................................................................................7 2.1. RECENT ECONOMIC DEVELOPMENTS............................................................................................ 7 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 12 3. GOVERNMENT PROGRAM ........................................................................................................ 16 4. PROPOSED OPERATION ............................................................................................................ 18 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 18 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 18 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 31 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 31 5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 32 5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 32 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ................................. 33 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 33 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 35 6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 36 ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 38 ANNEX 2: FUND RELATIONS ANNEX .................................................................................................. 41 ANNEX 3: LETTER OF DEVELOPMENT POLICY..................................................................................... 45 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 50 ANNEX 5: DOMINICA PROGRAM ADJUSTMENT IN RESPONSE TO COVID-19 ...................................... 52 ANNEX 6: PERFORMANCE AND POLICY ACTIONS FY21-23 .................................................................. 55 Preparation of the Dominica First COVID-19 Response and Recovery Programmatic Development Policy Credit was supported by an IDA team led by Cal MacWilliam (Task Team Leader) and which included Karlene Francis, Asha Williams, Katie O’Gara, Vinicius Lima Moura, Carolyn Shelton, Nelissa Hines, James Newman, Jacobus Joost de Hoop, Mary Boyer, Arun Manuja, Moad Alrubaidi, Alexandra Lelouch Loebl, and Jose Janeiro. Miriam Beatriz Villarroel and Suchada Nevis provided production assistance. Peer reviewers were Philip Schuler, Jeff Chelsky and Cornelius Fleischhaker. The team is grateful for the guidance and supervision of Tahseen Sayed (Country Director); Jorge Araujo, (Practice Manager); and Abha Prasad and Vickram Cuttaree (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. Page 1 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 P174927 Yes 1st 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 resilient recovery. Organizations Borrower: COMMONWEALTH OF DOMINICA Implementing Agency: MINISTRY OF FINANCE PROJECT FINANCING DATA (US$, Millions) SUMMARY Total Financing 25.00 DETAILS International Development Association (IDA) 25.00 IDA Credit 25.00 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 Substantial . Page 2 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Results Indicator Name Baseline Target 2019 June 30, 2021 Number of persons tested for COVID-19 0 12,000 Number of Accommodation facilities certified to operate March 2020 June 30, 2021 under the Health and Safety protocols. 0 50 The number of beneficiary entities benefiting from the 2019 2022 8 percent tax reduction by retaining 80 percent of staff. 0 25 Annual and mid-year oversight reports issued by the Fiscal 2019 2022 Council. 0 2 per year Cumulative amount of funds deposited into the Vulnerability Risk and Resilience Fund to respond to climate-related and 2019 2022 other disasters (recognizing that deposits may be suspended 0 EC$13.5 million during periods of disaster events). Percentage reduction in Cabinet authorized discretionary 2019 2022 exemptions. EC$ 2.2 million 50 percent reduction 2019 2022 Number of joint audits undertaken. 0 5 Annual DPR available on a government website. 2019 2020-2022 no yes Percentage of new public investment projects funded in the 2022 annual budget that were also in the Parliamentary approved PSIP (recognizing that natural disaster events can 2019 2022 impact outcome). 0 60 percent Percentage of awarded public procurement contracts made 2019 2022 available on a dedicated Government website. 0 80 percent . Page 3 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) IDA PROGRAM DOCUMENT FOR A PROPOSED CREDIT TO THE COMMONWEALTH OF DOMINICA 1. INTRODUCTION AND COUNTRY CONTEXT 1. This proposed First COVID-19 Response and Recovery Programmatic Development Policy Credit (DPC), in the amount of US$25 million, and the first in a series of two operations supporting Dominica’s COVID-19 response and recovery. The COVID-19 pandemic struck Dominica and triggered a sudden stop in tourism as the economy was recovering from the devastation of successive natural disasters. The series supports actions taken by the Government of the Commonwealth of Dominica (GoCD) in responding to the crisis and laying the foundation for economic recovery. This DPC includes policy reforms for a broader economic and social response to the crisis, including the protection of jobs, livelihoods, and household consumption. Furthermore, given the fragile fiscal and debt situation in the aftermath of natural disasters, the operation supports critical measures to support fiscal and debt resilience and facilitate a resilient recovery. The second operation in the series would build on and deepen the fiscal and public financial management (PFM) reforms supported under the first operation. 2. This is the first World Bank-financed DPC for Dominica. Given the GoCD’s lack of experience with DPCs and the limited technical capacity due to the country’s small size, a programmatic approach will allow for a sustained reform engagement over time and greater support for the implementation of necessary follow-up actions to deepen and reinforce the reform effort. The Bank will continue to support ongoing policy dialogue through the existing program and provide substantive technical assistance, together with the country’s other development partners, for key reforms. This programmatic approach will help facilitate capacity building, policy dialogue, and technical assistance in support of Dominica’s reforms. 3. Dominica responded rapidly to the pandemic and has been effective in limiting community transmission. As of February 11, 2021, a total of 121 positive confirmed cases and no deaths had been reported. From the onset of the pandemic, the Government took measures to promptly test, treat, and isolate COVID-19 patients to prevent contagion. Strict controls were imposed at all points of entry and, as the pandemic intensified, led to the complete closing of Dominica’s borders and imposition 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. While the outbreak has been well- contained, economic activity has suffered markedly, and fiscal costs associated with control and containment measures have been significant. 4. Dominica is a small island developing state that is particularly vulnerable to climate change, with a population of 71,625 and a 2020 per capita income of approximately US$7,500.1 Dominica’s economy is driven largely by tourism and agriculture, making the country highly vulnerable to natural disasters and economic shocks. Dominica has been classified as one of the countries most vulnerable to climate change and extreme weather events.2 The vulnerability of Dominica’s agricultural sector is manifested in the risks presented by both current and future natural disasters and climate extremes and 1https://data.worldbank.org/country/dominica 2Dominica ranks 10th on the Germanwatch Climate Risk Index 1999-2018: https://www.germanwatch.org/sites/germanwatch.org/files/20-2-01e%20Global%20Climate%20Risk%20Index%202020_14.pdf Page 4 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) variability. Furthermore, due to its 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, as well as flooding as Atlantic storms and hurricanes become stronger as a result of climate change.3 In 2017, Hurricane Maria caused losses and damages equivalent to 226 percent of GDP damaging large swaths of agriculture land, destroying critical infrastructure, and extensively damaging an estimated 90 percent of buildings. This disaster severely affected progress the Government was making on fiscal consolidation committed under the IMF Rapid Credit Facility (SDR 6.15 million) to facilitate recovery from Tropical Storm Erika (2015), which caused damages equivalent to 96 percent of GDP. As a small state with limited resources and capacity, such shocks can require long periods of recovery and reconstruction and difficult policy choices to return fiscal and debt paths to sustainable trajectories. 5. COVID-19 presents an additional shock on top of the reconstruction, rehabilitation, and recovery efforts underway following the previous natural disasters . The global recession, disruptions in international trade and travel, as well as local containment measures, have paralyzed the tourism sector and adversely affected domestic production, as business activity has been curtailed to combat the spread of the disease. More specifically, COVID-19 has affected growth through several channels, including: the sudden total stop in tourism; declining remittances, as global growth slows; lower foreign direct investment; and falling Citizenship by Investment (CBI) revenues.4 The full magnitude of the decline in growth, currently estimated at -10.0 percent in 2020 compared to a pre-COVID-19 forecast of 4.9 percent, will depend on the length of the crisis and how quickly the global economy rebounds – both of which remain uncertain at present. 6. The COVID-19 pandemic has highlighted the importance of increasing preparedness efforts to deal with disease outbreaks and other natural disasters simultaneously. Therefore, this operation also aims to improve Dominica’s ability to mitigate and respond to climate change impacts, in particular through measures to strengthen social safety nets to support vulnerable groups, operationalize a disasters contingencies fund, and institute green procurement approaches. 7. This operation is set within a broader international response to the pandemic crisis in Dominica. In addition to this operation, the Bank provided COVID-19 Fast Track Facility financing of US$2.5 million and activated Contingent Emergency Response Components of ongoing projects in the amount of US$11.8 million for immediate COVID-19 response to save lives and livelihoods. The IMF approved a Rapid Credit Facility (RCF) of US$14 million, the Caribbean Development Bank (CDB) approved a budget support operation of US$20 million, the OPEC Fund for International Development approved US$10 million to finance COVID-19 health services, and the Eastern Caribbean Central Bank (ECCB) reduced the interest rate on government borrowings from 6.5 percent to 2 percent. Bilateral assistance is not yet fully confirmed, but available international support totals US$69 million to date in 2020, or approximately 12 percent of GDP, including the US$25 million in DPC resources provided through this operation. Dominica is also participating in the Debt Service Suspension Initiative (DSSI), which should realize savings of around US$2.5 million (0.5 percent of GDP). 3World Bank Climate Change Knowledge Portal 4 Dominica’s Citizenship-By-Investment (CBI) program has accounted for up to 33 percent of GDP in domestic revenue generation annually in recent years. CBI revenues are expected to decline to 9.9 percent of GDP in 2020 from 13.8 percent in 2018. Page 5 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 8. The operation supports prior actions under two pillars that represent the main components of the Government’s response: • Under Pillar 1, “saving lives, protecting livelihoods and preserving jobs,” the operation supports: (i) standardized protocols to ensure adequate COVID-19 testing through the Border Reopening Programme and the Action Plan for Entry into Dominica; (ii) approval of Health and Safety Protocols for the Tourism and Hospitality Industry to limit the risk of COVID-19 transmission; and (iii) tax reforms including a three-month extension for filing and payment of personal and corporate income tax; a reduction of 8 percent in the corporate income tax rate for companies that commit to continue to employ at least 80 percent of their staffing complement, deferment of tax and interest payments, and waiving of penalties for businesses that enter into payment plans. • Under Pillar 2, “strengthening fiscal policies, public financial management and debt transparency for a resilient recovery,” the operation supports: (i) development of a Fiscal Rules and Responsibility Framework (FRRF); (ii) funding of a Vulnerability Risk and Resilience Fund; (iii) limiting discretionary and ad-hoc duty exemptions on vehicle imports; (iv) signature of a formal Memorandum of Understanding between its Customs and Inland Revenue administrations to increase compliance; (v) improved coverage, timeliness, and public disclosure of the Debt Portfolio Review (DPR); and (vi) preparation of a new Public Procurement Bill. 9. The policy actions supported by this operation are aligned with the recommendations of the World Bank Group (WBG) COVID-19 Crisis Response Approach Paper: Saving Lives, Scaling-up Impact and Getting Back on Track. The prior actions supported in Pillar 1 of the DPC are aligned with the Approach Paper’s Pillars 1 and 2, “Savings Lives” and “Protecting the Poor and Vulnerable” in strengthening the health sector to manage the response to COVID-19, ensuring appropriate health protocols to limit the risk of transmission during the reopening of the economy, and implementing a COVID-19 Immunization Plan. The expansion of cash and in-kind safety nets and health services reduces the need for negative coping strategies (e.g., reducing nutritional intake, ignoring social distancing to procure income), and thus helps preserve human capital. Additional prior actions in the first pillar are meant to provide short-term liquidity to enterprises to preserve employment and economic linkages, reduce borrowing costs, and maintain trade flows. These coincide with the principal recommendations of Pillar 3 of the Approach Paper, “Ensuring Sustainable Business Growth and Job Creation.” Reforms supported in the second pillar of this operation are contributing to strengthening policies and institutions for building back better, as recommended in Pillar 4 of the Bank’s Approach Paper. 10. There are no recent official poverty data, but poverty remains a cause for concern. The official poverty data are outdated (2008) with indicated poverty rates of 28.8 percent.5 Economic recovery in 2018 and 2019 are expected to have reduced poverty levels but the extent of this potential poverty reduction cannot be confirmed. With growth decelerating markedly in 2020 due to the COVID-19 pandemic, poverty rates are expected to have increased in 2020. Indicative data from a rapid survey for the Caribbean6 revealed that impacts of the COVID-19 pandemic seem to be taking an increasing toll on household income. As of June 2020, 70 percent of households reported a loss in employment or reduced 5 Kairi Consultants Ltd. 2009. Country Poverty Assessment: Dominica (Caribbean Development Bank) 6 World Food Program, 2020. Page 6 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) salaries, 12 percentage points higher than in April 2020.7 Additionally, 70 percent of those whose income comes from informal sources and 66 percent of those in petty trades reported livelihood disruptions, compared to 50 percent for salaried workers. Based on the 2008 Dominica Country Poverty Assessment, most of the poor work in services and agriculture, sectors that are directly linked to tourism. Given the high negative impact of COVID-19 on the tourism sector, all sectors linked directly and indirectly to tourism are expected to be heavily affected, with income losses likely substantial among the poor whose livelihoods are in these sectors. Women are over-represented in these sectors and thus, particularly vulnerable to the effects of COVID-19 and the containment measures. In this regard, Pillar 1 of the operation has the potential to benefit these women. The active transfers programs instituted by the Government and continued reconstruction spending are unlikely to fully offset the impacts on poverty. The incidence of poverty is thus expected to remain elevated over the medium term. 11. Given the global economic impact of the COVID-19 pandemic, and uncertainty regarding the full resumption of global and domestic economic activity, particularly tourism, 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, several of which will be supported in the subsequent operation. A return to primary budget surpluses over the medium term and the enshrinement of responsible fiscal targets in a Parliamentary approved FRRF provide confidence in an improving and sustainable macro/fiscal framework. Consistently low and stable inflation of 2 percent or less and a forecasted decline in debt following the COVID-19 pandemic further support macroeconomic stability. The measures supported through this operation, and the associated financing, will support the economy to withstand the shock of the pandemic and help lay the foundations for recovery. The Government is cognizant of the need to reinforce macroeconomic stability and also of the importance of supporting households and firms in weathering the crisis, recognizing this is a balancing act. 2. MACROECONOMIC POLICY FRAMEWORK 2.1. RECENT ECONOMIC DEVELOPMENTS 12. 