COMMONWEALTH OF DOMINICA ECONOMIC RECOVERYSUPPORTOPERATION CURRENCYAND EXCHANGERATES US$1.OO : EC$2.67 FISCALYEAR July 1-June 30 ABBREVIATIONS AND ACRONYMS AID Agricultural IndustrialDevelopmentBank CARICOM CaribbeanCommunity CARTAC CaribbeanRegional Technical Assistance Center CAS CountryAssistance Strategy CDB CaribbeanDevelopmentBank CFAA CountryFinancialAccountability Assessment CIDA CanadianInternationalDevelopmentAgency CPAR Country ProcurementAssessment Report DFID UKDepartmentfor InternationalDevelopment DOMLEC DominicaElectricity Services, Ltd. DSS DominicaSocial Security ECCB EasternCaribbeanCentral Bank ECCU EasternCaribbeanCurrency Union ECEMP EasternCaribbeanEconomic ManagementProject(CIDA) ERSO Economic Recovery Support Operation EU EuropeanUnion FAD FiscalAffairs Division (IMF) FATF FinancialAction Task Force (OECD) FERP Fiscal and Economic Recovery Project (DFID) FSAP FinancialSector Assessment Program GDP Gross Domestic Product GEF GlobalEnvironmentalFacility GOCD Government of the Commonwealthof Dominica IDA InternationalDevelopmentAssociation IDF InstitutionalDevelopmentFund IMF InternationalMonetary Fund I-PRSP InterimPoverty ReductionStrategyPaper MDGs Millennium DevelopmentGoals MoFP Ministry of Finance and Planning MOU Memorandumof Understanding MTPSRS MediumTermPublic Sector ReformStrategy NCB NationalCommercial Bank NPL NonPerformingLoan OECS Organizationof EasternCaribbeanStates PSIP Public Sector InvestmentProgram PRGF Poverty Reduction and GrowthFacility PRSP Poverty ReductionStrategy Paper SBA Stand-By Arrangement SDR Special DrawingRights SIGFIS StandardizedIntegratedGovernmentFinancialInformationSystem VAT Value Added Tax UNDP UnitedNations DevelopmentProgramme XDS ExternalDebtService XGS Exports of Goods and Services Vice President: Davidde Ferranti Country Director: Caroline Anstey SectorDirector: Ernest0May SectorManager: Mauricio Carrizosa SectorLeader: Antonella Bassani Task Team Leader: CamilleNuamah FOROFFICIAL USEONLY COMMONWEALTH OF DOMINICA ECONOMIC RECOVERY SUPPORT OPERATION TABLE OF CONTENTS PROGRAMAND CREDITSUMMARY ..................................................................................... i PROGRAM DOCUMENT ........................................................................................................ 1 PARTI. Background and Rationale........................................................................... 1 PARTI1. Dominica's Structural Challenges ............................................................... 5 A. Regaining fiscal sustainability ......................................................................... 5 B. 8 C. Protecting social gains ................................................................................... Stimulating growth and economic diversification........................................... 11 PARTI11. The Government's Program ...................................................................... 13 A. The macroeconomic stabilization program ................................................... 13 B. Improving fiscal and financial management.................................................. 14 18 D. C. Promoting growth and diversification ........................................................... Poverty Reduction Strategy Paper................................................................. 20 PART IV. The Proposed Operation............................................................................ 20 B. A. Objectives and description............................................................................. Rationale........................................................................................................ 20 20 C. 23 D. Implementation. monitoring andevaluation.................................................. Prior actions and benchmarks ........................................................................ 24 24 F. E. Environmental and social issues.................................................................... G. Fiduciary arrangements ................................................................................. 25 Benefits and risks........................................................................................... 25 ANNEXES ............................................................................................................................ 28 28 ANNEX 2. ANNEX 1. Letter of Development Policy............................................................ Key Economic Indicators .................................................................. 41 ANNEX 3. ANNEX 4. Dominica At A Glance ...................................................................... 43 Timetable of Key Processing Events................................................. 45 46 ANNEX 6. ANNEX 5. Status of World Bank Operations ...................................................... InternationalMonetary Fund............................................................. 49 This document has a restricted distribution andmay be usedby recipients only in the performance of their official duties Its contents may not be otherwise disclosed without World Bank authorization . . COMMONWEALTH OF DOMINICA ECONOMICRECOVERYSUPPORT OPERATION PROGRAMAND CREDIT SUMMARY Borrower: The Commonwealth of Dominica Amount: SDR 2.1 million (US$3 million equivalent) Terms: IDA terms for blend countries (10 years grace and 35 years repayment with principal repayable at 2.5% per annum for years 11-20and 5% per annum for years 21-35). ImplementingAgency: Ministry of Finance and Planning(Mom) Objectives: The proposed Economic Recovery Support Operation (ERSO) would provide urgently needed budget support to finance continued public service delivery while the Government of Dominica (GOCD) corrects an unsustainable fiscal position, implements measures to create a stable macroeconomic platform essential to achieving a resumption of economic growth, and develops a broad structural reform agenda for the medium term. The ERSO supports the Government's immediate objectives o f (a) restoring fiscal balance, by promoting actions to improve financial and debt management, reinforce the Government's budget constraint and achieve sustainable expenditure reductions through public sector reform; and (b) encouraging a resumption of growth, by supporting actions to strengthen the financial sector, increase the productivity of the public investment, and improving the climate for private investment. Simultaneously, the authorities are working with the World Bank and other development partners to formulate and begin implementation of a medium term program of reforms aimed at addressing the economy's remaining structural problems. These will be included in the Government's upcoming Poverty Reduction Strategy Paperto be completedin 2004. Description: The ERSO supports reform measures in the following main areas: (a) Financial management. The difficult fiscal situation calls for improving the Government's expenditure and cash management. This has been achieved through: establishing a cash management system that adjusts budget allocations and enforces commitment levels on a monthly basis in line with forecasted revenue inflows and cash availability; reducing the number of government bank accounts; and appointing an internal auditor to ensure the implementation of new financial management procedures at the ministry level. (b) Debt management. The Government has taken steps to strengthen debt management by consolidating the management of external and domestic debt; and preparing and starting to implement a comprehensive debt strategy toward stabilizing its public debt dynamics. i (c) Public expenditure allocation and effectiveness. As part of regaining fiscal balance and supporting a resumption of growth, the Government has undertaken measures to strengthen the public sector investment program (PSIP) through a more streamlined, growth-oriented portfolio, and has adopted revised procedures for its preparation and execution. It i s also protecting critical non-wage recurrent expenditures in priority sectors, despite the very difficult fiscal situation. (d) Public Sector Reform. The authorities have prepared and are undertalung a comprehensive reform of the public sector which includes measures to improve public administration; strengthen economic management; enhance the enabling environment for private investment; and rationalize social service delivery and improve their targeting. (e) Financial sector. The authorities are undertaking measures to improve the health of the financial sector and create a hard budget constraint for the Government. These include measures to: (i)reduce the Government's shareholding in NCB to a minority position and strengthen the bank's management of its government debt portfolio; and (ii) improve regulation of the large credit union subsector. In addition, the Government has resumed paying regular contributions to the Dominica Social Security after several years of interrupted payments. (f) Privateinvestment climate. The Government is addressing two important distortions that proved costly in the past - port charges and petroleum pricing - and correcting weaknesses in the regulatory framework for electricity supply. The Dominica Port Authority has effectively reduced port handling charges after consultations with trade unions and other stakeholders. Ad hoc price adjustments for petroleum products have been replaced by a transparent price adjustment mechanism that reflects movements in international prices and which will stabilize Government revenues from petroleum imports. The Government is also introducing legislative and regulatory changes to ensure adequate incentives for efficiency and consumer protection in electricity supply. Poverty Aspects: The ERSO supports the Government's efforts towards a resumption of economic growth and employment creation through the measures outlined above. More immediately, the ERSO also creates fiscal room for protecting essential recurrent expenditures in the priority social sectors and supports the formulation of a program to rationalize the delivery of social services and improve targeting to lower income groups under a Medium Term Public Sector Reform Strategy. In addition, the Government resumption of contributions to the Dominica Social Security (DSS) will help ensure its future solvency and restore financial sector soundness, and strengthening regulation and oversight - particularly of the credit unions - will protect the savings of small depositors. 11 Benefitsand risks: The overall main benefit of the operation is to contribute to poverty reduction through two complementary ways. First, the reform program supported by the ERSO aims at correcting Dominica's unsustainable fiscal situation by improving public expenditure management, launching a process to rationalize public service delivery, restoring financial sector soundness, and creating fiscal room for financing essential recurrent expenditures. Second, the ERSO supports the first stage of a multi-year effort to accelerate economic growth through reform measures aimed at reducing private sector distortions and improving Dominica's competitiveness. As indicated in the Letter of Development Policy, the Government intends to pursue implementation of the reforms initiated in this first phase and i s preparing a Poverty Reduction Strategy Paper (PRSP) which will detail the second stage of its reform agenda, whose main pillars are public sector reform, debt restructuring, financial sector strengthening and improvement of the private investment climate. All prior actions for this single-tranche operation have been met satisfactorily. While policy reversal of these actions is highly unlikely, swift implementation of further stages of the Government's reform agenda i s however uncertain. The country faces a number of domestic and external risks that may pose a threat to fiscal stability and economic recovery. Inparticular: (a) the outcome of the debt restructuring exercise is uncertain and may significantly alter the macroeconomic framework; (b) existing and severe capacity constraints in the public sector could hinder the implementation of follow up planned reform measures; (c) after a prolonged recession and the introduction of difficult stabilization measures in 2003, delays in economic recovery over the coming year could lead to reform fatigue on the part of the population and a deterioration of the Government's fragile political consensus; and (d) external shocks, including natural disasters or continued global economic slowdown could delay the resumption of fiscal sustainability. Protracted negotiations or a particularly modest reduction in the public debt levels as a result of the debt restructuringexercise could require Dominica to undertake a significantly higher fiscal adjustment or seek to obtain additional concessional financing in order to achieve fiscal sustainability. Given the already achieved and planned adjustment efforts, and already committed donor support, this would be challenging. However, the Government is committed to adjusting the fiscal targets in line with the outcomes of the debt restructuring exercise in order to ensure fiscal sustainability. To mitigate the capacity risks, the World Bank, in close coordination with other donors, has provided significant technical assistanceto the Government of Dominica and plans to continue doing so, along with regular program supervision, joint missions with other donors and the provision of analytical and advisory activities. To mitigate the political risks, the 111 ... Government and the Bank have consulted extensively with trade unions, private sector organizations and political groups on the reform agenda to increase understanding of the difficult challenges facing the country and build support for the stabilization and structural reform agenda for 2003 and beyond. At the request of civil society, the authorities have recently begun reporting on a monthly basis to the Independent Monitoring Group of civil society representatives, including religious organizations. Scheduleof disbursements: Single-tranche of US$3 million equivalent to be disbursed upon effectiveness. Project IDNumber: PO78841 Map: IBRD 13502R i v INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FORA PROPOSEDADJUSTMENT CREDIT TO THE COMMONWEALTH OFDOMINICA FORAN ECONOMIC RECOVERY SUPPORTOPERATION 1. This programdocument proposesa single-tranche adjustment credit inthe amount of US$3 million equivalent to support an Economic Recovery Support Operation (ERSO) for the Commonwealth of Dominica. The operation is part of the Bank's response to the Government of Dominica's (GOCD) request for assistance in support of the country's fiscal adjustment and structural reform program and is consistent with the broad objectives of the Country Assistance Strategy for the Eastern Caribbean (discussed at the Boardin 2001). PART I. BACKGROUND RATIONALE AND 2. Dominica i s a small Caribbean island state (pop. 71,000) with a primarily agricultural economy concentrated in bananas, a small export-oriented manufacturing sector, and off-shore and tourism service activities. The share of output in agriculture has declined steadily over the last ten years, particularly following the reduction in preferential market access to the UK and Europe. Although incomes are relatively high at US$3,180 per capita, poverty rates are also persistently high (39 perc.ent of the population is poor and 15 percent i s indigent),` reflecting high unemployment, inadequate household insurance mechanisms and considerable macroeconomic volatility associated with Dominica's economic size and location in the hurricane belt.2 However, the country does have good social indicators as a result of sustained investments in human development since independence, and these indicators are not significantly different for the poor and the non-poor, with the exception of a small group of indigenous people - Caribs, who make up 4 percent of the population and 7 percent of the poor - and in the area of secondary education attainment. Notably, women as individuals are no more likely to be poor than men, although female-headed households (makingup 34 percent of population versus 39 percent of the poor) are somewhat over-represented among poor households. In this context, reducing poverty in Dominica will require creating jobs through economic growth, improving the targeting of basic services, including to the Carib community, and expanding secondary education to give the poor greater access to income- earning opportunities. 3. Dominica i s a member of the Organization of Eastem Caribbean States (OECS) and the Eastern Caribbean Currency Union (ECCU) with which it shares a common monetary and exchange rate policy administered by the Eastern Caribbean Central Bank (ECCB). The ECCB manages a quasi-currency board arrangement supporting an exchange rate peg fixed to the US.dollar since 1975 at EC$2.67. 4. Recent economic developments. Dominica is currently suffering an unprecedented decline in output and a sharply deteriorated fiscal position, mainly due to a loss of competitiveness and a severe worsening of its external environment because of declining preferential market access for its banana exports3, the post-September 11, 2001 contraction in tourism, the global economic slowdown more generally, and a retrenchment of Dominica's offshore sector due to increased international scrutiny. ' On the basis of a locallydefined povertyline. Dominica Country Poverty Assessment, CDB/GOD, 2003. In 1998, the WTO ruledagainst EUpreferentialaccess for banana importsfrom the African, Caribbeanand Pacific states. Inresponse, the EUintroducedagradual programto eliminate tariffs on non-ACPbanana importsby end 2005, at which time it will also eliminateACP quotas for banana imports. 1 Delayed fiscal adjustment to declining growth rates, combined with an increase in commercial borrowing for unproductive public investments, exacerbated the macroeconomic situation and resulted in a rapid increase in the central government deficit, a doubling of the public sector debt in recent years, and the accumulation of domestic and external arrears. 5. Dominica's economy performed reasonably well over the 1980s with growth rates averaging 4.6 percent per year, fueled by increasing bananaproduction under a preferential trading regime with the EU and UK, and favorable exchange rate movements against its major trading partner, the UK. During this period, the country undertook significant trade and tax reforms and public finances strengthened considerably. However, following a catastrophic hurricane in 1988, sharp public sector wage increases in FY90/91 which undermined competitiveness, and growing uncertainty about trade preferences', growth slowed significantly duringthe 1990s averaging 2.7 percent between 1990-98. Other exports - primarily soap products sold to Jamaica - overtook bananas, and tourism receipts and earnings from a budding offshore sector grew steadily. 6. From 1999, however, the economy began to experience a more rapid slowdown marked by a decline in manufactured exports, the tapering-off of tourism receipts, and further damage to the banana crop causedby the Hurricane Lenny (November 1999). Muchof the decline in manufactured exports was due to the steady appreciation of the real exchange rate since 1996. As Jamaica reduced external tariffs in line with its regional agreements, Dominica's exports to that country began to face competition from cheaper imports from outside the region. At the same time, tourism sectors across the OECS were being challenged by the mass market strategies of other Caribbean destinations. Then in 2001, Dominica was further hit by the impact of a severe drought on already dwindling banana production, the impact of September 11,2001 on tourism and offshore services, and by the global economic slowdown. FIGURE1. DOMINICA:GROWTH AND INVESTMENT 1983-2003 ("4 , (a) Real GDP Growth (%), 1983-2003 (b) Gross Dom. Investment 1984-2003 (% GDP) ___-____.____________ ~- ___Public w m w r v w w m o c oo u r r r r r r r r " m cm omm co m o mm mm mm m mm oo 7. Combined with mounting debt service from a rapidly increasing public sector debt, delays in adjusting to the declininggrowth rates causedthe overall central government deficit to reach a high of 11 percent of GDP while the primary balance (including grants) fell to -5.9 percent of GDP in FYOO/Ol. The economy contracted by 4.2 percent in 2001 and a further 4.7 percent in 2002, exacerbating an already weakened fiscal position. Private investment contracted by around 80 percent between 1998 and 2002. By December 2002, domestic arrears had mounted to around 9.2 percent of GDP and external arrears to 2.1 percent of GDP. With a public debt burden estimated at 112 percent of GDP in June 2003, the authorities had limitedroomfor maneuver to address the ongoing recession. 8. Recent social developments. Given the prolonged economic recession in Dominica and the slowdown inthe sub-region and global economies, the poverty level i s likely to have increasedrecently in Dominica. The poverty headcount of 39 percent, as measured by a 2002 household survey, represents a significant increase over the poverty rate of 28 percent last measured in 1995 (although the indicators are The WTO action on EUpreferences for ACP banana imports began as early as 1991. 2 not precisely comparable). Fifteen percent of the population are now estimated to be indigent (in extreme poverty). This i s consistent with qualitative reports about the impact of the banana sector retrenchment on rural households, and job losses in the private sector on account of the recent contraction. Unemployment rates have risen to 25 percent in 2002 and are even higher among the poor (40 percent in 2002). 9. Government's response to the crisis. In an effort to stabilize the economy, the Government of Dominica obtained a one-year Stand-By Arrangement (SBA) from the International Monetary Fund (IMF) in August 2002. At the same time, the Government requested assistance from the Bank and preparation of this operation was initiated. Shortly after, however, implementation of the Fund-supported program went off-track in late 2002 in part due to a deeper-than-expected economic contraction and policy slippages reflecting a combination of capacity constraints and problems in securing political support for structural reforms. Following extensive public consultations and the adoption of corrective measures taken by the authorities in July 2003 inthe context of the FY03/04 budget, includinga 5 percent public sector wage cut, the IMF extended the SBA to early 2004. Implementation under the SBA remained on track through December 2003, during which time Dominica received significant financial assistance from donors to fill the 2003 financing gap (see para. 11). In December 2003, the SBA was followed by a three-year Poverty Reduction and Growth Facility from the IMF. The key elements of the macroeconomic program are a comprehensive debt restructuringexercise aimed to reduce debt levels to a sustainable level andthe adoption of fiscal measures of around 5 percent of GDP over the next three years notably through reductions in public employment (see para. 51). 