document of the world bank for official use...
TRANSCRIPT
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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 50152-DO
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
FOR A PROPOSED
FIRST DEVELOPMENT POLICY LOAN ON
PERFORMANCE AND ACCOUNTABILITY OF SOCIAL SECTORS (PASS)
IN THE AMOUNT OF US$150 MILLION
TO THE
DOMINICAN REPUBLIC
October 20, 2009
Human Development Department Caribbean Country Management Unit Latin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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GOVERNMENT FISCAL YEAR
January 1 December 31
CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 19, 2009)
Currency Unit = Dominican Pesos
US$1.00 36.10
ABBREVIATIONS AND ACRONYMS
ADESS Administrator of Social Subsidies AECI Spain International Cooperation Agency AF Additional Financing APL Adaptable Program Loan APMAEs Fathers, Mothers and Friends of the School Association (Asociacin de
Padres, Madres y Amigos de la Escuela) ATI Access to Information CAF Andean Development Corporation (Corporacin Andina de Fomento) CCSC Civil Society Consultative Council (Consejo Consultivo de la Sociedad Civil) CCT Conditional Cash Transfers CDEEE Dominican Corporation of State Electrical Enterprises CMU Country Management Unit CONARE National Commission for State Reform CRAL Social Crisis Response Adjustment Loan CSOs Civil Society Organizations CPS Country Program Strategy CRI Cost Recovery Index DGII General Tax Directorate DPL Development Policy Loan DR Dominican Republic DSA Debt Sustainability Analysis EC Executive Committee EU European Union ECD Early Childhood Development FDI Foreign Direct Investment FINCR Credit Risk Department in Finance FTZ Free Trade Zones GCPS Office for the Coordination of Social Policy (Gabinete de Coordinacin de
Poltica Social) GDP Gross Domestic Product GoDR Government of the Dominican Republic GPRF Governance and Partnership Facility Grant
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FOR OFFICIAL USE ONLY
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
IADB Inter American Development Bank IFIs International Financial Institutions IMF International Monetary Fund LAC Latin American and Caribbean LGP Liquefied Gas from Petroleum LOI Letter of Intent MIS Management Information System NLTA Non-Lending Technical Assistance OM Operational Manual OREALC Regional Education Office for Latin America & the Caribbean (Oficina
Regional de Educacin para Amrica Latina y el Caribe) PASS Performance & Accountability for Social Sectors Program PARSS2 Health Sector Reform Adaptable Program Loan II PFM Public Finance Management PFSS Public Finance and Social Sector Development Policy Loan PROMESE/CAL Essential Medicines Program/National Procurement and Distribution Agency PSIA Poverty and Social Impact Assessment RHSs Regional Health Services SBA Stand-By Agreement SEAP Secretariat of Public Administration (Secretara de Administracin Pblica) SEE Secretariat of Education (Secretara de Educacin) SEEPyD Secretariat of Economy, Planning and Development (Secretara de Economa,
Planeamiento y Desarrollo) SEH Secretariat of Finance (Secretara de Hacienda) SENASA National Health Insurance SERCE Second Regional Comparative and Explanatory Study SESPAS Secretariat of Health (Secretaria de Estado de Salud Pblica y Asistencia
Social) SGCE School Management System (Sistema de Gestin de Centro Escolar) SIFMUN Municipal Financial Information System (Sistema de Informacin Financiera
Municipal) SIGEF Financial Management Information System SIUBEN Single Beneficiary Selection System (Sistema nico de Beneficiarios) SMU Sector Management Unit SPIL Social Protection Investment Loan SRS Regional Health Services (Servicios Regionales de Salud) UNAPs Primary Attention Units (Unidades de Atencin Primaria) UNESCO United Nations Educational Scientific and Cultural Organization UNICEF United Nations Childrens Fund WB World Bank
Vice President: Pamela Cox Country Manager/Director: Yvonne Tsikata
Sector Manager: Helena Ribe Task Team Leader: Carine Clert
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DOMINICAN REPUBLIC FIRST DEVELOPMENT POLICY LOAN ON
PERFORMANCE AND ACCOUNTABILITY OF SOCIAL SECTORS (PASS)
TABLE OF CONTENTS I. INTRODUCTION .................................................................................................................................................. 4 II. COUNTRY CONTEXT ....................................................................................................................................... 4
II.1 MACROECONOMIC DEVELOPMENTS ......................................................................................... 4
II.2 MEDIUM TERM MACROECONOMIC OUTLOOK, DEBT SUSTAINABILITY, AND POLICY CHALLENGES ................................................................................................................................... 8
III. GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES ..................................................... 16 III.1 HUMAN CAPITAL, UNEMPLOYMENT, AND POVERTY: KEY FACTS AND ISSUES .................... 16
III.2 HUMAN CAPITAL PROMOTION FOR THE POOREST ................................................................ 24
III.3 IMPROVING EXPENDITURE MANAGEMENT AND PERFORMANCE OF THE SOCIAL SECTORS . 29
III.4 TRANSPARENCY AND OVERSIGHT IN SOCIAL SECTORS ........................................................ 33
III.5 PARTICIPATORY PROCESSES ................................................................................................. 38
IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM ......................................................................... 39 IV.1 LINK TO THE CPS .................................................................................................................. 39
IV.2 COLLABORATION WITH IMF ................................................................................................. 40
IV.3 COLLABORATION WITH OTHER DONORS .............................................................................. 42
IV.4 RELATIONSHIP TO OTHER BANK OPERATIONS ..................................................................... 42
IV.5 LESSONS LEARNED ............................................................................................................... 43
IV.6 ANALYTICAL UNDERPINNINGS ............................................................................................. 43
V. THE PROPOSED OPERATION ...................................................................................................................... 45 V.1 POLICY AREA I. ENHANCING THE PERFORMANCE OF SOCIAL SECTOR AGENCIES TO PROMOTE EQUITABLE ACCESS TO HUMAN CAPITAL ...................................................................................... 48
V.2 POLICY AREA II. IMPROVING BUDGET MANAGEMENT TO SUPPORT THE PERFORMANCE OF THE CCT PROGRAM ....................................................................................................................... 51
V.3 POLICY AREA III. SUPPORTING THE GRADUAL INTRODUCTION OF PERFORMANCE AGREEMENTS IN THE SOCIAL SECTORS ......................................................................................... 51
V.4 POLICY AREA IV. IMPROVING TRANSPARENCY AND OVERSIGHT ....................................... 52
VI. OPERATION IMPLEMENTATION .............................................................................................................. 53 VI.1 ENVIRONMENTAL ASPECTS, POVERTY AND SOCIAL IMPACTS ............................................. 53
VI.2 IMPLEMENTATION, MONITORING AND EVALUATION ........................................................... 55
VI.3 FIDUCIARY ASPECTS ............................................................................................................. 55
VI.4 DISBURSEMENT AND AUDITING ............................................................................................ 57
VI.5 RISKS AND RISK MITIGATION ............................................................................................... 57
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TABLES Table 1: Dominican Republic Key Economic Indicators 2003-2013 ........................................................................... 7 Table 2: External Transactions (percentage changes, annualized) ............................................................................... 9 Table 3: Fiscal Financing Requirements and Sources, 2009 (US$ million and GDP percentages) ............................ 12 Table 4: Trends in Transfers (Million DR$ and %GDP) ............................................................................................ 14 Table 5: Public Debt in the DR (stock at end of year) ................................................................................................ 15 Table 6: Net Enrollment Rates (by Quintile) 2000-2008 ............................................................................................ 17 Table 7: Phases for the Development and Implementation of Performance Agreements in the Public Administration,
Dominican Republic ...................................................................................................................................... 31 Table 8: Proposed PASS Program. Major Risks and Risk Mitigation Measures ........................................................ 57
FIGURES Figure 1: Age-Specific Enrollment in the Dominican Republic, 2004 ....................................................................... 17 Figure 2: Average Years in School and Years of Schooling ...................................................................................... 18 Figure 3: Percentage of Children Working (2008) ..................................................................................................... 19 Figure 4: Public Expenditure in Education (2004-2006) ............................................................................................ 20 Figure 5: Public Expenditure in Health (2004-2006) ................................................................................................. 21 Figure 6: Poverty, Extreme Poverty, and Unemployment (2000-2008) ..................................................................... 21 Figure 7: Evolution of Private Sector Formal Employment (2007-2009) .................................................................. 22 Figure 8: Public Expenditure in Education and Health (1996-2006) ......................................................................... 23
TEXT BOXES Box 1: Improving Coordination between Solidaridad and the Education Secretariat through a New MIS ................ 27 Box 2: Bridging Supply-Side Gaps in Education ........................................................................................................ 28 Box 3: Bank AAA on Public Sector Performance: A Strategic Approach .................................................................. 44 Box 4: PASS. Prior Actions for DPL 1 ....................................................................................................................... 47
ANNEXES Annex 1: Matrix of Policy Actions ........................................................................................................................... 60 Annex 2: Select Monitoring Indicators for the PASS DPL Series ............................................................................ 67 Annex 3: Toward an Overhaul of the Solidaridad CCT Program ............................................................................. 74 Annex 4: Analytical and Advisory Work Underpinning the PASS DPL Series ....................................................... 79 Annex 5: Letter of Development Policy ................................................................................................................... 82 Annex 6: Country at a Glance ................................................................................................................................. 101 Annex 7: Map (IBRD No. 33398) .......................................................................................................................... 105
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Acknowledgements: The First Development Policy Loan of the PASS series was prepared by a Bank team
consisting of Catherine Abreu Rojas (Procurement Specialist LCSPT), Pablo Acosta (Economist/YP LCSHS), Ana Bellver (Public Sector Management Specialist LCSPS), Raja Bentaouet Kattan (Sr. Education Specialist LCSHE), Maurizio Bussolo (Sr. Economist LCSPE), Miguel Ceara (Country Officer LCCDO), Caroline Charpentier (Operations Analyst/Consultant LCSHS), Carine Clert (Task Team Leader, Sr. Social Protection Specialist LCSHS), Christian Contin (Consultant LCCDO), Mary A. Dowling, (Program Assistant LCSHD), Myrna Machuca-Sierra (Education Consultant LCSHE), Fernando Montenegro (Sr. Health Economist LCSHH), Maria Poli (Civil Society/Transparency Specialist LCSSO), Maritza Rodriguez (Sr. Financial Management Specialist LCSFM), Maria Concepcin Steta (Social Protection Advisor LCSHS), and Theo Thomas (Sr. Public Sector Management Specialist LCSPS).