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 by the devastating Category 5 Hurricane Maria in 2017. Following Hurricane Maria in September 2017, growth was -9.5 percent in 2017, 0.5 percent in 2018, and picked up to 8.6 percent in 2019 (see Table 1). Per capita GDP (2020) is approximately US$7,500 (Atlas method). The tourism sector accounts for approximately 20 percent of GDP and nearly 50 percent of total exports.8 Agriculture and fishing are also important sources of jobs and incomes. Tourism has essentially ceased in Dominica during the pandemic and growth in 2020 is expected to be -10.0 percent, down from a pre-COVID-19 forecast of 4.9 percent. 13. Dominica’s economy continues to be seriously affected by the current pandemic. In addition to the slowdown in global growth and the sudden stop in tourism, domestic COVID-19 containment 7 Caribbean COVID-19 Food Security & Livelihoods Impact Survey, Dominica Summary Report. World Food Programme, October 2020. 8 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. Page 7 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) measures implemented as early as March 2020, such as lockdowns, closing of national borders, quarantines, and closing of shops and factories have had important economic repercussions. As firms began to lay-off workers and wage payments ceased, or were reduced, this created an income squeeze for many households. Furthermore, the closing of national borders and the stop in air travel had a severe impact on the tourism industry, as well as those indirectly related to tourism such as transport, hotels, commerce, and services. In the first half of 2020, tourist spending reached US$24 million, about US$37 million less compared to the first half of 2019. Table 1 provides a summary of key economic indicators, including pre-COVID-19 estimates. Table 1: Key Economic Indicators, 2016–24 Pre- Pre- COVID COVID 2016 2017 2018 2019 2020 2020 2021 2021 2022 2023 2024 Proj. Real sector (annual percentage growth) Real GDP (market prices) 2.5 -9.5 0.5 8.6 4.9 -10.0 4.1 1.0 3.0 2.5 2.5 Consumer price index (avg.) 0.0 0.6 1.4 1.6 1.5 1.4 1.5 1.8 2.0 2.0 2.0 Monetary (percent of GDP) Broad money (M2) 6.0 18.0 0.7 -0.4 -0.4 0.1 0.0 0.5 0.4 0.5 0.6 Credit to private sector 3.1 -3.0 -2.7 -1.5 0.5 -12.3 0.5 -2.5 -2.0 -1.3 -1.5 Fiscal1 Revenue 59.6 55.2 46.1 34.7 35.1 36.8 34.3 34.9 34.0 34.1 34.2 Expenditure 44.9 53.9 65.3 44.6 38.9 47.0 36.2 40.0 37.7 35.5 34.9 Overall balance2 14.8 1.3 -19.2 -9.9 -3.8 -10.2 -1.9 -5.1 -3.7 -1.5 -0.7 Primary balance 16.4 3.4 -17.2 -8.7 -2.0 -7.8 -0.1 -3.6 -2.2 0.0 0.8 Public debt 75.3 76.5 76.9 78.8 80.0 88.1 80.0 95.6 98.3 97.7 97.0 External debt 58.3 57.4 57.9 54.9 56.1 70.3 56.0 78.5 80.4 80.7 79.9 External Current account balance -7.7 -8.8 -44.6 -28.0 -25.9 -30.5 -22.3 -24.8 -20.1 -13.5 -11.0 Exports (goods and services) 46.9 41.6 29.6 37.7 41.4 20.9 44.2 26.5 27.8 28.8 30.6 Imports (goods, services) 57.2 61.1 78.7 70.9 81.0 55.5 75.7 53.7 50.2 45.5 45.2 Foreign direct investment 7.2 4.3 14.3 6.2 6.4 3.2 6.2 5.2 5.2 5.3 5.1 Exchange rate (EC$/US$) 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Memorandum items Nominal GDP (EC$ million) 1554 1414 1440 1590 1685 1520 1770 1562 1640 1713 1790 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 2021 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. 14. The baseline projections are fairly conservative and reflect the high degree of uncertainty with respect to tourism sector recovery prospects. These projections are based on prolonged global pandemic conditions that will continue to impact tourist arrivals into 2022 and 2023. The basic assumption is that tourism will recover only to 20 percent of 2019 levels in 2021, 60 percent of 2019 levels in 2022, and 80 percent in 2023. Given recent vaccine developments, these assumptions could be considered overly pessimistic for 2022 and 2023. However, the 2021 tourist season is essentially already lost, regardless of promising vaccine developments, as bookings for the peak mid-December 2020 through April 2021 Page 8 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) tourism season have not materialized. Tourist arrivals could outperform projections in 2022 and 2023, although it is unlikely in 2021. Box 1 looks into the implications of an even less positive downside scenario. Box 1. Macroeconomic Impact of the COVID-19 Crisis The COVID-19 pandemic has adversely and considerably impacted Dominica’s macroeconomic aggregates, surpassing the downturn encountered during the 2008 global financial crisis. The projected macroeconomic impact for the baseline and downside scenarios relative to the pre-crisis projections are explored in the following analysis. Table 2: Macroeconomic Impact of the COVID-19 Crisis Pre-Covid Baseline Downside 2020 2021 2022 2020 2021 2022 2020 2021 2022 Real Sector (% change) Real GDP 4.9 4.1 3.0 -10.0 1.0 3.0 -10.0 -0.5 1.0 Agriculture 11.7 9.7 5.0 4.9 2.5 2.5 4.9 2.0 2.0 Industry 13.1 10.2 6.0 -9.8 0.0 2.0 -9.8 0.0 2.0 Services 1.3 1.3 1.3 -14.9 1.7 3.3 -14.9 -1.0 0.5 Fiscal Accounts (% of GDP) Revenue 35.1 34.3 35.0 36.8 34.9 34.0 36.8 34.0 34.0 Expenditure 38.9 36.2 36.0 47.0 40.0 37.7 47.0 41.0 38.0 Overall Fiscal Balance -3.8 -1.3 -1.0 -10.2 -5.1 -3.7 -10.2 -7.0 -4.0 Primary balance -3.0 -0.1 0.3 -7.8 -3.6 -2.2 -7.8 -4.5 -2.6 Public debt (% of GDP) 80.0 80.0 78.5 88.1 95.6 98.3 88.1 96.5 98.7 Financing needsa (% of GDP) 12.9 5.8 5.8 20.1 9.6 8.5 20.1 11.5 8.8 Sources: World Bank and IMF estimates. a. Government financing needs Under the new baseline scenario, real GDP is expected to contract by 10 percent in 2020, compared to a projected expansion of 4.9 percent pre-COVID-19. This is the result of a near complete halt in tourism activities in 2020 and assumes a return in tourism to 20 percent of 2019 levels in 2021, 60 percent of 2019 levels in 2022 and 80 percent in 2023. Given continuing uncertainty around the pandemic, the downside scenario assumes that tourism will remain essentially stalled in 2021, which will lead to a further contraction in GDP of -0.5 percent, and then recovering more modestly in 2022 than indicated in the baseline scenario. The impact of the crisis will spill over to the fiscal accounts due to lower revenues from tourism, trade, and domestic consumption, as well as increased public spending on mitigation measures to alleviate the impact of the crisis. In this context, the overall fiscal balance is expected to exceed 10 percent of GDP in 2020 in the baseline and downside scenarios. The 2021 overall fiscal deficit is forecast to be 5.1 percent of GDP in the baseline and 7.0 percent of GDP in the downside scenario, declining in 2022 to a deficit of 3.7 percent and 4.0 percent of GDP in the baseline and downside scenarios respectively. As a result of widening fiscal balances, the pandemic is projected to place upward pressure on debt levels, spurring the debt-to-GDP ratio to as high as 98.7 percent of GDP by end-2022 should the downside scenario materialize or to 98.3 percent of GDP under the baseline scenario. This contrasts strongly with the pre-crisis public debt projection of 78.5 percent of GDP at end-2022. Central Government gross financing requirements for 2020 (baseline scenario) are estimated at 20.1 percent of GDP in both the baseline and downside scenarios, as compared to 12.9 percent pre-COPVID-19. These financing needs are expected to be met, as indicated in Table 7 in the next section. 15. 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$1.00 since July 1976. Inflation has been maintained under 3.0 percent over the past decade. Page 9 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Box 2: Fiscal impact of COVID-19 Pandemic Following the first positive case on March 22, 2020, the Prime Minister announced several measures to control the spread of the virus. Further fiscal measures to help cushion the effects of the pandemic were taken on May 17, 2020. These measures included the following and the fiscal costs are noted in Table 3: • Significant increases in budgetary funding to the Ministry of Health, since it is the lead ministry in the country’s direct response to the pandemic, and Ministry of Agriculture, because of the importance of enhancing food security and in improving export earnings from this sector. • Dominica Social Security has also made provisions for additional unemployment benefits and the Government has instituted loan facilities for farmers, hoteliers and the manufacturing sector and to micro and small businesses (including self-employed persons). • Tax measures to provide financial relief to business and households included: (i) waivers for penalties for non-filing of 2019 tax returns and extension of the deadline to June 30, 2020 (from March 31); (ii) a waiver of VAT on electricity to Domestic customers, hotels and guest houses for the period April-July 2020; and (iii) reduction of landing taxes to incentivize tourism post containment of COVID-19. Table 3: Increased Public Expenditures associated with the COVID-19 Pandemic US$ million Percent of GDP COVID-19 testing and medical supplies 6.6 1.1 COVID-19 center and quarantine services 2.8 0.5 Income support transfers 15.9 2.7 of which Dominica Social Security provision 4.4 0.8 Total 25.3 4.3 Revenues have also come under strain. While revenues were performing well in FY2020 prior to the impact of COVID-19, due to the buoyant economic rebound post-Hurricane Maria, revenues have been hard hit by the pandemic since its onset in March 2020. Table 4 compares revenue performance over the period March 2020 through August 2020 against 2019. Table 4: Revenue Comparison (EC$) – March-August 2019 vs March-August 2020 Mar - Aug 2019 Mar - Aug 2020 Variance Total Revenue + Grants 380,051,196 285,161,223 (94,889,974) Total Revenue 370,733,141 276,852,104 (93,881,037) Recurrent Revenue 369,959,127 276,814,505 (93,144,621) Tax Revenue 227,863,269 152,456,306 (75,406,964) Taxes on Incomes 43,167,940 30,053,652 (13,114,288) Income Tax – Individual 15,277,020 13,903,087 (1,373,933) Income Tax – Corporations 28,677,667 16,114,469 (12,563,198) Taxes on Property 5,195,086 2,499,841 (2,695,245) Taxes on Goods and services 127,502,383 90,193,014 (37,309,369) VAT-Domestic 37,154,032 28,157,735 (8,996,297) VAT-Import 51,297,702 34,211,725 (17,085,976) Excise Tax -Other 11,442,339 6,583,436 (4,858,903) Excise Tax -Petroleum 16,328,356 13,495,443 (2,832,912) Taxes on Trade 51,997,860 29,709,798 (22,288,062) Import Duty 24,451,617 15,865,454 (8,586,163) Customs Service Charge 13,375,676 7,043,777 (6,331,899) Environmental Surcharge 7,729,082 4,044,015 (3,685,066) Non-Tax 142,095,858 124,358,200 (17,737,658) CBI 119,519,711 117,658,423 (1,861,288) Other 22,576,147 6,699,777 (15,876,370) Capital Revenue 774,014 37,599 (736,415) Grants 9,318,055 8,309,118 (1,008,937) Source: Ministry of Finance. Page 10 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 16. Dominica’s fiscal position has clearly come under increasing strain after Hurricane Maria and has been exacerbated by the COVID-19 pandemic. The budget deficit increased to 10.2 percent of GDP in FY2020 (July 2019-June 2020) with a primary deficit of 7.8 percent. Accumulated CBI reserves have essentially been depleted to fund Hurricane Maria reconstruction and recovery activities. Current CBI revenue has remained relatively robust in 2020 at around 10 percent of GDP. While the Government had 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 projections remain muted given the global economic recession and the constraints in tourism, though budget expenditures are expected to fall modestly as COVID-19 support programs unwind over the coming weeks and months. On the expenditure side, this is primarily reflected in lower transfers and subsidies as unemployment benefits and support to households and businesses diminish. Measures supported under this operation, including the fiscal rules framework, procurement reform, limiting discretionary expenditures, creation and resourcing of a contingencies fund, all support this fiscal consolidation effort. Table 5 presents the fiscal position in greater detail. Table 5: Key Fiscal Indicators, 2016–241 Pre- Pre- 2016 2017 2018 2019 COVID 2020 COVID 2021 2022 2023 2024 2020 2021 (Share of GDP) Proj. Revenue and grants 59.6 55.2 46.1 34.7 35.1 36.8 34.3 34.9 34.0 34.1 34.2 Tax revenue 24.4 23.3 28.3 22.9 21.7 23.6 22.3 23.3 24.7 25.2 25.3 Tax on income and profits 4.5 3.6 4.4 2.9 3.5 4.2 3.9 4.1 5.1 5.4 5.5 Taxes on property 0.7 0.4 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.7 0.7 Tax on international trade 5.3 5.0 7.0 5.9 4.8 5.2 4.8 5.0 5.0 5.0 5.0 Tax on domestic transact. 13.9 14.3 16.4 13.5 12.8 13.6 13.2 13.7 14.0 14.1 14.1 Non-tax revenue 34.3 27.3 16.9 11.2 11.0 11.3 11.1 8.6 6.3 5.9 5.9 Property income 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Sales, fees and fines 0.8 0.6 1.4 0.7 0.6 0.7 0.6 1.3 1.3 1.3 1.3 Other non-Tax revenue 33.4 26.6 15.4 10.4 10.4 10.4 10.4 7.3 5.0 4.5 4.5 Of which CBI 33.1 22.1 13.8 9.5 9.5 9.9 9.5 6.8 4.5 4.0 4.0 Grants 1.0 4.6 0.9 0.6 2.4 1.9 0.9 3.0 3.0 3.0 3.0 Expenditures 44.9 53.9 65.3 44.6 38.9 47.0 36.2 40.0 37.7 35.5 34.9 Current expenditures 28.4 30.9 39.7 34.6 25.3 36.9 24.7 32.3 32.7 30.5 29.9 Wages and salaries 10.4 12.7 10.4 10.7 10.5 10.6 10.4 10.5 11.3 11.1 10.9 Interest 1.6 2.1 2.0 1.2 1.8 2.4 1.8 1.5 1.5 1.5 1.5 Transfers and subsidies 7.2 7.0 10.2 10.4 5.2 8.0 5.0 7.2 6.0 6.0 6.0 Goods and services 9.1 10.2 17.7 12.5 8.0 15.9 7.6 13.1 13.9 11.9 11.5 Capital expenditure 16.6 23.0 25.6 10.0 13.6 10.2 11.5 7.5 5.0 5.0 5.0 Overall Balance 14.8 1.3 -19.2 -9.9 -3.8 -10.2 -1.9 -4.1 -3.7 -1.5 -0.7 Primary Balance 16.4 3.4 -17.2 -8.6 -2.0 -7.8 -0.1 -2.6 -2.2 0.0 0.8 Gross public sector debt 75.3 76.5 76.9 78.8 80.0 88.1 80.0 95.6 98.3 97.7 97.0 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. 17. Dominica has registered large but moderating current account deficits, balanced largely by the capital account (mainly CBI) and foreign direct investment (FDI). The current account deficit is expected Page 11 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) to increase to 30.5 percent in 2020 due to continued reconstruction efforts and the dramatic decline in tourism receipts. The current account deficit 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 imports. Tourism receipts approximate 20 percent of GDP in a typical year and make a substantial contribution to financing the trade deficit, as do net remittances at between 3 and 4 percent of GDP. FDI also helps finance the current account deficit, though given the small size of the economy it can fluctuate significantly. The large external financing gap in 2020, at 11.6 percent of GDP (US$65 million) will be filled primarily by IMF, World Bank and CDB resources. Table 6: Balance of Payments, 2017-25 2017 2018 2019 2020 2021 2022 2023 2024 2025 (percent of GDP) proj. Current Account Balance -8.8 -44.6 -28.0 -30.5 -24.8 -20.1 -13.5 -11.0 -10.1 Exports of goods and services 41.6 29.6 37.7 20.9 26.5 27.8 28.8 30.6 31.5 Exports of goods 2.5 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.5 Tourism 30.7 16.6 24.6 9.8 15.4 16.7 17.7 19.5 20.4 Imports of goods and services 61.1 78.7 70.9 55.5 53.7 50.2 45.5 45.2 45.1 o/w fuels 5.3 6.7 5.5 3.3 3.0 2.8 2.8 2.6 2.3 o/w food 6.6 7.1 6.4 6.5 6.7 6.1 6.4 5.9 6.1 Net income 0.3 -0.1 1.0 1.0 -0.1 -0.6 0.2 0.3 0.1 Net current transfers 10.4 4.6 4.3 3.2 2.5 2.9 3.1 3.3 3.4 Capital account balance 70.0 27.6 12.3 10.5 13.6 11.7 6.8 6.0 5.5 Financial (net) -19.0 16.6 15.9 6.4 8.4 9.0 7.3 5.6 5.1 Direct investment 4.3 14.3 6.2 3.2 5.2 5.2 5.3 5.1 5.7 Public sector flows -1.5 -0.5 8.0 2.1 3.4 4.2 3.1 1.7 0.9 Commercial banks -22.3 -15.5 0.8 1.0 0.1 0.2 0.5 0.4 -0.1 Other private flows 0.3 15.2 1.2 0.0 -0.3 -0.6 -1.6 -1.6 -1.4 Errors and commissions -44.0 -3.5 0 0 0 0 0 0 0 Overall Balance -1.9 -3.9 0.2 -2.0 0.6 0.6 0.6 0.6 0.5 External financing gap 0.0 0.0 0.0 -11.6 -3.4 0.0 0.0 0.0 0.0 Reserves (months of imports) 7.9 5.4 5.5 6.9 6.9 7.1 7.7 7.6 7.5 Sources: ECCB, IMF, and World Bank staff estimates. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 18. Economic growth in 2020 is forecast to contract by approximately 10 percent and is expected to remain constrained at 1 percent or less in 2021, with growth stabilizing over the medium term at around 2.5 percent. As noted previously, tourism is expected to recover to 20 percent of 2019 levels in 2021, 60 percent of 2019 levels in 2022, and 80 percent in 2023. Medium-term GDP growth remains driven largely by a rebound in tourist arrivals and it is possible that vaccine developments over the coming months could result in a stronger than expected rebound in tourism, particularly in 2022 and 2023. However, conservative projections are being maintained until greater clarity is achieved. Growth will also be driven to some extent by new hotel developments, housing construction using CBI revenues, and a Page 12 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) relatively robust public investment program. Geothermal developments bode well for future growth prospects, as does Dominica’s commitment to becoming a fully climate resilient economy. Price pressures are expected to remain muted over the short to medium term and inflation is expected to remain around 2.0 percent. 