10. Future prospects. Preliminary indications are that the economy continued to contract in 2003, albeit at a slower pace, with GDP growth of around -1.0 percent. A resumption of growth is expected in 2004, provided the debt is successfully restructured, no new external shocks emerge, and the stabilization and structural reforms remain on track. The recovery i s based on the stabilization of the fiscal situation and projected improvements in the external environment which should serve to boost consumer and investor confidence. Over the mediumterm, the key sources of growth are expectedto be a resumptionof private investment mainly in the tourism sector and in non-traditional agricultural production. This is expected to be spurred by the alleviation of the debt overhang problem and less crowding out by the public sector, structural reforms in key sectors (Sections 1I.C and III.B), more targeted promotion in the tourism sector (see Annex 1, para. 25), improved productivity of public investment (paras. 63-64) and better delivery of growth-related public services (paras. 65 and 68). 11, Even with the fiscal measures outlined in the PRGF, aimed at improving the primary balance (includinggrants) to 0.2 percent of GDP in FY03/04, the programenvisages a fiscal deficit of 5.6 percent of GDP in FY03/04 and an overall financing gap of US$30 million of which US$27 million has been committed. It i s expected that the remaining gap will be filled by returns from the debt restructuring exercise. Indeed, Dominica's fiscal position will remain fragile in the short-term, owing to its dependence on the outcome of that exercise, the moderate outlook for growth, and the country's continued vulnerability to external shocks. As such, regaining macroeconomic stability over the medium term will require a continuous fiscal adjustment over the next few years aimed at bringing public spending in line with resource availability and stabilizing the reduced levels of public debt. 12. Rationale for Bank assistance. The proposed credit of US$3 million has been prepared in the context of strong international cooperation and in close collaboration with the IMF and other donors (see paras. 94-95). It has benefited from the broad dialogue on stabilization and structural reform measures that took place in the country in 2003 and the extensive amount of recent analytical work conducted on Dominica by the Bank and other donors (see paras. 90 and 95). The credit i s crucial and timely. Dominica faces not only a difficult socio-political situation following a prolonged and deep recession which limits the space for reforms, but also a severe cash shortage, and outstanding domestic and external arrears. Since June 2003, the authorities have shown strong commitment to the reform program by adopting politically challenging measures under difficult social conditions. The authorities have actively 3 and successfully engaged the donor community to support their efforts and have significantly strengthened the level of ownership of the program. 13. The proposed credit marks a departure from the standard practice of offering Dominica a blend of 50 percent IDA and 50 percent IBRD terms, under the small island economies exception'. Instead, it proposes to offer Dominica a 100 percent IDA operation on a one-time exceptional basis, due to the fact that, given the difficult debt situation and the imminent debt restructuring exercise, the country i s not currently eligible for IBRD lending2. It is envisaged that Dominica's debt restructuring exercise and fiscal adjustment, which the Government launched in December 2003, will effectively lower the debt-to- GDP ratio and restore the country's access to IBRD lending in line with its blend status during 2004. The next operations for Dominica will, therefore, be on standardblendterms. 14. The single tranche approach is well suited to Dominica's current situation and needs. The country suffers from severe macroeconomic imbalances, capacity constraints in the public sector, limited natural resources and low growth prospects that are difficult to tackle at once and need a multi-year effort. Moreover, the country's policy choices are constrained by its membership in the ECCU. The authorities have adopted a two-stage strategy to address these complex issues in a systematic manner and thus reduce the risk of a spillover to other ECCU countries. In the first phase, the Government's efforts focus on stabilization measures to forestall a budgetary crisis through reductions in public expenditures and increased revenue collection, and on improvements in financial and debt management practices. In this first phase, the authorities are also implementing some urgent structural reforms to promote private sector investment and a resumption of growth. These reform measures are laying the groundwork for a second- stage of reform measures to consolidate and deepen the program, which the Government i s designing with the help of the donor community and which will be the focus of the Poverty Reduction Strategy Paper (PRSP) currently under preparation by the Government. The World Bank is helping the Government to formulate this second stage reform program through analytical work on sources of growth and competitiveness and the provision of a range of technical assistance. Any possible future Bank assistance and the definition of its form (lending, analytical work and/or technical assistance) and amounts would be assessed as a function of the country's performance, the final content of the second-stage reform agenda, the size of the external financing gap and the Bank's comparative advantage. 15. This IDA operation is being presentedto the Board although Dominica is believed to be in breach of the negative pledge covenant on its IBRD loans. Dominica's outstanding debt to IBRDi s about US$4 million and i s being serviced in a timely manner in accordance with the terms of the loan agreements. Obligations to IBRD average $373,000 per year until 2016, when the current outstanding debt will be fully repaid. Dominica, under the previous administration, provided security over public assets for bonds issued in 1999 to a regional investment bank. Based on the information received by the Bank, staff are of the view that such security contravenes the negative pledge clause for the country's IBRD loans. The bonds amount to US$29 million and the security provided i s over cash and securities amounting to approximately US$10 million as well as shares owned by the Government in a local utility. The Government i s committed to resolving the breach and is currently negotiating with the creditor as part of the ongoing debt restructuring exercise for the bonds to rescind the liens. No new Bank operations will be processedfor Dominicauntilthe negative pledge situation i s resolved. '"An exception to the GNIper capita operational cutoff for IDA eligibility ($865 for Ey04) has been made for Some small island economies, which otherwise would have little or no access to Bank Group assistance because they lack creditworthiness. For such countries, IDA funding is considered case by case for the financing of projects and adjustment programs designed to strengthen creditworthiness." (Operational Manual, OP 3.10 Annex D,Footnote 10). Inexceptional circumstances, IDA extends eligibility temporarily to countries that are above the operational cutoff and are undertaking major adjustment efforts but are not creditworthy for IBRD lending. 4 PART 11. DOMINICA'S STRUCTURAL CHALLENGES 16. Dominica i s currently facing the simultaneous challenges of (i)regaining fiscal sustainability and improving fiscal management; (ii) stimulating growth and improving the investment climate; while (iii) protecting past social gains and meeting new challenges in the social sectors. The macroeconomic outlook suggests that it will take several years to achieve fiscal and debt sustainability and resume a steady growth path, in particular given the changed external environment and Dominica's continued vulnerabilities. A. Regainingfiscal sustainability 17. Over the past six years, Dominica experienced rising fiscal deficits and increasing debt levels, associated mainly with slow adjustment to a secular decline in growth rates and an increasein commercial borrowing to finance public investments. The impact on the economy has been dismal as pressures on the domestic financial sector mounted and government consumption crowded out private investment. Dominica needs to correct fiscal imbalances and reduce its debt overhang in order to regain fiscal stability and create a stable macroeconomic platform for attracting investment and achieving economic growth. However, the country has limited flexibility to significantly reduce government expenditures in the short run and maintain basic services because of the fixed costs of public goods in a small state and the structure of public spending (see paras. 24 and 25). In addition, the tax burden i s already high at around 28 percent of GDP. 18. Under its stabilization program, the Government has taken measures to reduce expenditures and increase revenuesaimed at increasing the primary balance (includinggrants) from -1.6 percent of GDP in FY02/03 to 0.2 percent in FY03/04. However, the country will needto embark on a broader public sector program to reduce public expenditures in line with the macroeconomic outlook over the coming years, in order to attain the fiscal targets set out under the InterimPoverty Reduction Strategy Paper (I-PRSP, see para, 48). The Government will also need to focus on tightening expenditure controls, improving efficiency of spending and better management of public debt if it i s to maintain fiscal stability over time and avoid a recurrence of the recent trends. FIGURE2. DOMINICA:FISCALACCOUNTS AND EXTERNAL DEBT,1993-2002 phGDp) (b) Debt and Debt Service, 1994-2003 ("4 25 -int/curr rev --- - - - - - - - --cXDS/XGS 20 15 10 5 0 19. Reducing debt overhang and improving debt management. Prior to mid 1998, Dominica's public debt stock and debt service were declining (see Figure 2b). Over the last five years, the debt stock rose from 60 percent in FY98/99 to 112 percent of GDP in FY02/03. The majority of this was due to a rapid build-upof external debt from 34 percent of GDP in FY98/99 to 84 percent in FY02/03, stemming from four commercial borrowings incurred during 1999-2000. Approximately US$63 million was borrowed to finance poorly conceived public investments (that increased public investment from 7 percent of GDP in 5 1997 to 17 percent of GDP in 2000) whose impact on economic growth is questionable.' As of June 2003, traditional bilateral and multilateral loans accounted for 65 percentof the external debt stock and 50 percent of the total debt. Domestically, the Government exploited captive creditors like the state-owned National Commercial Bank (NCB), whose exposure to the public sector reached 120 percent of its total capital and reserves by end 2002 and the Dominica Social Security (DSS) which holds one-third of the Government's domestic financing and a significant percentage of its recent external bond issues. In addition, by December 2002, the central government had accumulated 9.2 percent of GDP in domestic payment arrears, mainly to the social security fund (5.1 percent of GDP) and public utilities, but also to local suppliers, and external arrears of 2.1 percent of GDP. 20. The level of public debt has imposed a heavy burden on the economy. Public debt service has become onerous, projected at 36 percent of government revenuesduring FY03/04, with interest payments expected to reach 21 percent of current revenues in FY03/04 and external debt service estimated at 21 percent of exports of goods and services during2003. 21. In general, Dominica needs to revamp its system of public debt management, both as a means to increase transparency and accountability, as well as to include an effective debt management strategy at the center of its macroeconomic framework. It will be important for the authorities to avoid any new non- concessional borrowing until the debt stock falls to more sustainable levels. 22. Reducing public expenditure through public sector reform. The level of public expenditures in Dominica as a share of GDP rose sharply between FY93/94 and FYOO/Ol due to sharp increases in capital investment and a steady but gradual upward creep incurrent spending. Current primary expenditures rose from 23 percent to 28 percent of GDP between FY95/96 and FY02/03, mainly due to increases in the wage bill which grew by 4 percent of GDP over the same period, and transfers which increased by 3 percent of GDP, while spending on goods and services fell to the lowest share of GDP in a over a decade. The increase inthe wage billhas been driven mainly by a 9 percent increase inthe number of personnel in established posts, the majority in the social sectors. Real wages have been essentially flat for the past decade, while the lack of vacancies, low turnover and limited use of contract employees suggest that wage levels are not a systemic problem. 23. At the same time, findings from a recent Bank Public Expenditure Review for Dominica suggest that the sectoral allocation of public spendingis broadly adequate vis-&vis the social sectors, with around 6.6 percent of GDP going to education, 4.3 percent of GDP to health, and 5.6 percent to social protection* inrecent years. Ineducation and health, the allocations across sub-sectors are also appropriate, given the needs in D~minica.~ ' These include(i) bondissues totaling US$48million originally intendedto finance the constructionof a new two internationalairport which later provedto be infeasible- land was purchasedbuthas not beenutilized; (ii) an US$11millioncommercial bank loanpartially guaranteedby ECGD (UK)to finance the constructionof a financial complex which still has significant vacancies owing to retrenchmentin the offshore sector; and (iii)a US$2.5 million build-operate-lease-transferarrangement for the constructionof a netballstadium, involving commercial financingfor construction. Includingsocial security. Pre-primaryeducationreceives 0.2 percentof recurrent spending on education, primary (includingjunior secondary)receives 48 percent, general secondaryreceives 33 percent, tertiary receives 8 percent, and administration receives 13 percent. Fifty-six percent of the healthrecurrent budget goes to secondarycare and 35 percent to primary. 6 FIGURE3. DOMINICA:STRUCTURE OF PUBLICEXPENDITURE, 1993-2002 (a) Current and Capital Expenditure, 1993-2003 70 - (b) Structure of Current Expenditures,1993-2002 - - - - - _ - _ _ - - _ - - 11Wages ii Sal GC~SSew & 1 _ _ _ _1c1Transfers hterest 24. This brief expenditure analysis highlights the challenges of curbing expenditures. Whereas the sectoral allocation may be reasonable, the level of spending is no longer affordable and points to the need for reforms to improve efficiency and cost effectiveness. Current modes of service delivery are relatively effective but too costly. In education and health, wages and salaries consume a huge share of public spending - 92 percent of current expenditures in education and 74 percent in health - in part because of the large number of schools and health facilities that serve small communities. As a result, when fiscal resources are scarce, as they have been in recent years, maintenance of facilities and material supplies have been severely under-funded, negatively affecting service quality and impacting social outcomes. The Government needs to consider more efficient and affordable modes of service delivery which could necessitate consolidation of schools, clinics and hospitals if it i s to address the large fiscal deficits. Inthe near term, however, it will be essential to protect critical non-wage recurrent expenditures in the priority sectors of health, education and community development. 25. It is clear that reducing the sizeable wage bill will be the key to reducing primary current expenditures in line with resource availability. Spending on transfers consists primarily (83 percent) of retirement benefits, social assistance and commitments to international and regional organizations, while spending on goods and services have already been squeezed by rising interest payments. Although a 5 percent wage cut and a hiring freeze have yielded some budget savings over the past year, further expenditure reductions will have to come from reductions in employment numbers. However, because there is little scope for widespread job cuts while maintaining basic services, a radical change in the existing mode of service delivery, particularly in health, education and security (these account for around 70 percent of establishedposts) will be needed. 26. Improving the productivity of public investment. A third major challenge in addressing public expenditure management relates to the public sector investment program. Capital expenditure has fluctuated significantly over recent years (Figure 3a) along with its sectoral allocation and sources of financing. This situation reflects political interference, inadequate project selection analysis and weak donor coordination rather than evolving investment needs. Regarding financing, the Government has traditionally utilized scarce local resources, and more recently foreign commercial loans, for investment projects, while a substantial amount of grant resources, in particular from the European Union (EU), have remained underutilized because of institutional and administrative bottlenecks. Implementation rates on both local- and donor-financed projects have been very low because of weak implementation capacity, cumbersome procurement processes and poor monitoring. Recent examples of poorly conceived or executed large projects include an unfeasible international airport project, a sports facility which remains incomplete, and a new financial complex which remains largely unoccupied because of a shortage of clients from the declining offshore sector. Improving the focus of the Public Sector Investment Program 7 (PSIP) towards growth-enhancing and labor-intensive projects, utilizing external concessional financing and improving its implementationrate are critical to support a resumption of growth. 27. Strengthening revenue mobilization through tax reform. Although the tax system in Dominica has a good balance between direct (28 percent of tax revenues) and indirect taxes (72 percent), within each category there are elements that reduce buoyancy and distort incentives for resource allocation. In particular, Dominica relies too heavily on the taxation of imports, which accounts for over 50 percent of tax revenues, and would benefit from a comprehensive and modem sales tax like the VAT. Inaddition, the income tax base is too narrow because of overly generous deductions and exemptions. Liberal fiscal incentives erode revenue intake while "discretionary" duty and tax concessions and collections arrears create unfair advantages in the private sector. In recent years, Dominica has foregone approximately 5 percent of GDP annually in customs duties because of concessions. Inthe short run, the authorities need to close a number of loopholes in the current tax framework and improve administration. Inthe medium term, the country will need to gradually replace volatile import taxes with more stable and broad-based consumption and income taxes. 28. In2001, the OECS countries committed to reduceconcessionsacrossthe sub-region andappointed a high-level Tax Commission to make recommendations for, inter alia, harmonizing their fiscal regimes. More recently, the IMF and CARTAC' conducted a thorough review of the tax system in early 2003 and identified a number of measures to broaden the tax base in Dominica. These include, notably, the introduction of a Value Added Tax (VAT), replacing the residual tax on petroleum imports by a specific tax and the removal of income tax exemptions from various sources of income including mortgages, interest on public debt and bank deposits, unit trust income, real estate sales and rental profit, and income from agricultural enterprises and statutory bodies. 29. Improving financial management. The worsening deficits and mounting arrears during the last several years revealed critical weaknesses in financial management as a major contributor to the rising fiscal imbalances. A recently completed Country Financial Accountability Assessment (CFAA) for Dominica found that the Government's capacity to gather, analyze and respond to relevant financial information has been impeded by outmoded and incomplete reporting systems (primarily manual), inadequate training, poorly defined procedures, and inadequate internal controls. In 1998, the Eastern Caribbean Economic Management Projects (ECEMP) supported by the Canadian International Development Agency (CIDA) introduced a new information system (SIFGIS) in Dominica to modernize financial management. However, as the project's original intention was to pilot the implementation in each of the OECS member states, only a few ministries and agencies were placed online. With inadequate information, revenue forecasting was poor, and expenditure allocations were not being adjusted duringthe budget year in line with either revenue inflows or available cash and/or financing. As revenues contracted, this lack of control resulted in a delays in adjusting expenditures and a build-up of arrears (see para. 7). B. Stimulating growthandeconomicdiversification 30. Inadditionto regainingfiscal sustainability, Dominica needsto reestablish the basis for sustained growth and economic diversification. Dominica's economy has suffered in recent years as a result of many factors. Its dependence on banana production has led to sharply lower export receipts due to declining preferential access to UK markets. Increasing competition in global and regional markets has hurt demand for other exports and tourism. The resulting decline in exports of goods and services contributed to slower economic growth. Improved competitiveness and greater economic diversification will be neededto address this weak performance, which in turn requires a stronger financial sector and a better climate for private investment. Government efforts will need to focus on addressing financial sector weaknesses includingleveling the playing field for borrowers, lowering the cost of doing business, reducingdistortions, improving the delivery of growth-enhancingpublic services. 