The team is particularly grateful to the following managers and staff for their valuable
input and suggestions: Keith Hansen (Sector Manager LCSHH), Chingboon Lee (Sector Manager LCSHE), Nick Manning (Sector Manager LCSPS), Helena Ribe (Sector Manager LCSHS), Roby Senderowitsch (Country Manager LCCDO), David Seth Warren (Sector Leader LCSHD), Edward Mountfield (Economic Adviser OPCCE), Mutukhurama Mani (Sr. Environmental Economist SASDI), William Reuben (Senior Social Accountability Expert, Consultant), Ian Walker (Lead Social Protection Specialist, LCSHS), Theresa Jones (Lead Operations Officer, LCSHS, Peer Reviewer), Alberto Rodriguez (Country Sector Coordinator, ECSH2, Peer Reviewer), Jehan Arulpragasam (Country Sector Coordinator, EASHS, Peer Reviewer), Yasuhiko Matsuda (Sr. Public Sector Specialist EASPR, Peer Reviewer), Omar Arias (Sector Leader, LCSHD), and Rogelio Gomez Hermosillo (External Peer Reviewer, former Head of the Mexican CCT Program Oportunidades).
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LOAN AND PROGRAM SUMMARY
DOMINICAN REPUBLIC
FIRST DEVELOPMENT POLICY LOAN ON
PERFORMANCE AND ACCOUNTABILITY OF SOCIAL SECTORS (PASS)
Borrower Government Of Dominican Republic Implementing Agency MINISTRY OF FINANCE Financing Data IBRD Loan Amount: US$ 150 million. Terms: Fixed-Spread Loan (FSL) with a repayment
schedule linked to commitments and with all the conversion options, payable in 23 years, including a 12.5-year grace period with a custom repayment schedule with repayments on each May 15th and November 15th respectively. Front End Fee: equal to one quarter of one percent (0.25%) of the loan amount payable from the loan proceeds (capitalized).
Operation Type First operation of a series of three proposed Programmatic Development Policy Loans. Main Policy Areas
1. Social Protection 2. Health (Primary Healthcare) and Education Policy 3. Quality and Efficiency of Public Spending
Key Outcome Indicators
1. Enhanced performance of social sectors to promote human capital for the poor (*) By end of 2012, the CCT Program (Solidaridad) verifies timely compliance with co-responsibilities in health, nutrition and education for 90 percent of household beneficiaries. (*) Increased compliance by Regional Health Services to objectives on improving maternal/infant care and vaccination rates at the first level of care. (*) By end of 2012, 80 percent of beneficiaries are satisfied with the overall quality of attention and service by Solidaridad. 2. Improved budget management for enhanced performance of the social sectors linked to the CCT Solidaridad. Specifically: (*) The difference between the allocated budget and the actual budget to cover the supply gaps in health, nutrition, and education services within Solidaridad will be less than the difference between the approved overall national budget and the actual budget in relative terms. (*) The difference between the quarterly agreed disbursement schedule (Scheduled Quota) to cover the supply gaps in health, education and nutrition, and the actual funds that are received by the social sectors on a quarterly basis will be reduced.
3. Gradual introduction of Performance Agreements in social sectors (*) Increase in the number of priority programs in health, nutrition, and education related to Solidaridad (including Solidaridad) that have strategic plans that include multi-year objectives and projections of expenditures, budget structures, goals, and monitoring indicators 4. Enhanced transparency and civil society oversight (*) An increase in the number of registered users (100 by end of 2012) and annual hits to the online information search program for the national budget, Consulta Amigable (2,500 by end of 2012). (*) By end of 2012, 70 percent of the community reports produced based on the community scorecards receive follow-up.
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5. (Overall PASS result): Increased share of extremely poor households who invest in human capital formation, as measured by: (*) An increase in CCT Solidaridad beneficiary households who comply with health and nutrition co-responsibilities. (*) An increase in the share of students from Solidaridad beneficiary households who are enrolled in, attending and completing basic and secondary education, and/or who are enrolled in and attending pre-primary education.
Program Development Objective(s) and Contribution to CAS
The PASS has four inter-related objectives: (i) to enhance the performance of social sectors to promote human capital (health, nutrition, education) for the poorest citizens, through a fundamental redesign of the Governments Conditional Cash Transfers (CCT) program, Solidaridad, and its articulation with critical actions in health and education; (ii) to improve budget management to support the performance of these social sectors within the CCT program; (iii) to support the gradual introduction of Performance Agreements in social sectors; and (iv) to enhance transparency and accountability to users by strengthening the enabling environment for a better informed demand for improved public sector performance in the social domain. The PASS is consistent with the central pillar of the new CPS which calls for reducing vulnerability while producing results for all. Specifically, it will help preserve and enhance the human assets of the poor (health and education) by supporting a meaningful shift in social policy from social assistance to the protection and promotion of human capital. It will also enhance accountability both within government agencies, and between government agencies and the public.