19. The COVID-19 pandemic has created new fiscal pressures. Pre-COVID-19, the FY2020 fiscal deficit was projected at 3.8 percent of GDP with a primary deficit of 2.0 percent. However, post-COVID, this has resulted in a fiscal deficit of 10.2 percent of GDP. It is projected that FY2021 will see a similar deterioration compared to pre-COVID forecasts, though not as stark. An overall fiscal deficit of 5.1 percent of GDP is projected in 2021, with a primary deficit of 3.6 percent, driven by continued pandemic-related expenses and weaker revenue performance. With limited fiscal space and limited room to immediately reallocate current expenditures, contraction in the public investment portfolio accommodates to some extent the increased COVID-19-related expenditures, though the fiscal deficit will still widen. Over the medium term, fiscal consolidation measures, including the establishment of a FRRF, public procurement reform, increased tax compliance measures, a reduction in discretionary tax expenditures and exemptions, and a review of social programming to rationalize expenditures, improve targeting and avoid duplication, should return the fiscal path to one of primary balance surpluses. Most of these stated reforms are supported by this operation, while other reforms are being implemented by the Government with counterpart resources and assistance from other development partners. 20. Fiscal balances will depend to some extent on the performance of CBI revenues, which can be volatile. Dominica’s CBI program has resulted in substantial fiscal revenue over the past decade. However, these flows can fluctuate significantly 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 treated as general government revenue rather than remaining off-budget and largely seen as discretionary. Only a portion of CBI revenues are directly available to the Government for discretionary spending and these revenues have now been brought on- budget. A significant portion of CBI revenues, varying from year to year but typically more than half of all CBI revenues, flow directly to firms with whom the Government has CBI-related contracts. These firms market Dominica’s CBI program and resultant revenues generated through their marketing efforts accrue to their pre-contracted activities, in most cases public housing projects. As such, while CBI revenues can be large, not all are available for discretionary budgetary use. Dominica has increasingly brought CBI revenues and expenditures on-budget, though not fully, and have also identified CBI revenues as the source of financing for the contingencies fund. 21. Table 7 presents gross government financing needs. It can be noted that existing and expected financing sources will fully cover current needs. Page 13 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Table 7: Government Financing Needs (US$ millions, fiscal years July-June) 2020 2021 2022 2023 2024 Gross financing needs 114 53 47 47 36 Primary deficit 80 28 14 4 0 Interest 7 7 7 7 7 External debt 4 6 6 7 7 Domestic debt 3 1 1 1 0 Principal repayments 35 28 27 36 28 External 20 17 16 17 16 o/w in pipeline 20 17 16 17 16 Domestic 15 11 11 19 12 Gross financing sources 114 53 47 47 36 External financing 94 41 36 35 28 Multilateral 75 32 22 20 30 WB 31 25 20 18 15 CDB 30 7 2 2 15 IMF 14 0 0 0 0 Bilateral 19 9 14 15 -2 Commercial and other 20 4 1 2 7 Domestic financing 20 12 11 12 8 Memo items Stock of govt deposits 24 15 21 28 35 Principal repayments, % of GDP 6.0 4.9 4.4 5.7 4.3 Sources: World Bank, IMF and MoF estimates. 22. The current account deficit is expected to decrease over the medium term as reconstruction efforts diminish and tourism recovers. Depending on COVID-19 developments, continued lower tourism receipts in 2021 will negatively affect the current account deficit (CAD). However, a resumption in tourist arrivals over the medium term is expected. 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. Reserves held by the ECCB are expected to be maintained at adequate levels. 23. The financial sector had been recovering post-Hurricane Maria but remained relatively fragile at the onset of the COVID-19 pandemic. Bank non-performing loans (NPLs) peaked at 18 percent of loans in 2018 and had improved to 14 percent in 2019, including a significant increase in provisioning to 73 percent of NPLs. Given regulatory and reporting delays, data for 2020 is not yet available but it is expected that some key financial sector metrics will have deteriorated. The credit union sector has experienced positive credit and deposit growth. This implies increasing financial risk as several institutions are below the minimum capital requirement of 10 percent, with provisioning below the 60 percent requirement. Despite the financial weakness of credit unions, liquidity and loans increased, underpinned by a sustained increase of deposits. Credit unions account for over 60 percent of financial sector assets and include systemically important institutions. The insurance sector was key in supporting the recovery in 2019, but the indigenous insurer is illiquid and insolvent, and currently remains unable to pay remaining outstanding claims. Financial regulators are taking measures to protect the financial system from the impact of the Page 14 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) pandemic and remain committed to further strengthening financial supervision and regulation to safeguard macro-financial stability. The ECCB took preemptive measures to address the impact of the pandemic on the financial sector, including: (i) loan moratoria for 6 months, with possible extension upon review; and (ii) a waiver of late fees and charges to eligible customers. The ECCB also took policy actions related to targeted supervisory flexibility, including additional data reporting requirements for intensified surveillance. 24. Public debt was on a downward trajectory prior to Hurricane Maria in September 2017. The April 2020 joint Bank-Fund debt sustainability analysis (DSA) found that Dominica remains at high risk of debt distress. As stated in the April 2020 DSA: “The authorities have underscored their commitment to a fiscal consolidation plan that would put debt on a solid downward trend, consistent with achievement of the regional debt target of 60 percent of GDP by 2030. The plan is fully identified, and was prepared, in consultation with Fund staff and other development partners, prior to the pandemic to create fiscal space for investment in building resilience to natural disasters. Under the baseline scenario, including the government’s commitment to fiscal consolidation, debt is assessed to be sustainable in a forward-looking sense.” The April 2020 DSA also indicated that public debt becomes unsustainable under the low-growth, natural disaster and historical scenarios. Achieving debt sustainability will require sustained efforts on the fiscal front and continued fiscal consolidation – all the more pressing in light of the pandemic. As noted, Dominica is participating in the DSSI and is expected to benefit from bilateral debt payment deferrals of approximately 0.5 percent of GDP or US$2.5 million. 25. While the prolonged COVID-19 pandemic has worsened indebtedness indicators, the public debt trajectory is expected to remain sustainable over the medium term. The recent November 2020 DSA analysis reaffirms that external and public debt remains sustainable over the medium to long run as public debt remains downward sloping, though from a higher initial 2022 peak level. The debt trajectory clearly returns to its downward path over the medium term as fiscal deficits are reduced and primary surpluses are once again achieved. Measures included under this operation directly support government efforts to reduce debt and implement their fiscal consolidation plan, such as measures to be more transparent in budgeting, including with respect to CBI revenues and expenditures, and to strengthen debt reporting and transparency. The approval of the FRRF, and preparation, publication and presentation to Parliament of the DPR, are included as Performance and Policy Actions (PPAs) under the IDA-19 Sustainable Development Financing Policy (SDFP). Furthermore, technical assistance through the provision of trust fund resources is being provided to ensure completion of these actions. Page 15 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Figure 1: Indicators of Public and Publicly Guaranteed External Debt Sustainability Baseline Historical scenario Most extreme shock Natural disaster Threshold Source: World Bank. 26. The macroeconomic outlook is subject to significant risk. In addition to the ongoing impact of the pandemic and the uncertainty associated with its evolution, Dominica is subject to a number of additional sources of risk. These include: vulnerability to natural disasters, which as a small island state can have catastrophic economic impacts; exposure to volatile global oil prices as an import dependent economy, though these risks seem muted for the moment; 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, which again, as a small island economy, can significantly impact economic outcomes over time, if not necessarily with immediate impact. 27. Dominica’s macroeconomic policy framework is adequate for this development policy financing operation, despite the presence of substantial risks. This is supported by recently approved fiscal measures (including those supported by this operation) and a strong commitment to further economic and fiscal reforms. This assessment is reflected in: improving growth prospects; consistently low and stable inflation of 2 percent or less; a forecast decline in debt following the COVID-19 pandemic; and through the maintenance of primary budget surpluses over the medium term and the enshrinement of such targets in a Parliamentary-approved FRRF. 3. GOVERNMENT PROGRAM 28. The Government’s development vision and strategy is outlined in the National Resilience Development Strategy 2030 (NRDS) and the Dominica 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 aimed at 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 Page 16 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 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: Pillar 1, Climate Resilient Systems, covers a wide range of systems and processes that must have the capacity for adjusting to, and absorbing the impacts of, climate change—for instance, a robust financial system that is able to support other core elements of resilience. Pillar 2, Prudent Disaster Risk Management, focuses on minimizing and managing, as best as possible, the risks associated with climate-related disasters. This involves the development of a strong evidence base for decision-making related to the planning and management of disasters. Pillar 3, Effective Disaster Risk Response and Recovery, speaks to the post-disaster phase, minimizing disaster impacts and reducing the pain and the period of recovery. 29. The CRRP expands the NRDS’ three pillars into six focused results areas of a Climate Resilient Dominica, namely: Strong Communities, which have 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, which has 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. Well-planned and Durable Infrastructure ensures that critical physical infrastructure can absorb shocks or can 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 is defined as the ability to effectively and efficiently deliver on Government’s comprehensive socio-economic development mandate, and to continue to operate 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 the unique assets of the country, maintaining a pristine environment, and carefully monetizing them to support the resilience agenda. Page 17 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 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 the conditions for the country’s 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 resilient and sustainable recovery. 31. This operation is also complementary to the Government’s stated objectives under the NRDS and CRRP. In line with these strategic government documents, the Government has committed to maintaining macroeconomic stability, fostering broad-based economic growth, and supporting the most vulnerable in society, especially in respect of the country’s vulnerability to climate change and natural disasters. The operation is particularly aligned with stated government objectives as they pertain to the strategic objectives of fostering: (i) a robust economy; (ii) well planned and durable infrastructure; and (iii) strengthened institutional systems. 32. The prior actions supported under this 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 include temporary cash transfers to affected workers and self-employed persons who lost jobs, currently financed by the contingent emergency response component (CERC) of the World Bank-financed Housing Recovery Project (P166537); and a temporary top-up to beneficiaries of the country’s main non-contributory social assistance program and to other poor and vulnerable households, which is financed by the World Food Program. 33. Furthermore, this operation will directly support Dominica’s resilience to natural disasters and other shocks, including future health shocks. The series will strengthen Dominica’s ability to deliver services to beneficiaries during these events through measures to strengthen social safety nets to support vulnerable groups, operationalize a disasters contingencies fund, and institute green procurement approaches. Social safety net and direct benefits will be delivered to these populations that have been significantly impacted economically by the COVID-19 pandemic, which will also increase their resilience to additional shocks that may result from climate change impacts such as hurricanes, floods, and sea level rise. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS 34. 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 resilient recovery. Pillar 1: Saving lives, protecting livelihoods and preserving jobs Page 18 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 35. The GoCD provided a rapid response to the COVID-19 pandemic. Dominica recorded its first positive COVID-19 test result on March 22, 2020. On April 1, 2020, the Prime Minister declared a national emergency and announced several measures both to contain the spread of the virus and respond to the potential economic and social impact of the pandemic. As of February 11, 2021, a total of 121 positive test results have been confirmed and there have been no deaths. The Government has imposed travel restrictions, implemented social distancing measures, established quarantine facilities, and closed schools and non-essential services. While, as of now, Dominica has been able to contain the COVID-19 outbreak, the country is nonetheless facing serious social and economic impacts because of the resultant global economic slowdown and the domestic, regional, and global measures taken to contain the pandemic. Several measures and programs have been put in place to protect the vulnerable from the economic and social impact of the crisis. Those supported by this operation are as follows: Prior Action 1: The Recipient, through its Cabinet, has approved standardized protocols to ensure adequate COVID-19 testing through the Protocols for Entry into the Commonwealth of Dominica and the Action Plan for Entry into the Commonwealth of Dominica. Trigger 1: To ensure adequate capacity to deploy COVID-19 Vaccines, the Recipient has approved a COVID- 19 Immunization Plan following directives from the World Health Organization (WHO). 36. Rationale: In response to the COVID-19 pandemic, Dominica has been strengthening its health sector response by taking steps to improve testing capacity, adopt health and safety protocols to allow for a gradual reopening of the country’s borders, and has thus far managed to limit the spread of the virus. Key actions taken to date by the Government include: (i) activation of the Health Emergency Operations Centre (EOC) to coordinate response activities in collaboration with the Pan American Health Organization (PAHO) and other partners; (ii) approval and implementation of Health and Safety protocols for multiple sectors, including for the tourism industry; (iii) setting up of dedicated COVID-19 Isolation Units at the Dominica China Friendship Hospital and Princess Margaret Hospital; (iv) operationalization of three mobile isolation units for treatment of mild and severe cases, one of which will be installed at the Douglas Charles airport; and (v) ensuring early on in the pandemic the ability to carry out Polymerase Chain Reaction (PCR) testing in-country through the procurement of laboratory equipment and supplies as well as training of laboratory staff at the national laboratory. As Dominica works to strengthen the overall capacity of the health sector to cope with the pandemic, it is important to prevent any further transmission in light of the reopening process and avoid community spread. The country’s ability to successfully do so will depend on ensuring that adequate testing capacity is continuously in place to detect and respond to any potential outbreaks and to ensure that risks of imported cases are well managed.9 The development and approval of a COVID-19 immunization plan, supported as a trigger, will further strengthen the Government’s response to the pandemic and help ensure a more resilient recovery. 