The World Bank Dominica: Strengthening Fiscal and Climate Resilience DPC (P508114) @#&OPS~Doctype~OPS^blank@pidaprdpfcoverpage#doctemplate Program Information Document (PID) Appraisal Stage | Date Prepared/Updated: 24-Feb-2025 | Report No: PIDDA00149 The World Bank Dominica: Strengthening Fiscal and Climate Resilience DPC (P508114) @#&OPS~Doctype~OPS^dynamics@pidaprdpfbasicinformation#doctemplate BASIC INFORMATION A. Basic Project Data Project Beneficiary(ies) Operation ID Operation Name Dominica: Strengthening Fiscal and Climate Resilience Dominica P508114 DPC Region Estimated Approval Date Practice Area (Lead) Financing Instrument LATIN AMERICA AND Macroeconomics, Trade Development Policy 02-Apr-2025 CARIBBEAN and Investment Financing (DPF) Borrower(s) Implementing Agency Ministry of Finance, Commonwealth of Economic Development, Dominica Climate Resilience and Social Security Proposed Development Objective(s) The operation aims to support the Commonwealth of Dominica in (i) strengthening domestic revenue mobilization and financial sector resilience; and (ii) promoting biodiversity and disaster preparedness. @#&OPS~Doctype~OPS^dynamics@pidpfrprojectfinancing#doctemplate Financing (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Is this project Private Capital Enabling (PCE)? SUMMARY Total Financing 22.00 DETAILS Total World Bank Group Financing 22.00 World Bank Lending 22.00 @#&OPS~Doctype~OPS^dynamics@pidaprdecision#doctemplate Decision Page 1 The World Bank Dominica: Strengthening Fiscal and Climate Resilience DPC (P508114) The review did authorize the preparation to continue Explanation The team was authorized to proceed with program preparation with an appraisal planned for February 2025. Approved by: Lilia Burunciuc (Country Director, LCC3C). B. Introduction and Context Country Context Dominica is a small, middle-income island economy, rich in biodiversity but highly vulnerable to natural disasters. Dominica, often referred to as the "Nature Island of the Caribbean," boasts extraordinary natural wealth and marine biodiversity that it seeks to protect and sustainably leverage to create economic opportunities through tourism. But Dominica is increasingly threatened by climate change and environmental mismanagement, affecting local livelihoods, tourism and the region's biodiversity. Moreover, increase in temperatures has exacerbated Dominica’s exposure to extreme weather events such as hurricanes, landslides, and floods, posing increasing risks to its infrastructure, population and economy. In 2015, Dominica was struck by Tropical Storm Erika, which caused damage amounting to US$ 480 million (90 percent of the country’s GDP). This was followed by the catastrophic impact of Hurricane Maria in 2017, which inflicted an unprecedented US$1.3 billion in damages and losses—equivalent to 226 percent of Dominica's GDP. Although Dominica avoided the worst of Hurricane Beryl’s destruction that hit the region in July 2024, it still caused considerable damage to infrastructure, forced evacuations, and disrupted daily life across the island. Dominica's exposure to climate events, combined with the Covid-19 pandemic, has heavily strained its fiscal position and the resilience of its financial sector. Public debt surged from 66.9 percent of GDP in 2016 to 114 percent in 2020, and a fiscal surplus in 2016 turned into a deficit of 10.7 percent by 2020 as a result of Hurricane Maria and the Covid-19 pandemic. Owing to the revenues from the Citizenship by Investment (CBI) program, tourism recovery, and careful fiscal policy, debt decreased to 93 percent in 2024 but remains high. Moreover, Dominica’s dependence on volatile CBI revenues (which accounted for 55 percent of total revenues in 2023) and a narrow economic base leaves its fiscal framework highly vulnerable to shocks, especially with new scrutiny on the CBI program resulting in declining revenues from this source. Dominica’s banking sector is adequately capitalized in aggregate, but its exposure to shocks, weak asset quality and heavy reliance on credit unions pose risks to its financial sector. In September 2024, non-performing loans (NPLs) stood at 11.0 percent, exceeding the Eastern Caribbean Central Bank's (ECCB) 5 percent cap.1 This proposed Development Policy Credit (DPC), amounting to US$ 20 million, is the first of a programmatic series of two operations that seek to: (i) strengthen Dominica’s domestic revenue mobilization and financial sector resilience and (ii) promote biodiversity and disaster preparedness. The first pillar aims to mobilize domestic revenue and enhance financial sector resilience. Key reforms under this pillar include raising excise taxes on diesel, sugary 1https://www.eccb-centralbank.org/viewPDF/documents/2022-03-03-05-00-34-Revised-Standard-On-Credit-Risk-Management-and-Credit- Underwriting.pdf. Page 2 The World Bank Dominica: Strengthening Fiscal and Climate Resilience DPC (P508114) drinks, alcohol, and tobacco. These measures target revenue growth, lower greenhouse gas emissions, and encourage better health outcomes. To address the low asset quality of credit unions, the pillar also supports a more robust Comprehensive Supervisory Assessment (CSA) process for assessing financial institutions’ stability. The second pillar focuses on biodiversity protection and disaster preparedness. It supports