Risks and Risk Mitigation
Economic: The current global financial crisis and economic downturn are expected to reduce the DRs main exports of services and goods and its remittances. It is also increasing the governments cost of rolling over existing debt and servicing variable-rate debt. These exogenous developments will likely reduce economic growth, strain government finances, and put pressure on the exchange rate, and the risk is that these developments might stall or reverse the reform momentum. Mitigation: While the current economic risks are substantial, mitigating factors include reduced oil and food prices, which should reduce external financing requirements. Declining inflation should help limit the negative impact of slower growth on the poor. The financial resources provided by this loan, and other IFI financing are expected to mitigate the debt-management risk in 2009.The ongoing macro-monitoring and country dialogue will offer a source of advice for the authorities on policies to deal with other potential issues as they may emerge. Risk of possible shift in institutional priorities over time, exacerbated by intersectoral coordination challenges within the Government. Mitigation: -The policy actions were selected on the basis of strong Government ownership and the existence of broad consensus outside the Government, as demonstrated by consultations described in the document (Reform goals with the National Development Strategy and the conclusions of last National Civil Society Summit). -Civil society oversight will be ensured through regular dialogue and information-sharing, and DPL supported actions (Enhanced access to budget information and results of social auditing mechanisms). - PASS supports the formalization and institutionalization of the major committees that will oversee the implementation of the redesigned CCT, including the CCT Intersectoral Committee, bringing together Education and Health Ministries with the CCT Program. -PASS measures to improve budget management reform to support the joint performance of
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social sectors within the CCT will align incentives for social agencies to jointly deliver the agreed-upon performance targets for the CCT program. - The PASS program is strongly aligned with that of other donors (e.g. IADB, EU). Institutional and administrative capacity and financial constraints to implement the targeted reforms. Mitigation: -Technical assistance, grant financing and capacity-building will be provided by the Bank (through NLTA and synergies with other Bank operations), IADB, and other donors to support the PASS. -PASS will support institutional reforms that will strengthen the mechanisms of targeting and verification of co-responsibilities, ensuring that payments of transfers will progressively be based on certification of responsibilities. -CSOs will closely monitor the redesigned CCT program performance. Data will be available through the development of an integral system of monitoring and evaluation. -A multi-donor committee for the CCT Solidaridad Program will be set up, assess progress and address any issues of concern at least on a biannual basis. Vulnerability to multiple natural disaster risksparticularly floods and hurricanes. Mitigation: Damages to the major private sector enterprises are partly covered by their own insurance. There is current World Bank assistance in natural disaster risk mitigation with the US$80 million Emergency Recovery and Disaster Management Loan. The Dominican Government has also expressed interest in negotiating a loan with the IADB to get financial help in case of natural disasters. The strengthening of the CCT Solidaridad, Program through this loan, can also help to mitigate the impact of disasters on the poorest.
Operation ID P116972
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I. INTRODUCTION
1. This document describes the proposed program for a Development Policy Loan (DPL) aimed at improving Performance and Accountability of Social Sectors (PASS) in the Dominican Republic (DR). This operation is being proposed as the first of a series of three sequential programmatic operations. The strategic vision of the PASS is to improve results in social sectors (mainly social protection, education and health), preserving in the short term, and enhancing in the medium term, the human capital of the poorest citizens. Consistent with this vision, the PASS has four inter-related objectives: (i) to enhance the performance of social sectors to promote human capital (health, nutrition, education) for the poorest citizens, through a fundamental redesign of the Governments Conditional Cash Transfers (CCT) program, Solidaridad, and its articulation with critical actions in health and education; (ii) to improve budget management to support the joint performance of the social sector within the CCT program, as part of the interim measures to protect critical aspects of social spending and support the required improvements in the supply of health, nutrition and education services; (iii) to support the gradual introduction of Performance Agreements in key social sector agencies; and (iv) to enhance transparency and oversight in social sectors. 2. The proposed PASS DPL program is integrated into the new CPS, which was approved by the Board of Directors on September 17th, 2009. 3. This document is structured as follows: (i) country context (Section II); (ii) Governments program and operation rationale, discussing the outlook and policy challenges for enhancing the performance and accountability of social sectors, as well as the participatory processes that inform these challenges (Section III); (iii) brief description of Bank support to the Government program targeted by the PASS (Section IV); (iv) the proposed operation, overall approach and specific areas of policy actions (Section V); and (v) implementation aspects, including poverty, social and environment aspects, risks and risk mitigation (Section VI). Annex 1 describes the matrix of policy actions and indicators.
II. COUNTRY CONTEXT
II.1 MACROECONOMIC DEVELOPMENTS 4. In the two years prior to the current international crisis, the DR had growth well above the Latin American and Caribbean (LAC) regional average (Table 1)10.7 percent in 2006 and 8.5 percent in 2007. For 2008, growth was about 5.3 percent, still above the regional average of 4.6 percent. Internal and external factors supported this economic expansion. Internally, the government implemented reforms to enhance fiscal sustainability, including: rationalization of spending, improvements in revenue collection and debt management, institutionalization of the budgetary process, and strengthening of the financial system. Fueled by strong private consumption and investment demand, the manufacturing and service sectors communication, commerce, and tourism grew strongly. External contributing factors included strong global growth and ample foreign exchange inflows from tourism, remittances, and foreign direct investment.
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5. During 2005-2007, the DR achieved positive results in terms of fiscal balances, debt and international reserve ratios, and inflation. The primary fiscal surplus reached 1.7 percent of GDP in 2007, up from 0.6 percent and 0.4 percent in 2006 and 2005 respectively (Table 1). This improvement was primarily due to increased revenues, boosted by tax reforms and better revenue administration, as well as increased exports of nickel in 2007. Nonetheless, the tax base remained narrow, and public expenditures have been slowly rising as a percentage of GDP since 2005. Large and poorly targeted subsidy programs (for electricity and liquefied gas) were among the main causes of increased spending.
6. For 2008, the overall deficit was 3.2 percent of GDP, and the primary deficit was estimated at about 1.5 percent of GDP. These deficits were mainly due to increased spending in the run-up to the May Presidential elections and increased subsidies starting in early 2008. To avoid the full pass-through of rising international prices to consumers, the Government introduced subsidies to reduce: (a) domestic prices of food items (bread, milk, rice, beans, eggs, and poultry); (b) domestic prices of fuel for the transport sector; and (c) labor costs for the free trade zones producers. These measures had high fiscal costs and undermined macroeconomic stability. The cost of energy subsidies more than doubled from 1.2 percent of GDP in 2007 to an estimated 2.7 percent in 2008, primarily as a result of the spike in international oil prices. Although no precise incidence analyses are available, energy transfers have been regressive with fewer benefits for and the most vulnerable groups, as wealthier people use more fuel. About 80 percent of residential consumers receive subsidized tariffs (up to 700kWh/month), and there is no income differentiation in the Programa de Reduccin de Apagones (PRA) subsidy scheme, originally aimed at disadvantaged geographical areas. At 2.7 percent of GDP in 2008, electricity transfers outweigh public health expenditures (1.6 percent of GDP in 2008) almost two to one.
7. The public-debt-to-GDP ratio has declined substantially since reaching a high of 47.4 percent in 2004, following the banking crisis. By 2008, it was down to 34 percent, because of the restructuring in 2005 of sovereign external debt, rapid GDP growth, falling real interest rates, and real exchange rate appreciation. Better fiscal management played a modest role only. In addition to a lower debt level, the structure of public debt has improved with lengthening maturities (especially for the certificates of the Central Bank) and a higher share of fixed interest rate debt. The governments target for the debt to GDP ratio was to achieve the target of 25 percent by 2015, but this had to be revised upwards due to the global economic crisis (see below).
8. Inflation declined from 51.5 percent in 2004 to 6.1 percent in 2007 and 10.6 percent in 2008. In the aftermath of the 2003 banking crisis, inflation was driven by excess liquidity following the banking collapse and subsequent bailout, and it was exacerbated by the depreciation of the peso due to currency substitution. Prudent monetary policy brought a rapid return to single-digit inflation. External conditions have been more important for recent inflation rates. Since late 2007, when international price inflation accelerated, prices in the DR increased more rapidly than the regional average. In January 2007, the DRs inflation was 4.5 percent (year on year) but, by October 2007 it climbed to over 7 percent, and in August 2008 it peaked at almost 15 percent. For 2008 as a whole, inflation averaged 10.6 percent.1 Given their expenditure
1 This high inflation during this period is attributable to the pass-through from international prices and the increase in domestic food prices was also related to the Tropical Storms Noel and Olga that hit the country at the end of 2007.
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patterns, poor people were severely affected by the food-related inflationary pressure in 2008. Recent estimates2 show inflation reached 16 percent in August 2008 for the CPI calculated for poor people. This is more than one percentage point higher than the average CPI inflation figure, but has likely subsided with the decline of world food prices.