37. Substance of the Prior Action: This action supports the approval and implementation of Dominica’s broader Border Reopening Programme as it pertains to the Action Plan for Entry into Dominica. In July 2020, the Government approved these measures to govern the national response to the COVID-19 pandemic and preparations for reopening the economy. The Border Reopening Programme travel related protocols outline: (i) requirements for mask wearing and social distancing in public; 9World Health Organization, COVID-19 Strategy Update, April 2020: https://assets.documentcloud.org/documents/6838637/COVID-19-Strategy-Update-14April2020.pdf Page 19 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) (ii) submission of negative PCR test prior to arrival in Dominica; (iii) completion of health screening questionnaire upon arrival including temperature taking and documenting arrivals from high risk countries; and (iv) quarantine requirements for those with positive PCR test or arrival from high risk countries. Going forward, the Ministry of Health, Wellness and New Health Investment is focusing on sustained testing for all new arrivals in Dominica, as well as for high risk groups such as health care workers and the elderly. 38. Expected Outcomes: The approval and implementation of the Border Reopening Program is expected to strengthen Dominica’s ability to carry out safe reopening measures. This will be measured by the number of persons tested for COVID-19, as an indicator measuring the capacity of the health sector response. The capacity of the health sector in Dominica has benefitted from its participation in the ongoing OECS Regional Heath Project (P168539), which complements the reforms under this DPC. Prior Action 2: The Recipient, through its Cabinet, has approved General Guidelines for the Managed Experience to limit the risk of COVID-19 transmission. 39. Rationale: Since March 2020, Dominica, with a population of 71,625, has maintained the number of confirmed COVID-19 cases to a minimum and has avoided widespread community transmission. Since July 2020, a phased reopening of businesses, schools and borders has been in progress. As Dominica works to strengthen the overall capacity of the health sector to cope with the pandemic, it is important to prevent any further transmission in light of the reopening process and avoid community spread. Tourism being a main driver of economic activity and employment requires particular attention in a pandemic environment. The country’s ability to successfully reopen and welcome tourists will depend on ensuring that adequate testing capacity is continuously in place to detect and respond to any potential outbreaks and to ensure that risks of imported cases are well managed. This extends to the responsibility of tourist and hospitality businesses to comply with best practices in reducing viral transmission. 40. Substance of the Prior Action: This action supports the Health and Safety Protocols for the Tourism and Hospitality industry. In July 2020, the Government approved these measures to govern the national response to the COVID-19 pandemic and preparations for reopening the economy. With the implementation of the protocols, Dominica aims to continue to minimize the number of COVID-19 cases as the country reopens businesses, schools, and borders. Health and Safety Protocols are minimum requirements that each service provider or owner must meet, though establishments can implement stricter guidelines if so inclined. The intention is that as medical research advances or the risk profile related to COVID-19 changes, the guidelines will be revised. The protocols established apply to accommodation, transportation, vending and tour operators and will be enforced. A team comprised of officers from the Environmental Health Department (EHD) of the Ministry of Health, Wellness and New Health Investment and the Quality Assurance Unit of Discover Dominica Authority (DDA) will undertake assessments to ensure adherence to the minimum requirements. If all minimum requirements are met, the tourism service provider will be issued with EHD’s Certificate of Approval. 41. Expected Outcomes: The number of accommodation facilities certified to operate under the Health and Safety Protocols will be measured to reflect the effectiveness of the overall health measures implemented to maintain confidence in Dominica’s tourism experience, thereby further minimizing the risk of COVID-19 transmission originating from overseas visitors. Page 20 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Prior Action 3: The Recipient, through its Cabinet, has supported liquidity and continuity of businesses affected by COVID-19, by establishing the corporate income tax at a rate of 17 percent for companies that have retained or have agreed to retain at least 80 percent of their staff employed in January 2020. 42. Rationale: Businesses have clearly been directly affected by the pandemic, particularly in the tourism sector, though not exclusively. Containment measures to control the spread of COVID-19 have resulted in a near complete halt in tourism activities as arrivals were prohibited and ports were closed, including a complete cessation of cruise ship travel. As a result, tourism has been severely impacted in Dominica (20 percent of GDP), affecting a substantive proportion of the population directly engaged in the sector, particularly women (see Table 8). Furthermore, industries and activities, such as agriculture, fisheries, arts, crafts, and cultural events and sites that support tourism are suffering as well. These sectors, while not solely dependent on tourism, have experienced a loss in income and earning potential and represent a further vulnerable portion of the population. The impacts on tourism due to the COVID- 19 pandemic further compound the risks to the industry due to climate change – especially given the historical impacts on this sector due to hurricanes and the continued impacts from sea-level rise. Prior action 3 focuses on reducing the corporate income tax rate on businesses who have directly lost income due to the pandemic and also seeks to preserve livelihoods by supporting businesses that commit to retain employees despite the economic downturn. Table 8: Male/Female Distribution of Employment Across Industry (%) Men Women Agriculture, Forestry, and Fishing 86 14 Mining and Quarrying 88 12 Manufacturing 63 37 Electricity, Gas steam and air conditioning supply 80 20 Water Supply Sewage waste management and remediation activities 80 20 Construction 97 3 Wholesale and Retail Trade 45 55 Transportation and storage 84 16 Accommodation and food service activities 30 70 Information and communication 63 37 Financial and insurance activities 33 67 Real estate activities 36 64 Professional scientific and technical activities 41 59 Administrative and support service activities 52 48 Public Administration and defense compulsory Social Security 57 43 Education 28 72 Human Health and social work activities 18 82 Arts entertainment and recreation 72 28 Other Service Activities 45 55 Activities of households as employers 18 82 Activities of extraterritorial organizations and bodies 43 57 Not Stated 53 47 Total 58 42 Source: 2011 Population and Housing Census. Page 21 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 43. Substance of prior action: Government support for health-related expenditures, vulnerable workers, and businesses is forecast to total over US$25 million (4.3 percent of GDP). Prior action 3, among other actions taken by the Government, addresses the economic impact of the pandemic on those businesses, entities and self-employed persons negatively affected by the economic downturn, particularly those vulnerable to climate change impacts. The tax relief provided through the supported action, in reducing the income tax rate payable from 25 percent to 17 percent, will provide affected businesses with the increased liquidity necessary to retain their employee base over the economic downturn. 44. Expected Outcomes: The prior actions responding to the economic impact of the pandemic and the provision of support to businesses and households will be measured by the number of entities benefiting from the tax relief. Pillar 2: Strengthening fiscal policies, public financial management, and debt transparency for a resilient recovery 45. Creating fiscal space is necessary to strengthen fiscal resilience and stability, deliver needed social services, provide resources for infrastructure investment, reduce public debt, and better accommodate recurrent shocks. As per the findings of the Dominica Post-Disaster Public Financial Management Review (World Bank, 2019), there is scope to address existing PFM weaknesses in basic budget processes, including budget preparation and execution, as well as developing and clarifying emergency-related PFM procedures. An important measure is the adoption of a FRRF that will establish fiscal targets, and to reduce the gap between the budget, budget projections and actual execution. The Government will also strengthen the annual Medium-Term Economic and Fiscal Framework (MTEFF) and budget preparation process through a revision of the Financial Administration Act. Measures to strengthen domestic revenue mobilization and reduce distortions in the tax system will be supported, as will additional domestic revenue mobilization reforms. To strengthen transparency in debt reporting the annual publication and presentation of a DPR will be supported. Negative economic impacts from shocks, including climate change impacts and pandemics like COVID-19, will be mitigated by the operationalization of a disaster contingencies fund, which will contribute to fiscal, health, and climate resilience for vulnerable populations in Dominica. Finally, constraints and delays in public procurement will be addressed through a new Public Procurement Bill. Dominica spends significant fiscal resources on goods, civil works and services, particularly in post-natural disaster periods. A greener and more effective and efficient procurement system will enable a more climate resilient approach, greater competition, improved transparency, better value for money, and generate efficiencies and fiscal savings over the medium term. 46. In sum, in contributing to maintaining fiscal and macroeconomic stability and reducing debt, this operation supports critical reforms to contribute towards Dominica’s efforts to build a more robust fiscal framework that can generate savings, reduce debt loads, and create fiscal space to provide increased flexibility when natural disasters, pandemics and or other shocks materialize. Prior Action 4: The Recipient, through its Cabinet, has explicitly approved the development of a Fiscal Rules and Responsibility Framework that includes: (i) fiscal targets for public debt, (ii) the fiscal balance, (iii) wage bill ceilings, (iv) public expenditure growth limits with oversight provided by an independent fiscal Page 22 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) council, and (v) temporary deviations to the rules to be allowed in specific situations such as natural disasters and unanticipated economic shocks. Trigger 2: The Recipient, through its Parliament, has adopted a Fiscal Rules and Responsibility Framework that: (i) outlines fiscal responsibility principles; (ii) establishes measurable quantitative targets for spending, fiscal balances, wage bill ceilings and public debt levels; (iii) includes remedial mechanisms for ensuring adherence to stated target; and (iv) establishes a Fiscal Council and outlines its responsibilities for oversight and reporting. Trigger 3: The Recipient, through Cabinet, has created the Fiscal Council and nominated and appointed its members. Trigger 4: The Recipient has revised its Financial 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. 47. Rationale: The lack of alignment among policy, planning and budgeting is one of the most important causes of poor budgeting outcomes in developing countries. In response, the GoCD is in the process of adopting fiscal rules through Parliamentary approval of the FRRF and 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 key to ensuring adherence to and compliance with fiscal discipline principles. Capacity limitations and competing urgent priorities, including drafting of the new Procurement Bill, has constrained the full development of the FRRF to this point. As an expression of commitment, the Cabinet has approved an explicit decision to proceed with the FRRF and its presentation to Parliament. Approval of the fully developed FRRF is included as a trigger to ensure it proceeds as planned and is also a PPA in compliance with the SDFP introduced under IDA19. To further support this effort and compliance with the FRRF, additional triggers for the second operation in the series are a strengthened MTEFF process as a necessary step towards an effective medium-term approach to strengthening budget planning and preparation and the creation of the Fiscal Council. The Government requested, and the Bank is providing substantive TA, as well as good-practice examples, for the FRRF and preparation of the MTEFF. 48. Substance of prior action: The targets to be established under the FRRF will aim to generate annual primary budget surpluses, reduce the debt to GDP ratio, and limit public expenditure growth. The FRRF will mandate the creation of an independent fiscal oversight council to review fiscal performance and adherence to the FRRF, and to prepare public reports to Parliament on fiscal performance. The FRRF also includes mechanisms for the Fiscal Council and Parliament to recommend fiscal adjustments should performance deviate from established targets as well as time-bound responses and actions from the Minister of Finance and the administration to address such deviations. In the current COVID-19 environment it is difficult to meaningfully identify quantitative fiscal targets. The quantifiable fiscal targets will be specifically identified in the lead up to the next budget year, July-June, and included in the submission to Parliament, at which time there should be greater clarity on global and local economic conditions. Page 23 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 49. 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, the chosen results indicator of the number of reports prepared by the Fiscal Council is seen as an indicator reflective of the FRRF being fully implemented, which over a longer timeframe should lead to improved fiscal outcomes and performance as oversight is strengthened and compliance with stated targets reinforced. Prior Action 5: The Recipient, has funded its Vulnerability, Risk, and Resilience Fund, by opening a dedicated account at the ECCB, and depositing EC$500,000 (US$185,000) into said fund. Trigger 5: The Recipient, through its Cabinet, has approved guidelines for the operation and management of the disaster contingencies fund. 50. Rationale: Disasters, primarily climate shocks and natural disasters, as well as pandemics (as experienced currently), can negatively affect economic growth and development progress, particularly if resources are not available immediately and the Government reallocates resources from other priorities. 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 participation in the CCRIF-SPC parametric insurance arrangement. However, these instruments have been insufficient to address the costs to the GoCD in the immediate aftermath of a climate-related disaster. Contingency funds can provide rapid and cost-effective access to financial resources, as the need for liquidity immediately following a disaster is often extremely high and urgent. In the aftermath of a disaster, immediate expenditure needs are high, but financial resources are rarely immediately available, creating a liquidity gap. The GoCD has established a contingencies fund, the Vulnerability Risk and Resilience Fund, to ensure funds are available when needed and reduce liquidity risk. To resource the fund, the GoCD has committed to using CBI resources in the amount of EC$500,000 per month (US$185,000 per month or 0.4 percent of GDP annually). Under the second operation in the series, the authorities, with Bank technical support, will prepare management guidelines that will include measures for triggering the release of the funds, and the administration and disbursement of the proceeds in order to ensure effective, efficient, transparent and accountable public financial management of the resources of the fund. 51. Substance of prior action: The Vulnerability Risk and Resilience Fund 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 trigger for the second operation will ensure guidelines establish clear rules and criteria for access, disbursement, use, and public reporting on contingencies fund finances to ensure transparency and accountability in the use of funds. The guidelines, the preparation of which will be supported by Bank-provided TA, will outline the modalities for the accumulation of resources in the fund, the management of the fund, the investment of fund balances, the mechanisms for the release of funds, and the type of expenditures that can be covered. Page 24 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 52. Expected Outcomes: The Vulnerability Risk and Resilience Fund will enhance Dominica’s fiscal and climate resilience by providing a financing source for damages and losses caused by frequent, but less severe hazard events – the bottom layer in a traditional risk layering fiscal strategy. It is expected that deposits will total EC$6 million annually (US$2.2 million), or about 0.4 percent of GDP per annum. The fund’s existence and operation are expected to reduce fiscal and liquidity risks arising primarily from climate-related events. Intervening in time with rapid liquidity can prevent adverse coping actions from the Government, households, and businesses, which, in the absence of external assistance, can have increasingly pronounced negative consequences, such as reduced food consumption, distressed productive asset sales, 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, like the CCRIF-SPC. Prior Action 6: The Recipient has strengthened revenue mobilization, by: (i) reducing the percentage of the duty paid on vehicle imports authorized to be refunded to 50 percent; and (ii) increased the cooperation between its Comptroller of Customs and its Comptroller of Inland Revenue in the exchanging of data through the mutual operation, administration and implementation of an information technology system with the objective of ensuring increased taxpayer compliance. Trigger 6: The Recipient has instituted a number of recommendations derived from the review of social safety programs implemented in the Recipient’s territory, to ensure programs are: (i) meeting the needs of vulnerable citizens, (ii) meeting program objectives, and (iii) improving the efficiency and effectiveness of social spending. (Specific measures to be identified) 53. Rationale: Frequently granted discretionary exemptions and concessions significantly affect the administration of both customs and taxation regimes. For example, almost all vehicles are imported with some form of discretionary exemption on payable duties or VAT. This concern goes well beyond the foregone-revenue issue, as such practices can become an economic competitiveness issue. Inequitable treatment and ad hoc, informal extension of exemptions and concessions can lead to an uneven and unpredictable economic playing field. Uncertainty about business conditions and competitiveness can significantly discourage investment, whether by local firms and investors or, even more importantly, by potential new foreign investors and business interests. Discretionary exemptions can also have perverse distributional and gender impacts since the poorest and most vulnerable will often lack access to relevant decision-makers. Considerable potential revenue appears to be lost through granting tax holidays and exemptions of various types and estimates are that 3.0 to 5.0 percent of GDP in additional revenue could be realized. As can be appreciated, significant political economy issues are associated with this measure and this prior action is seen as an initial first step in reducing the application of discretionary expenditures and laying the foundation for further progress in reducing such exemptions and concessions. 