the establishment of the first marine protected area for sperm whale conservation and the adoption of a risk-based asset management system to enhance preparedness for climate events. Relationship to CPF The World Bank Group’s (WBG) engagement in Dominica is guided by the WBG Regional Partnership Framework (RPF) for the OECS, which was discussed by the Board of Executive Directors on April 19, 2022, covering FY 2022 – 2025 (Report No. 160349-LAC) and two regional operations. The RPF covers the six OECS countries that are member countries of the WBG, namely Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. The RPF objectives are closely aligned to the development priorities identified in the Systematic Regional Diagnostic (SRD) for the OECS countries, which discusses key constraints and opportunities for green, inclusive, and sustainable growth in the region, the national and regional development strategies of the Eastern Caribbean, and the priorities for resilient recovery from the impacts of the COVID-19 pandemic crisis. The regional approach of this RPF is motivated by the shared development challenges faced by the OECS countries, the benefits of regional initiatives to effectively overcome these challenges, and the strong commonalities of the World Bank’s engagement in these countries. The proposed operation’s development objectives are closely aligned with the overarching objective of the RPF to support green, resilient, inclusive and digital development (GRID) and competitiveness, as the OECS countries recover from the COVID-19 crisis, address their medium-term development priorities, and build resilience to climate change and other external shocks. The operation is also linked to the Caribbean Digital Transformation Project (P171528) and the OECS MSME Guarantee Facility Project (P157715). The operation is also closely linked to other World Bank analytical reports including the OECS Country Climate and Development Report (CCDR) published in October 2024 and forthcoming Strengthening Tax Policy for Climate Resilient Growth in Dominica. C. Proposed Development Objective(s) The operation aims to support the Commonwealth of Dominica in (i) strengthening domestic revenue mobilization and financial sector resilience; and (ii) promoting biodiversity and disaster preparedness. Key Results The policy reforms implemented through this operation are expected to mobilize resources, enhance financial sector stability, promote biodiversity, and bolster resilience to climate change and natural disasters. The higher excise tax on diesel is projected to boost revenue and support environmental sustainability by curbing fuel consumption. Similarly, higher excise taxes on sugar-sweetened beverages, tobacco, and alcohol are expected to generate significant revenue and improve health outcomes, especially for men. The CSA will conduct an evaluation of the financial health of the AID Bank. This assessment will subsequently be extended to credit unions in the medium term, promoting their financial stability. The sperm whale reserve will safeguard habitats and increase government revenue from whale-watching permits, benefiting both conservation efforts and local tourism. Inventorying public Page 3 The World Bank Dominica: Strengthening Fiscal and Climate Resilience DPC (P508114) fixed assets and assessing their level of risk will help prioritize mitigation measures, enhancing building maintenance and climate resilience. D. Project Description The proposed DPC operation is structured around two mutually reinforcing pillars. The first pillar aims to strengthen domestic revenue mobilization and financial sector resilience. Key reforms under this pillar include raising excise taxes on diesel, sugary drinks, alcohol, and tobacco. These measures target revenue growth, lower greenhouse gas emissions, and encourage better health outcomes. To address the low asset quality of the financial sector, the pillar also supports a comprehensive supervisory assessment process for Aid Bank and credit unions to enhance the stability of financial sector. The second pillar focuses on biodiversity protection and disaster preparedness to build climate resilience. It supports the establishment of the first marine protected area for sperm whale conservation and the adoption of a risk-based asset management system to enhance preparedness for climate events. E. Implementation Institutional and Implementation Arrangements The Ministry of Finance will oversee the collection and monitoring of information related to program implementation and progress toward achieving desired outcomes. It will also coordinate essential actions among the agencies involved in the reform program supported by this DPC series. In collaboration with the Ministry of Finance and line ministries, the World Bank has defined clear and measurable results indicators, preferring those already regularly collected to minimize additional reporting efforts. F. Poverty and Social Impacts, and Environmental, Forests, and Other Natural Resource Aspects Poverty and Social Impacts Among the reforms of this operation increase in diesel, SSB, tobacco, and alcohol excise taxes under PA#1 and PA#2 are likely to negatively affect poor and vulnerable groups in Dominica. These negative effects can be mitigated through short-term compensatory measures such as targeted