9. Capital markets inflows between 2003 and mid 2008 were sufficient to finance the current account deficit, even as it expanded recently. International reserve ratios have improved relative to the period of the banking crisis and the exchange rate has been a fairly stable since early 2005. The current account deficit widened considerably since 2006 because of the combination of slowing export growth and rising import bills. Real export growth averaged only around 3 percent between 2003 and 2008, mainly due to declining net exports of the Free Trade Zones (FTZ). Other exports flows have become more diversified, as non-traditional products and tourism services have substituted for textiles and other traditional exports. Imports grew rapidly from 2006 to early 2008, due to booming investment and consumption demand, along with high international prices. The DR remains heavily dependent on energy imports: oil imports represented about ten percent of GDP in 2007. Assuming fixed imported quantities, a decline of US$10 in the average price of a barrel of oil results in savings of nearly US$480 million in the import bill.3
2 Assuming the poor do not receive any compensation for the rising living costs they face and that the proportion of income spent on food is equal to 48 percent. 3 The total amount of barrels of oil and derived products has been of about 48 million for 2007 and a similar amount for 2008.
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Ta
ble
1:
Do
min
ica
n R
epu
bli
c K
ey E
con
omic
In
dic
ato
rs 2
003
-201
3 (P
erce
nta
ge
of G
DP
, un
less
oth
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ise
ind
icat
ed)
20
03
2004
20
05
2006
20
07
2008
* 20
0920
10
2011
20
12
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Est
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tes
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s
Inco
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s
GD
P g
row
th (
% c
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9
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10
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8.5
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GD
P p
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a (%
ch
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) -1
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7
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8.7
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4.1
4
.1
Infl
atio
n (C
PI
% c
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27.4
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te (
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21.5
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ss d
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12.9
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15.7
16
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17.4
15
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13.8
14.3
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.1
15.5
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otal
tax
rev
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11.9
12
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13.6
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13.8
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incl
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) 44
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31.3
28
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22.6
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TZ
) 44
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.028
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For
eign
dir
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8 1,
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2 1,
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91,
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9 1,
919.
2 2,
095.
4
Sou
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ance
, Cen
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IMF
and
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rld
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200
8.
-
8
10. After the domestic financial crisis in 2003, foreign direct investment (FDI) made a robust recovery. Inflows went primarily to tourism, communications, commercial sectors and real estate. FDI was the most significant component of the capital account in 2008, reaching US$2.9 billion and covering about three-quarters of the current account deficit. FDI and other capital inflows compensated for a larger current account deficit, and foreign exchange reserve levels did not suffer. Strong remittance flows (estimated at around ten percent of GDP in recent years) have also been an important source of foreign exchange; although they contracted in late 2008 (see below). II.2 MEDIUM TERM MACROECONOMIC OUTLOOK, DEBT SUSTAINABILITY, AND POLICY CHALLENGES 11. For 2009, growth is expected in the range of 0.5 to 1.5 percent. Preliminary data for the first half of 2009 show growth of 1.4 percent. This growth was supported by the expansion of agriculture, which rebounded from a weather-related shock and low growth of the previous year, and by the good performance of non tradable services. However non-tradable production has reached capacity constraints and, unless the slowdown in investment activity is reversed, may not sustain growth going forward. Conditional on an improved external environment and on the successful implementation of a fiscal countercyclical stimulus supported by an IMF program in the last part of 2009 and the first half of 2010 growth is estimated to be 2.0-3.0 percent for 2010 and to gradually return to its long term potential rate of 5.0-6.0 percent in the medium term,
12. Inflation is expected to remain subdued in the medium run. Due to the decline in international prices of oil and other commodities, and in contrast with the inflation spike observed during the first half of 2008, inflation in the DR is projected to: (a) be 0.9 percent in 2009; (b) rebound to 5.4 percent in 2010; and (c) to gradually reach 3.0 percent in the medium term. These levels are well within the targets established by the Central Bank.
13. Domestic and external factors underpin the medium term growth prospects. Among the domestic factors the macroeconomic policy responses described in more detail below will play an important role. The prompt loosening of monetary policy since the beginning of 2009, the policy interest rate has been lowered by 550 basis points to stand currently at 4 percent helped avoid a more severe contraction of growth. Credit has begun to expand in the second quarter of 2009 which could facilitate expansion in the construction and other investment sectors. Going forward, the monetary authorities are expected to maintain an accommodative stance which will accompany the countercyclical fiscal expansion but, as conditions may change, they have announced their commitment to contain inflationary pressures and preserve macro stability. With the support of an IMF program and other IFI financing, fiscal policy which has been restrictive in the first half of 2009 will be geared towards a countercyclical stimulus in the last part of 2009 and first half of 2010. In particular, the governments capital and social expenditures, restricted in the first part of 2009 due to falling fiscal revenues and limited external financing, will be accelerated. In the medium term, fiscal consolidation a clear objective supported by the IMF program will aim at a gradual return to a primary surplus of about 2 percent in 2012 so that, in the medium term, the debt-to-GDP ratio could return to the 2008 levels.
14. Improvements in the USA and global economic conditions will support growth recovery in the DR. The country is highly dependent on external developments given its high
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9
trade openness4 and its large imports of food and energy. The DR economy is particularly sensitive to developments in the USA. The USA is its most important trading partner, its main source of FDI (accounting for a third of the total), the predominant origin of remittances, and a major source of tourism revenues. Consequently, the Dominican Republic growth cycle is strongly correlated to that of the USA. World Bank staff estimate that a 1 percent change in US growth leads on average to a 0.25 percentage point change in the DRs growth, with a delay of about three quarters.5
Table 2: External Transactions (percentage changes, annualized)
2008 2009
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
National Exports 34 4 18 -7 -42 -50 -40 -26 -47 -38 -41 -17
FTZ Exports 4 -4 -4 -1 -4 1 -26 -24 -14 -25 -16 -26
Remittances 16 2 -3 -7 -11 2 -7 -10 -5 -9 1 -2
Tourism (arrivals) -4 -3 -11 -11 -6 -7 -3 -6 -8 -2 2 -1
Imports 48 24 14 9 -15 -18 -30 -37 -26 -31 -39 -35
Source: World Bank-based calculation on Central Bank data. Notes: (1) changes are calculated from values at current US$ for all variables excluding for Tourism which represents changes of the number of people visiting the country (arrivals by air); (2) in 2008, national exports represented 15 percent of all the sources of foreign exchange in the current account, FTZ exports were 29 percent, remittances 20 percent and tourism 26 percent.
15. In the short run, the external environment is expected to have mixed effects on the DRs external balances. During the first part of 2009, declining international commodity prices have relieved pressure on import costs, but the global economic slowdown and lower demand from North America and Europe have reduced revenues from exports, remittances, and tourism. Merchandise exports decreased by about 2.9 percent in 2008. Table 2 shows the monthly evolution of the external transactions data through the second quarter of 2009. A clear reduction of international transactions, begun in the fourth quarter of 2008, continued in the first quarter of 2009 and does not show much improvement in the second quarter. The dramatic reduction of import flows in the first quarter of 2009 shown in the table results from a contraction of international commodity prices, notably oil, but also from slowing economic activity in the country.
16. A recovery in exports and tourism receipts is expected for 2010. In terms of external balances, these increasing receipts will be partly compensated by larger outlays due to higher import demand which is related, in turn, to the expected increased levels of domestic activity (especially investment). Overall these trends are estimated to result in a current account deficit of around 6.0 percent for 2009-2010. Over the medium term as external condition improve and exports recover (including new investments in the mining sector) the current account deficit is projected to narrow to about 4.0-5.0 percent of GDP. The current account balance is very sensitive to changes in oil prices (see paragraph 9). Notwithstanding increased inflows of foreign capital in the last few months, lower global growth, tighter international liquidity conditions, and greater risk aversion of investors are expected to limit private financing inflows in the near future. However, foreign direct investments in specific sectors
4 Calculated with data for 2007, trade openness (imports plus exports) was at 87 percent of GDP. 5 It should be noticed that this ratio of four to one estimated with a VAR model for the DR, is actually lower than the ratio of one to one reported by Osterholm and Zettelmeyer (2007) in a study based on 6 Latin American countries.