54. There are also significant potential gains in revenue that could be realized from harmonizing and integrating the Customs and Tax Administration databases and operations. While Tax Administration authorities currently have formal access to Customs data, data-sharing is neither automatic nor systematic, i.e., it requires manual identification and investigation. A harmonized and integrated system Page 25 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) would provide electronic and software-based identification of inconsistencies, raise red flags automatically and would significantly improve audit and oversight functions across both the Customs and Tax Administration systems. As the income tax base is highly concentrated, in that a small number of taxpayers are responsible for a significant share of total tax receipts, harmonizing and integrating the two systems could lead to important efficiencies in tax administration. A first priority is VAT control, by implementing a monthly automatic match function between import VAT and domestic VAT for each taxpayer. Also, there are opportunities for arrears recovery on the Inland Revenue side, by identifying through Customs data capital goods or assets imported by arrears debtors. 55. On the expenditure side, recent analysis of Dominica’s social protection and labor market programs indicate that the management and the targeting of programs to the most vulnerable segments of the population could be significantly improved. This improved targeting would enhance benefits to individuals with the greatest level of unmet needs, thereby ensuring the credibility and the sustainability of these programs over the medium- to longer-term horizons, and enhance the efficiency of social spending. 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. In order to strengthen targeting, avoid duplication, and improve social spending efficiency, Cabinet ordered a review of all social safety programming. The second operation in the series will support specific measures recommended and identified in the review once completed. 56. Substance of prior action: As an initial step in dismantling the extensive discretionary exemption and concessions regime, the Government has limited all duty exemptions on vehicle imports to a maximum of 50 percent. Vehicle imports were an area where exemptions were generously granted and is a high profile and prominent application of the discretionary exemption practice. A reduction in this area is seen as initial signaling of an imminent change in the granting of exemptions. 57. A formal memorandum of understanding has been entered into between the Customs Administration and the Inland Revenue Division outlining the areas of cooperation between the two administrations in order to share common data, including direct joint network connections, participate in joint audits, coordinate training activities, undertake joint collection activities, among others. 58. Expected Outcomes: In order to maintain meaningful attribution links between the supported actions and the expected results, the first results indicator measures the level of reduction in Cabinet authorized discretionary exemptions, of which vehicle exemptions are one such example. The Government has expressed the intention to reduce such Cabinet exemptions by 50 percent, which would represent an extension of the vehicle exemptions to other areas and evidence that the issue was more fully addressed. Similarly, measuring the number of joint audits undertaken and the number of taxpayers in the joint database would maintain attribution between the actions and outcomes and would be highly reflective of the implementation of the supported action. Taken together, these actions would be expected to lead to improved domestic revenue mobilization and the supported trigger to more effective and efficient expenditure. Prior Action 7: The Recipient, through its Cabinet, has taken measures to improve coverage and timeliness of the 2019 Debt Portfolio Review (DPR), by: Page 26 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) (i) including loan guarantees in the 2019 DPR; (ii) submitting the DPR to Parliament; and (iii) publicly disclosing the DPRs on the Ministry of Finance website. Trigger 7: The Recipient has approved a Revised Public Sector Investment Programme (PSIP) Allocation Methodology and Enhanced Public Sector Performance Management Framework to strengthen budget allocations, public investment planning, prioritisation, and reporting. 59. Rationale: Dominica has weaknesses in debt management, transparency, and reporting. The DPR presently lacks full inclusion of government-guaranteed loans, which total 13.9 percent of total public debt, and is irregularly presented to Parliament. In some years it is not made publicly available. In particular, the DeMPA (2018) noted: “The quality of the (Debt Portfolio Review) DPR content and presentation is of a high standard, it is less comprehensive regarding loan guarantees. The analysis of loan guarantees should include decomposition by type of loans guaranteed and also basic risk measures such as ratio of guaranteed debt to GDP. More importantly is that the DPRs (2016 and 2017) were never submitted to Cabinet and published.” A strengthened DPR process is required to improve coverage and timeliness of the DPR and hence debt transparency. Policymakers in borrowing countries need reliable debt information to make informed borrowing decisions, and creditors, donors, analysts, and rating agencies need it to assess sovereign creditworthiness, and to appropriately price debt instruments. Citizens need it to hold their governments accountable. This action is also a PPA under the SDFP. 60. 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, the Government, through Cabinet has now required that such reports be completed annually and that these be made public. The content of the report has been strengthened to include government-guaranteed debt and has been expanded to include risk analysis metrics incorporating maturity, interest rate, currency, and roll-over risks. 61. Expected Outcomes: This measure should, in a limited though not insignificant way, contribute to the earlier noted objective of reducing/limiting Dominica’s public debt burden. Increased public, media, civil society, and Parliamentary oversight and review can be expected to lead to greater accountability and more informed decision making on public debt issues. More directly, the impact of these measure will be verified by actual publication of the annual DPRs and the number of site visits to the published report. Prior Action 8: The Recipient, through its Cabinet, has approved and disseminated for public consultation, the Public Procurement and Disposal of Public Property Bill 2020 which strengthens public procurement practices, including defining parameters for emergency public procurement, introducing considerations for e-procurement and others to promote environmentally, socially and economically sustainable procurement. Trigger 8: The Recipient has approved the Public Procurement Act, adopted the required regulatory framework under the legislation, and promulgated the legislation rendering it effective, including the adoption of fit-for-purpose standard procurement documents to standardize, streamline and expedite Page 27 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) public procurement proceedings, especially in response to disasters and other emergencies, as well as green procurement and gender-based aspects. 62. 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. Having a green and efficient procurement system enables increased competition, more transparency and better value for money, generating efficiencies and fiscal savings over the medium- term. Public procurement in Dominica is currently governed by an outdated, deficient set of regulations that does not reflect the many advances in public procurement. In addition, Dominica is currently utilizing a manual procurement system and moving to an e-procurement system will provide business continuity during natural disasters and improve efficiency in the procurement process. A new Public Procurement bill is also necessary to align Dominica’s commitments to other OECS and CARICOM partners to modernize its public procurement system. The inclusion of triggers related to the passage of the Bill in Parliament and the application of regulations, as stipulated by the new procurement bill, will ensure timely implementation of the provisions of the new Act alongside continued Bank engagement and TA. 63. Substance of prior action: The Public Procurement Bill will align Dominica’s public procurement system with international best 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 Bill 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. Furthermore, the Bill recognizes the need for modern procurement processes to facilitate and encourage a green growth agenda and ensure 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 natural disasters 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. Finally, the draft Bill also provides for environmentally and socially responsible procurement practices and the regulatory framework to be supported under the subsequent operation will include specific green procurement measures and gender-based aspects. The drafting of the proposed Bill has benefitted from substantive TA provided by the Bank and particularly from the CDB. The Bank will provide further TA in assisting the authorities in the development and implementation of the associated regulatory framework to be supported under the subsequent operation in the series. 64. Expected Outcomes: Implementation of the new Public Procurement Act and the adoption of necessary regulations will result in several important improvements, including: greater value for money and increased public trust in the procurement system; more effective policy development and oversight of compliance; a more robust information disclosure requirements; and increased climate resilience resulting from green procurement strategies that promote mitigation and adaptation. 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. Page 28 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) Table 9: DPC Prior Actions and Analytical Underpinnings Prior Actions Analytical Underpinnings Pillar 1: SAVING LIVES, PROTECTING LIVELIHOODS AND PRESERVING JOBS Prior Action 1: The Recipient, through its Cabinet, has COVID-19 Strategy Update, World Health Organization 2020. approved standardized protocols to ensure adequate The document provides detailed technical guidance for COVID-19 testing through the Protocols for entry into national public health responses to COVID-19. the Commonwealth of Dominica and the Action Plan for Entry into the Commonwealth of Dominica. Prior Action 2: The Recipient, through its Cabinet, has Gender Dimensions of the COVID Pandemic. World Bank approved General Guidelines for the Managed 2020: this paper highlighted the role of women in those Experience to limit the risk of COVID-19 transmission. sectors hardest hit by the pandemic, including retail, tourism, hospitality, education, etc. Prior Action 3: The Recipient, through its Cabinet, has supported liquidity and continuity of businesses Carranza, Eliana; Farole, Thomas; Gentilini, Ugo; Morgandi, affected by COVID-19, by establishing the corporate Matteo; Packard, Truman; Santos, Indhira; Weber, Michael. income tax at a rate of 17 percent for companies that 2020. Managing the Employment Impacts of the COVID-19 have retained or have agreed to retain at least Crisis : Policy Options for Relief and Restructuring. World 80 percent of their staff employed in January 2020. Bank (2020). https://openknowledge.worldbank.org/handle/10986/34263 Dingel and Neiman, How Many Jobs Can be Done at Home?, National Bureau of Economic Research (2020). https://www.nber.org/papers/w26948 Mongey et al, Which Workers Bear the Burden of Social Distancing Policies?, National Bureau of Economic Research (2020). https://www.nber.org/papers/w27085 Hallegatte et al, Climate Change Through a Poverty Lens, Nature Climate Change (2017). https://www.nature.com/articles/nclimate3253 Government of Dominica, Post-Disaster Needs Assessment Dominica (2017). Pillar 2: STRENGTHENING FISCAL POLICIES, PUBLIC FINANCIAL MANAGEMENT AND DEBT TRANSPARENCY FOR A REILIENT RECOVERY Prior Action 4: The Recipient, through its Cabinet, has Fiscal Rules and Economic size in Latin America and the explicitly approved the development of a Fiscal Rules Caribbean. World Bank (2020): Provides insight into the and Responsibility Framework that includes: (i) fiscal effective application of fiscal rules frameworks in the context targets for public debt, (ii) the fiscal balance, (iii) wage of small states, particularly Caribbean countries. bill ceilings, (iv) public expenditure growth limits with Dominica PD-PFM Review, World Bank 2019: Provides a oversight provided by an independent fiscal council, and number of key PFM recommendations, including inputs for (v) temporary deviations to the rules to be allowed in PFM bill, need for fiscal transparency via the timely specific situations such as natural disasters and publication of financial statements, strengthening legal and unanticipated economic shocks. regulatory framework for managing disaster risk financing. Post-Disaster Public Financial Management (PD-PFM) Review. Prior Action 5: The Recipient, has funded its June 2019. World Bank: Evaluated the current disaster risk Vulnerability, Risk, and Resilience Fund, by opening a financing mix and specifically recommended creation, dedicated account at the ECCB, and depositing capitalization, and management rules for Contingencies Fund. EC$500,000 (US$185,000) per month into said fund. Cummins, Mahul. Catastrophe Risk Financing in Developing Page 29 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 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 6: The Recipient has strengthened revenue Marques, Jose. Dominica Social Protection Assessment. mobilization, by: World Bank (2017). This paper clearly identified areas where social spending could improve in terms of efficiency and (i) reducing the percentage of the duty paid on effectiveness and will be key in evaluating measures to be vehicle imports authorized to be refunded to supported through the trigger identified for the second 50 percent; and operation. (ii) increased the cooperation between its Comptroller of Customs and its Comptroller of Inland Revenue in the exchanging of data through the mutual operation, administration and implementation of an information technology system with the objective of ensuring increased taxpayer compliance. Prior Action 7: The Recipient, through its Cabinet, has DeMPA. World Bank 2018. Detailed information and taken measures to improve coverage and timeliness of recommendations provided in the document on improving the the 2019 DPR, by: Debt Portfolio Review, including content and publication. (i) including loan guarantees in the 2019 DPR; DSA. World Bank and IMF. Detailed quantitative data included (ii) submitting the DPR to Parliament; and on the extent of loan guarantees for inclusion in the DPR. (iii) publicly disclosing the DPRs on the Ministry of Finance website. Prior Action 8: The Recipient, through its Cabinet, has E-Government Procurement (e-GP) Readiness Assessment approved and disseminated for public consultation, the Report of St. Lucia, Grenada, and Dominica. World Bank, 2017: Public Procurement and Disposal of Public Property Bill Provides direct knowledge of identified procurement reform 2020 which strengthens public procurement practices, needs in Dominica. including defining parameters for emergency public Post-Disaster Public Financial Management (PD-PFM) Review. procurement, introducing considerations for e- June 2019. World Bank: Global Governance Practice: Latin procurement and others to promote environmentally, American and the Caribbean: Provides key recommendations socially and economically sustainable procurement. for improved emergency procurement, including for strengthening contingency purchase planning, emergency procurement manuals and operating procedures, and standard procurement documents and templates. Page 30 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 65. Bank programming in Dominica is guided by the WBG Regional Partnership Strategy (RPS) for the OECS for FY15-19 endorsed by the Executive Directors on November 13, 2014 (Report No. 85156- LAC) and the Performance and Learning Review (PLR) of the RPS, considered by the Executive Directors on May 23, 2018 (Report No. 118511-LAC), which extended the RPS to FY20. The objective of the RPS is to help lay the foundations for sustainable inclusive growth through two areas of engagement: (i) Fostering Conditions for Growth and Competitiveness, and (ii) Enhancing Resilience. This operation directly addresses the priorities noted in the RPS and the increased focus on macro-fiscal issues and resilience stated in the PLR. This operation seeks to address issues of resiliency and disaster management, in an effort to reinforce macroeconomic stability and enhance resilience to shocks. The operation is specifically designed to build on complementarities between strengthening resilience to climate change and natural disasters, and the fiscal aspects that arise from such recurrent climatic events, such as increased macroeconomic instability and rising debt levels. Reforms supported under this operation will contribute to the WBG’s twin goals of ending extreme poverty and promoting shared prosperity. 