cash transfers. Existing social assistance programs like the Public Assistance Program (PAP) and the Over 65 Program can support these measures. In addition, the increase in diesel tax is not expected to substantially affect poor and vulnerable groups, as they predominantly use LPG and kerosene for cooking, and transport prices are regulated by legislation. PA#3, which aims to improve access to credit by strengthening the financial sector, is expected to have positive or neutral impacts on poor and vulnerable Dominicans. This will aid in purchasing inputs for self-employment and coping with economic shocks, benefiting those in lower welfare quintiles who are more likely to be self-employed. Regarding the impact of the sperm whale reserve in PA#4 on poor and vulnerable communities, the government and the SWR Task Force have engaged with stakeholders, including fishers and water sports operators, to ensure compliance and mitigate adverse effects. The SWR community development team will support local businesses through training and providing equipment. PA#5 aims to make public buildings more climate resilient, ensuring continued access to key public services during climate shocks. This will benefit both poor and non-poor Dominicans who rely on these services. Page 4 The World Bank Dominica: Strengthening Fiscal and Climate Resilience DPC (P508114) Environmental, Forests, and Other Natural Resource Aspects The policy reforms of this operation are designed to support climate change mitigation and adaptation with several positive environmental impacts. Measures include increasing diesel excise to reduce air pollution and greenhouse gas emissions. The creation of a sperm whale reserve aims to protect endangered sperm whales, enhancing biodiversity and climate resilience. Establishing a risk-based asset management system will inventory public buildings, monitor their climate change risk, and prioritize mitigation measures for resilience. G. Risks and Mitigation The risk associated with this operation is considered “substantial�. Areas of particular concern are macroeconomic, institutional capacity, and environmental risks given exposure to climate shocks and natural disasters. Macroeconomic risks are considered substantial, due to volatile food and fuel prices, global geo-political events, and volatile CBI revenues that were at or above 30 percent throughout 2020-2024 and projected at 23.6 percent in 2025 and 15.7 from 2026 onwards. Natural disasters, climate change, tighter global financial conditions, fiscal vulnerabilities, and public debt sustainability concerns pose additional risks. The financial sector is vulnerable to risks from the credit unions. Bank engagement in these areas is expected to continue over the IDA-20 and next IDA period. Dominica’s institutional and human resource capacity is limited as a small island state. Capacity to implement and sustain supported reforms is concentrated in the hands of a small group of individuals with decision-making and technical capabilities. Furthermore, natural disasters could seriously impact the achievement of the operation’s objectives by disrupting economic activity, such as agriculture and tourism, and generating significant fiscal costs that could affect macroeconomic stability and particularly public debt levels. To mitigate the macro, institutional, and environmental risks, various measures have been taken. Macroeconomic risks are addressed through higher excise taxes on diesel, sweetened beverages, alcohol, and tobacco, along with phasing out fuel subsidies and pandemic support. Capital expenditures are expected to decrease significantly from 2025 onwards and regular payments to the Debt Repayment Fund have been approved. In addition, authorities plan to enact new taxes for tourism and solid waste management and digitize tax administration to further increase tax revenues. Institutional capacity risk is mitigated by World Bank’s regular follow-up and technical assistance (TA) support. This support is particularly crucial for establishing a risk-based asset management system, comprehensive supervisory assessment of the AID Bank, and creating the sperm whale reserve. Environmental risks are managed through strengthened disaster preparedness and response capacity, supported by the World Bank and other partners. The government is investing in climate-resilient infrastructure, risk-based management of public assets, and geographic information systems. Contingency funds like the Vulnerability Risk and Resilience Fund (VRF) and the Debt Repayment Fund are being built to better respond to natural disasters, promoting resilient and sustained growth. @#&OPS~Doctype~OPS^dynamics@contactpoint#doctemplate CONTACT POINT World Bank Page 5 The World Bank Dominica: Strengthening Fiscal and Climate Resilience DPC (P508114) Hulya Ulku Senior Economist Borrower/Client/Recipient Commonwealth of Dominica Implementing Agencies Ministry of Finance, Economic Development, Climate Resilience and Social Security Ms. Denise Edwards Financial Secretary financialsecretary@dominica.gov.dm FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects @#&OPS~Doctype~OPS^dynamics@approval#doctemplate APPROVAL Task Team Leader(s): Hulya Ulku Approved By Practice Manager/Manager: Shireen Mahdi 06-Feb-2025 Country Director: Sangeeta Carol Pinto 24-Feb-2025 Page 6