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10
may offset these negative trends. According to official sources, a large investment project in the mining sector is in the pipeline for 2009 and 2010. The degree of uncertainty around this investment is limited given that expected 2009 inflows are part of a larger investment plan across several years. This planned investment amounts to about US$3.6 billion of which US$700 million have been invested in 2008 already.
17. While the external financing needs for 2009 and future years are substantial, they are attainable with the assistance of the IMF and other IFIs. In the short run, the situation remains delicate: international liquidity is scarce and borrowing costs for the DR are high; the country is vulnerable to external price shocks and fiscal expenditures in excess of what can be securely financed can create additional pressures. Given the restricted amount of reserves and the current loose monetary policy (adequate to counter the slowdown of the economy), authorities are aware of the limits of their current macroeconomic policy stance and are following events closely. However, in the medium run, improvements in economic activity, fiscal consolidation and a reduced risk aversion of international investors should translate in increased access to international financing at lower interest rates.
18. Monetary and exchange rate policies. During the first months of 2009, the Central Bank reduced policy rates five times. The policy rate (overnight rate) stands at four percent--down from 9.5 percent at the end of 2008. Additional measures to increase liquidity in the economy have included the reduction of the legal reserves for the banks. These changes are providing some countercyclical stimulus, but the effects of a looser monetary policy come with a lag. Private credit has just recently (July 2009) shown signs of expansion. Another direct consequence of the monetary policy stance has been the reduction of market interest rates. Inter-banking rates decreased from around 15 percent at the end of 2008 to about 7 percent by end of September 2009. Further reductions may be possible but external conditions may limit the policy of reducing interest rates, especially given the commitment of the Central Bank to stability of the peso and to low inflation (see also paragraphs 13-17). The recently recovered macro-stability has helped maintain confidence in the economy and its currency: sovereign spreads, although still quite high, have decreased from a peak of about 1800 basis points in December 2008 to 600 basis points in September 2009. Going forward the Central Bank is expected to maintain a managed floating exchange rate regime. In accordance with the signed Letter of Intent for the IMF program, international reserves will be replenished gradually and by end-2010, they are expected to recover to the level of 2007.
19. Fiscal policy. The budget for 2009 was initially designed to be consistent with: (a) slower economic activity causing lower tax revenues; (b) forecasted lower international commodity prices; (c) forthcoming debt servicing; and (d) limited financing available from international financial organizations. The underlying quantitative assumptions were as follows (annual rates for 2009): (a) real GDP growth of 2.5 percent; (b) inflation of 5 to 6 percent; (c) oil price of US$69.8 per barrel; and (d) USA GDP growth of negative 0.6 percent. Under these assumptions the overall deficit was projected at 1.7 percent of GDP. However, the situation has deteriorated and some of these assumptions will not be met. In the first half of 2009, fiscal revenues have decreased at a faster pace than projected and the electricity sector is projected to have a larger than budgeted deficit. If the current trends continue for the rest of the year, the gap in total revenues is estimated to reach about US$ 600 million (see Table 3). On the expenditures side the downside scenario has a larger deficit of the electricity sector. The government budget for the electricity sector in 2009 included about US$ 350 million for current expenditures and
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11
US$70 million for investment expenditures, totaling about US$420 million. However, the latest estimates put the electricity sector deficit in the range of US$550 to 700 million.
20. In the first part of 2009, lower revenues and the need to finance a higher deficit of the energy sector have been partially counterbalanced by reductions in expenditures, notably in goods and services and public investments. This reduction in expenditures has helped avoid a cash flow problem; however, it has also acted as a pro-cyclical fiscal cut which, in turn, has further decelerated economic growth. Furthermore, the external financing from Venezuela through PetroCaribe is likely to have a shortfall of about US$65 million.6
21. In the medium run, fiscal policy is expected to change from its recent restrictive stance to become countercyclical in the last months of 2009 and first half of 2010 and will return, gradually, to a balanced stance during the period 2011-2012. This multi-year fiscal stance is needed to provide support to the short term recovery of growth and to guarantee fiscal sustainability and a return to declining debt ratios in the medium run. The financing of this fiscal policy for 2009 and 2010 is detailed in Table 3 and paragraphs 22-24 and its viability for the medium term is ensured by the implementation of a series of structural reforms some of which are supported by the PFSS DPL loan and some other complementary ones supported by the IMF program.
22. The re-estimated fiscal deficit projected for 2009 is 3.2 percent of GDP and its financing has been secured. Given the changes described above and the fiscal expansion planned for the last part of 2009, the public sector will require about US$2.8 billion in financing (around 6 percent of GDP), US$700 million above the requirements in the initial budget. Table 3 shows in detail the differences between the initial 2009 budget and the revised one. It also presents the differences in the composition and size of the financing sources. The government has devised a multi-frontal strategy to meet its financing requirements. The governments plan consists of: (a) implementation of all the electricity reforms supported by this loan; the government estimates to contain the additional electricity sector deficit within US$150 million; (b) additional multilateral financing including an IADB emergency loan; (c) expansion of domestic bank loans and domestic bond market; and (d) IMF financing.
23. Public sector borrowing requirements will remain high in 2010, but adequate financing has been identified. According to the latest estimates (see Table 3), an important source will be project financing, closely linked to public investment; additional funding will be provided by the IFIs, PetroCaribe and from sales of public assets. Borrowing in the domestic market will also continue. Finally, the government plans to place a bond in international capital market for US$500-600 million in 2010 when it expects international liquidity conditions to further improve and DR spreads to decrease.7
6 The external financing from Petro Caribe is linked to the oil price level and, with a lower than anticipated (at the time of the drafting of the 2010 budget) oil price, there may be a decline in the Petro Caribe financing. 7 Authorities have indicated that they will consider maturity of 5 to 10 years. The current yield for Dominican sovereign bonds is 10 percent, a substantial improvement from the near 20 percent yield recorded at end of 2008, but still high.
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12
Table 3: Fiscal Financing Requirements and Sources, 2009 (US$ million and GDP percentages)
2009 2010
Initial
budget Re-estimated
budget Estimated
Differences Estimated
Budget
Millions US$
Total Revenues 6,781 6,171 -610 6,466
Of which tax revenues 6,546 5,936 -610 6,376
Total Expenditures 7,612 7,670 58 7,642
Of which interest payments 1,082 939 -143 995
of which CB recapitalization (int payment) 469 469 0 300*
Current Transfers to the electricity sector 359 530 171 362
NFPS Deficit -831 -1,500 -669 -1,176
Amortizations 1,244 1,252 8 1,348
of which external debt repayments 768 768 0 827
Financing requirements 2,075 2,752 677 2,524
Domestic Borrowing 539 869 330 484
External Borrowing 1,537 1,883 346 2,040
Bilateral: (incl PetroCaribe) 305 240 -65 240
Multilaterals (WB, IDB) 703 800 97 400
IMF Program 300 300 150
Investment Projects 543 543 0 750
Sovereign Bonds 500
Financing Sources 2,075 2,752 677 2,524
Financing Gap (-), Surplus (+) 0 0 0 0
As % of GDP
Total Revenues 14.6 13.8 -1.3 14.3
Total Expenditures 16.4 17.1 0.2 16.9
Of which interest payments 2.3 2.1 -0.3 2.2
Current Transfers to the electricity sector 0.8 1.1 0.4 0.8
NFPS Deficit -1.8 -3.1 -1.5 -2.6
Amortizations 2.7 2.8 0 3.0
of which external debt repayments 1.7 1.7 0 1.8
Financing requirements 4.5 5.9 1.5
5.6
Domestic Borrowing 1.2 1.5 0.3 1.1
External Borrowing 3.3 4.4 1.1 4.5
Of which: Bilateral (PetroCaribe) 0.7 0.5 -0.1 0.5
Multilaterals (WB, IDB) 1.5 1.5 0 0.9
Financing Sources 4.5 5.9 1.4 5.6 Source: LCSPE calculation on Central Bank and Fiscal Authorities data. * According to the Signed Letter of Intent to the IMF, the Government remains committed to recapitalize the Central bank; however it plans to submit to the Congress a limited set of amendments to the BCRD Capitalization Law including technical adjustments and the lengthening of the period of recapitalization from 10 to 15 years. This should allow for a less onerous schedule of transfers, while respecting the spirit of the original legislation.