66. The Bank quickly adjusted its ongoing and pipeline program in Dominica to support the county’s COVID-19 response and recovery. The reprioritized IDA program is consistent with the WBG’s COVID-19 Crisis Response Approach Paper (see Annex 5). 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. As previously noted (see paragraph 9), policy actions supported by this operation are aligned with all four pillars of the World Bank’s Approach Paper. 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 67. The proposed operation is in line with the NRDS and the Dominica Climate Resilience and Recovery Plan (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. 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, FCDO, and Canada). 68. 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 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 Page 31 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) technical assistance that is directly complementary to this operation. In particular, the CDB is providing 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. Also, 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. It is fully expected that this level of cooperation and collaboration will continue in the development of the second operation in the series. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 69. Measures under Pillar 1 supporting interventions for saving lives, re-opening the tourism sector, protecting livelihoods and preserving jobs are expected to impact welfare positively by limiting the increase of unemployment and labor income losses due to the COVID-19 shock. The COVID-19 crisis is likely to have long-lasting economic and social impacts given the direct and indirect effects of the pandemic on public health and household income. COVID-19 related mobility restrictions have had major direct implications for tourism and cascading consequences for non-tourism sectors. Considering the importance of tourism in Dominica, re-starting the sector is expected to have important implications for livelihoods. Activities to address the COVID-19 pandemic supported by prior action 1 are considered critical to re-open the tourism sector and the wider economy. In addition to the direct health impact, these actions are thus expected to help limit the detrimental effects of COVID-19 on poverty. Until tourism picks up and the economy restarts, palliative measures are needed. Prior actions 2 and 3 are expected to support economic activity and mitigate reductions in household consumption. Incentives to continue to employ staff will help to protect labor income. 70. Prior actions under Pillar 2 (prior actions 4 through 8) are expected to have a positive, though indirect, impact on poverty in the medium term. Improved efficiency in revenue collection and government spending through the application of fiscal rules, improved budget planning, and reinforced procurement practices should allow the Government the ability to create additional fiscal space and additional resources for public spending. It is anticipated that the increased fiscal space will facilitate increased development, poverty reduction, social spending, and improved public services, which will have a positive distributional impact in the medium term. In terms of more direct impacts, prior action 5 in supporting the contingencies fund and the subsequent trigger establishing the management guidelines for the fund, should have a more direct positive impact on poverty and social outcomes as natural disasters and shocks tend to hit the poorest households hardest. Having access to available resources with which to respond rapidly in the aftermath of such an event should help limit the negative impact of such disasters and allow for more prompt delivery of assistance to poor households. The poverty and social impact of trigger 5 in reviewing and rationalizing social assistance programs is yet to be identified given that the specific actions are yet to be determined, but such actions will be subject to a more formal poverty and social impact assessment prior to proceeding with the second operation in the series. Page 32 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS 71. The DPC-supported policy reforms are not expected to have significant negative environmental effects and may have some 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. In fact, 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 green procurement policy reforms under prior action 8 in “Pillar 2 – Strengthening Fiscal Policies, Public Financial Management and Debt Transparency for a Resilient Recovery” are likely to reduce the environmental risks of government investments over the medium term. 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 72. 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 2016 which was carried out by the Caribbean Regional Technical Assistance Centre (CARTAC) with support from donor partners, showed mixed, but encouraging PFM performance. Overall, the PEFA assessment reflects a public financial management system in Dominica that is strong in the areas of budgeting process, debt management, predictability, and control in budget execution. However, there are notable weaknesses in aspects of risk management, public asset management, internal audit, financial reporting, and external audit and scrutiny. In addition, the Post- Disaster PFM Review of 201910 identified areas of strengths and weaknesses in the PFM system to facilitate efficient and effective response to natural disasters. Main areas of 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. 73. 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 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 process11. Notably, through prior action 4 of this operation, the GoCD is adopting a Fiscal Rules and Responsibilities Framework, which outlines fiscal responsibility principles, sets targets for spending, fiscal balances and public debt levels. This will provide added credibility to an already reasonable budget process. The Budget Estimates book is presented to Parliament and published with detailed expenditure 10 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”. 11 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 33 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 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 MTEFF process is also to be strengthened under this operation. Budget credibility has improved as actual expenditures deviation from budgeted expenditures has gone down in recent years. The Accountant General Department (AGD) and revenue agencies have good control over execution of the budget. Budget formulation, execution, and reporting is based on administrative, economic and functional/sub-functional classification, using GFS/COFOG standards 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. 74. Accounting, reporting and auditing. The GoCD uses SmartStream as the Integrated Financial Management System (IFMIS) 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. 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 internal audit function is in the nature of pre-audit of transactions. The IA unit does have a mandate from the Accountant General to follow a more modern approach to internal audit, which focuses on providing advice to managers on the adequacy and effectiveness of internal controls. Audited government financial statements are available on website, but preparation of annual financial statements is significantly delayed. Consolidated financial statements are prepared, but the latest consolidated government statement available for audit is as of June 30, 2016, as posted on Office of the Director of Audit’s website in September 2020. As such, 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 their scrutiny ineffective as counter checks on inefficient use of resources. 75. The foreign exchange control environment of the ECCB, which manages the foreign exchange reserves of the ECCU, including Dominica, is adequate. The IMF completed a Safeguards Assessment of the ECCB in April 2016. In response to the assessment, a time-bound action plan was agreed to and has been satisfactorily implemented by the GoCD. The ECCB operates a currency board that maintains 100 percent foreign-exchange backing for all issued currency. The ECCB has well-established procedures to ensure the integrity of its operations. It also has a well-functioning internal audit department, and its accounts are audited by an independent external auditor. The ECCB Board of Directors has an audit sub- committee, which provides additional oversight. 76. Disbursement and reporting arrangements, ineligible expenses, and audit: • Disbursement and reporting arrangements. The proposed loan will follow the World Bank’s disbursement procedures for development policy financing. Once the loan 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 loan proceeds, denominated in US$, into GoCD’s Page 34 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) foreign-exchange account at the ECCB. The ECCB will then immediately credit an equivalent amount in Eastern Caribbean Dollars (EC$) to GoCD’s budget management system account. Within 30 days of the funds transfer, the GoCD, through its MOF, will provide the World Bank with written confirmation of the amount deposited into GoCD’s foreign-currency account at the ECCB and that the equivalent EC$ 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.12 If the proceeds of the loan 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 promptly refund an equal amount to the World Bank. Amounts refunded to the World Bank upon such request shall be cancelled from the loan. • Audit. No specific audit of the deposit of the loan 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 December 31, 2021. 77. Based on the above analysis fiduciary risk is considered moderate. 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 78. 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). The results framework agreed to by the Government and the Bank is presented in Annex 1. The MoH noted above will be responsible for execution of various prior actions in the health sector and communication of results to the MOF, who is responsible for providing written progress report to the World Bank on an agreed upon basis. 79. Monitoring and evaluation (M&E) of the reform program will be undertaken jointly by the Government and World Bank teams. 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 both the Government and the World Bank. 80. 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 12See 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 35 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 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 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 81. The risk associated with this operation is considered “substantial”, given several risks to the achievement of the program’s objectives. Areas of particular concern include macroeconomic, institutional capacity, and environmental risks given exposure to natural disasters. Bank engagement in these areas is expected to continue during the IDA19 period. While most risk areas are moderate, the high macroeconomic risk given prevailing global economic conditions, the impact of the COVID-19 pandemic on macroeconomic outcomes, and the pervasive risk of natural disasters and the impact these could have on operational outcomes, the overall risk is considered substantial. Table 10: 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 ⚫ High 8. Stakeholders ⚫ Moderate 9. Other Overall ⚫ Substantial Page 36 The World Bank Dominica First COVID-19 Response and Recovery Programmatic DPC (P174927) 82. Macroeconomic risks are considered high. COVID-19 poses considerable risk to the macroeconomic framework, as growth, fiscal, and debt outcomes could be significantly impacted depending on the pandemic’s evolution. These risks could have a direct and substantive impact on the achievement of operational objectives, including fiscal and debt sustainability. This is compounded by the fact that Dominica has yet to fully emerge from the devastating impact of Hurricane Maria and the economic, social, and fiscal impacts associated with that event. The measures supported under this operation, including direct pandemic-related measures to address the health and economic impacts of the pandemic, as well as those which seek to strengthen macroeconomic and fiscal performance, should mitigate to a considerable extent some of these macroeconomic and fiscal risks. Nonetheless, substantive residual risk remains, as the level of uncertainty around the trajectory of the pandemic remains high and rather unpredictable. Dominica is particularly exposed to this risk as tourism is one of the first discretionary expenditures to be cut during times of slow growth or recession. A global resurgence of the pandemic, as appears to be happening (early 2021), could have a lingering negative economic impact on an already hard-hit tourism sector despite a slightly positive outlook with the availability of COVID-19 vaccines. An increasingly adverse external environment could also exacerbate the external financing gap and make the process of fiscal adjustment more difficult. The substantive public investment program in the wake of Maria also raises risk in that fiscal management and the maintenance of primary surpluses and minimal budget deficits will be increasingly challenging. Being at a high risk of debt distress, and despite measures taken to limit growth in debt, the residual risk of significant natural disasters, increases susceptibility to macroeconomic, fiscal and debt instability. Ongoing reforms supported by this operation, as well as other reforms, are expected to significantly enhance the resiliency of the fiscal and macroeconomic framework over time, which will help mitigate these risks, though the scale of natural disasters in a small island economy can overwhelm the best laid plans and thus remain a source of significant residual risk. Support of the contingencies fund is one instrument that responds to remaining residual risk. 83. Institutional capacity risk is considered substantial. Being a small island state, Dominica’s institutional and human resource capacity is limited. Capacity to implement and sustain supported reforms, and hence operational objectives, relies on a small group of individuals, with decision-making and technical capacity for implementation concentrated in the hands of a few. While these individuals are capable and committed, this small cadre is stretched rather thin and saddled with numerous responsibilities. Both time and resources to implement reforms is limited. Significant follow-up and TA support will be maintained to support reform and implementation momentum in order to mitigate this risk. This is particularly relevant in support of the fiscal rules framework, contingencies fund management and procurement reform. This related TA should mitigate capacity risk to a significant extent. Nonetheless, residual risk remains as capacity is highly subject to unexpected staff changes, staff incapacity for one reason or another, or the occurrence of external shocks or events that require attention and can distract from implementation of the supported reform program. 