'CaribbeanRegionalTechnical Assistance Center. 8 31. Strengthening and safeguarding the financial sector. The domestic financial sector inDominica consists of four commercial banks and the state-owned Agncultural Industrial and Development Bank (AID Bank) and a fairly large credit union subsector' with 18 institutions accounting for over 15 percent of financial sector deposits. The system i s relatively financially deep for a developing country with M2- to-GDP ratio of 7.4 and about EC$5,800 in bank aeposits per capita. Three of the commercial banks are branches of international banks and the fourth is the state-controlled National Commercial Bank (NCB) which holds about 40 percent of banking system deposits. Although the commercial banking system has excess liquidity with a loan deposit ratio of 74 percent, credit to the private sector i s undesirably low at 63 percent of GDP and has actually decreasedin nominal terms since 2000, while credit to the public sector has increased through 2002. 32. Banking supervision is handled by the ECCB under the OECS Unified Domestic Banking Act, but the power to grant licenses and enforce closures is reserved for the Ministry of Finance. InDominica, as in most OECS countries, this poses a serious conflict of interest for the Government, which is the majority shareholder in NCB. A number of the banking regulations fall well short of international standards in important areas includingprovisioning requirements, maximum credit exposure to one credit risk, insider lending limitations, and maximum foreign exchange risk limitations. Indeed, the government, as a borrower, is exempt from limits on maximum credit exposure to one credit risk. The Banking Act also has severe restrictions on disclosure of individual bank soundness indicators and excludes government borrowers from prudential exposure limits. Minimumdeposit rates of 3 percent set by ECCB and high spreads drive up lendingcosts in Dominica which range between 10 and 16 percent. Moreover, competition among the commercial banks recently declined with the merger of two foreign banks. 33. Given the recent economic contraction, non-performing loans have risen and there are concerns about the impact on NCB and the credit unions. By early 2003, NCB had a total exposure to the public sector equal to 120 percent of its total capital and reserves, and its non-performing loan ratio had risen to 23 percent of total loans and advances, more than double ECCB's norm of 10 percent. In addition, the Government was, and still is, in arrears to the bank on debenture interest payments. Measures are being taken to clear the arrears and reduce the exposure through the transfer of various assets. There was a danger, however, that a "recapitalized bank" would only open the door for financing future government deficits, and therefore should be addressedby reducing Government participation inthe bank. 34. Both AID Bank and the credit unions effectively compete with the commercial banks (including taking demand deposits) but are not subject to the same regulations and are tax exempt. The three largest institutions have a combined asset base larger than any commercial bank other than NCB while the largest Roseau Cooperative Credit Union, has 28,000 members. The credit unions are not regulated by the central bank, but by a reasonably prudent Act and supervised by the Cooperative Division of the Ministry of Community Development, while the AID Bank has no effective supervisor. AID Bank however, voluntarily follows, ECCB guidelines for loan classification and provisioning requirements. Given the weaknesses in the financial sector and likelihood of a prolonged economic recovery, Dominica will need to ensure that both the credit union and development banking sectors are well supervised and regulated. 35. Finally, the Dominica Social Security fund plays a central role in the financial sector, particularly in relation to Government's indirect access to reserves. As mentioned above, the Government has accumulated substantial arrears to DSS, the majority of which it i s working to clear through a transfer of land holdings and other assets. While DSS currently has adequate reserves and medium term financial stability partly on account of being a young system, there are some concerns that as the system matures, further accumulation of arrears2would put this soundness at risk. Inaddition, around 75 percent of DSS assets remain concentrated in central government or public enterprises. There i s a need to ensure that the investment portfolio is sufficiently diversified, including into regional and international assets. ' Dominicahas the highestcredit unionmembership in the world. Or any delays in adjusting benefits parametersinresponseto an aging population. 9 36. OfSshore sector and anti-money laundering efforts. Dominica has been malung steady improvements in the management of its offshore sector since mid-2000 when it was listed by the Financial Action Task Force (FATF) as a non-cooperative jurisdiction. The legislative framework is largely complete and the Money Laundering Supervisory Authority and Financial Intelligence Units are fully staffed. As a result of these efforts, the country was de-listed in October 2002. Inthe meantime, however, the offshore sector declined substantially. Revenueshave fallen significantly, all but one of the offshore banks have ceased operations and the number of international business companies has fallen by over 80 percent. 37. Reducing the cost of doing business, Inorder to increase investment and spur diversification, Dominica will need to improve its investment climate, in particular by lowering costs of doing business, and improving the delivery of economic services to the private sector. 38. Maritime transport costs. The Dominica Port Authority (DPA), which i s otherwise well-run, has had the highest cargo handling charges in the OECS owing to an outdated labor contract with the cargo handlers' union. Prior to late 2001, stevedoring services at the Dominica Port Authority were provided by a private firm that acted as a clearing house for the Dominica Port Workers Association under a contract that did not allow for the control of cargo handlingcharges. The firmcontinuedto use an archaic work rule dating back to the time when ships were primarily wooden. Although the contract expired in 1995, the firm made no effort to renegotiate wage rates given its ability to pass on spiraling costs to consumers. When the Port Authority resumed management of stevedoring services in late 2001 (in part because of this untenable situation), it accepted the contract without prejudice for a 6-month transition period. Subsequently, the DPA attempted to renegotiate with the union, and offered to compensate any retrenched workers. As an interim measure, the port management allowed a major manufacturer on the island to take delivery of its containers at its own facility constructed for this purpose, in order to avoid the highcharges associatedwith the work arrangements. These charges added to the high transport costs associated with Dominica's remote location, which has essentially one-way freight traffic and faces limited shipping services within the OECS. 39. Petroleum prices. The pricing of petroleum products has been a source of distortion in the economy owing to an ad hoc pricing mechanism. Because of the nature of the domestic market - small volumes, few importers and distributors, and an inherent risk of collusion - retail prices are controlled by the authorities under the Supplies Control Act. However, prices were adjusted on an ad hoc basis with little pass-through of international price fluctuations. The price structure was built up from an import price based on postings from Caribbean producers as opposed to regional spot market prices such as the U S Gold Coast prices which are used throughout the Americas, and reflects a CARICOM' common external tariff of 20 percent on imports of petroleumproducts. Margins were fixed at different levels for individual importers, distributors and retailers which did not provide incentives for efficiency, and left the consumption tax as a fluctuating residual. 40. As a result, the importation and distribution of petroleum in Dominica is fraught with inefficiencies. Each importer owns and operates separate storage facilities and trucking fleets, and the product is procured in very small quantities. Pooling of storage facilities and transportation at the national level would be more efficient, as would regional procurement of petroleum supplies. Without reference to international benchmarks, the price structure cannot provide sufficient incentive to operators to realize these efficiencies. Inaddition, Dominica along with its OECS neighbors should argue within CARICOM for a removal of the tariff on petroleum products so that they can gain the benefit of international competitive biddingand the resultingmarket prices. 41. Electricity supply. As part of the SBA, the Government removed a consumptiontax exemption on petroleum imports for electricity generation in July 2003. Electricity supply, which i s provided by a private utility - Dominica Electricity Services (DOMLEC) - was already costly at around US$0.23/kWh 'CaribbeanCommunity. 10 compared with a Latin American average of US$0.08/kWh1 and an OECS average of US$0.18/kWh.2 In this already high cost environment, the utility sought to pass the entire burden of the increasedfuel costs to consumers. This has generated substantial negative public reaction to the earlier privatization and highlightedthe authorities' limited capacity to effectively regulate the sector. C. Protectingsocial gains 42. Important progress has been made toward reaching the Millennium Development Goals (MDGs) in Dominica and past investments in human and social development have yielded relatively good social outcomes (see Table 1). However, major challenges remain, notably vis-84s the reduction of the poverty headcount, expansion of secondary education and stemming the spread of HIV/AIDS. The country has an extensive network of community centers, clinics, and schools, and an active local government system comprising 42 village councils. But the current fiscal crisis and medium-term macroeconomic outlook imply that this system has become unaffordable. Demographic changes, migration from rural to urban areas, improvements in transportation and communications, and new technologies offer some scope for reducing costs while simultaneously improvingquality, mainly through the consolidation of schools and clinics and better deployment of human resources. In addition, there i s scope for increased cost recovery in a number of services. The medium-termreformprogram will need to improve cost effectiveness of social service delivery and address the emerging challenges. TABLE 1. DOMINICA:SOCIAL INDICATORS (most recent year available) Dominica LCR Upper middle income Infant mortality (per 1000) 18 27 19 Access to an improved water source (5% pop) 99 86 90 Net primary enrollment 99 85 87 Adult Literacy 91 89 93 Life expectancy at birth(years) 77 70 71 Public spending on education (% of GDP) 6.5 2.8 2.9 on health (% of GDP) 4.5 3.3 4.4 on social protection (% of GDP) 5.6" 4.7 n.a. * Includes social security 43. Health. Dominica has achieved impressive health indicators, including for the poor who do not have significantly differenthealth outcomes from the general population. The country's current challenge i s to address new needs, such as Dominica's changing disease profile, and to safeguard health outcomes in the face of budgetary constraints. Starting in the 1980s, the Government invested heavily in a strong primary health care model with 45 clinics within five kilometers of every village and seven health centers with more specialized staff. All primary services are free, and health clinic staff make home visits and conduct outreach activities3. This model has been a significant factor in producing Dominica's good health outcomes, but i s now proving too expensive to maintain operating effectively. Wages and salaries account for 78 percent of recurrent expenditures, leaving pharmaceuticals, and building and equipment maintenance severely under-funded in recent years. A number of clinics have fallen into disrepair and others are only partially functional, immunization rates slipped recently due to a shortage of vaccines, and arrears and late payments to pharmaceutical suppliers have created drug shortages. 44. Given that the budgetary pressures are likely to continue in the medium term, Dominica needs to reexamine the health care model to maximize the impact of its spending on health, while adapting to changes in population distribution, lifestyles, and health technology. For example, the Government has traditionally relied on external assistance for the construction and maintenance of health facilities, but ' 1999average. 2002 average not including St. Kitts. Two district hospitals complement the national hospital in Roseau for secondary care services. There are no tertiary care services in Dominica, but the Government refers patients overseas and provides some assistance. 11 these must be increasingly accommodated within its own resources. In addition, early initiation of sexual activity among teenagers and the patterns of temporary migration make it imperative that the Government scale up its HIV/AIDSprograms. There is considerable scope for improving efficiency while improving quality and protecting access for the poor. These measures include consolidation of clinics and better prioritization of public investments to ensure that critical health facilities are maintained, moving toward more shared services within the Eastern Caribbean sub-region, and increasing cost recovery. However, these changes will require a carefully developed plan and institutional reforms that will take time to design and implement. 45. Education. Over the past decade, the Government has given high priority to education with significant results. Dominica has achieved near universal primary enrollment and completion (two key MDGs), and a remarkable expansion in primary-to-secondary transition rate from 34 percent in 1996 to 84 percent in 2002. Enrollment rates in primary are slightly higher for males than females, while the reverse i s accentuated in secondary schooling. As such, improving secondary education outcomes remains a major challenge. At the secondary level, the highest repetition rates in the Caribbean, inadequate teacher training and inefficient teacher deployment, and a severe shortage of supplies have combined to yield very low completion rates, around 56 percent. Also the recent gains in enrolment have come at an increased cost. Spending on administration increased from 5.3 percent of the education budget in FY98/99 to an estimated 11.6 percent in FY02/03, but resulted in some improvements in the quality of governance. Moreover, in recent years, the Government has safeguarded personnel emoluments, by severely cutting capital investments and crowding out maintenance, materials and supplies. As such, Dominica has the second highest recurrent expenditure on education as a share of GDPwithin the OECS, after Grenada. 46. Dominica's major challenge i s to maintain the expansion in secondary schooling and improve overall quality, while containing costs. There is scope for efficiency gains at the primary level. In particular, Dominica has a number of very small primary schools with less than 50 students, that cost twice as much to run as larger schools, and have generally lower quality outcomes. Moreover, declining birth rates, increasing urbanization and migration have reduced the need for some of these schools. Consolidating schools and raising very low pupil-teacher ratios - 20 and falling in primary schools, and 18 in secondary schools - to more efficient levels, would also help to improve educational outcomes. At the secondary level, needed curriculum reform would lead to a consolidation of programs and more efficient teacher deployment. Moreover, Dominica should continue to explore ways to reduce administrative costs through sub-regional cooperation. These efficiency gains would help finance the neededexpansion in secondary education and improvements in overall quality. 47. Social Protection. Like most of the Eastern Caribbean countries, Dominica has most of the buildingblocks for an effective social protection system. However, these consist of a plethora of public safety net programs which are uncoordinated and poorly targeted'. These programs are, also complemented by large flows of remittances that go to the poor as well as the non-poor and act as an informal safety net to some degree. Given that unemployment is the leading cause of poverty, and that a prolonged period of adjustment i s likely, rationalization and improved targeting of these programs i s critical if the poor are to be protected duringthis difficult time. In particular, any move to increased cost recovery as a source of financing for social services will have to be based on improved targeting. The Bank's recently completed Dominica Social Protection Review identifies specific areas for improvement, including: (i) rationalizing existing programs to eliminate duplication of efforts; (ii) improving targeting of programs, including to the Carib community; and (iii) strengthening capacity for implementation, monitoring and evaluation in ministries and agencies. 'Includingpublic assistance for poor families, aschoolfeeding programand an educationtrust fund for low-income students, a labor intensive roadmaintenanceprogramwhich offers short-termemployment for unemployedworkers, skills trainingand adult education programs, and donor-fundedlabor-intensivecommunity-based infrastructure developmentactivities, includingthe Basic Needs Trust Fundfinanced by the Caribbean Development Bank (CDB) and a Social InvestmentFundsupportedby the EU. 12 PART111. THEGOVERNMENT'SPROGRAM 48. Inthe June 2003 budget address, the Government reiteratedits commitment to the "Programme for Economic Stabilization and Recovery"' launched in 2001, and to "laying a platform for economic growth through stabilisation of the public finances, prudent fiscal and expenditure management and appropriate structural reforms embracing the entire public sector, and conducive to the stimulation of economic activity." The authorities have subsequently prepared an Interim Poverty Reduction Strategy Paper (shared with the Board on December 11, 2003) which outline the key element and targets for the stabilization and recovery program, as well as the approach for addressing social and poverty impact of the current economic difficulties and needed reforms. Simultaneously, the authorities are working with the Bank and other development partners to design and implement a medium term program of structural reforms to address the remaining structural challenges outlined in the previous section. The Government intends to include this programin a full Poverty Reduction Strategy Paper being prepared during 2004. A. The macroeconomic stabilization program 49. The authorities have recently negotiated a new macroeconomic stabilization program supported by a Poverty Reduction and Growth Facility arrangement which was approved by the IMF Board on December 19, 2003. The cornerstones of this program are a comprehensive debt restructuring exercise aimed at reducing the public sector debt, and a program of fiscal adjustment aimed at achieving the requiredfiscal balancesnecessaryto maintainthe reduced level of debt. Under the PRGF, the authorities have targeted a primary balance (includinggrants) of 3 percent of GDP to be achieved by Fy06/07. This constitutes a fiscal effort of around 5 percent of GDP over the next three years' This i s consistent with the authorities objectives of a significant reduction in the debt-to-GDP ratio in net present value terms and key macroeconomic parameters. 50. Following the package of politically challenging fiscal measures adopted by the Government inthe context of its FY03/04 Budget, including a public sector wage cut of 5 percent and measures to broaden the tax based amounting to 1.5 percent of GDP, the additional adjustment through January - June 2004 will be around 0.5 percent of GDP to be achieved through further reductions in discretionary tax exemptions. The authorities intend to target a primary surplus of 0.5 percent of GDP for FY04/05, 2 percent in FY05/06 and 3 percent in FY06/07. This adjustment path requires the adoption of fiscal measure equivalent to 5 percent of GDP (to switch from a projected primary deficit of about 2 percent of GDP (excluding one time exceptional grants of 2.5 percent of GDP) in Fy03/04 to a surplus of 3 percent inFY06/07. 51. Duringthe next two fiscal years, the main measurewill be a reduction inthe wage billby 5 percent each year, mainly through a reduction in government employment as part of a Comprehensive public sector reform that the Government has initiated (see paras. 65-69). The primary fiscal target would be adjusted to accommodate the one-off costs of severance payments for employment retrenchment. The remainingadjustment i s expected to come from a combination of expenditure measuresincluding pension reform, and tax measures aimed at broadening the tax base and improving collections. With a view to improving efficiency and minimizing distortions, the authorities intend to introduce a VAT by mid-2005, mainly in lieu of consumption, sales and other taxes. While it i s not envisaged, at this stage, that additional tax increases would be needed to achieve the fiscal targets over the medium term, the VAT would be usedto safeguardthe fiscal objectives of the program. 52. Under this program, a large financing gap of around US$30 million remains for FY03/04. Of this amount, approximately US$27 million is expected to be covered through a combination of loans, grants This program built on an earlier Economic Stabilization Program prepared by the Ministry of Finance, ECCB and the Caribbean Development Bank (CDB) inMarch 2002, which aimed to "increase growth, reduce unemployment and generate savings on the central government current account". 