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13
24. In terms of medium term sustainability (2010-2012) the IMF program supports a policy of gradual return to balanced fiscal accounts. The speed of adjustment is expected to depend, among other things, on: (a) future growth; (b) further improvements in the quality and control of public spending; and (c) implementation of a multi-year budget and macroeconomic framework. Debt sustainability would not be seriously compromised by the issuing of US$500-600 billion bonds (roughly 1.2 percent of GDP), as long as public finances go back to generating a reasonable primary surplus (see paragraph 30). Due to increases in future interest payments, the further reduction of poorly targeted subsidies would become even more important. To sustain its social and development program under these circumstances, the government is taking appropriate steps to improve the quality of public expenditures (see paragraphs 25 to 27). The adoption of a multi-year formulation of monetary and fiscal policy is also being pursued as required by the National Development Strategy.
25. In summary, declining revenues, higher energy sector deficits, and reduction of financing sources (PetroCaribe) created a risky situation. By requesting the expected IMF support, the Government seems to have secured sufficient additional financing and signaled its commitment to macroeconomic stability recognizing that continuing and accelerating key structural policies is required for long term sustainability. In particular, controlling and improving the quality of public spending are key tools to limit the damage (especially to the poor) from the international crisis and to create the conditions for a recovery.
26. Improving the quality of public spending remains the more substantial challenge. The following are the four main categories of non-interest spending: Current Transfers (7.1 percent of GDP in 2008), Capital Expenditure (5.0 percent), Wages and Salaries (3.8 percent), and Goods and Services (2.3 percent). The latter two categories have been stable or declining for the past few years and are low by international standards. To avoid a potential pro-cyclical fiscal cut, public investments will be accelerated in the near future.
27. Transfers are the largest and most volatile part of current expenditure. The largest transfer is for the electricity sector. It should be noted that: (a) every basis point increase in the Cost Recovery Index (CRI) translates into US$15 million additional revenues per year; in fact, if authorities were able to increase 15 basis points in CRI cumulatively during the next three years a reasonable challenge the medium term electricity sector deficit would be reduced by about US$225 million per year; and (b) other measures to reduce costs in operational and administrative processes could save an additional US$25 million. Accordingly and if the CRI continues improving, tariffs keep reflecting changes in input costs, and there is a cost control plan in place, the medium term deficit could be reduced from the current levels of US$700 800 million to US$330-430 million by 2013. The second largest current transfer was a subsidy for liquefied gas from petroleum. This transfer aimed both to benefit the poor, who use LGP for cooking, and to protect the environment by discouraging the use of wood as fuel. Until October 2008 this was a general subsidy for LGP thus inefficient in helping the poor and its cost increased considerably in line with the rise of world fuel prices. The government recently transformed this general subsidy to a targeted subsidy, thus saving fiscal resources (see below the section on the government program). The third main transfer is a Conditional Cash Transfer program for low-income households, called Solidaridad (Solidarity). The government has embarked the overhaul of this program to increase its overall effectiveness (see section III.2).
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14
28. The fourth main transfer is to the Central Bank for its recapitalization. These capital transfers8 to the Central Bank do not add to the overall public sector debt, as long as the Central bank does not use them to expand its outlays. Rather, they shift total public sector indebtedness from the Central Bank to the central government, as intended. The Central Bank Recapitalization law of 2006 requires the government to transfer a share of GDP each year to the Central Bank starting at 0.5 percent in 2007 and rising by 0.1 percent each year until it reaches 1.4 percent of GDP in 2014. The intent is to cover 85 percent of the Central Banks interest costs via transfers, while seignorage would cover the rest plus some profit, which would go to capital. In 2008 the government only transferred only 0.3 percent of GDP to the Central Bank, under half of the legal target. In the second half of 2008, the Central Bank issued bonds with a very high yield at 24 percent in order to cover its capital needs.
Table 4: Trends in Transfers (Million DR$ and %GDP)
2004 2005 2006 2007 2008
(Budget) 2008
(Estimates) 2009
Budget LPG Subsidy 2,407.40 1,303.80 5,758.70 5,464.50 9,413.00 7,698.80 3,584.20
As % of GDP 0.26 0.13 0.5 0.4 0.6 0.5 0.22
Electricity Transfers* 2,833.60 15,593.90 16,465.60 16,493.83 42,723.18 42,723.18 13,113.90
As % of GDP 0.31 1.52 1.38 1.2 2.7 2.7 0.8
Solidaridad 3,901.60 3,670.90 4,924.00
As % of GDP 0.2 0.2 0.3
Central Bank Recapitalization 2,172.00 5,827.00 9,167.00 4,117.00 17,417.10
As % of GDP 0.2 0.43 0.6 0.3 1.05
Total Transfers (Million DR$) 32,171.20 46,727.80 55,163.50 68,294.40 99,553.80 99,483.50 64,246.00
Total Transfers (as %GDP) 3.5 4.6 4.6 5 6.3 6.3 3.9
Source: WB staff calculations based on data from Ministries of Economy, Hacienda and Central Bank * To Corporacin Dominicana de Empresas Estatales de Electricidad (CDEEE)
29. Debt management represents another challenge. The DR has not developed a strong reputation with the private credit market. There is not an established market for domestic government debt. For these reasons, the Central Bank holds most of peso-denominated government debt and in turn issues interest-bearing liabilities, most of which are held at the government-owned Reservas Bank, whose deposit base is mostly small depositors. These small depositors provide most of the domestic financing to the government. This financing is attractive for its low cost and predictability for roll-over financing, but it does not offer much financial space for the government to increase its borrowing domestically. As long as the external financing is concerned, there are very few bonds on the international market and these are seldom traded. As of September 2009, the external debt faces spreads of 600 basis points, up from 300 basis points in mid 2008. More recently the DR has obtained loans mostly from international agencies (WB, IDB, CAF, PetroCaribe) and bilateral aid agencies; however these sources of funding are limited (see Table 5).
8 These transfers are accounted for as interest payments on bonds issued by the government (Ministry of Finance) to recognize a debt with the Central Bank.
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15
Table 5: Public Debt in the DR (stock at end of year) (US$, Millions) 2000 2001 2002 2003 2004 2005 2006 2007 2008
Consolidated
Public Sector
4,117.4
4,742.7
5,014.3
8,275.9
10,706.8
11,660.5
13,050.6
13,778.1
15,530.1
NFPS
3,240.7
3,939.5
4,179.8
5,782.3
6,542.2
6,822.0
7,407.1
7,558.3
9,263.7
External
2,777.9
3,338.5
3,669.5
5,185.6
5,544.1
5,847.1
6,295.8
6,555.7
7,219.8
Internal
462.8
600.9
510.3
596.7
998.1
974.9
1,111.3
1,002.6
2,043.9
Central Bank
876.7
803.2
834.5
2,493.6
4,164.6
4,838.5
5,643.5
6,219.8
6,266.4
Internal
-
-
-
1,714.9
3,357.5
3,898.9
4,693.9
5,171.6
5,182.7
External
876.7
803.2
834.5
778.7
807.1
939.6
949.6
1,048.2
1,083.7
As %GDP (Base 1991)
Consolidated
Public Sector
17.3
19.3
20.1
40.5
47.4
34.5
36.4
33.4
34.0
NFPS
13.6
16.0
16.7
28.3
28.9
20.2
20.6
18.3
20.3
External
11.7
13.6
14.7
25.4
24.5
17.3
17.5
15.9
15.8
Internal
1.9
2.4
2.0
2.9
4.4
2.9
3.1
2.4
4.5
Central Bank
3.7
3.3
3.3
12.2
18.4
14.3
15.7
15.1
13.7
Internal
-
-
-
8.4
14.9
11.5
13.1
12.5
11.3
External
3.7
3.3
3.3
3.8
3.6
2.8
2.6
2.5
2.4 Source: Ministry of Finance, Central Bank, and World Bank calculations.
30. Debt Sustainability analysis (DSA) shows that the DR public debt appears to be on a sustainable path. At about 34 percent at the end of 2008, the public-debt-to-GDP ratio was not high by regional standards. Nonetheless, the government aims to bring debt back to pre-2003 crisis levels in the medium run. The DSA assumes that the public debt to GDP ratio will not be reduced in 2009, a year during which the fiscal stance will be counterbalancing, in a measured manner, the global slowdown. After 2010, however, when global external conditions are projected to improve, the government would continue reducing the debt ratio by generating primary surpluses of 1.5 to 2.2 percent of GDP.