84. Due to inherent vulnerability to natural disasters and climate change, environmental risks are also substantial. 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 and 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, substantive risk remains given the level of exposure and the sizeable potential impact that . natural disasters pose. Page 37 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 1: POLICY AND RESULTS MATRIX Dominica First COVID-19 Response and Recovery Programmatic DPC Prior Actions Triggers Results Indicators Pillar 1 – SAVING LIVES, PROTECTING LIVELIHOODS AND PRESERVING JOBS Prior Action 1: The Recipient, through its Cabinet, has approved Trigger 1: To ensure adequate capacity to deploy Number of persons tested for COVID- standardized protocols to ensure adequate COVID-19 testing through the COVID-19 Vaccines, the Recipient has approved a 19: Protocols for entry into the Commonwealth of Dominica and the Action COVID-19 Immunization Plan following directives from 2019 0 → June 2021 12,000 Plan for Entry into the Commonwealth of Dominica. the World Health Organization (WHO). Number of accommodation facilities Prior Action 2: The Recipient, through its Cabinet, has approved General certified to operate under Health and Guidelines for the Managed Experience to limit the risk of COVID-19 Safety Protocols: transmission. March 2020 0 → June 2021 50 Prior Action 3: The Recipient, through its Cabinet, has supported liquidity The number of beneficiary entities and continuity of businesses affected by COVID-19, by establishing the benefiting from the 8 percent tax corporate income tax at a rate of 17 percent for companies that have reduction by retaining 80 percent of retained or have agreed to retain at least 80 percent of their staff employed staff: in January 2020. 2019 0 → 2020 25 Pillar 2 –STRENGTHENING FISCAL POLICIES, PUBLIC FINANCIAL MANAGEMENT AND DEBT TRANSPARENCY FOR A RESILIENT RECOVERY Trigger 2: The Recipient, through its Parliament, has adopted a Fiscal Rules and Responsibility Framework Prior Action 4: The Recipient, through its Cabinet, has explicitly approved that: (i) outlines fiscal responsibility principles; (ii) the development of a Fiscal Rules and Responsibility Framework that Annual and mid-year oversight reports establishes measurable quantitative targets for includes: (i) fiscal targets for public debt, (ii) the fiscal balance, (iii) wage bill issued by the Fiscal Council: spending, fiscal balances, wage bill ceilings and public ceilings, (iv) public expenditure growth limits with oversight provided by an 2019 0 → 2022 2 per year debt levels; (iii) includes remedial mechanisms for independent fiscal council, and (v) temporary deviations to the rules to be ensuring adherence to stated target; and (iv) allowed in specific situations such as natural disasters and unanticipated establishes a Fiscal Council and outlines its economic shocks. responsibilities for oversight and reporting. Trigger 3: The Recipient has created the Fiscal Council and nominated and appointed its members. Page 38 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Dominica First COVID-19 Response and Recovery Programmatic DPC Prior Actions Triggers Results Indicators Trigger 4: The Recipient has revised its Financial 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. Cumulative amount of funds Prior Action 5: The Recipient, has funded its Vulnerability, Risk, and Trigger 5: The Recipient, through its Cabinet, has deposited into the Vulnerability Risk Resilience Fund, by opening a dedicated account at the ECCB, and approved guidelines for the operation and and Resilience Fund to respond to depositing EC$500,000 (US$185,000) per month into said fund. management of the disaster contingencies fund. climate-related and other disasters (recognizing that deposits may be suspended during periods of disaster events): 2019 0 → 2022 EC$13.5 million Prior Action 6: The Recipient has strengthened revenue mobilization, by: Trigger 6: The Recipient has instituted a number of Percentage reduction in Cabinet (i) reducing the percentage of the duty paid on vehicle imports recommendations derived from the review of social authorized discretionary exemptions: authorized to be refunded to 50 percent; and safety programs implemented in the Recipient’s 2019 EC$2.2 million → 2022 50 (ii) increasing the cooperation between its Comptroller of Customs territory, to ensure programs are: (i) meeting the needs percent reduction and its Comptroller of Inland Revenue in the exchanging of data of vulnerable citizens, (ii) meeting program objectives, through the mutual operation, administration and and (iii) improving the efficiency and effectiveness of Number of joint audits undertaken: implementation of an information technology system with the social spending. (Specific measures to be identified). 2019 0 → 2022 5 objective of ensuring increased taxpayer compliance. Prior Action 7: The Recipient, through its Cabinet, has taken measures to Annual DPR available on a government improve coverage and timeliness of the 2019 Debt Portfolio Review (DPR), Trigger 7: The Recipient has approved a Revised Public website: by: Sector Investment Programme (PSIP) Allocation 2019 no → 2020 - 2022 yes Methodology and Enhanced Public Sector Performance (i) including loan guarantees in the 2019 DPR; Management Framework to strengthen budget Percentage of new public investment (ii) submitting the DPR to Parliament; and allocations, public investment planning, prioritisation, projects funded in the 2022 annual (iii) publicly disclosing the DPRs on the Ministry of Finance website. and reporting. budget that were also in the Page 39 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Dominica First COVID-19 Response and Recovery Programmatic DPC Prior Actions Triggers Results Indicators Parliamentary approved PSIP (recognizing that natural disaster events can impact outcome): 2019 0 → 2022 60 percent Trigger 8: The Recipient has approved the Public Percentage of awarded public Prior Action 8: The Recipient, through its Cabinet, has approved and Procurement Act, adopted the required regulatory procurement contracts made available disseminated for public consultation, the Public Procurement and Disposal framework under the legislation, and promulgated the on a dedicated Government website: of Public Property Bill 2020 which strengthens public procurement legislation rendering it effective, including the adoption 2019 0 → 2022 80 percent. practices, including defining parameters for emergency public of fit-for-purpose standard procurement documents to procurement, introducing considerations for e-procurement and others to standardize, streamline and expedite public promote environmentally, socially and economically sustainable procurement proceedings, especially in response to procurement. disasters and other emergencies, as well as green procurement and gender-based aspects. Page 40 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 2: FUND RELATIONS ANNEX Dominica—Assessment Letter for The World Bank December 18, 2020 This letter updates the assessment contained in the Request for Disbursement Under the Rapid Credit Facility (RCF) staff report approved in April 2020. Dominica is a small island state that is highly vulnerable to shocks. It was recently affected by back-to- back natural disasters in 2015 and 2017 with losses estimated at 96 and 226 percent of GDP, respectively. Since then, the Government policies focused on building resiliency to natural disasters. The disasters sparked a reform agenda, embedded in the National resilience Development Strategy, which includes key resilience investments in critical public infrastructure, housing, and social protection. Mindful of debt sustainability challenges, the Government remained fiscally prudent despite large spending need for rehabilitation and reconstruction. This spending was largely financed with Citizenship by Investment (CBI) revenue, containing the issuance of public debt, which remained at around 80 percent of GDP in 2018. Dominica’s membership to the ECCU’s quasi currency board arrangement has helped anchor inflation, but it limits domestic policy options when adverse events materialize. Reforms to bolster public sector efficiency and improve the conditions for private investment are critical to improve competitiveness, promote inclusive growth, and strengthen resilience to natural disasters and other shocks. The Covid-19 pandemic severely hit Dominica yet again in 2020, causing a halt in tourism exports and a sharp decline in economic activity. Since the outbreak, the spread of the virus has been well- contained primarily through a prompt closure of the borders to international visitors, with 85 total cases and no deaths. The Government has implemented policies to address health risks from the pandemic committed to in the April 2020 RCF disbursement, including the establishment of a center for quarantine services, purchase of medical supplies, and transitory income support transfers to the unemployed, with additional support of World Bank financing. The Government also approved tax relief measures including postponement of the income tax payment deadline. Measures to support the financial sector included loan service moratoria in the bank and credit union sectors. However, tourism, which accounts for over 70 percent of total exports and 20 percent of GDP, has come to a halt, causing ripple effects on the economy. As outlined in the October 2020 WEO, Dominica’s real GDP is projected to contract by 9 percent in 2020, and the current account deficit would reach 28 percent of GDP, supported by financing from CBI deposits and official loans. The fiscal balance is projected to reach -2.5 percent of GDP, underpinned by a decline in tax revenue of 15 percent, and an increase in health-related expenditure and income transfers to support the unemployed. Public debt would approach 90 percent of GDP. Tax collection is projected to decline further in FY2020 with the full impact of the pandemic, but the fiscal deficit could remain contained due to financing constraints that will reduce the fiscal space for public investment. Downside risks are significant, including uncertainty with regards the global recovery from the pandemic, and recurrent natural disasters. These risks could put pressure on the ECCU’s quasi-currency board arrangement, including from balance of payments pressures in other ECCU members. The medium-term recovery is expected to be protracted, as the pandemic is expected to further deteriorate lingering weakness in the bank and non-bank financial sectors, and near-depletion of fiscal buffers. Page 41 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) The external and financial sector policies are largely in the purview of the ECCB and subject to the constraints of the quasi-currency board arrangement. Dominica’s imputed reserve position at the ECCB has not yet been adversely affected by the crisis. However, the financial sector entered the COVID-19 outbreak in a fragile position, with high Non-Performing Loans (NPLs) and pockets with limited capitalization. Bank NPLs peaked at 18 percent of loans in 2018, followed by some improvement in 2019 to 14 percent and a significant increase in provisioning. The credit union sector, which account for over 60 percent of financial sector assets and includes systemically important institutions, remains undercapitalized, with provisioning below the 60 percent requirement. Since the pandemic outbreak, the financial sector remained stable, including an increase in private sector deposits and stable credit, while containing the increase in NPLs. Financial regulators (ECCB for banks and the national authority for nonbanks) strengthened monitoring of underlying vulnerabilities that could become more apparent after the moratoria ends. Dominica received financing from the IMF under the Rapid Credit Facility (RCF) and took advantage of the G-20 DSSI initiative to help fill its large external financing needs. The request for purchase of SDR10.3 million (US$14 million), equivalent to 89.4 percent of the quota, was approved in April 2020. The RCF disbursement to finance the budget and the debt service suspension under the DSSI supported government and balance of payments needs, created fiscal space for health spending, and unlocked financing from other multilateral creditors, including the World Bank. Dominica’s outstanding purchases and loans with the Fund amount to SDR17.05 million (September 2020). The Fund has provided natural disaster assistance on four previous occasions, in 2008, 2009, 2012, and 2015. The Fund has also supported two adjustment programs over 2002–06 (SBA and PRGF), which were able to help Dominica ease acute vulnerabilities through fiscal adjustment, debt restructuring, and related structural reforms. Dominica’s external financing needs are projected to remain large in 2021, compounding downside risk. Dominica’s current account deficit is projected at above 25 percent of GDP. Meeting the financing needs would require significant financing from the multilateral and bilateral creditors, as needed to maintain government operations, fiscal space for expected health-related spending including vaccination, a reduced amount of public investment, while containing the decline of international reserves. An external financing gap, however, could emerge if the significant downside risks materialize. Medium term policies are anchored by Dominica’s fiscal consolidation plan committed to in the RCF disbursement, and other reforms that are being pursued. The authorities intend to strengthen fiscal sustainability with identified structural measures targeting fiscal savings of 6 percent of GDP cumulatively, phased over 5 years. Implementation of the fiscal consolidation plan remains critical for fiscal sustainability—Dominica was rated High Risk of Debt Distress in the Debt Sustainability Analysis attached to the April 2020 RCF disbursement report. The Government is also preparing institutional fiscal reforms to strengthen public debt sustainability, including the adoption of a fiscal rule consistent with regional commitments, and improvement of Public Financial Management (PFM) and Public Procurement. The Government has approved a comprehensive development plan to build resilience to natural disasters, expected to enhance long-term growth and support fiscal sustainability. The authorities are committed to continue strengthening financial supervision and regulation to safeguard macro-financial stability. Despite fiscal pressures, the Government has remained current with all debt obligations, and managed to save resources in the Vulnerability Fund to build a fiscal buffer against Page 42 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) natural disasters. The Government has made significant progress to close the external financing gaps identified in the April 2020 RCF disbursement. In June 2020 the World Bank approved a US$16 million loan to build resilience to natural disasters and to strengthen food security. The Government is finishing the preparation of additional multilateral and bilateral loans focused on structural fiscal reform. Other contributing factors include better-than-projected tax revenue performance after the lockdown flexibilization; contained revenue loss from the decline in tourism activity because the sector benefits from significant tax exemptions; and a reduction in public investment execution. Page 43 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Dominica: Selected Economic Indicators I. Social and Demographic Indicators Area (sq. km.) 754 Adult literacy rate (percent, 2016) 94 Population (2016) Unemployment rate (2016) 23 Total 73126 Annual rate of growth (percent) -0.1 Density (per sq. km.) 97 Gross Domestic Product (2018) Population characteristics Millions of E.C. dollars 1,440 Life expectancy at birth (years, 2016) 76 Millions of U.S. dollars 533 Infant mortality (per thousand live births, 2016) 12 U.S. dollars per capita 7,295 II. Economic Indicators Est. Projected 2018 2019 2020 2021 2022 2023 2024 2025 Output and prices (annual percent change, unless otherwise specified) Real GDP 1/ 0.5 8.4 -8.8 3.3 3.2 3.0 1.8 1.5 Nominal GDP 1/ 1.9 10.1 -7.2 5.2 5.3 5.1 3.8 3.5 Consumer prices Period average 1.4 1.6 1.8 1.9 2.0 2.0 2.0 2.0 End of period 1.4 1.8 1.8 2.0 2.0 2.0 2.0 2.0 Central government balances 2/ (in percent of GDP, unless otherwise specified) Revenue 46.3 36.8 34.2 34.6 33.5 33.2 33.6 33.8 Taxes 28.4 23.6 21.6 22.7 23.9 24.1 24.4 24.6 Non-tax revenue 16.9 11.3 9.8 8.6 6.3 5.8 5.8 5.8 Grants 3/ 0.9 1.9 2.8 3.3 3.3 3.3 3.3 3.3 Expenditure 65.4 45.5 35.2 33.8 29.8 29.9 29.5 28.9 Current primary expenditure 37.7 34.7 28.4 24.9 23.3 23.4 23.2 22.7 Interest payments 2.0 2.4 0.8 1.4 1.6 1.5 1.4 1.3 Capital expenditure 25.7 8.4 5.9 7.4 4.9 4.9 4.9 4.9 Primary balance -17.1 -6.3 -0.2 2.3 5.3 4.9 5.5 6.1 Overall balance (incl. ND cost buffers), of which: -19.2 -10.2 -2.5 -0.7 2.3 1.9 2.5 3.3 annualized cost of natural disasters (ND) 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Central government debt (incl. guaranteed) 4/ 78.8 85.7 88.4 85.7 80.1 75.8 70.8 65.3 External 54.5 56.1 60.7 60.5 60.4 61.0 58.3 55.5 Domestic 24.4 29.6 27.7 25.2 19.7 14.8 12.5 9.8 Money and credit (annual percent change) Broad money (M2) 0.7 -0.4 0.1 0.5 0.4 0.4 0.5 0.6 Real credit to the private sector -2.7 -1.5 -15.1 -2.7 -2.2 -0.8 -1.5 -1.8 Balance of payments Current account balance, of which: -44.6 -27.2 -27.8 -26.3 -21.1 -15.7 -12.9 -11.4 Exports of goods and services 29.6 37.7 19.2 23.7 29.0 33.9 35.8 37.8 Imports of goods and services 5/ 78.7 70.4 51.2 52.3 52.5 52.8 52.2 52.7 Capital and financial account balance 15.8 -0.1 12.9 10.2 5.7 -0.9 0.3 2.9 FDI -14.3 -6.2 -2.6 -5.1 -5.4 -5.7 -5.3 -5.7 Capital grants 27.6 13.6 19.3 18.6 13.7 7.7 6.9 7.4 Other (incl. errors and omissions) 2.5 -7.5 -3.8 -3.3 -2.6 -2.9 -1.3 1.2 External debt (gross) 6/ 104.6 107.1 118.9 113.5 110.7 108.3 103.7 99.5 Saving-Investment Balance -44.6 -27.2 -27.8 -26.3 -21.1 -15.7 -12.9 -11.4 Saving -11.2 -3.5 -14.5 -15.7 -12.3 -7.9 -4.6 -3.1 Investment 33.4 23.6 13.3 10.6 8.8 7.8 8.3 8.3 Public 25.9 17.1 8.3 7.6 7.0 5.8 5.8 5.8 Private 7.5 6.5 5.0 3.0 1.8 2.0 2.5 2.5 Memorandum items: Nominal GDP (EC$ millions) 1,440 1,586 1,472 1,549 1,631 1,714 1,779 1,842 Nominal GDP, fiscal year (EC$ millions) 1,513 1,529 1,511 1,590 1,673 1,747 1,810 1,875 Net imputed international reserves: End-year (millions of U.S. dollars) 189.2 190.3 178.8 182.6 186.2 189.8 193.7 198.4 Months of imports of goods and services 5.4 5.5 7.7 7.3 7.0 6.8 6.8 6.6 Sources: Dominican authorities; Eastern Caribbean Central Bank (ECCB); and Fund staff estimates and projections. 