13 rollovers, and reschedulings' (includingthe proposed ERSO), while the remaining gap of US$3 million is expected to come as savings from the debt reduction. TABLE2.DOMINICA EXTERNAL BUDGETARY SUPPORT, FY03/04 Disbursedas of US$ M Nov 20,2003 % GDP Financing Gap 30.0 11.8 EU(grants) 3.3 2.2 1.3 Barbados (rollover) 4.7 4.7 1.8 Trinidad & Tobago (rollover) 4.0 4.0 1.6 Bahamas 1.5 1.5 0.6 CDB 3.0 1.o 1.o 1.2 ECCB 1.o 0.4 IMF-SBA 1.3 0.9 0.5 IMF-PRGF 4.3 1.7 IDA 3.O _--_ 1.2 Private rescheduling 0.7 0.7 0.3 Commitments la 26.6 16.0 10.6 Remaining gap 3.4 1.2 la Discrepancydue to rounding. 53. Dominica's medium-term outlook i s modest at best, and fraught with significant risks. The country's medium term economic prospects hinge decisively on the resumption of private investment, which in turn depends on the external environment, investor confidence and on critical real improvements in the investment climate. It is expected that the debt restructuring exercise will contribute to a restoration of confidence by establishing the basis for fiscal stability. The government's performance on the stabilization program and structural reforms through FY04/05 will be pivotal. Even under projections of a full recovery in output with real growth rates between 1 and 2 percent per year over the next three years based on a projectedrecovery in the global economy, strong and sustained fiscal adjustment will be needed to stabilize public debt dynamics. Moreover, Dominica's continued vulnerability to external shocks, both economic and from natural disasters, poses significant risks for the medium-term outlook. B. Improvingfiscal andfinancial management 54. Debt management. In preparation for the debt restructuringexercise, the authorities prepared and adopted a comprehensive debt strategy, and have contracted qualified legal and financial advisers to assist them in this process with support from the Canadian, US and UK governments. Implementation of the debt strategy will be key to regaining fiscal sustainability. Discussions started with creditors* on December 17,2003 when the strategy was formally announced in Barbados. The Paris Club has given its approval for Dominica to negotiate bilaterally with the two official bilateral creditor members, France and the United Kingdom. The authorities are committed to pursue a debt restructuring process that is collaborative and to continue, to the extent possible, to remain current on their debt obligations duringthis process. The authorities expect to complete the debt restructuring in the first quarter of 2004. While an ambitious undertaking, rapid implementation of the debt restructuring is critical to securing appropriate financing for the program. 55. Simultaneously, the authorities are addressing both the institutional and regulatory framework for public borrowing. The management of external and domestic debt has been consolidated in a newly- established Cash and Debt Management Unit in the Ministry of Finance, although back office functions continues to be divided between the Accountant General's Office for domestic debt and the Ministry of 'Includesreschedulingof debt service paymentsto Societe General already completed. The authoritieshave contractedlegal and financial advisers and have begundiscussionswith the various creditors. The Bank and Fund have been assignedpreferredcreditor status and, as such obligations to the two institutions are exempt from any restructuring efforts. 14 Finance and Planning for external debt, pending the installation of new software (CS-DRMS 2000+) to unify this process. The Bank is assisting the authorities with a review of existing debt legislation, following which the Government intend to submit revised legislation for government borrowing to Parliament by December 2004. 56. Financialmanagement. A key immediate challenge in the effort to regain fiscal sustainability is to tighten controls over spending and to halt and reverse the accumulation of domestic arrears. Weak commitment controls, inadequate revenue forecasting and poor cash management have contributed to a growing stock of arrears. Inrecent months, the fiscal crunchhas also resulted in late payments on salaries and allowances. As such, the authorities have been working with a consortium of donors, including the World Bank, CARTAC, CDB, CIDA, the Department for International Development (DFID) and the IMF, to put in place an effective system of cash management and expenditure control, as a matter of priority, and to outline a medium-termprogram to further improve financial management. 57. The Bank recently completed a Country Financial Accountability Assessment (CFAA) for Dominica and an associated Financial Management Action Plan. Phase Iof the Action Plan comprises those measures needed immediately to strengthen cash management and expenditure control so that the authorities could arrest and reverse the accumulation of arrears, while Phase 11includes measures to reduce further fiduciary risk by implementing stronger internal controls and establishing a robust accountability framework. 58. The authorities are completing Phase Iof the Financial Management Action Plan and have made significant progress in strengthening commitment controls and cash management. The Government has introduced a cash and commitment management system that adjusts line ministries expenditure allocations and enforces commitment limits on a monthly basis in line with resource availability. The stock of arrears has been reduced by around EC$4.7 million since the beginning of FY03/04. Technical assistance has been procured to improve the quality of revenue projections at the Customs and Inland Revenue Departments. Inaddition, an internal auditor post, that had been vacant for some time, has been filled and this person is working with line ministries to ensure better control of expenditures and payment commitments. In an effort to stem the use of bank accounts to circumvent expenditure and funds controls, the MOWhas also completed a census of all existing Government bank accounts and has issued explicit terms and conditions for the operation of the remaining accounts. Those accounts not meeting these criteria have beenclosed. 59. Finally, in an effort to improve transparency and accountability for public expenditure, the MoFP has been issuing monthly budget execution statements to the Independent Monitoring Group made of up stakeholders from the private sector and civil society as part of its periodic reporting on the progress of the stabilization program. 60. Phase I1of the FinancialManagement Action Plan consists of the following measures: Completemodemization offinancial management information systems. The Government has procured additional technical assistance from CIDA and CDB to complete the roll out of SIGFIS to all ministries, departments and agencies by June 2004. The new system is to be linked with the cash management and debt recording systems. The process is already well underway and proceeding on track - key revenue agencies have already been brought on stream. Inaddition, the Government has strengthenedthe management and staffing of its computer center to ensure that the new systems are maintained. Improvefinancial reporting. With the new information system in place, the Government will ensure that public accounts and financial statements follow international standards, including specifically those related to the government landpurchasesand sales. Update regulatory framework. Following the further refinement of the new procedures, the Government intends to complete the process to replace the current legislation governing 15 financial management with a new Finance (Administration) Act that reflects the new processes as well as the use of computerized information systems. The new Act and supporting regulations are planned to be submitted to parliament by June 2004, and a Cash Management Manual i s to be completed in time for the execution of the FY04/05 budget. In addition, under the PRGF the authorities intend to adopt a fiscal responsibility law by mid 2005 with the objective of instituting broad guidelines for the conduct of fiscal policy over the business cycle as well as rules to prevent another rapid accumulation of debt inthe future. 61. Public expendituremanagement. Followingthe results of the public expenditure review recently completed by the Bank, the authorities in Dominica recognize that to sustainably reduce public spending they would need to undertake fundamental reforms to improve efficiency and cost effectiveness across the public sector, and that these reforms would only yield savings in the medium term. The authorities have adopted a Medium Term Public Sector Reform Strategy (see paras. 65-69) aimed to reduce the cost of government in an orderly and effective way in order to achieve fiscal and broader economic development of Dominica. In the interim, the Government took the following short term measures to contain and better managepublic expenditure. (a) Wages and salaries. In the context of the SBA, in 2003 the Government took crucial short term measuresto contain the wage bill, including a 5 percent public sector wage cut, a freeze on hiring, and the reduction of overtime pay and various allowances. On the employment side, the authorities have tightened control over the contracting and payment of non- established workers, through the financial management measures mentioned above, and have started to reduce the use of temporary staff inline with available budgetary resources. (b) Priority non-wage recurrent expenditures. In order to ensure the delivery of critical social services during the stabilization and adjustment period, Dominica's FY03/04 budget maintained non-wage recurrent expenditures for the Ministries of Health, Education and Community Development. 62. Despite these measures, the public sector wage bill remains one of the highest in the region (16 percent of GDP). As part of the program supported by the PRGF, the authorities intend to reduce the wage bill by 5 percent in each of the next two fiscal years, through the reductions in the number of employees. As indicated in paragraph 69 this will be pursued in the context of a public sector reform programaimed at restructuringthe current modes of public service delivery. 63. Publicinvestment. The authorities recognize that inthe current macroeconomic environment, it is critical that Dominica raise the productivity of its public investments to support a resumption of growth. The authorities also recognize that weak management of the public sector investment program has in the past contributed to both poor choice of projects and financing, and low execution rates. To this end, with technical assistance from the Government of Barbados, the United Nations Development Program (UNDP) and the World Bank, the Government has formulated a new three-year PSIP for FY03/04 - FY05/06 which maximizes the use of available grant and concessional resources financing'. The PSIP now reflects realistic estimates of project implementation and a prioritization of projects in line with the Government objectives of supporting private sector investment and growth. In addition, a number of projects whose impact on the economy was questionable were halted and measures taken to terminate government' s contractual obligations. To improve implementation of the PSIP, new monitoring procedureswere established to which line ministries have been adhering. As a result, the government was able to publish the first quarterly PSIP execution report for July - September 2003 and the PSP implementation rate for the first quarter of the fiscal year has increased to 91 percent as compared to 10 percent in the previous year, although the latter was exceptionally low due to over-projections and under- reportingas well as to actual implementation bottlenecks. ' Grants finance 68 percent of the FY03/04public investment program and external loans on favorable terms finance 27 percent. 16 64. The Government has also adopted new administrative procedures for PSIP preparation, management and execution, including explicit and appropriate criteria for project selection and approval for implementation. To help insulate the public investment programfrom arbitrary political influences, a Projects Supervisory Committee, comprising public officials from various key ministries, the Budget Director and the Debt Manager, has been appointed and mandatedto oversee project selection, financing, approval and implementation. 65. Public sector reform. Following a consultative workshop in January 2003, the authorities have adopted and are in the early stages of implementing a Medium Term Public Sector Reform Strategy aimed at achieving greater cost efficiency and effectiveness in the delivery of public services. The strategy has four components (i) modernizing public administration; (ii) strengthening public expenditure management and controls; (iii)enhancing growth-supporting public services; and (iv) rationalizing the delivery of social services and improving their targeting. The Strategy builds on the broad public consultations undertaken for earlier work on the Integrated Development Plan' and the Carib People's Development Plan, a recent Poverty Assessment, and Growth Conference as well as on other studies and reviews on public sector management issues in Dominica undertaken over the last few years. The Strategy also incorporates and will help to harmonize earlier reformefforts that were ongoing in different parts of the public sector. Strategy implementation is being overseen by a Public Sector Reform Task Force chaired by the Minister of Health and Social Protection and consisting of key public officials and representatives from the Public Service Union, the Dominica Teachers' Union, the Dominica Association for Industry and Commerce, and the National Association of Non-Governmental Organizations. 66. Under the first component: "modernizing public sector administration", the authorities are taking measures to strengthen policy formulation, strategic planning, and Cabinet decision-making processes, and to introduce performance management arrangements for senior public officials. Supported by DFID's Fiscal and Economic Recovery Project (FERP), the authorities have held a series of retreats and workshops for senior public officials aimed at clarifying roles and responsibilities. Ongoing work on improving line ministry corporate plans, implementing a manpower planning model and reforming the budgeting process for FY04/05 is focused on the implementation of the target reductions in public employment. Under this component the Government i s also completing a process that was begun earlier in2002 to update the Public Service Acts and Regulations which govern public service employment. The EUhas provided an longterm adviser to assist with this component. 67. The second component of the strategy: "strengthening expenditure management" includes implementation of the Financial Management Action Plan discussed above in paras. 57-60, reform of the budget process being supported by DFID's FERP, and improvements in the management of the Public Sector Investment Program described inparas. 63-64. 68. Under the thirdcomponent "enhancing the enabling environment", the authorities appointed a Task Force in July 2003 to address this issue. The Government currently is studying the recommendations of the Task Force report, including the introduction of Customer Service Improvement Plans in key public agencies such as customs and the development of a case management system to clear the backlog and expedite hearings in the court system. Subsequently, the Government has established a Consultative Working Group on Private Sector Development and, with assistancefrom the EU, has appointed a Private Sector Advisor in the Reform Management Unit. In addition, the private sector i s in the process of establishing an umbrella group to liaise with the Government on relevant issues. 69. The final component, "rationalizing the delivery of social services and improving their targeting has been informed by the results of the Poverty Assessment recently completed by the Government and 'Inearly 2002, the authorities initiatedthe preparationof a medium-term IntegratedDevelopmentPlan, with support from the EU. After a series of public consultations, the consultingteam draftedareport which focuses primarily on the establishmentof a participatoryplanningprocess, rather than a development strategy, per se. The authorities have incorporatedthis work and the feedback from the consultationsinto the formulationof the PSIP, and mediumterm Public SectorReformStrategy, and planto use it in the formulation of the PRSP. 17 CDB, the Carib People's Development Plan, the Social Protection Review completed by the Bank in July 2003 and a recently completed Public Expenditure Review. The Social Protection Review contains recommendations for streamlining and improving the targeting of social protection programs and for expanding coverage of social security. The Ministry of Education i s working on a proposal to consolidate rural schools which would simultaneously improve the deployment of teachers, raise the quality of instruction and achieve some cost efficiency. Finally, the Ministry of Health will review a proposal to expand cost recovery mechanisms in the health service, to consolidate a number of health clinics and district hospitals, and to outsource certain non-essentialfunctions. C. Promoting growth and diversification 70. The Government is cognizant of the need to enhance the climate for private investment both by improving its delivery of growth-related public services as well as strengthening the dialogue with the private sector. These form a key component of its MediumTerm Public Sector Reform Strategy outlined above, the details of which are in the process of being formulated and prioritized. In the short term, however, the Government has taken measuresto strengthen and safeguard the financial sector and address inefficient pricing policies in the critical areas of port operations, petroleum products and electricity supply. The authorities have also to undertake reviews of the administration of fiscal incentives and role of public enterprises in order to ensurethat there is a level playing field for private investment. 71. Financial sector. Given the current pressureson the financial sector stemming from the economic contraction, the Dominican authorities are taking measures to strengthen and safeguard key institutions. At the same time, the Fund and the Bank are currently undertaking a Financial Sector Assessment Program (FSAP) for the OECS. The Bank plans to support implementation of the FSAP recommendations through a OECS-wide financial sector operation (see CAS, page 24). 72. National Commercial Bank. The authorities have taken measures to strengthen the operations of the National Commercial Bank. Exposure to the public sector, including guarantees and debentures, has fallen from 120 percent of the bank's Tier 1 capital and reserves in 2002 to just under 95 percent. In particular, the Government's overdraft balance has fallen to EC$27 million in November 2003 from EC$37 million just over a year ago. Under a Memorandum of Understanding (MOU) signed between NCB and ECCB, the commercial bank has prepared and ECCB has approved an Action Plan to improve the financial health of the bank, including time bound benchmarks for reducing the share of non- performing loans in its portfolio. The Government has repealed the NCB Act and placed the bank under the Companies' Act, in order to level the playing field vis-&vis other private commercial banks in Dominica in terms of tax treatment. In addition, the Government reduced its share in NCB bringing its ownership to a minority stake, and has applied a significant share of the proceeds to reducing its outstanding arrears to NCB and DSS. NCB has, in turn, restructured its Board to reflect these changes. The authorities plan to divest additional shares in NCB and are in the process of retaining a transaction advisor to recommend options in this regard and taking into account the recommendations of the ongoing FSAP. 73. Credit union subsector. The Government has amended the Cooperatives Act to place credit unions under MOWsupervision, leaving the Commissioner of Cooperatives with authority for cooperative- specific aspects of their operations. In order to operationalize this change, a committee has been formed (with appropriate stakeholder participation) to review and propose changes to the cooperative regulations by end March 2004. In addition, MoFP and the Commissioner of Cooperatives carried out a pilot joint inspection of the largest credit union -- Roseau Cooperative Credit Union - with assistance from ECCB, in October 2003. The authorities intend to undertake joint inspection of other credit unions by end 2004 and direct them to take timely measuresto strengthentheir operations. 74. Agricultural Industrial Development Bank. In a similar vein, the Government intends to take measures to strengthen the state-owned Agricultural Industrial Development (AID) Bank by reducing its 18 role in the management of the bank. To this end, the Government i s in the process of retaining a consultant to conduct an audit of its portfolio and evaluate strategic options. 75. Dominica Social Security. Since July 2003, the Government has resumedits monthly contributions to DSS which had been suspended for several years. DSS plans to prepare and adopt a medium- and long-term investment strategy for managing its assets which includes regional and international diversification, in line with the recommendations of the Social Protection Review. This in turn should help safeguard against excessive Government intervention in the future. The Bank will monitor progress on the development of such a strategy targeted for completion inMarch 2004. 76. Port operations. After overturning two injunctions by the union, the Government has successfully put in place new work arrangements at the Dominica Port Authority that have reduced stevedoring and longshoring charges by 25 percent and charges for handling break-bulkcargo by 30 percent. Inaddition, the Port Authority has also negotiated reductions in, and eliminations of, surchargesby various shipping lines which had been imposed due to the antiquated work arrangements. For example, the Caribbean Ship Owners' Association has removed a surcharge of EC$190 per 20-foot container. The authorities are currently awaiting the outcome of judicial tribunal on the role of the union in management of the work roster before completing negotiations on a new employment scheme and wage contract. 