31. In the medium term, the external debt of the overall economy is expected to decline as a share of GDP, because the current account is assumed to improve as described above. Financing from international financial organizations and foreign direct investment should be sufficient to cover the forecasted current account deficit in the next few years.
32. The domestic financial system is vulnerable to the possibility of further deterioration in the domestic and/or international environment. The financial sector was resilient in 2008, in the face of rising interest rates from a restrictive monetary policy. With low international reserves, a large fiscal deficit and very high peso interest rates, however, the authorities have little room to dampen the impact of the crisis on the countrys productive and financial sectors.
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16
33. The banking systems low-cost funding base does not face a significant threat of sudden deposit withdrawals, because deposits are mostly small and domestic. However, if the central bank were forced to raise interest rates dramatically in response to an unexpected deterioration in the balance of payments, the banking system could experience major credit losses and capital flight that would make its position unsustainable. Although there is no real policy remedy or Central Bank management decision that could significantly change this outcome, improving the monitoring and regulation of banks could reduce the likelihood of financial sector problems and would give the authorities time to prepare and react.
34. Even though the economy is experiencing a downturn and there are significant risks to the short-term outlook associated with the difficult global environment, the macroeconomic policy framework is adequate for Bank development policy lending to support the implementation of the government program provided that this program is effectively implemented.
III. GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES
35. Despite recent improvements in this decade, the Dominican Republic still faces challenges in ensuring access to quality education and health for most of its population, especially its poorest citizens. This section focuses on human capital for the poor. It first outlines basic facts and issues and assesses the impact of the current financial crisis (III.1). It then identifies three of the governments social and public policy reform areas that can enhance the performance and accountability of key public sector agencies and improve investment in health, nutrition and education by poor families, while ensuring that public resources are more effectively and efficiently managed to provide for these entitlements. These policy reform areas are as follows: first, a shift from the current social assistance model of the CCT Government flagship program to full-fledged CCTs focused on the promotion of human capital (III.2); second, the enhancement of the quality, accountability and efficiency of overall public spending, specifically through the piloting of performance-informed social sector budgeting and management (III.3); and third, the enhancement of transparency and oversight by creating a better informed demand for improved public sector performance in the social domain (III.4). Finally, the section documents the participatory processes that inform the reforms targeted by this operation (III.5). III.1 HUMAN CAPITAL, UNEMPLOYMENT, AND POVERTY: KEY FACTS AND ISSUES 36. Despite almost universal coverage in basic education (94 percent), access to pre-school and secondary school is limited (31 and 53 percent, respectively) and unequal. The DRs enrollment performance reflects sustained improvements since the 1990s. There are almost no differences in net enrollment related to gender or rural-urban disparities (Figure 1). However, differences persist in net enrollments between richer and poorer children in pre-school (7 percentage points) and secondary school (6 percentage points) (Table 6). A substantial gap equal to more than three years of schooling emerges between the poorest and richest families. More substantial differences are observed both in pre-school and secondary school level data between the poorest and richest quintiles (World Bank Poverty Assessment, 2006). Also, urban-rural differences are observed both for pre-school and secondary attendance (Figure 2). While, in
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17
both cases the urban-rural gaps displayed are not large, it should be noted that in both cases children exhibit lower enrollment levels in rural areas, where the poor are disproportionately located. This pattern of inequality in years of schooling between urban and rural areas, and across income quintiles was observed in other Latin American countries, as noted by the 2004 World Development Report.
Figure 1: Age-Specific Enrollment in the Dominican Republic, 2004
Source: World Bank (2006) based on 2004 ENCOVI data.
Table 6: Net Enrollment Rates (by Quintile) 2000-2008
October October October October October October October October October
Q1 19.6 23.9 32.4 29.8 26.8 32.6 35.0 36.3 24.3
Q2 23.3 30.7 31.8 31.6 31.4 37.3 31.1 28.2 33.0
Q3 25.2 23.9 33.9 29.4 30.9 37.9 34.1 35.4 34.2
Q4 30.1 38.7 37.1 38.3 38.7 37.5 35.0 35.1 32.4
Q5 43.3 41.0 41.1 40.1 41.0 40.3 40.8 36.6 31.9
Total 28.3 32.0 35.1 34.0 33.8 37.2 35.0 34.2 31.6
Q1 91.5 92.8 91.7 94.0 94.4 94.1 95.6 94.6 94.2
Q2 92.8 93.8 94.8 95.9 96.0 95.1 94.1 94.9 93.9
Q3 93.5 96.0 95.3 94.8 95.7 94.2 95.1 94.8 93.5
Q4 93.3 93.7 95.9 94.3 95.7 94.9 93.9 95.8 93.6
Q5 95.8 93.1 95.7 94.4 94.8 95.2 93.9 94.8 93.1
Total 93.4 94.0 94.8 94.7 95.4 94.7 94.5 95.0 93.7
Q1 27.8 28.0 35.5 37.9 37.6 39.2 42.1 48.3 47.3
Q2 36.3 34.6 40.2 43.5 43.2 49.4 46.8 49.7 49.6
Q3 41.2 44.5 41.9 46.5 48.2 47.3 52.3 54.6 50.1
Q4 47.5 45.8 49.6 50.2 53.3 55.3 56.3 57.2 55.7
Q5 56.7 55.1 59.6 56.3 59.1 57.6 61.6 63.0 59.9
Total 43.7 42.9 46.5 48.0 49.7 50.9 52.9 55.4 53.2
Source: SEEPyD (2009), based on EFT data.
Note:Pre-school (Initial Education) serves children ages 4-5. Only grade 3 in Initial Education is mandatory.
Basic Education comprises grades 1 through 8, divided in two cycles of 4 grades each (1st cycle: 1st -4th; 2nd cycle: 5th - 8th).
Secondary Education comprises grades 9 - 12, divided in two cycles of 2 grades each (1st cycle: 9th -10th; 2nd cycle: 10th - 11th).
Secondary Education Net
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Basic Education Net
Enrollment Rate (%)
[1st - 8th grade]
20072000 2001 2002 2003 20082004 2005 2006
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Figure 2: Average Years in School and Years of Schooling
Source: World Bank (2006) based on 2004 ENCOVI data.
37. Inequities in attendance and schooling are particularly pervasive for children and youth of the poorest households. Student and household characteristics such as parental education achievement or family income have a determinant effect on household decisions to send and keep children in school (Figure 3). Participation in the labor market is another factor that takes children out of school, especially among the poorer households. In the DR, an alarming 26 percent of the children in the lowest quintile work, either inside or outside their homes. In this scenario, boys are disproportionately and negatively affected. Dominican boys are more likely to participate in child labor than girls (20.1 and 6.6 percent, respectively), especially as they age. The increasingly higher opportunity cost of schooling for poor, secondary school-age boys may explain why they are the least likely to complete secondary school. Households with mothers with no education showed higher rates of children working, at 20.3 percent, compared to 6.9 percent among mothers with university education; in addition, 20.4 percent of the children in the bottom income quintile self-reported as actively working versus 8.4 percent of the children in the top quintile. Household characteristics, coupled with system inefficiencies such as chronic repetition, resilient student overage, limited supply of secondary schools, and low student progression, gradually increase the opportunity cost of schooling and reduce the probability that disadvantaged students will continue in school (Figure 3).
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Figure 3: Percentage of Children Working (2008)
Source: 2006 National Multi-Purpose Household Survey (Encuesta Nacional de Hogares de Propsitos Mltiples ENHOGAR 2006), Dominican Republic National Statistics Office.