1/ At market prices. 2/ Data for fiscal years from July to June. 3/ Does not include grants received but not spent. 4/ Includes estimated commitments under the Petrocaribe arrangement with Venezuela. 5/ Includes public capital expenditure induced imports from 2019 onwards to account for possible mitigation of natural disasters 6/ Comprises public sector external debt, foreign liabilities of commercial banks, and other private debt. Page 44 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 3: LETTER OF DEVELOPMENT POLICY Page 45 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Page 46 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Page 47 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Page 48 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Page 49 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE 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 These measures are expected to have Prior Action 1: The Recipient, through its Cabinet, has positive poverty, social and approved standardized protocols to ensure adequate No significant effects distributional effects by protecting the COVID-19 testing through the Protocols for entry into health of the population and facilitating the Commonwealth of Dominica and the Action Plan a reopening of the economy. for Entry into the Commonwealth of Dominica. Prior Action 2: The Recipient, through its Cabinet, has Potential positive effects as These measures are expected to have approved General Guidelines for the Managed measures are likely to reduce positive poverty, social and Experience to limit the risk of COVID-19 transmission. the vulnerability of people to distributional effects by limiting the climate change by improving increase of unemployment and labor their health and income losses due to the COVID-19 socioeconomic resilience. shock. Prior Action 3: The Recipient, through its Cabinet, has Potential positive effects as These measures are expected to have supported liquidity and continuity of businesses measures are likely to reduce positive poverty, social and affected by COVID-19, by establishing the corporate the vulnerability of people to distributional effects by limiting the income tax at a rate of 17 percent for companies that climate change by improving increase of unemployment and labor have retained or have agreed to retain at least 80 their health and income losses due to the COVID-19 percent of their staff employed in January 2020. socioeconomic resilience. shock. Pillar 2 –STRENGTHENING FISCAL POLICIES, PUBLIC FINANCIAL MANAGEMENT AND DEBT TRANSPARENCY FOR A RESILIENT RECOVERY Prior Action 4: The Recipient, through its Cabinet, has explicitly approved the development of a Fiscal Rules and Responsibility Framework that includes: (i) fiscal targets for public debt, (ii) the fiscal balance, (iii) wage This measure is expected to have a bill ceilings, (iv) public expenditure growth limits with No significant effects positive, though indirect, impact on oversight provided by an independent fiscal council, poverty in the medium term. and (v) temporary deviations to the rules to be allowed in specific situations such as natural disasters and unanticipated economic shocks. Prior Action 5: The Recipient, has funded its This measure is expected to have a direct Vulnerability, Risk, and Resilience Fund, by opening a positive impact on poverty and social dedicated account at the ECCB, and depositing No significant effects outcomes as natural disasters and shocks EC$500,000 per month into said fund. tend to hit the poorest households hardest. Access to available resources with which to respond rapidly following such an event should help limit the negative impact of such disasters and allow for more prompt delivery of assistance to poor households. Page 50 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) Prior Action 6: The Recipient has strengthened revenue mobilization, by: (i) reducing the percentage of the duty paid on vehicle imports authorized to be refunded to 50 percent; and (ii) increasing the cooperation between its Comptroller of Customs and its Comptroller of No significant effects This measure is expected to have a Inland Revenue in the exchanging of data positive, though indirect, impact on through the mutual operation, administration poverty in the medium term. and implementation of an information technology system with the objective of ensuring increased taxpayer compliance. Prior Action 7: The Recipient, through its Cabinet, has taken measures to improve coverage and timeliness of the 2019 DPR, by: (i) including loan guarantees in the 2019 DPR; No significant effects This measure is expected to have a (ii) submitting the DPR to Parliament; and positive, though indirect, impact on (iii) publicly disclosing the DPRs on the Ministry of poverty in the medium term. Finance website. Prior Action 8: The Recipient, through its Cabinet, has approved and disseminated for public consultation, the Potential positive effects as This measure is expected to have a Public Procurement and Disposal of Public Property Bill green procurement policy positive, though indirect, impact on 2020 which strengthens public procurement practices, reforms are likely to reduce poverty in the medium term. including defining parameters for emergency public the environmental risks of procurement, introducing considerations for e- government investments over procurement and others to promote environmentally, the medium term. socially and economically sustainable procurement. Page 51 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 5: DOMINICA PROGRAM ADJUSTMENT IN RESPONSE TO COVID-19 The World Bank Group’s (WBG’s) engagement in Dominica is guided by the WBG Regional Partnership Strategy (RPS) for the Organization of Eastern Caribbean States (OECS), which was endorsed by the Board of Executive Directors on November 13, 2014 (Report No. 85156-LAC). The RPS is structured around two pillars: (i) fostering conditions for growth and competitiveness; and (ii) enhancing resilience. The Performance and Learning Review (PLR), 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: (i) build cross-cutting resilience to external shocks; (ii) embed growth in the blue economy; (iii) strengthen and harness human capital; (iv) embrace new technologies; and (v) strengthen regional integration. Impact of the COVID-19 pandemic on Dominica and Government response Dominica has been hit hard by the COVID-19 pandemic, both economically and socially. Early implementation of social distancing measures effectively contained the spread of COVID-19 infections, with 121 confirmed cases and zero deaths reported as of February 11, 2021. However, GDP is projected to contract by 10 percent in 2020 due to the almost complete halt of the tourism sector, which accounts for close to 25 percent of GDP and employment. A gradual recovery is expected over the medium term, with GDP growth projected at 1 percent and 3 percent in 2021 and 2022, respectively, and tourism returning to close to 2019 levels by 2023. The recession has been accompanied by a large fiscal deficit of around 10 percent in 2020 and a sharp increase in public debt levels from around 79 percent of GDP in 2019 to 88 percent of GDP in 2020. Although there is no recent household survey or poverty data, poverty is expected to increase as a result of income and job losses. Dominica has implemented a broad series of mitigation measures geared towards containing the spread of COVID-19 and stimulating economic recovery. The Government has implemented a package of fiscal stimulus measures estimated at around $25.5 million or 4.3 percent of GDP, including: (i) increased spending of $9.5 million in the health sector to respond to the pandemic; (ii)increased social security unemployment benefits of $4.5 million; (iii) instituted loan facilities for farmers, hoteliers, the manufacturing sector, and micro and small businesses (including self-employed persons) of $11.5 million; and (iv) implemented tax measures to provide relief for businesses and households. Furthermore, the fiscal year 20/21 budget included $48.6 million for the agriculture sector to ensure food security and increase export earnings. WBG support for responding to the crisis The Bank is adjusting its program to support Dominica’s COVID-19 response and recovery. The Bank’s program in Dominica has a strong focus on building cross-cutting resilience across the fiscal/financial, infrastructure, human capital, and environmental dimensions. Hence, the active portfolio was well placed to respond to the current priorities, and adjustments are being made to address COVID-19 recovery needs. This includes the cancellation of the Dominica – Caribbean Regional Air Transport Connectivity Project (P171224, $13 million) to maximize the availability of IDA funds for COVID-19 recovery. The IDA-19 lending program (SDR 47.3 million, or approx. US$67.7m equivalent) is being reprioritized with a mix of budget Page 52 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) support and high priority investment operations, aligned with the WBG’s COVID-19 Crisis Response Approach on “Saving Lives, Scaling-up Impact and Getting Back on Track.” Moreover, proposed Performance and Policy Actions under IDA19’s Sustainable Development Finance Policy include important measures to strengthen fiscal sustainability, public finance management, and debt management. • To save lives - The World Bank provided $5.1 million to bolster the capacity of Dominica’s public health system to manage COVID-19. Funds are being used to purchase drugs, medical supplies and equipment, and laboratory supplies to boost testing capacity, and for minor retrofitting of isolation units. The funds were provided from Contingent Emergency Response Components (CERCs) from two sources: $3 million from the OECS Regional Health Project (P168539) and $2.1 million from the Emergency Agricultural Livelihoods and Climate Resilience Project (P166328). Moreover, the proposed COVID-19 Response Programmatic DPC series (first in the series planned for FY21 delivery – P174927, $25 million) aims to help strengthen the health sector to manage the response to COVID-19, ensure appropriate health protocols to limit the risk of transmission during gradual reopening of the economy, and implement a COVID-19 Immunization Plan following directives from the World Health Organization. • To protect the poor and vulnerable – Activation of the CERC in the Housing Recovery Project (P166537, $40 million) provided $5.2 million to finance an income support program for over 7,000 Dominicans. The program provides grants to affected self-employed business owners and other people who have suffered from income or jobs losses due to the pandemic and provides support to elderly citizens 75 years or older who do not have a pension. Moreover, the proposed DPC series (P174927) aims to support MSMEs and the self-employed through low interest loans to businesses run by vulnerable segments of the population hard hit by the pandemic. • To save livelihoods, preserve jobs, and ensure more sustainable business growth and job creation – $1.5 million from the CERC under the Emergency Agricultural Livelihoods and Climate Resilience Project (P166328) has supported agriculture and strengthened national food security during the pandemic. The intervention is targeted to reach an estimated 3,200 farmers to ensure that the local food supply chains are better able to meet the needs of the island. The Caribbean Digital Transformation Project (P171528, $94 million total, of which $28 million are for Dominica) approved in June 2020 will support resilient economic recovery by increasing access to broadband, digital services, and digital skills in Dominica and other OECS countries, helping mitigate the challenges of scale by increasing connectivity, strengthening the efficiency of public services, and facilitating payment systems and access to larger markets. The Housing Recovery Project (P166537, $40 million) and the Third Phase Disaster Vulnerability Reduction APL for Dominica (P129992, $60.8 million) will support employment through the rebuilding of houses devasted by previous hurricanes and the rehabilitation, widening, and resurfacing of 30km of the East Coast Road to climate resilient standards. The proposed DPC series (P174927) aims to provide support to businesses that commit to retain employees through an 8 percent reduction in the corporate income tax rate, as well as loan relief and tax payment relief to most affected businesses. The OECS MSME Guarantee Facility Project (P157715, $10 million) also provides support through a Partial Credit Guarantee (PCG) instrument helping increase SME access to finance. • To strengthen policies, institutions, and investment for resilient, inclusive, and sustainable growth – The proposed DPC series (P174927) would support the adoption of a Fiscal Rules and Responsibility Framework that will establish fiscal policy principles, targets, and review and compliance mechanisms to Page 53 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ensure consistency and adherence to fiscal responsibility and debt sustainability. Moreover, the proposed DPC series will help improve budget preparation and management through the strengthening of the Medium-Term Economic and Fiscal Framework (MTEFF) and the revision of the Financial Administration Act. Lastly, it aims to support the establishment, operation, and management of a disaster contingency fund to provide rapid and cost-effective access to financial resources following a disaster. Selectivity, Complementarity, Partnerships. WBG engagement and reprioritization of IDA-19 adheres to the selectivity principles of strong alignment with the Government’s development and COVID-19 response strategies, the WBG’s comparative advantage, and complementarity with activities of other development partners. Support from development partners to the country’s COVID-19 response includes $14 million from the IMF Rapid Credit Facility, a $20 million budget support operation from the Caribbean Development Bank, $10 million to finance COVID-19 health from the OPEC Fund for international Development, and the Eastern Caribbean Central bank (ECCB) has reduced interest rate on government borrowings from 6.5 percent to 2 percent. Bilateral assistance is not yet fully confirmed, but available international support totals US$4,169 million in 2020, approximately 7.5 percent of GDP, including the US$25 million in DPC resources provided through this operation. Dominica is also participating in the Debt Service Suspension Initiative (DSSI), which released additional fiscal space amounting to approximately 0.5 percent of GDP in 2020. Page 54 The World Bank Dominica COVID-19 Response and Recovery DPC (P174927) ANNEX 6: PERFORMANCE AND POLICY ACTIONS FY21-23 DSPE Area by March 2021 by March 2022 by March 2023 Analytical Supported underpinning by Improving debt PPA1: The Government, through its DPR submitted, including all DPR submitted, including all DeMPA (2016) TA transparency Cabinet, has required: (i) inclusion of records of active loan records of active loan Policy all records of active loan guarantees guarantees, and publicly guarantees, and publicly dialogue in the DPR; (ii) annual submission of disclosed by March 2022. disclosed by March 2023. the DPR to Parliament; and (iii) public disclosure of DPRs on the Ministry of Finance or other relevant government web site. Strengthening PPA2: The Government has Cabinet has approved a Medium The Government remains in DSA TA fiscal approved a Fiscal Responsibility and Term Economic and Fiscal compliance with its Fiscal TA reports Policy sustainability Rules Framework, in accordance with Framework process to strengthen Responsibility and Rules Article IV dialogue sound practice, that outlines fiscal the legal framework for budget Framework and relevant targets. responsibility principles and sets planning, preparation and Public targets for spending, fiscal balances Financial Management. and public debt levels. Page 55