77. Petroleum pricing and taxation. Following consultations with market operators and with the support of technical assistance from the World Bank, the Government has established and is implementing a new transparent mechanism for pricing petroleumproducts inline with internationalprice fluctuations. The mechanism involves regular adjustment of the petroleumprices according to a specified formula which i s based on an international benchmark price, uniform margins for the various industry operators - importers, distributors and retailers - and a specific consumption tax intended to stabilize government revenues. Retail prices adjustments are being made on an 8-week cycle. As part of the transition to the new system, a first adjustment was made on November 5,2003 and a second adjustment on December 1, 2003. The Government will conduct an early review of the system in January 2004 to resolve a number of implementation issues, including the import price benchmark calculations and allowances for haulage and transit losses, as well as to re-examine the periodicity of price adjustments. Following this review, the authorities will codify the new system into regulations under the Supplies Control Act by end February 2004. Dominica is also supporting efforts within CARICOM to review the pricing of petroleum products within the Community by PETROTRIN, the monopoly state-owned supplier in Trinidad, and will host a workshop to showcase their new system to other OECS member countries early next year. 78. Electricity sector. In response to the recent disagreement between the Government and the monopoly electricity provider - DOMLEC - the authorities have requested technical assistance from the Bank to review the regulatory environment and tariff setting mechanisms for the power sector in Dominica. On the basis of this ongoing review, the Government intends to update the tariff formula in the Electricity Supply Act by mid January, when an interim agreement with the utility i s scheduled to expire, Following that exercise, the authorities plan to revise the regulatory framework for electricity supply to provide stronger incentives for efficiency and consumer protection and submit a revised Electricity Supply Act to Parliament by June 2004. 79. Levelingthe playing field. The even-handed treatment of the private sector by government either through withdrawal from commercial activities or the administration of fiscal incentives i s crucial to encourage private investment. 80. Discretionary' fiscal incentives. The authorities recognize that discretionary tax and duty concessions which may be inconsistently and inequitably applied can in fact impede the efficient allocation of resources in the private sector. Under the PRGF, the Government has agreed to reduce the ' "Discretionary"incentives refer to those incentives that are not found in legislation, including those authorized by Cabinet decision only. Statutory incentives are legislated. 19 granting of such exemptions in order to achieve additional tax collections of 0.5 percent of GDP on an annualized basis in line with the macroeconomic program. The authorities also intend to conduct by June 2004 a comprehensive review of all statutory and discretionary tax exemptions with a view to accessing their effectiveness andjustification, and to prevent abuses. 81. Public enterprises. The authorities recognize that there is a need to streamline the number of enterprises in which the Government has an ownership stake, in order to level the playing field for private investment. To this end, the Ministry of Finance i s completing a review of public enterprises and public participation inprivate companies, includingthrough government guarantees. On the basis of this review, the authorities intendto prepare and adopt a new policy for the establishment of, and public investment in, such enterprisesby endMarch 2004. D. Poverty ReductionStrategy Paper. 82. The Government has recently completed an InterimPoverty Reduction Strategy Paper (distributed to the Board on December 11, 2003) and is currently preparing a Poverty Reduction Strategy Paper. The strategy will build on a recently completed Country Poverty Assessment prepared by the Government and CDB. The Country Poverty Assessment combines information from the Dominica 2001 Living Conditions Survey, with a Participatory Poverty Assessment conducted in October 2002. The PRSP will also incorporate earlier work on an Integrated Development Plan, the Carib People's Development Plan, the three-year PSIP, the Medium Term Public Sector Reform Strategy, the Bank's recently completed review of public expenditures and assessment of the social protection system, and analytical work preparedby other donors. P A R T IV. THEPROPOSED OPERATION A. Objectives and description 83. Objectives. The proposed Economic Recovery Support Operation would support the Government's program and reform agenda described in Part I11and in the Letter of Development Policy (see Annex 1). The main objective of the proposed operation i s to support Dominica's efforts to regain fiscal sustainability and to restart growth, while protecting past social gains. In helping to fill the current financing gap, the operation will provide the Government with the needed space to complete the formulation of a medium-termreform program, which i s to be embodied in a Poverty Reduction Strategy Paper, and to protect investments in social and human capital. 84. Description. The proposed ERSO i s a single-tranche structural adjustment credit in the amount of US$3 million equivalent. The operation will support the authorities' efforts to: (a) improve public expenditure management, through reforms in financial and debt management and a restructuring of the public sector investment program; (b) strengthen the financial sector reforms by commercializing the state-owned banks and improving supervision of the credit union sub-sector; and (c) reduce the cost of doing business through reforms in the petroleum, electricity and transport sectors. The operation focuses on the most urgent measures required for fiscal consolidation and a resumption of growth and on areas of the Bank's comparative advantage. The operation's concessional terms will reduce the government's borrowing costs and lengthen debt maturities at the margin. The credit is based on structural reform measures that havebeen implemented by the Government prior to Board presentation. B. Rationale 85. Consistency with the Country Assistant Strategy (CAS). The proposed ERSO i s consistent with the broad objectives of the FY02-06CAS covering the Eastern Caribbean states (discussed by the Board in June 2001), namely to: (i) vulnerability and income insecurity; and (ii)strengthen human and reduce institutional capacity across the sub-region. The focus on fiscal sustainability, improved public sector performance and private investment climate will help Dominica create a sound basis for the increased 20 private investment and the economic diversification necessary to reduce vulnerability to external shocks, as well as protect returns from its significant past social investments. 86. However, the CAS did not envisage any adjustment lending, and the strategy emphasized sub- regional rather than individual country programs. The need for adjustment lending was not present at the time of the CAS, as Dominica had not entered the deep recession and fiscal and external balances were broadly acceptable, and there was general reluctance among Governments in the sub-region to undertake Fund-supported macroeconomic programs.' Major external shocks since the CAS Board discussion - including the events of September 11, 2001, and the subsequent global economic slowdown and drastic fall in tourism - worsened growth performances and fiscal balances throughout the Eastern Caribbean sub-region. The impact of these external shocks has been particularly severe for Dominica given its limited natural resources and less diversified economy, and it has so far been the only Eastern Caribbean country to request an IMF disbursing program. Moreover, the individual difficulties of one country, like Dominica, could pose a threat to the sub-regional currency board arrangement if the fiscal crisis spills over into the financial sector. 87. Despite its emphasis on sub-regional approaches, the CAS does allow for single country operations which address a specific problem in one country that could be scaled up or replicated in other countries. Given the fiscal deterioration across the OECS countries, it is not unlikely that in the future other OECS countries may also opt for an IMF-supported stabilization program and request assistancefrom the World Bank in the form of adjustment lending. Inthat case, successful adjustment in Dominica may provide an important demonstration for the other countries in the sub-region, especially in the area of public sector reform. There are sufficient similarities across the OECS to ensure that this operation will yield important learning benefits for the Bank and its clients that can be applied to subsequent operations in the region. 88. The proposed ERSO fits within the lending and exposure limits of the CAS lending program of US$95 million (not including GEF2grants) for FY02-06. To date, US$53 million of the CAS envelope has been committed to sub-regional and regional programs, comprising one Disaster Management, two HIV/AIDS, three Education, and five post September 11, 2001 Emergency Recovery projects as well as stand alone Water Sector Reformproject for St. Lucia. 89. Complementaritywith other Bank activities. The proposed structural reform agenda supported by this operation complements ongoing efforts to strengthen the investment climate and overall competitiveness in Dominica (and the OECS) through: (i) the OECS Telecom Reform Project (US$1.2 million) which has successfully improved the telecom regulatory framework and reduced telecommunication charges in the region, and (ii) the Emergency Recovery Project (US$3.3 million) approved following the events of September 11, 2001, to help improve security arrangements at air and sea ports necessary to support the tourism sector. The program benchmark on electricity i s being supported by a PPIAF3grant and complements other Bank support for the energy sector at the regional level through an ongoing Energy Sector Management Assistance Program (ESMAP) grant. The Bank i s also preparing the Dominica component of the Caribbean HIV/AIDS Prevention and Control Project. The preparatory work for this operation which includes the formulation of an HIV/ALDS strategy and surveillance work is ongoing. 90. The proposed operation also builds on recently completed work on public expenditure (Dominica Fiscal Issues), in financial management (Dominica CFAA) and procurement (Dominica CPAR4), and an institutional capacity review of the OECS at the sub-regional level. In addition, a detailed analysis of Dominica's social protection system was completed in July 2003. This program of analytical work The CAS did provide for the event of weather-driven macroeconomic volatility with a US$10million contingency fund under the OECS Emergency Recovery and Disaster Management projects. * Global Environmental Facility Private Participation in Infrastructure Advisory Fund Country Procurement Assessment Report 21 provides important knowledge and recommendations on the workings of budget processes and controls, and identifies weaknesses that need to be addressed to establish fiscal discipline. The results of these analyses were' used to define the program of reform measures that comprise the proposed ERSO and the medium-term framework. Additional analytical work currently ongoing includes a sub-regional Financial Sector Assessment Program (FSAP) which i s already underway and a study on growth and competitiveness issues affecting Dominica and the rest of the OECS. The findings emerging from this research, together with the lessons learned from the first-round reform measures supported by this operation, will provide the necessary underpinnings for future progress on the medium-term reform agenda. 91. Lessons learned from previous operations. Dominica has had only one previous adjustment operation with the Bank - a Structural Adjustment Credit in 1987 (see Box 1). Between 1987 and 1995, the Bank supported the OECS through a line of credit to the Caribbean Development Bank (CDB), which was later suspended because of weak implementation. Since then, Dominica has benefited from a small IDFI grant for informatics development (FY04), a GEF project for shipwaste management (FY95), and five blend investment operations for solid waste management (FY95), basic education (FY96), telecom reform program (FY98), disaster management (FY98) and a post-September 11 emergency recovery project (FY02), all of which were part of sub-regional programs. BOX 1. DOMINICA STRUCTUFUL ADJUSTMENTCREDIT (FY87) In June 1987,the Bank approved a US$3 million three-tranche StructuralAdjustment Credit for Dominicaaimed at improving the macroeconomic, incentive and institutional framework through: (i) trade liberalization; (ii) tax reform; (iii) public sector wage and employment restraint; (iv) improved PSIP and private investment approval processesand agriculturalextension services. During the first two years, comprehensivetrade and tax reforms were achieved (even beyond the conditionalities)and macroeconomic targets were exceeded. Progresswas also made in the institutionalreforms. In the third year, however, the situationdeteriorated due to the impact of HurricaneHugo and rising labor resistance to the wage restraint. The credit closed in June 1992 after six extensions and the third tranche was cancelled because key wage bill targets had been exceeded. The project was rated unsatisfactory in the ImplementationCompletion Report, but later upgraded to moderately satisfactory by the Operations Evaluation Department because significant trade and tax reforms had been achieved early and the macroeconomic impact of those reformswas sustained. 92. The main lessonsof the earlier adjustment operation were that: (c) small economies with severe capacity constraints in the public sector and subject to periodic natural disasters may require longer adjustment periods than more resilient economies; (d) limited capacity of a small economy creates the need for significant capacity-building measures and technical assistance to support the design and implementation of the reform program, and for effective donor coordination to avoid overburdening the country; (e) in countries, such as Dominica, where the political consensus i s fragile, the Bank may need to support governments in reaching understanding with civil society on the importance of neededreforms. 93. Lessons learned from the SBA in FY02/03 further highlight the importance of a focused and phased approach for implementing the reform agenda, the need for extensive technical assistance for its design and implementation, and for building public understanding and acceptance for sustained policy reform. 94. Complementarity with other development partner programs. Dominica's request for fast- disbursing support from the Bank complements ongoing assistance from the IMF, other development partners and neighboring countries. As mentioned above, the authorities successfully completed the ~~ InstitutionalDevelopment Fund. 22 second review of a one-year Stand-By Arrangement for SDR3.3 million with the IMF, initially launched in August 2002, and extended through early 2004. On December 19, 2003, the IMFBoard approved a three year arrangementunder the Poverty Reductionand Growth Facility (PRGF) and a first disbursement of SDR 2.4 million. The PRGF provides the macroeconomic framework for implementing the Government's stabilization for SDR 7.7 million program. The proposed ERSO has been designed in close collaboration with the Fund, and in parallel with both IMF programs. The Bank will continue to coordinate closely with the IMF in the review of economic policy and the preparation and support of individual reforms in Dominica. 95. The proposed operation will also complement ongoing work under: (i)DFID's Fiscal and Economic Recovery Project (FERP) with close collaboration on the public sector reform, improvements in financial and debt management, and private sector development; (ii)CIDA's Eastern Caribbean Economic Management Program (ECEMP) which is helping to strengthen budget and financial management systems in Dominica; (iii)CARTAC's technical assistance for financial sector regulation, treasury and expenditure management; and (iv) IMF/CARTAC support on tax reform. In addition, a consortium of development partners, includingCARICOM, CDB, CIDA, CARTAC, DFID, EU, UNDP, the World Bank, the IMF, and Caribbean countries is providing a coordinated net of technical assistance to help the Government implement its stabilization and structural reform program. For example, the Government of Barbados, UNDPand DFIDcollaborated to provide an expert to assist with improvements inthe managementof the PSIP, in close coordination with the Bank. The Bank is also collaborating with the EUand CDB on social protection issues inDominica. C. Prior actions and benchmarks 96. The Government's Letter of Development Policy included in Annex 1 outlines the short term structural measures already under implementation and the steps being taken to define the medium-term policy reform measures. The following are the key actions implemented by the authorities prior to Board presentation of the ERSO. The Letter of Development Policy details the key follow-up actions (benchmarks) that will constitute the second phase of the Government's reform program and also identifies outcomes and performance measures on the basis of which the impact of the Government's program will be evaluated. (a) Maintain a satisfactory macroeconomic framework as demonstrated by the continued implementation of the Government stabilization program supported, inter alia, by the IMF PRGF. (b) Improve financial management by: (i)establishing a cash and commitment management systemthat adjusts line ministry expenditures allocations and enforces commitment limits on a monthly basis in line with resource availability; (ii) reducing the number of government bank accounts; and (iii) appointing an internal auditor to ensure the implementation of new financial managementprocedures at the ministry level. (c) Improve debt management by: (i)consolidating the management of external and domestic debt; and (ii) adoption of a comprehensive mediumterm debt strategy acceptable to Cabinet the Bank. (d) Improve the management and execution of public investment by: (i) adopting a three-year PSIP acceptable to the Bank; (ii) issuing new procedures acceptable to the Bank for the planning and administration of public investment projects that identify clear criteria for project selection and establish a Projects Supervisory Committee to oversee the process; and (iii) publicizing the first quarterly report on the execution of FY03/04 PSIP based on monthly reports of project expenditure from line ministries. 23 Prepare, adopt and begin implementation of a Medium Term Public Sector Reform Strategy, acceptable to the Bank, for achieving greater cost efficiency and effectiveness of public service delivery focusing on: (i)modernizing public sector administration; (ii) strengthening expenditure management; (iii) enhancing the enabling environment for private investment and (iv) rationalizing social service delivery and improving their targeting. Strengthen the operations of NCB through: (i) establishing a Memorandum of Understanding between ECCB and NCB on actions to improve financial health of the bank, including time- bound benchmarks for reducing non-performing loans; (ii)reduction of Government's shareholding in NCB below 50 percent and usinga significant share of the proceeds to reduce public sector arrears to NCB; (iii)restructuring NCB Board of Directors so that the Government cannot appoint more than three of the eight members, nor the Chairman; and (iv) repealing the NCB Act and placing the bank under the Companies Act to equalize its treatment with that of private commercial banks. Improve financial supervision and regulation of the credit union sector by: (i) submittingto Parliament an amendment to the Cooperatives Act to assign responsibility for supervision and financial regulation of credit unions to MoFP; (ii)completing a joint MoFP/ECCB/ Cooperatives Department inspection of the Roseau Cooperative Credit Union; and (iii) establishing a committee and timetable for revising cooperative regulations to operationalize MoFP role infinancial regulation and supervision of credit unions. Remain current on employer andemployeecontributionsto DSS from July 2003. Introduce a new mechanismfor adjusting domestic prices of petroleum products in line with international price movements, including regular price adjustments, a flat consumption tax and uniformallowances across industry operators. Reduce cargohandlingchargesat Dominica Port Authority by at least 25 percent. D. Implementation,monitoringandevaluation 97. The Ministry of Finance and Planning (MoFP) is the principal executing agency and has responsibility for coordinating and overseeing all aspects of the program. Other ministries and agencies, notably the Public Sector Reform Management Unit, the Ministry of Foreign Affairs, Trade and Marketing, the Ministry of Communication, Works and Housing, and the ECCB, also have key roles in executing the program, and are working closely with the MoFP in implementing program components under their respective jurisdictions. The Government will provide quarterly written implementation reports to the Bank. Inturn the Bank will monitor implementationthrough quarterly supervision missions focusing on progfam benchmarks, reform outcomes (see Annex l), and any unexpected policy reversals. Missions would also provide technical assistance and advisory services. Inaddition, the authorities will continue to provide monthly reports to the Independent Monitoring Group made up of civil society representatives recently formed to review progress on the Government's reform program. The closing date of the credit would be June 30, 2004. E. Environmentalandsocialissues 98. Environmental Issues. The proposed structural adjustment credit supports fiscal and regulatory changes that do not have direct environmental impacts. Positive environmental benefits in the medium term may emerge as a result of the introduction of the new petroleum pricing mechanism, which will allow pass-through of international oil prices to consumers, creating a greater disincentive against consuming polluting oil products, and possibly as a result of the electricity regulatory reform. 