38. In addition, there are serious issues in student retention and completion rates. Factors hindering student progression and completion include repetition, and significant percentages of overage students (40 percent as early as in 3rd grade), and student drop-outs (especially among students 12 years of age and older). Additionally, there are severe supply constraints in upper middle school and lower secondary levels. These issues contribute to low educational efficiency, which becomes increasingly evident as children age. The 2006 Poverty Assessment Report shows that by age 9, Dominican children have spent an average of 3.71 years in school but have only attained an average of 2.17 years of schooling. By age 18, 11.5 years in school render 8.41 years of schooling, instead of 12.9 With an average excess of 3.5 years spent in school, the DR is one of the worst performers in Latin America, ranked only above Brazil, Belize, and Nicaragua. 39. Primary health services at the first level of care need strengthening. Although data show no major access barriers to public sector health services, significant obstacles remain at the first level of care. The number of hospital births is over 95 percent for the poorest quintile and 98 percent for the second-poorest quintile. Yet maternal mortality rates are stubbornly high, estimated at 150 per 100,000 deliveries for 2007. Countries with comparable or lower levels of development and health care coverage have better health outcomes. The disparity between high levels of service coverage and high levels of mortality suggest substantial shortcomings in the quality of delivery for key primary health services, in particular at the first level of care. Lack of
9 World Bank, 2006, Dominican Republic. Poverty Assessment, Washington, D.C.
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staffing continuity (particularly physicians), medicines, and other medical inputs are also among key contributing factors to reduced access to the first level of care by the poor. For instance, 94 percent of women in rural areas have on average more than 4 prenatal visits. However, high-risk pregnancies are not identified in a timely fashion and lack adequate follow-up. Similarly, immunization relies more on vaccination campaigns and less on continuous implementation of mother and child health care protocols at the first level of care. Although important progress has been achieved in the overall nutrition of the population, preventive nutritional interventions are yet to reach all of the poor and most vulnerable groups of the population. For instance, preventive interventions such as ensuring access to micronutrients for mothers and children remain an important challenge, particularly for the poorest groups. 40. The below average indicators of human capital are partly a product of scarce public resources allocated to the crucial social sectors of health and education. Public expenditure in education amounts to only 2.1 percent of GDP (average for 2004-2006), which is the lowest share of GDP across the LAC region. Public expenditures in health are also among the lowest in the region, barely reaching 1.4 percent of GDP (average for 2004-2006). Moreover, fiscal resources to improve or even maintain recent social gains are expected to be impeded by the current global recession.
Figure 4: Public Expenditure in Education (2004-2006)
Source: ECLAC (2008).
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Figure 5: Public Expenditure in Health (2004-2006)
Source: ECLAC (2008).
41. The economic crisis may dramatically increase poverty and unemployment, as history shows from recent experiences. The last economic recession in DR, between 2003 and 2004, increased unemployment rates by 4 percentage points (from 16 to 20 percent). Among the most affected groups were youth (unemployment for the 10-19 years-old cohort reached 39 percent in 2004, up from 30 percent in 2002) and women (female unemployment increased from 26 percent to 32 percent between 2002 and 2004). The 2003-4 crises also pushed 1.3 million people into poverty, which rose by 15 percentage points between 2002 and 2004 (from 28 percent to 43 percent).
Figure 6: Poverty, Extreme Poverty, and Unemployment (2000-2008)
Source: Secretaria de Estado de Economa, Planificacin y Desarrollo (2009)
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42. Indeed, the crisis is already negatively affecting the creation of formal employment. The growth rate in the number of social security contributors, a proxy for formal employment, has been declining dramatically since mid-2008. Some sectors are already experiencing drastic formal employment declines, notably in mining, but also in manufacturing industries, construction and hotels and restaurants. These sectors altogether represent 40 percent of private formal employment in the country.
Figure 7: Evolution of Private Sector Formal Employment (2007-2009)
Source: Tesoro de la Seguridad Social (2009) 43. The fall in fiscal revenues (as discussed in Section II.B) and the limited access to external financial markets in midst of a global economic crisis could endanger the planned budget execution, in particular those which correspond to social sectors. During the 2003-2004 recession, public expenditures in education as a percent of GDP declined by half, from 3.4 percent of GDP in 2002 to 1.7 percent in 2004. Health expenditures also declined substantially, from 1.9 percent of GDP to 1.2 percent in the same period. Since then, public expenditures in education and health have not yet been able to recover their pre-crisis shares of income.
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Figure 8: Public Expenditure in Education and Health (1996-2006)
Source: ECLAC (2008). 44. A further decline in social public expenditures would halt any efforts to improve equitable access to quality education and health services. This would undermine the capacity of the social protection system to serve as a buffer for the poor in this time of crisis. In addition to the fact that the DR has the lowest public expenditures in LAC, the Government informed the Bank in May that the level of investment in education has now declined further to 1.9 percent of GDP. So far, cuts in social assistance seem to have affected universal benefits such as the school breakfast program. But they could affect the cash transfers, which reach 463,516 families through the current CCT program Solidaridad, for the remainder of 2009. It is noteworthy that in the period of April and October 2008, extreme poverty remained stable at around 11 percent according to the Secretary of Economy, Planning and Development (SEEPyD), while moderate poverty increased 2.6 percentage points (from 35.2 to 37.8 percent), possibly owing to the rise in food and fuel prices. SEEPyD attributes the relative stability in extreme poverty to the buffer effect of the CCT Solidaridad program (the food component amount of the cash transfer was increased last summer to respond to the increase in food prices). Cuts in social transfers could therefore contribute to a deterioration of extreme poverty figures this year. 45. In this context, there is a large consensus in the DR that three major social policy challenges are emerging. First, it is urgent to preserve the human capital of the poor in the short term, especially through the protection of the CCTs, social transfers, education and primary health care services. Compared to 2003, the DR now has a social protection mechanism to protect the extreme poor through the CCT program, Solidaridad, which can be used to provide an income protection floor to maintain consumption levels. This program already covers about two million people. Second, an adequate supply-side response to the increased demands of new CCT program beneficiaries requires an expansion of supportive health and education services. Third, the crisis also presents an opportunity to improve the impact of public services in the social sectors over the medium term, through social and public sector policy reforms that should
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not be postponed due to the adverse macroeconomic context. These reforms are at the center of this proposed DPL program and are discussed further in the sections below. III.2 HUMAN CAPITAL PROMOTION FOR THE POOREST 46. Compared to the 2003-2004 crisis, the DR is better equipped now with a social safety net for the protection of its poorest citizens from the effects of a major crisis. First, the government launched the CCT program Solidaridad (Solidarity) in September 2005, by combining two existing programs: Comer es Primero (Eating Comes First) and Incentivo a la Asistencia Escolar (School Attendance Incentive). Second, the country has been moving away from a traditional clientelistic model of social policy by developing and institutionalizing the targeting system, Sistema nico de Beneficiarios (Single Beneficiary Selection System or SIUBEN). SIUBEN takes into account geographic and household variables to specifically identify and include the extreme poor. SIUBEN started with an initial survey of 1.2 million households, which was conducted in late 2004 and early 2005. At the time, SIUBEN identified approximately 700,000 poor households, 112,000 of which were extremely poor. In this context, the SIUBEN survey corresponded to the Banks 2005 Poverty Assessment, which calculated the poverty rate at 34 percent (about 700,000 households). 47. But there is an emerging consensus within the Government that an overhaul of the CCT Solidaridad program is needed, to enable the safety net to increase its performance, enhance the human capital of the poorest citizens and break the intergenerational cycle of poverty. Specifically:
The Government recognizes that the CCT Solidaridad program needs to become truly conditional so that it can have a greater impact on the human capital of its beneficiaries. Despite its categorization as a Conditional Cash Transfers Program at the time of its creation, Solidaridad has de facto operated as an unconditional cash transfers program. There have been serious gaps in the verification of beneficiaries compliance with co-responsibilities, i.e. households required investments in health (e.g. timely vaccinations for children) and education (school enrollment and attendance) (See Annex 3). These gaps have been largely due to the lack of intersectoral coordination and collaboration (weak involvement of the ministries of health and education) for the verification of co-responsibilities and to some extent to the hesitancy to verify conditions when the actual supply of inputs and services was not available in some parts of the country. For instance, the Program