99. Social Issues and Poverty Impact. The ERSO supports the Government's efforts towards a resumption of economic growth and employment creation through the measures outlined above. 24 Simultaneously, the ERSO creates fiscal room for protecting essential recurrent expenditures in the priority social sectors, thus preventing impoverishment of Dominica's lower income groups and human capital degradation. The Government is committed to provide compensation for those employees who will be affected by the implementation of the Public Sector Reform Strategy, and has approached development partners for grant assistance. The reforms inthe electricity sector are geared to reducingthe costs to the consumer by providing incentives for efficiency within the tariff setting mechanism in the regulatory framework. Likewise the petroleumreform has special measures for the treatment of liquified petroleumgas which i s primarily usedby low income households. 100. As indicated in paragraph47, Dominica has a range of social protection programs that will provide a safety net over the short term for the current difficult times facing the country (notably through a Social Investment Fund supported by the EU). The Government intends to further improve the coverage and targeting of these programs, including to the Carib community, as part of its Public Sector Reform Strategy (see para. 69). In addition, the resumption of government contributions to the Dominica Social Security and the reform of DSS's investment strategy will help ensure its future solvency, while efforts to restore financial sector soundness and improve regulation and oversight - particularly of the credit unions -willhelpprotectthesavingsofdepositors,inparticularsmallaccountholders. F. Fiduciaryarrangements 101. Disbursement and Auditing. This operation consists of single tranche credit of US$3 million equivalent. The entire amount will be disbursed upon effectiveness. Disbursement arrangements will follow the simplified procedures for structural adjustment loans approved by the Board on February 1, 1996. The Borrower will open an account in the Eastern Caribbean Central Bank. The IMF has conducted an on-site safeguards assessment of the ECCB on February 20, 2003 and concluded that it has in place appropriate mechanismsto manageresources and that vulnerabilities than remain do not present an undue risk. The ECCB i s currently implementing the recommendations from the safeguards assessment. Once the Bank formally notifies the borrower that the single tranche i s available for withdrawal, the borrower may submit withdrawal application for the credit, so that the proceeds of the tranche are deposited by the Bank in this account to be used in accordance with the Credit Agreement. Disbursements would not be linked to specific purchases, and supporting evidence for disbursement is therefore not required. The proceeds of the Credit would not be used to finance expenditures excluded under the Credit Agreement. In accordance with Bank policy1,the deposit account will be audited on terms of reference acceptable to the Bank within six months of credit disbursement in accordance with InternationalStandards on Auditing, by an independent firm acceptableto the Bank. 102. FinancialManagement and Procurement. As noted above, a key component of this operation and the Government's reform program i s the improvement of financial management systems, practices and regulatory framework in Dominica. Regarding procurement, the authorities are currently reviewing the recently completed Country Procurement Assessment Report and Action Plan for Dominica for inclusion under the Medium Term Public Sector Reform Strategy. In addition, the Dominica CPAR complements an earlier OECS Procurement Assessment Report and Regional Procurement Action Plan which was endorsedby all the OECS member countries, including Dominica, inMay 2003. G. Benefitsand risks 103. The overall main benefit of the operation is to contribute to a resumption of growth and poverty reduction through two complementary ways. First, the reform program supported by the ERSO aims at correcting Dominica's unsustainable fiscal situation by improving public expenditure management, launching a process to rationalize public service delivery, restoring financial sector soundness, and creating fiscal room for financing essential recurrent expenditures. Second, the ERSO supports the first stage of a multi-year effort to accelerate economic growth through reform measures aimed at reducing Guidelines:Annual FinancialReporting and Auditing for World Bank-FinancedActivities, June 2003 25 distortions and improving Dominica's competitiveness. As indicated in the Letter of Development Policy, the Government intends to pursue implementation of the reforms initiated in this first phase and is preparing a Poverty Reduction Strategy Paper which will detail the second stage of its reform agenda, whose main pillars are public sector reform, debt restructuring, financial sector strengthening and improvement of private investment climate, the components of which are presented in Section 111. The Government's commitment to regaining fiscal sustainability and undertakingneeded structural reforms provides a window of opportunity for the Bank to engage in this small island state. Moreover, given the broader situation in the sub-region, there are significant potential positive externalities that could come from Bank support of successfuladjustment in Dominica at this time. 104. All prior actions for this single-tranche operation have been met satisfactorily. While policy reversal of these actions i s highly unlikely, swift implementation of further stages of the Government's reform agenda is however uncertain. The country faces a number of domestic and external risks that may pose a threat to fiscal stability and economic recovery. In particular: (a) the outcome of the debt restructuring exercise i s far from certain and would, if very different from envisaged, significantly alter the macroeconomic program; (b) existing severe capacity constraints in the public sector (the result of out-migration and outdated government processes) could delay the implementation of planned follow-up reform measures; (c) after aprolongedrecession and the introduction of difficult stabilization measures in FY02/03 and during FY03/04, lack of economic recovery over the coming year could lead to reform fatigue on the part of the population and a deterioration of the Government's fragile political consensus; and (d) external shocks, including natural disasters or continued global economic slowdown could delay a resumption of fiscal sustainability. 105. Protracted negotiations or a particularly modest reduction in the public debt levels as a result of the debt restructuringexercise would require Dominicato undertake the significantly higher fiscal adjustment or obtain additional concessional financing in order to achieve sustainability which, given the already achieved and planned adjustment efforts, and donor support, could be challenging. While the Government i s committed to adjusting the fiscal targets in line with the outcomes of the debt restructuring exercise to ensure fiscal sustainability, there are limits to what can be achieved over the short run while safeguarding a resumption of growth and maintaining social stability. 106. To mitigate the capacity risks, the Government has identified its technical assistance needs and a coordinated group of donors and regional partners has been providing assistance to support the reform program. The World Bank has provided significant technical assistance in the areas covered by the ERSO and plans to continue to do so, along with regular program supervision, joint missions with other donors and analytical and advisory services. 107. To mitigatethe political risks, the Government has undertaken an extensive consultation effort with trade unions, private sector organizations and political forces on the reform agenda to increase understanding of the difficult challenges facing the country and build support for the stabilization and structural reform agenda for 2003 and beyond. Since the onset of the stabilization program in late 2002, quarterly meetings were held with an Economic Stabilization Consultation Group (ESCG) comprising trade unions, private sector and civil society. The Government has also undertaken a "Change Management" program within the public sector to sensitize officials to the need for reform. The open public debate of the proposed fiscal measures leading up to the June 2003 presentation of the Government's budget to Parliament was crucial in the smooth implementation of the public sector wage cut (see para. 9). At the request of civil society, the ESCG has now been replaced by an Independent Monitoring Group made up of civil society representatives, including religious organizations, which receive monthly reports on the stabilization and structural reform program and publicize their own analysis of the Government's performance. In addition, the ongoing work on the PRSP and the Public Sector Reform Strategy involves a broad spectrum of stakeholders in an effort to build political consensus. 26 108. Contagion effects could also arise vis-&vis the financial sector, although this represents a remote risk. Inthe context of Dominica's fragile domestic banking sector, the collapse of one of its commercial banks or credit unions could spread throughout the sub-region's vulnerable domestic banking sector and destabilize the shared currency board arrangement. However, the proposed operation addresses this risk through the policy measures relating to Dominica's National Commercial Bank which will serve to insulate it from further fiscal pressures and improve its management and asset quality, and measures related to the credit union sector. At the same time, the Bank will review ECCB's efforts to update the sub-region's unified banking regulations which seek to strengthen the powers of the central bank to intervene in troubled institutions. Finally, the Bank will continue working closely with the IMF and the ECCB to help the subregion implement the recommendation of the ongoing OECS-wide FSAP.' ' As indicated inthe 2001 CAS, the Bank plans to support implementation of the FSAP recommendations through a OECS-wide financial sector operation. 27 ANNEXES ANNEX 1. LETTER OF DEVELOPMENT POLICY 28 _ _ . -01/06/2004 - - - - - 09: 50 -. 17674480054 --. MIN OF FINANCE PAGE 02/13 Tal: (787)446-2.401 Extn.-16 - Government of the Commonwealth of Dominica MINISTRY OF FINANCE 6 PLANNING FlrraneBuWig,9 flaor Fax:(787) KennedyAvenue, Roseau E-mail: flnsec@cudnm.dm commonwealthof Dominka west Indies Ref: Letter of DevelopmentPolicy Roseau.January 5,2004 Mr. JamesWolfensohn Presidem The World Bank 1818HStreet, NW Washington,DC 20433 Dear Mr.Wohsohn: 1. This letter describes the economic programmeof tbe hrnmerrt ofthe Coinmawealthof Dominica launched to m r s e the recent deterioration in the fiscal position and lay the groundwork fix economic recovery and achieving robust economic &wwth m the coming ycars. In &IS later we describe the measures already uudertaken as well as those we intend to adopt m the future. We request financial assistance frmnthe World Bank, inthe fimn of an adjust" operatian,to support our efhrts to stabilize the e m m y andstimulate a " p t i i o n ofgrowth. Dominica's EconomicandSocialSituation 2 Damin~cahas beenhithardbystnretural changes, prmcipallythe phasingout ofprefkmtial access to UK and Europeanbanana markets, the slowdown intourism fbUowmg the tenonst attacks m the US on September 11,2001, andthe reversal offins inthe off-shore sector As a result, the economy c a r t t a d by 9% between 2001-2002 Tt was mevitable W the poor growth performanceafkted public finances wh~chdecenoratwlto an owrall deficitof 11%ofGDPinFYOO/Ol 3. In order to a r m the detmoration, the Government began preparinga stabd~sationprogramwtth help from ECCB m 2001. By August 2002, we had embarked on a Stand-By k q e m e n t d h the IMF including a package of ambdous fiscal measures. Howwer, atthough important progress was made during FY01/02, delays in the implementation of the public sector investment progmnme and other db",and a deeper ecanomic ccmract~cmthan was anticipatedcausedrevenues ~.IJ Mterand the p q " e to go offtrack. Inthe summer of2003, the Gwemmeut negotiatedan emension dthe Stand- By Arrangement with the IMFthruugh the end of 2003. The program included a package of politically difficult fiscal" r e s a " t h g to around2 5% ofGDP. `These measur89includeda 5% public sedar 29 01/06/2004 . - 09: 50 -. 176744800.54 - - MIN OF FIfiANCE PAGE 63/13 wage cut and extension of the stabilisatim levy (a payroll tax) which were agreed to by ESOvemmd empJoyees and their unions abr extensive cmsuMan and public debate, an mcreasc m the sales tax, a freeze on hiring (with the exccptxon of a few critical positions), reductions of overtime pay and certain allowmces, and better control over the use of temporary M. The programW, in turn, suppodby pledges of US$22 million from the intematimal dunor community and our OECS and CPLRTCOM sister countries. We have made sipfiat progress inimplementingthe progmq hcludjngthe wage Cut, and have remained on-track to date. As a result negotiationswith the IMSwere mccessfully concluded On December 10,2003 fmaccessmgthe IMF's PovertyReductionandGmwtbFacilrtym Jaauary 2004. 4. Dominica's main challenge is h a very hqh level of accumulated public debt (exkmal and d ~ m d ~ ) which has gown by the needto finance recent fiscal deficits. At the a r m level d112% of GDP,this debt burden poses a real threat to the achievementof fiscal balance ma in the medium term andto &e resumption of g r d . Total debt service now cansumes 36% of revenues and extemal debt service is estimatedto be 1.4% of our exports of goods and services in 2003. Servicing of this level of debt is nat possible d o u t such a large correction in the balance of income and expenditure as to mut social and political instability. More so, by divsrting public expenditure aw:r.%m prionty areas, or by requiring higher levels of taxation, the ememely high level of the debt severely lintits the camtry's investment and powthprospects. 5. The ecunomic siowdawn and related fiscal difficulties hurt the entire pclpulation of Dominica, but especia3ly the poor. A recently completed Country Povexty Assessment indicates that poverty is au the rise md now a f k t s 29% of the households, of which 1096 are cansidered indigent. but also that it is fica-ly related to unemplopent. Poor households have an unemployment rate of 40% as opposed KO 16% of nm-poarhousehotds. As such, tho Govement recognizesthe h p m c e of job creation to raise incomes and livingstandards. The Government's Programme 6. Since the begi"3 of FY03/04, the Government has redoubled its ef#rts to implement a strong rekmprogrammethat iscrediblewiththepopulationailargeandwhicht h d r e canbesustained mthe coming years. Reobgnizingtba the solution would be a mediumterm one, the Government embarked on a. two phase strategy. The first stage involved the extension of the Stand-By Arrangement with the IMF described above @am.3). This providedthe breathing space needed by the GwemmuTt and people of Dominicato kmulatea mediumtermprogrammeneededto support economic recoverywhich Will fbrm the secondphaseofthe stabllisatianandrecbveryprogramme. 7. To preparefor the second phase, the Guvementhas fbrmulated a number of important mediumterm Development (DFID) and the World Bank and started implementing, a Medium Term Public Sector strmgas. Fim the Govermnent has completed, with support Lin the Jhpamnart fir baematianat R e h n Strategy (MTPSRS) which aims to improve the cost efficiency of the public sector while improvingthe delivery ofthose sewices and fimctions that are cruckl to spurrmg growth, andprtJtectmg the vulnerable during the austerity period. Second, with assistance fiom the Government of Barbados, DFID, UNDP and the World Bank,the Gave"& prepared a three-year program of public investment fir R03/04-Fy05/06 which will be updated fix the FY04/05 budget Third the Gwemmeat has recently completed a strategyfor dealing with Dominica's highdebt burden. Each ofthese is describedin moredetailbelow. 8. These strategies ham been incorporated m an Interim Poverty Reduction Strategy Paper that we shared with the World Bank and 1M on December 1, 2003. The I-PRSP builds on the cctlsultatious from an earlier htqnted DevelopmentPlanning exerase supportedbythe European Union (ELI) during 2002. and a Country Paverty Assessment supportedby the Canbbean DevelopmentBank and DFID. In 2 30 01/06/2004 09: 50 17674480054 -- MIN OF FINANCE PAGE 04/13 addition, it addresses findmgs fsom the analytical work completedby the World Bank over the last year, includinga Country FinancialAcmintabillty Assessment, a CountryProcurementAssesmerrt Report, an ongoingpublic expenditure review, and a Socjal ProtectionReview,as well as a nudy un tax policyand administration by the INF and the Caribbean Technical Assistance Centre (CARTAC), a report on medum term stabilisatian and adj"t supported by CDB, work on ptimte sector dmelopmeut completed by DFTD and a study on insituhcmalframework for regulationafthe offshore sedor and non- bank financial i"s by CARTAC. W& support fnrm UNDPthe Govement is prep- a concise -C framework fixmedium-term developmentin a m g e of sectors whch will be reflectedinthe fid PRSP. 9. In summary, the overarchq goal of the G m r e m ' s pwm is to empower the citizens of Dominica to carrtnbute to their own well-being, and to facilitate aa environment m which prlMte enterprise can flaunsh. The broad strategy focusas an layingthe platformfor e m m c growth h g h stabilisq public finances and estabhhing prudent fiscal and expenditure management, imprwing Govemmcntp e r f m a n e by inmasmgthe cost etficiency ofpublic s m c e delivery, creating an enabling c"mtforbusmessandimprovingthe~~~L-IKIo~f~growthsectorstowardemploymentcrdon, C C andmcreasmgparticipationofstakeholdersineconomicacnvrcyanddecision-making. Regainingfiscal sustainability 10. At present, Dominicais s&bring from d&t overhang. mvestmemhas declinedto about one-third of its lcvel in 1998, while taxation has increased over the past fcw years, The high level of debt creates uncertainties about h r e taxation and expenditure priorities which lead to lower investment and grcnvth. Inorder to unprove investment and growth prospects,the cloud of ,future&an needsto be removed. The Government's objective is to restore growth partly through the elimination of fiscal imbalancesanda sizable reduction mthe country's debt burden, The programwill targetthe historicalaverage grawth rate of 2 percent per annum, aimto presewe price stabilicy, and reduce the extemal Cumat account deficit by nearly50percentthroughimprovements incompetitiwness. 11. The Ciawmment will undertake to restructure its debt with our creditors w& t h ~ intWtion of a c h i h g a reduction m debt levels as a percartage of GDP. We have prepared a mediumterm debt strategy wtuch outlines our intentions ia this regard, and have conuacted an imemationaUy-recognized financial adviser and leading international law fimto assistus in&is effort. OnDecem& 17,2003, the Gc"ment publiclyarmouncedthe debtrestructuringexerciseandstad&iscussions witlithe creditors. 12. In conjunction with the debt resuucturing, the Gavemmsntintendsto achieve a primary surplus of at least 3 percadof GDP by FY06/07, m orderto regainfiscal sustapzabd@c I h e underlyingfiscal position l k FYCJ3/04 is a p h a r y detick of 2 percerrt of GDP (excluding exceptional graats that are not expected to occur again). Fiscalmeasures equivalentt4 5 percentof GDP will be adoptedto achieve the medium- term objective. A major amponart ofthe measures will ba a further reduaiun ofthe public sector wage bjJJby 10 percent over the next two years by reduang positions. This action will be supported by the EuropeanUnionfundrngfor redundancypackages. 13. In order to achieve this medium-term target, the Govemem wiil front-load our ltiscal adjustmeat effbrcs bytargetmg a pnmary surplus of: {a) 0.5 percent of GDP for the next fiscal year; @I)2 percent of GDP for FY05/06; and (c) 3 percent of GDP fbr N06/07. However,these targets would be adjustedto a c c m a h t e the cost of sevwrance pameats associatedwiththe reduction m public service employmcfilt, unless they are fmanced by grants. Even after the adoption of the fiscal ad~ustmaameasures for the Fy04/05 budgq sizeable financmg saps wdl "am, of the order of 8% of GDP for 2004, which are e x w to becoverwf bythedebt restructuring. 3 31 01/06/2004 09: 50 . .- .-17574480454 - MIN OF FINANCE PAGE 05/13 14. Debt m a n a m. The G"mt also mognized that weaknesses m debt managem- inherrted from previous administrationshave been a critical factor inthe rapid rise of our public debt burden. In management of "a1 order M correct this, theand Gowmment has taken a number of steps, mcludmg the cansolidation ofthe domestic debt in the newly estabhshed Cash and Debt Manage" unit and, witb the help of the World Bank, has begun a review of debt managematr l@f&on with the iZaention to update it and strengthen accountability and conno1o m the Conaactjng ofpublic debt. Tt is our intention&that the revision ofthis legislationwill be ready for presaaation to Parliamentby Drrember 2004. 15. Tax mb-" Wah support from CARTAC andthe I M F ' s Fiscal AfEZirs Departmart, the GoVemmerrt has completed a review of the tax system and has jd&ed a number of key reforms that wlll help to srengtben revenue mobilization. In particular, the Govermnent is commitid to the intrududcm of a Value Added Tax to replaceOUT current sales and consumptiontaxes. Work has already startedto prepare hr the implem~mwh& we hope to achieve by mid-2005. The Government will take a policy decision to reduce signiflicantly discretiunary tax exemptims by F d December 2003 in an effort to rationalize our tax system. In addition, we will also muduct a review by mid-2004 of statutory and discrecianarytax exemptions with a view to assessingtheir cd%aimess andjustiiicatiun, and to prevent abuses. Ensuringthat government expenditureis efficiently and effectivelyusedandmanaged 16. Financial manamert. The recent fiscal outcomes ievoaledthat Dominica needed to accelerate an ongoing program supported by CIDA's Eastem Caribbean Economic ManagementProgram ( E C W ) to strengthen OUT financial management systems and practices. Wrth support from DFD and CARTAC, and on the basis of a recently agreed Financial Manage" Actian Plan fiom the World Bank Country Financial Accountabllrty Assessment (CF,AA), the Govern" bas taken a series of measures to immediatelyimprove casb mabagemat and expenditure cmtrols. These includethe establishment of a new Cash Manage" Committeeand Cash and Debt Management Unit mthe Myllstry of Finance and Plannhg (MoFP) that maitor cash availability and line ministry Commmnents and spending. Together with the Budget DiVisiCm, these bodies have begun adjusting expenditure allocations and enforcing line ministries on cash management and commitment controt was held m December and an b c a m " e n t lrmie tbr line ministries an a monthly basis as per revenue inflows. A training sessionafarl Auditor has been appointed to help ensure that line ministries and agencies fbllk new financial managementprocedures. To help strqthen cash management the Government has also streamlined the number of bank awounts used fbr public busmess, although sane of those remain because of requirements by donor agencies. In addition, the Gowrnment has taken measures to improve the monitoring and cmtrol of the remaining public banks accourrts. ?me actions haw helped to halt the increasem, andreducsthe stodc of, arrearsby ECS.7millim duringthe first quarter dFY03104. 17. Under CIDA's ECEW, a new compirterized information system (SIGFIS) is operational today m five ministries and departmePrts and will be rolled out to all ministries, departments and agencies by the end ofthis fiscal par. W& coutinuinghelp from DFIDand CARTAC, we imendto further strengthen the l31ancial rnmqmmt and budget processes, including by improvingthe covmge of the budget and public acmms. In support &these efforts, tbe Gove"emt will prepare a new Finance Admmstdon . . Act which reflectsallthe newprocesses andproceduresfor submissionto ParliamentbySeptember2004. recovers. we will need to improve the productivity afpublic mveslmeut in supporting a resUmption of I S . Public investment. The Government recognisesthat during the next fkw years as private mvesbnent grcwfh, afbeit within limits of OUT fiscal program. Witb the asststance of the World Bank and the Government of Barbados who seconded One of their seaiot staff to assist us, we haw made substantial progress m addressing this challenge. We have restructuredthe public sector invwtment pmgram, first by 32 4 MIN OF FINANCE PAGE a m 3 extendingthe planninghorizonto threeyears and by cancelhg a number of problemprojeas that were itxconsistent with the priorities of spurring growth and reducing poverty. Second, we wfocused the irst year ofthe threeyear program, FY03/04, an pmJeasthat stimulate growth, are labour intensiveto h@ provide short term employment, and have primarily extemal cancessicrnalhancmg. Six petcent ofthe FY03/04 PSIP is being h a n d by government resources, with 68% combg from external me, and 27% fmexternalloans. 19,New procedures governingthe public invesnnart programme have been adoptd which clarie the selection criteria and approval processes for newprojects andensurethat adequate analysis i s undertaken before projects are included in the national program, includingthe consistency oftheir W c h g with the GOvemrnent's debt strate~3y. A Projects Supervisory Committee has been appointedto oversee seledon and financing, and to guide the imp1emart;aian of all projects. Already we ham achieved improved monitoring of the PSIP as evidenced by the publication of ttxe first quarrerly e x d o n report based 011 almost complete reporting by line ministries of the execution of both g m " t and donor-financed projects. This report has been shared with th0 public through the lndEpendepa Monit4iolg *up (discussedbelow). Our " r t i j o n rate ofthe PSKP ha5 increased from 10% in h e first qusrtar o fRT02/O3 (albeit this may have been excaptionally low because of over-projscriagand under-reporting), to 91% m the first quarter ofFY03/04. Underthe reorganizatianof Ministry of Finance, the Public Invemnentlht will be by iillinga number ofvacancies. The next s t ? , d be to update Chethree-prPSIP under the new procedures. This work has already started and will be campleted m h e with budget preparatian in 6r FY04105. 20. Public Sector Re-. The Gowrnmeot recognizes that the cumat lmts of public expenditure and public sector &ng are no longer affordable given Dominica`s growth prospects m the medium term. The Gavermnerrt intends to accomplish this through a fundamd rd.orm of tbe public sector in Dominica (see para. 12). To ths enh,the Government has prepared, wi& the participatjm ofthe p r i w sector and civil society, a Medium T m Public SecCor Reformstrategy (M"SRS) that aims to reduce the cost of government m an orderly and &&dive way in order to achieve fiscal and broader economic stability and at tbe same time Create a dynamic, accountable, eficient and effective public service to provide a stmng basis for the sustainable and irrtegratd political, social and economic development of Dominica. The strategy has fbur key components: (i) modernize public admwstratr`an; (ii)strengthen . . economic (ii) theenablkgenvimmart, and(iii) enbance rationalize social service delivery andimproveitstargeting. 21. A Task Force, chaired by the Minister of HeaTth (designated champion) comprising public oS,cicials, the private sector and civil society has been appointedto oversee the implmdcm ofthe suategy. The Reform Management Unit which will cosrdinzte the implemcntatian af the shategy bas btxn strengthendby the ad&m oftwo advisers inthe areas ofpublic sector m c d " i o n and priVate sector develupment with suppan fiom the European Union. In addition, further teclznical assistance will be provided for the social service rationabion component of the strategy. Assisted by DFID, wrk has already begun on a number of the componmts. Under t t i - e S m compaaent "Modernize Public Adminis~atim",work an the formulation of a mediumtenm policy agenda and @"en& to the line ministry corporate planning process has been initiated over the last %wmomhs, as well as prepa"s for implementing a manpower planning model developed in-house m FYO4105. The work on social senrices rstionalisatianis expected to include an examinatioo of uptions f;x school consoiidation in order to reachmore eEcierrt pupil-teacher ratios, possibilities for cost recovery inthe health semr andways to b p m targeting of public assistance progiams. `Iha report af a Scoping Study on Stxn@hening the Enabling Eavirmmeut for R i m e Sector Development (SEED) which was . h d d by DFID has been adopted by Cabinet and the majar recommandationshave formed palt o fthe work planfor &e compmmt ofthe private sedor develapmentpartofthe MTPSRS. 5 33 -. -..01/06/2004 -. 09: 50 - -17674480054 MIN OF FINANCE PAGE 07/13 Protectingthe poor duringthe stabilisatioaand adjustmentperiod 22. In addition to the preparation ofthe I-PRSP dis~ussedabove, th? Cmemment is m g a numbcr of measures to pmteclthe poor and vulnerable during &e stabilisatim period. We have also identified a number o f cmcial expendhues in.the social sectors which are being protected durmg the CUIT- fiscal year. The MTPSRS w3.I address the imprmurt intargeting of social pmtectian pm- including through the preparah`an of a national povarty map. In addition, the Enropean Union has p e m s l y pmvided fimding fbr a new Social hvestment Fund of EC$13.5 million o m three years. Fm&, the Govemerrt intends to pravide campensmion to the public sector employees affected by the donalizatian exercise discussed above, and to offer a program of assistance for hebhg these persans fmd alternativesources of " m e andemployment. Jmpravingthe climate far privateinvestmentandtheperfomance of growthaectors 23. The economic slowdown over the past decade has taken a toll o(1tbe well-being ofthe papularion. By undertaking difficult measuros to address the fiscal situation and increase co~xlpetitivwless, the Cbmn"t intends to send a positive signal to the private sector that it k committed to better management of the economy. Through this demonstration &ct, we aim ta restore mfidence. As detailed below, the G o v e " t is also addressing a number o fictofi that were proyen obstacles to greater prime sector investment and activxty jn the past. Steps to reduce the cost o f doing busmess Will have a posirive effect on g r 4 by amactiug more investment and increasingpro& margins ofdcandc producers. 24. Public-~rivatesear relations. Inthe cmsu~onsover the past p r , the primte sector indicated a needto institutionalize relatims with the GOvemmQlt on ismrc!--iAto m w climate and m. To this end, the Govemment has established a Cansultatiw Working Group on Private Sector Develupmmt and, whh assistance h m the European Union, appolmed a Private Seaor A h o r m the Reform Mamgement Unit. In addition, the private sector is in the process of establishing an umbr~lla group to liaisewith the Gmmmentonrelevantissuw. 25. Tourism. Giving ef%ct to the vision of making our courrtry a major nature tourism destination of the wdd, the Govemeut mtcnds to find ways to more carefidly define its niche inthe world fca-t" market. Inthis regard, we arepreparingan Eco-TourismStrategy with support fimthe EuropeanUnion. Work has a h started on impwvemaa~to the Melville Hall w o r t and on the Melville Hall-Roseau road, which are financed bythe EUmdAgence FrancaisedeDeveluppement,respectively 26 Apriculture. Banana exports were Once a staple of our economy. but have declbned sharply due to a new extemalenvironment. Wfi support fbm a number of dcmors, the Govern" has embarked on. a program to improve productMty in the banana sector and promote diVersi4Cation mm agri-1 products such as orgmc production, fisheries and livestock rhrougb investments in imgatJcm, access mads and dlenterprise development. The Dominica Banana Marketing Company has recently been primtisedand is shiftingtoward specialisedpmctuct.ianandnichemarkeung. 27. Financial sector. Integral to the business envimmmt in Daminica, a sound homcial sector is necessary for mobilismg saw,providing efficient commercial transactions and credit tinancing fbr private mwstment. In this respect, the Govermnent has taken a number dmeasutes to strw~gthenkey institutions m the kancial sectox, including the National Comme'rcial Bank, the Agricultural Industrial Develop" Ban4 andthe &OE andcredit union subsectors. 28. Nark" Commerctal &mk (NCB). With respectto the NCB, Dominica`s largestfinancial instituticm, the Gwe"ent intends to take steps to strengthen the bank and make it a compeatiW player in the sub- 6 34 01/06/2004 09: 50 171674480054 "_ ... MIN OF FINANCE PAGE 68/13 regionalfinancial market, As a first step. the Govenunent has reduced its shareholdiag in the bank *Om 51% to 49%, reduced its repW&dan an the NCB Board of Directon and p h c d it ~ n d d the Companies Act (repealing the NCB Act) to level the playing fieldSecuritieS commercial banks. n e s e steps pave the way fix NCB to be listed on the Ea- Can%- with otherExchange hearly2004. In addition, the Govemmm iutends to "-act an inv" advisor to propose the best modalay for &vesting additional shares m the commercial bankand has approachedthe EuropeanUnionfor assistance in this regard. The C b e " e n t intends to reflcct the recommendationsofthe ongoing OECS FSAP in its fuhrre actionsto further strengthenanddivestNCB. 29. An additional area d mcem for the Gw"ent is the concentration of NCB's portfolio m the public sector. A siguificaut share of the proceeds of the sale of shares has been used to reduce G o v e " & ' s arrears to NCB and Dominica Social Security (DSS). Tnthe m d e , NCB will adhere strictly to the central bank's prudential guidelines regardmgthe taking of irxtere~einto income on, aud making proVision for, any public sector debt and debenturesthat are in arrears. To furtbet @rove the apmians of the bank, the Eastem Caribbean Central Bank has established a memorandum of understandingwith the National Commercial Bankunder which NCB is taking measuresto strengthen its cr& managementand reduceits level ofnon-perf;orming loans. 30. Agricultural Industrial Developmnt Rank (AID). ln a similar m,the Govenuneut intends to take measures to strengthen the s " e d Agncuhral IndusaialDevelopment(AID) Bank. LikeNCB, the Govommemimends to r&ce its role in the management of the bmk and is m the process o f retaining a consultant ta conductan audit of its portfolioand waluate strategic opt". 3 1. Credit Unions. Dominica's vibrant credit unions are a major cornponeart of the financial sector. The Gown" has embarkedon a programto strengthen non-banking financial inszitmons through the establishment of a single regulatoryand supervisory unit under the h4hstry of Finance and Planning, which will receive technical assistance m its functions from the Eastem Caiibean Central Bank. Wrth respectto the credit union sexor, this unitwill share responsibilitieswith the CooperativesDepartment of the &istry of Communrty DewlcrpmeMand Gender Affiirs for the overs@ ofthe credit union sector. The Government has amended the Cooperatives Act to assign the'responsibil~tyfor financial. regukdion and supemision of credit uuim to the MofP. As a i5-sstep m operationalizlngthis amgem- the Gwe"ent, with the assistance of ECCB, completed a pilot joint MoFP-Cocperatives Department inspection of the largest credit union, Roseau Cooperative Credit Union, in December 2003. A Committee comprising representatives from the Cooperative League, (a civil society group), Mom, and the Coopemtives Depart" has been establishedto rwiew the regulations under the Cooperatives Act. This work is expected to be campleted by March 2004. Once the new repuldons are m place, the Gavemment expects to complete inspedcra of der Iarge coopdyes by December 2004. The MoFP and the Cammissioner of Cooperatives will also take steps to ensure that any vulnerable credit unions take timely measuresto streogthen their operations. 32. Dominica Social Securiry @Sg Since July 2003, the Go~mmer~t ramained ament on its has payments of employer and employee contributionsto Dominica Social SecuriCy. As the same time, the Government is concerned that the DSS portfblio is amcerrttatedheavily inpublic sector assets, as well as locally. To this end, the DSS boardofdirectorshas adopteda policythat 20% ofDSSportfblioshmldbe invested in assets outside of Dominica. The Government has instructed DSS to prepara, by end March 2004, a %mal mediumandlongterm investmentstrategyto achievethis tam. 33. Ofly'shore sector. Dominica bas been making sceady improvements m the management of its o m o r e sector. The legislative framework is largely complete and the Mmey LaunderingSupervisory Authority and Fmslcial Intelligence Units are fully statfed. As a result of these ffirts, the CoUIxtry was removed f"theFATFlistofn&cooperatmgcuuutriesandterritorieskrktober2002andtheofihoresector 7 35 01/06/2004 09: 50 176744800c4 .. - MIN OF FINANCE PAGE 89/13 has declined substantially. All of the off5hore banks, but one have closed or have been C b S e da d the number of international business companies has fkllen by over 80 percent. The Government r-ses the needto rwiewthe patential ofthe otFshoresector. 34. Petroleum pricinq. In an effort to stabjlize revenues f?om the oil imports, cocrect price distortions with respect to downstream products while ensuring the long tenn sustainability of the sector, the Government has begun implementation of a refomprogflm in the petroleum sector involvinga revision ofthe price structure and raxaticm mpthod. ,InOctober 2003, the assistance o f d~ World Bank, the Govemment replaced its old system of ad hoc adjustments to petroleum retail prices and a fluctuating consu~ontax with a mechanism m which retail prices are adjusted 8 weeks to d e c t fl~ctuath"inthe import prices and are basedOna formula includinga flat Cansumpaantax of ECS2.70 per imperjal gallon. The Gom"t will ccQltinue neguiatiuns cw participantsin January 2004 to review the operation ofthe new system wit11 a view to ensuring thar the most c0mpetit.i~Imek are achieved. The Govemrnem will also take steps to streamline tbe price adjusmzntprocess and codzfy it in the regulations to the Supplies Coutrol Act by a d February 2004. At the same time, the Gdvemmerrt i s Trinidad- Dominica'smainsource-to the rest ofthe region. The Gwemment,m collaborationwith the supparthg a number of other CARICOM sates which are reviewingthe pricingofpmleumproducts by OECS Secretariat, will also host a workshop early next year to showcase our reform programio other OECS membercountries. 35. Electricitv refinn. Recamly, as a radt of the re versa^ of a customs tax exemption an fuel imported fm electricity generation, DominicaElectricityServices -the privatelyawned u!iliry sought to increase - tariffs by 17% to reflect the increased fie1 costs. Tbe Gwemmt teels tbat the company can and should the r e g u h q hmwork, including tarifF setting mechanisms, for the electric settof with the aim of q m t e more efficierrtiy. With the help of the World the Govemment has coqbtd a review of pdding greater m c d v e for efTiciency and adequate consumm protection. Government has amended the Electricity Supply Act as the first stage of a process of compr&erxsively revising the regulatory frameworkfor the electricity sector, the entireprocessto be campldbyJune 2004. 36. Maritime trans^ort costs. The Government had long recognizad &at high port charges s t " h g from outdad work anangments were an importaut stumbling block ra Dominica's competitiVeness. However, difficulties m negotiating with the port workers' union mcludmg m a l court actions delayed any resolution o f this matter. The Dominica Port Autbonty has now revised its work arrangemem~ allawing it to reduce stewdoring and lang-shoring charges by 23;; and cbarges fbr handling break-bdk cargo by 30% as o f August 2003. These measures are expectedto reducethe transportations casts which have been a major impedimentto increasing exports, and costs of imporcs. This has already resultedin rhe remaal of additianal charges by key shipping fines, includingan ECS190 per entamer surcharge by the Caribbean Shrp h e r s ' Associatian Pendingthe outcome of a remaiDjng Tribunal adion pertaining ta the role oftbe union m w k ram,the Port Authoritywill negotiateanewcantractwith the aimof furrher reducingmaritimetransportcosts. 37. Public mtemrises. The Government is completinga review of public i"ent and invOlvemattin private enterprises, includingthrou& minority share ownership and loanguarantees, as part of a broader review ofthis issue. Toe Govemmmt intends to adopt a dear policy for the establishment of public enterprises and public investment m private companies, and prepare a programto implement this policy underthe MedimTermPublic Sector R&m Strategy. byJune 2004. Increasingparticipation of stakeholders in programmemonitoring 38. Throughout the stabilisation program, the Ganm& has followed an approach of openness and consultation with a broad cross-section of` Dominicans, Extensive amsultatians with labour unions 8 36 01/06/2004 .- 09: 50 .- 17674480054 -. -.- MIN OF FINANCE I PAGE 16/13 , during the Stand-By Arrangement with the IMF preceded important changes in the agreed fiscal measures. The Reform Management Unit held regular sessions within the public &ce ta sensitize officials on their role in the stabibsatiun programme. Meetingswere heldwith an Economic Stabilisatim Cansukatian Group (ESCG) comprisingtrade unians, private sector and civil society. Earlier this year, them was widespread and open public debate of the proposed fiscal measures leading up to the June p r e s d o nofthe Governmeat'sbudgetto Parliament. Onthis basis. we were able to undertakethe vex)' di&cult public sector wage cut with considerablepublic understanding and acceptance. At the request of civil society, the Govemmart reedy appointed an Independent Monitoring Group made up of civil society represdves, including m@ous organizatiuns, which receive monthly reports OD. the stabilisatim program and publish their own analysis of our performance The Govim" intends to continue this approach of openness and pansparemythroughout the implemdm of the medium term refbrmprogramme. 39. In addition, the G-cm"em wiJl provlde quarterly written intplemdan reports and any otber relevant inhmat.ion on the progress of the r&m programmeand ecanomic developments in the country to theWorldBankthroughend 2004. Requestfor Financial Assistance 40. The Gavemmeut is fully an."to securing a better future for Dominica through economic stabitisation and growth, and has developedthe programme o f reforms outtined above andin the attached matnx to achieve this end We wauld like to requestthe World Bank's assistance as we embark on this challenglng but necessary path. We look f o m d to working together wth the World Bank 011 implemerrtingthis pmg"ne and developmga scmegy furthe future. Sincerelyyours, w PrimeMinisterandPierre Charles Minister&Finance andPlanning 9 37 Electronic copy of attached matrix outcomes Performance Measures Satisfactory macroeconomic framework as Maintenance of a satisfactory macroeconomic Satisfactoryperfoonance on macroeconomic demonstrated by the continued framework. the Govemment's L management implementationof the Govemment stabilisation programme stabilisation program supported inter alia by the IMF PRGF. Improve financial management by Roll out Minformation system to remaining Effective expenditure and management (i) establishing a cash and commitment line ministries andagencies [June20041 commitment controls in management system that adjusts line Submit new FAA Act to Parliament place ministryexpenditures allocationsand [September 20041. Improvedbudget execution enforces commitment limits on a monthly Preparation of Cash Management Manual and cash management basis in line with resource availability; [June 20041 Achievement of specific (ii) reducing the number of govemment bank Continue monthly reportingby line ministries expenditure targets under the accounts; and and presentation of monthly reports to Govemmenr's stabilisation (iii) appointingan intemal auditor to ensure the Independent Monitoring Group. programme implementationof new financial management proceduresat the ministry level. Debt management Improve debt managementby Satisfactory implementationof debt Improveddebt management + (i) consolidating the managementof extemal management strategy New regulatory framework and domestic debt; Submit to Parliament revised legislation in placeforpublic debt (ii) Cabinet adoption of a mediumterm debt acceptableto the Bank on govemment strategy acceptableto the Bank. borrowing to improve control, transparency and accountability inthe contracting of public debt [December 20041 Public investment Improve management of public investment by Update rolling PSIP for FY04/05-FY06/07 Increasedproductivity of (i) adopting athree-year PSP acceptableto the using new procedures [June 20041 public investment Bank; Continue monthly and quarterly reportingon 75% PSIP implementation (ii) newproceduresacceptabletothe issuing PSIP execution. rate Bank for the planning and administration of Alignment of PSIP with public investmentprojects that identify clear upcoming PRSP and criteria for project selection and establish a corporate plans of line Projects Supervisory Committee to oversee ministries the process; and (iii) publicizing the first quarterly report on the execution of FY03/04 PSIP basedon monthly reports of project expenditure from line ministries. Public sectorreform Prepare, adopt and beginimplementation of a Satisfactory implementationof Public Sector ore efficient and effective MediumTerm Public Sector Reform Reform Strategy public service delivery Strategy, acceptableto the Bank, for tmplement first stage of downsizingprogram 5% reduction in public achieving greatercost efficiency and as per targets inthe Govemment's sector wage bill by redacing effectiveness of public service delivery stabilisation programme. [June 20041 employmentfor FY04/05 focusing on :(i) modemizingpublic sector administration; (ii) strengthening expenditure management, (iii) enhancing the enabling environment for private investment and (iv) rationalizingsocial service delivery and improving targeting. Financial sector Development implementationplan and begin implementing Dominica-specific recommendationsfrom OECS FSAP 38 ReformArea Key Prior Action for the ERSO FutureBenchmarks Outcomes December 2003 January - December 2004 8Performance .Measures Sational Commercial Strengthenthe operationsof NCB through Following completion andrecommendationsof Improvements in financial Bank (i) establishingaMemorandumof OECS FSAP, preparea strategyfor further conditionof NCB Understandingbetween ECCB and NCB on strengtheningandlor divestment of NCB Harder budgetconstraintfor actions to improvefinancialhealthof the public sector bank, including time-bound benchmarks for 8Reduce NCB exposureto the reducingnon-performingloans; public sector as a share of (ii) repealingthe NCB Act and placingthe bank tier 1 capital and reserves under the Companies Act to equalize its by 5percent. treatment with that of privatecommercial NCB reduction of non banks; performing loans by 3 (iii) reduction of Govt shareholdinginNCB percent of loans and below 50% equity stakeanduse of a advances in 2004 significant share of the proceedsto reduce public sector arrears to NCB and DSS; and (iv) restructuringNCB Boardof Directors so that the Govt cannot appoint morethanthree of the seven members, nor the Chairman. Cooperativessub- Improvefinancial supervisionandregulation of Adopt revisedcooperative regulationsto Strongersupervisionand sector the credit unions by: operationalize MoFPresponsibilityfor improvedfinancial (i) submittingto Parliament an amendment to strongerfinancial supervisionof credit conditionof credit unions the CooperativesAct to assignresponsibility unions [March20041 8 Regulatory framework for for supervisionand financial regulation of Formulatean approachand timetable for joint supervision of credit unions credit unions to MoFP; MoFP/CooperativesDept/ECCB inspection in place (ii) completingajoint MoFP/Cooperatives of credit unionsbasedon pilot inspectionof 8 Improvement in the Dept/ ECCBinspection of the Roseau RCCU [March20041 financial condition of most CooperativeCredit Union (RCCU); and Completejoint inspection of other credit vulnerable credit unions (iii) establishinga committeeand timetable for unions [December20041 revisingcooperative regulations. MoFPandCommissionerof Cooperativesto direct most vulnerablecredit unionsto take timely measuresto strengthentheir onerations Agricultural Conduct a portfolio audit andevaluate Stronger supervisionand Industrial strategic options for AID Bank [June improvedfinancial DevelopmentBank 20041. condition of AID Bank. Adopt andimplement strategic options for Strategic plan adopted by AID Bank [December20041 Cabinet Recommendationsof FSAP implemented Dominica Social Govt to remain current on employer and DSS to prepare and adopt mediumand long Financialstability of the social Security employeecontributions to DSS which term investment strategyfor managingDSS security fund. resumed on from July 2003 assetswhich includes regional and 5percent of asset in non- international diversification. [March20041 Dominica investments by Govt to remaincurrent on employer and December 2004 employeecontributionsto DSS. No new public sector arrears to DSS Petroleumpricing Introducean new mechanismfor adjusting Codify price adjustment mechanismsin Market-basedpricingand domesticpricesof petroleumproducts in regulationsto the Supplies Control Act increasedtransparencyin line with intemationalprice movements, [February 20041 pricing of petroleum including regularpriceadjustments,a Continue adjustingpetroleum prices in line products specific consumptiontax and uniform with internationalpricemovements. Codification of new pricing allowancesacross industryoperators. [ongoing] mechanism Completereview of new system, including Continued implementation intransit and haulageallowances [January ofwith new pricing 20041 mechanism Work with CARICOM to reviewthe pricing of petroleumproductswithin the Community. [ongoing] Port charges Reducecargo handlingcharges at Dominica Establishnew employment andpay scheme for Reducedcost of doingbusiness Port Authority by 25 percent. cargo handlers [December 20041 in Dominica Reduction or removal of additional surcharges established by private shipping linesfor services to Dominica Electricity reform Submit revisions to tariff formula in Electricity Greaterincentives for Supply Act to Parliament [January20041 efficiency inelectricity Submit fully revisedElectricity Supply Act to regulatory framework Parliament [June 20041 New performance- based regulatoryframework in place 39 public investment-inprivatecompanies. privatesector [March20041 Cabinet adoption ofpolicy Prepareandadopt aclear policy for the on public enterprises and establishmentof public enterprisesand criteriafor public public investmentinprivatecompanies. investment in private [June20041 companies Prepareprogramto implementpolicy for inclusion under the Medium Term Public Sector Reform Strategy. [June20041 40 ANNEX 2. KEYECONOMIC INDICATORS Actod Projected Indicator 19% 1997 1998 1999 ZOO0 2001 2002 2003 2004 Nationalaccounts (as % of GDP) Gross domesticproductd 100 100 100 100 100 100 100 100 100 Agriculture 20 19 19 19 18 18 19 18 19 Industry 22 22 22 22 23 22 21 20 21 Services 58 59 59 59 58 60 60 59 59 Total Consumption 83 77 80 85 88 97 103 100 102 Gross domestic fixed investment 27 31 27 25 25 21 11 13 15 Govemmentinvestment 10 7 7 10 17 15 7 7 8 Privateinvestment 18 25 19 15 8 6 4 6 7 E X P O ~ ~ S (GNFS)~ 51 56 58 58 54 46 47 47 47 Imports (GNFS) 61 64 66 68 68 64 60 62 60 Gross domestic savings 17 23 20 15 12 3 -3 Gross national savings' 14 21 19 10 5 3 -4 -4 -0.5 Memorandum items Gross domestic product 236 244 259 268 269 262 252 253 261 (US$million at current prices) GNI per capita (US$, Atlas methodId 3,010 3,130 3,230 3,190 3,190 3,280 3,180 Real annualgrowthrates (%, calculatedfrom 1990 prices) Gross domesticproduct at factor cost 2.6 1.5 5.0 1.6 1.4 -4.2 -4.7 -1.0 1.o Real annual per capita growthrates (%, calculated from 1990prices) Gross domesticproductat factor cost 2.5 1.4 4.9 1.5 1.3 -4.2 -4.7 -1.0 1.o Total consumption 3.1 -5.7 10.0 6.8 4.0 3.3 0.9 Privateconsumution 3.5 -8.4 8.7 8.2 4.9 4.7 2.6 Balance of Payments (US$millions) Exports(GNFS)b 121 137 152 155 144 121 118 118 123 MerchandiseFOB 53 54 63 56 55 44 43 40 41 Imports(GNFS)~ 145 I56 171 181 183 167 151 157 155 MerchandiseFOB 100 104 116 122 130 115 101 106 106 Resource balance -24 -19 -20 -24 -39 -46 -33 -39 -32 Net current transfers 10 10 13 14 18 18 16 15 13 Current accountbalance -32 -26 -23 -35 -53 -48 -37 -42 -40 Net privateforeigndirect investment 18 21 7 18 11 12 13 13 13 Long-termloans (net) -2 -10 -9 24 34 11 1 9 -11 Official 4 -4 2 35 21 23 25 11 -10 Private -6 -7 -11 -11 12 -12 -24 -4 -2 Other capital(net, incl. errors & omissions) 18 16 14 -7 -3 8 21 11 -_ Change in reservese -2 -1 -4 -4 2 0 -13 -2 -2 Memorandum items Resource balance(% of GDP) -10.0 -7.9 -7.2 10.5 -14.5 -17.6 -13.1 -15.4 41 Central government finance (as % of GDP at market prices)' Currentrevenues(including grants) 26.0 27.8 31.0 32.1 37.2 30.1 32.6 34.0 32.4 Currentexpenditures 24.4 27.6 27.8 30.1 31.9 33.1 33.2 32.8 31.2 Currentaccount surplus (+) or deficit (-) (includinggrants) 1.6 0.2 3.2 2.0 5.3 -3.0 -0.6 1.1 1.2 Capital expenditure and net lending 8.6 7.6 13.2 13.4 16.6 5.7 5.1 7.0 7.0 Foreignfinancing 5.6 3.8 4.7 12.1 5.9 3.7 6.6 4.2 -3.6 Monetary indicators M2/GDP 57.1 57.8 60.6 64.8 64.3 71.0 82.1 85.9 Growth of M2 (%) 2.0 3.5 11.4 10.4 0.6 7.4 8.5 3.0 Private sector credit growth .. 2.4 8.2 -3.2 -1.4 -1.0 3.1 Consumer price index (% change) 2.0 2.2 1.5 0.0 1.1 1.9 0.5 2.5 1.5 GDP deflator (% change) 2.8 1.7 1.2 2.5 0.6 1.2 -0.4 1.5 1.5 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includesnet unrequitedtransfers excluding official capital grants. d. 2002 representsGNI per capita (Atlas). e. Imputedreserves at the ECCB. Includes use of IMFresources. f. Fiscalyears e.g., 1996=FY96/97. 42 ANNEX 3. DOMINICAAT A GLANCE Dominica at a dance 12/20/03 POVERTY and SOCIAL America middle- Dominica & Carib. income Developmentdiamond* 2002 Population, mid-year (millions) 0 07 527 331 GNIper capita (Atlas method, US5) Life expectancy 3,180 3,280 5,040 GNI (Atlas method, US$billions) 023 1,727 1,668 Average annual growth, 1996-02 Population(%) 0 1 1 5 1 2 Labor force ("A) 2 2 1 8 IGNI Gross per primary Most recent estimate (latest year available, 1996-02) ~ capita nrollment Poverty (% ofpopulation belownationalpovertyline) 39 Urban population (% of totalpopulation) 72 76 75 Life expectancy at birth (years) 77 71 73 1 Infant mortality(per 1,000live biii`hs) 18 27 19 Child malnutrition(% of children under5) 9 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 99 86 90 Illiteracy(% ofpopulation age 15e) 9 11 7 1982 1992 2001 2002 Economic ratios' GDP (US$billiuns) 0.07 0.19 0.26 0.25 Gross domesbc investmenVGDP 31 30 21 11 Trade Exportsof goods and servicesiGDP 41 52 56 53 Gross domesticsavinqslGDP 3 16 3 -3 Gross nationalsavings/GDP 17 16 3 -4 Current account balancelGDP -11 -13 -18 -15 Externaldebt interestpayments/GDP 1 1 6 8 ExternaldebVGDP 28 50 71 84 Externaldebt service/exportsGNFS 2 5 11 12 1982-92 1992-02 2001 2002 2003-07 Indebtedness (averageannualgrowth) GDP 4 4 1 2 -42 -4 7 1 2 -Dominica GDP per capita 4 8 1 0 -42 -47 1 2 Exportsof qoods and services 8 1 1.1 -17.3 -2 0 1.3 STRUCTUREof the ECONOMY 1982 1992 2001 2002 1Growth of investmentand GDP (%) ("A of GDP) 1 Agriculture 30 22 18 19 Industry 20 20 22 21 Manufacturing 8 8 7 8 Services 49 57 60 60 Private consumption 73 64 75 81 Generalgovernment consumption 25 20 22 22 imports of goods and services 70 65 64 60 I GDI +GDP I 1982-92 1992-02 2001 2002 1 (averageannualgrowth) Growth ofexports and imports (%) c Agriculture 2.1 -2.0 -6.6 -0.7 Industry 6.5 1.4 -5.2 -10.3 Manufacturing 5.4 -0.1 -14.0 -0.4 Services 4.8 2.3 -3.3 -4.0 97 98 9 Privateconsumption 3.4 2.9 4.7 2.6 General government consumption 2.2 2.2 -1.3 -5.2 Gross domestic investment 6.0 -4.8 -25.4 -52.1 Importsof goods and services 5.8 1.4 -11.6 -12.1 Note: 2002data are preliminary estimates `The diamonds show four key indicatorsinthe country (in bold)comparedwith its Income-groupaverage.If data are missing,the diamond will be incomplete. 43 Dominica PRICES and GOVERNMENTFINANCE 1982 1992 2001 2002 Domesticprices Inflation(%) 1 (% change) Consumer prices 4.2 4.3 1.9 0.5 ImplicitGDP deflator 4.5 4.1 1.2 -0.4 Governmentfinance (fiscalyear) (% of GDP,includescurrentgrants) 1 Current revenue 28.1 30.1 32.6 97 98 9-9 00 01 %I Current budget balance 2.4 -3.0 0.6 Overall surplus/deficit -6.6 -8.6 -5.5 --GDP deflator h C P I I TRADE 1982 1992 2001 2002 (US$millions) Export and import levels (US$ mill.) Total exports (fob) 55 44 43 II 1160 T Bananas 31 8 8 Other Agricultural Exports 6 6 6 Manufactures 18 30 28 Total imports (cif) 93 131 115 Food 19 26 Fueland energy 6 13 Capital goods 34 Exportprice index (1995=100) 93 78 74 96 97 98 99 00 01 Importprice index (1995=100) 89 100 92 Exports Imports Terms of trade (1995=100) 104 78 80 BALANCEof PAYMENTS 1982 1992 2001 2002 (US$millions) [Current account balanceto GDP (%) I Exportsof goods and services 32 100 121 118 Importsof goods and sewices 50 125 167 151 Resourcebalance -18 -25 -46 -33 Net income 0 -7 -19 -20 Net currenttransfers 10 7 18 16 Currentaccount balance -8 -25 -48 -37 Financingitems (net) 6 27 50 48 Changes in net reserves 2 -3 -2 -13 Memo: Reservesincludinggold (US$ millions) -4 20 30 44 Conversionrate (DEC, /ocal/US$) 2.7 2.7 2.7 2.7 EXTERNAL DEBT and RESOURCEFLOWS 1982 1992 2001 2002 (US$ millions) :omposition of 2002 debt (US$ mill.) Total debt outstandingand disbursed 21 96 170 194 IBRD 0 0 3 3 IDA 0 11 14 17 G:26 A:3 B:17. Total debt service 1 6 16 11 IBRD 0 0 0 0 IDA 0 0 0 0 Compositionof net resourceflows Official grants 6 6 10 8 Official creditors 8 6 14 5 Privatecreditors 0 0 12 2 Foreigndirect investment 0 20 12 13 Portfolioequity 0 0 0 E: 39 World Bank program Commitments 5 0 0 2 \ IBRD E. Bilateral Disbursements 0 0 1 3 I IDA -- D Other multilateral - F Private Principalrepayments 0 0 0 0 :.IMF G Short-term -- Net flows 0 0 1 2 Interestpayments 0 0 0 0 Net transfers 0 0 1 2 DevelopmentEconomics 12/20/03 44 ANNEX 4. TIMETABLEOF KEYPROCESSINGEVENTS Time taken to Prepare: 13 months (Identification to Negotiations) Prepared by: Government and World Bank Staff Identification Mission Departure: November 11,2002 Management Review Meeting: January 13,2003 Pre-appraisal: September 14-17,2003 Regional Operations Committee: October 2,2003 Appraisal: October 13-17,2003 Negotiations: December 24,2003 BoardPresentation: January 29,2004 Planned Date of Effectiveness: February 7,2004 Closing Date: June 30,2004 45 ANNEX 5. INTERNATIONAL MONETARY FUND EXTERNAL RELATIONS DEPARTMENT Press Release No. 03/228 International Monetary Fund FOR IMMEDIATERELEASE Washington, D.C. 20431 USA December 22,2003 IMFApprovesInPrincipleUS$11.4 MillionPRGFArrangementfor Dominica The Executive Board of the InternationalMonetary Fund(IMF) has approved a three-year SDR 7.7 million (about US$11.4 million) credit for Dominica under the Poverty Reduction and Growth Facility (PRGF) arrangement. The decision approving the arrangement will become effective on December 29,2003, provided that as of that date the Word Bank has concludedthat Dominica's Interim Poverty Reduction Strategy Paper (IPRSP) provides a sound basis for the development of a fully participatory PRSP. The effectiveness of the decision will enable the release of SDR 2.4 million (about US$3.5 million) for Dominica under the PRGFarrangement. The IMFExecutive Board today also completed the second and final review o f Dominica's one- year SDR 3.3 million (about US$4.9 million) Stand-By Arrangement, which had been approved on August 28, 2002 (see Press Release No. 02/37). The completion of this review entitles Dominica to the release of SDR 307,500 (about US$450,000), bringingtotal disbursements under the Stand-By Arrangement to SDR 2.97 million (about US$4.4 million). The Executive Board also noted Dominica's intention to cancel the Stand-By Arrangement as of January 2, 2004. The PRGFi s the IMF'sconcessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted ina participatory process involving civil society and development partners, and articulated ina Poverty Reduction Strategy Paper (PRSP). This i s intendedto ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 M-year grace period on principal payments. Followingthe Executive Board's discussion on December 19, 2003 for Dominica, Agustin Carstens, Deputy Managing Director and Acting Chairman, said: "The recent performance by the Dominican authorities under the Stand-By Arrangement (SBA) has been encouraging. Policy implementation strengthened considerably, reflecting steps taken earlier this year to control government spending. The structural benchmarks for September, October, and November 2003, as well as all performance criteria for end-July and end- September 2003, were observed. In addition, the authorities have prepared their debt strategy and elaborated a comprehensive medium-term economic program designed to reestablish growth and reduce unemployment-related poverty. These actions evidenced the firm commitment of the government to achieving the objectives set out inthe SBA. 46 "The authorities are now preparedto embark on the second stage of their economic strategy, during which they will implement an ambitious fiscal program, combined with their debt strategy and a comprehensive structural reform agenda, with the support of an arrangement under the Poverty Reduction and Growth Facility. "During the first year and ahalf of the PRGFarrangement, the primaryfiscal balance is projected to improve steadily. The adjustment will place greater emphasis on expenditure cuts, with key expenditure measuresincluding a continuation of the freeze on all other non-interest current expenditures inthe budget for FY2004/05, as well as a 5 percent reduction inthe central government wage billthrough the implementation of a comprehensive civil service reform. "During the remainder of the PRGF arrangement, the primaryfiscal surplusis targeted to reach 3 percent of GDP.Additional fiscal adjustment measuresto achieve this goal will include expenditure moderation and a second round of public sector retrenchment during FY2005/06 designed to reduce the size of the public sector wage bill, as well as measures to broaden the tax base and enhance the efficiency of tax collections. "A large residual financing gap will still remain over the mediumterm, which is expected to be covered by debt restructuring. However, determined efforts toward fiscal consolidation supported by reforms to improve the efficiency and competitiveness of the economy will continue to be essential for achieving debt sustainability and preventing the reemergence of a debt problem. "The authorities plan to focus their structural reform agenda on four main areas, namely: 0 Implementation of the debt strategy, which i s critical to securing financing for the program; 0 Fiscal reform, including civil service reform, tax reform, pensionreform, and improved budgetary procedures; 0 Financial sector strengthening and 0 Other reforms to improve the investment climate, enhance competitiveness, and diversify the economy. "These structural reforms will be implementedinline with the authorities' poverty reduction strategy, as articulated inthe authorities' InterimPoverty Reduction Strategy Paper, with a view to preserving essential social safety nets and reducingemployment-related poverty," Mr. Carstens stated. 47 Recent economic developments Dominica's economic situation remains difficult, but there are signs of a modest recovery in manufacturing and tourism inthe secondquarter of this year, partly offsetting the continued deterioration in the banana sector. For the thirdquarter, tax collections have rebounded and imports are beginning to expand due to a surge in construction. However, exports continue to shrink,mostly on account of low bananaproduction. GDPis expected to fall by 1percent in 2003. Programsummary The economic program supported by the PRGFarrangement envisages a return to growth by addressing the country's debt overhang and structural weaknesses. The program aims at boosting growth to an annual average of 2 percent, while preserving price stability. Growth i s expected to reboundfrom negative 1percent in 2003 to 1percent in2004, and to 2 percent thereafter. The program will also aim to significantly reduce the large current account deficit, mostly through improvements incompetitiveness. Consistent with a reduced level of debt, fiscal policy will be strengthened significantly over the medium term to reach a primary surplus of 3 percent of GDP. Achievement of this target will require the adoption of fiscal measures of about 5 percent o f GDP inthe next three years, given that the primarybalance in 2003/04 i s now projectedto record a deficit of about 2 percent of GDP. The authorities indicated that the fiscal program would be designed to still preserve public investment at the historical average ratio of 7 percent of GDP. The structural reform agenda seeks to removekey obstacles to growth, including the economic uncertainty stemming from weak public finances. The structural agenda covers four main areas: (i) strategy,toeliminatethedebtoverhangandcreatetheconditionsforgrowth;(ii) debt fiscal reform, which includes public sector reform, tax reform, pension reform and improved budgetary procedures; (iii) financial sector strengthening, to ensure an efficient functioning of financial intermediation; and (iv) other reforms to strengthen the investment climate, improve competitiveness and deregulate the economy. Dominicajoined the IMFon December 12, 1978, and its current quota i s SDR 8.2 milli,on (about US$12.1 million). Its outstanding use of IMFcredit currently totals SDR 2.67 million (about US$3.9 million). 48 ANNEX 6. STATUS OF WORLDBANKOPERATIONS Dominica:IBRDandIDA Operationsas of November 30,2003 Financier Proiect Amount Disbursed Approval Date ClosingDate IBRD OECSWASTE MGMNT (SIM) 0 0 4-May-95 28-Feb-02 IBRD OECSWASTE MGMNT (SIM) 600,000.00 0 4-May-95 28-Feb-02 IBRD DM- BASIC EDUCATIONREF 3,070,000.00 2,853,908.00 21-Dec-95 31-Dec-01 IBRD OECS: TELECOM REFORM 600,000.00 112,103.00 4-Jun-98 31-Dec-03 IBRD DOMINICA DISASTERMANAGEMENT 2,530,000.00 1,085,319.00 10-Dec-98 31-Dec-02 IBRD DOMINICA-EMERGENCYRECOVERY P 960,000.00 256,159.00 7-Mar-02 30-Jun-05 IDA ROADMAINTENANCE & R 5,000,000.00 4,436,808.00 1-Apr-82 30-Jun-88 IDA POWER 3,000,000.00 3,257,052.00 31-Mar-87 31-Dec-95 IDA SAC I 3,000,000.00 2,184,410.00 9-Jun-87 30-Jun-92 IDA OECS WASTE MGMNT (SIM) 600,000.00 470,851.OO 4-May-95 28-Feb-02 IDA DM- BASICEDUCATIONREF 3,070,000.00 2,866,004.00 21-Dec-95 31-Dec-01 IDA OECS: TELECOM REFORM 600,000.00 420,196.00 4-Jun-98 31-Dec-03 IDA DOMINICA DISASTERMANAGEMENT 2,500,000.00 1,524,107.00 10-Dec-98 31-Dec-02 IDA DOMINICA- EMERGENCYRECOVERY P 2,240,000.00 1,204,837.00 7-Mar-02 30-Jun-05 TOTAL 27,770,000.00 20,67 1,754.00 49