This section features result stories from select projects supported by the GTP Fiscal Pillar:
Dominica: COVID Response and Fiscal Resilience
Challenge: Dominica is a small, middle-income island economy whose macroeconomic outlook has been severely disrupted by the pandemic. The economic slowdown has been precipitated by the stop in tourism along with domestic COVID-19 lock-down and other containment measures implemented as early as March 2020. While the outbreak has been well-contained, economic activity suffered, and fiscal costs associated with control and containment measures significantly increased. The authorities are now focusing increasingly on how to restart the economy in a more sustainable and inclusive way, and stabilize the fiscal and debt situation.
The 2021 fiscal deficit is forecast at 7.2% of GDP, spurring a debt-to-GDP ratio of 100% by end of 2022 under the baseline scenario. This contrasts with the pre-crisis debt projection of 78.5%. The Ministry of Finance of Dominica was overwhelmed by the crisis, with a very small complement of officials tasked with addressing these significant fiscal challenges. Furthermore, upon entering the crisis, Dominica was still recovering from the tropical storm Erika in 2015 and Hurricane Maria in 2017, the latter causing an estimated 226% of GDP in losses and damages. As a result, fiscal challenges became overwhelming after the onset of the pandemic. This project responds to the MoF’s request for support to budget planning, budget forecasting, and general budget preparation and prioritization in response to the pandemic.
Approach & Implementation:
The project team supported the government in taking the following four actions:
- Fiscal Rules and Responsibility Framework. The World Bank supported the authorities in drafting a Fiscal Responsibility Framework (FRF) to facilitate increased budget discipline and adherence to stated targets. The Framework establishes clear targets for the primary balance and public debt levels.
- Operational Guidelines for the Contingency Fund. Operational and management guidelines for the Vulnerability Risk and Resilience Fund have been drafted in close consultation with the World Bank. The Guidelines establish investment parameters, goals, conditions for disbursement, capitalization targets, accountability mechanisms, etc.
- Public Procurement Reform. Dominica spends significant fiscal resources on goods and services through its procurement system, particularly in the aftermath of natural disasters and other climate change-induced shocks such as floods and sea-level rise. Public procurement in Dominica had been governed by an outdated, inefficient set of regulations that neither reflect sustainability or climate resilient requirements nor the many advances that have come up as it relates to public procurement, including e-procurement initiatives. The World Bank has provided technical support to the Dominican authorities in developing a new Public Procurement Act and implementing regulations.
- Social Programming reform. The World Bank provided technical support in strengthening social programming and efficiency, particularly in response to vulnerable household needs in the aftermath of the COVID-19 pandemic and in preparation for future climate disasters. An analysis of Dominica’s social protection and labor market programs indicated that the management and the targeting of programs to the most vulnerable segments of the population could be significantly improved.
Results:
The Fiscal Rule and Responsibility Framework was introduced to the Parliament on June 28, 2021, and a revised version of the FRF was approved in November 2021. The measure is intended to turn the primary deficit into a surplus by 2023.
The Operational Guidelines for the Contingency Fund were approved in February 2022. This Fund will serve as a contingency in response to future emergencies so as to avoid borrowing or the halting of public investments.
Dominica passed the new Public Procurement Act and approved the regulatory framework. These measures will allow to modernize the procurement system and improve procurement requirements with sustainability and climate resilience.
With the World Bank’s technical assistance, the government established and institutionalized a Single Beneficiary Registry and a management information system (MIS) as a main pillar to improve efficiency and effectiveness of social protection delivery in Dominica. Both the registry and MIS will enhance the digital registration process and payment reconciliation mechanism by integrating these mechanisms with databases of key social programs and act as a new intake instrument for the Public Assistance Program. Furthermore, the registry will improve continuity of social protection services during future shocks given that it will be digital and not depend on paper or inaccessible records. The new registry will also increase its interoperability with DRM systems and tracking of relevant socioeconomic indicators, such as age, location, disability status, and poverty status.
Zimbabwe Managing Public Resources More Effectively
Challenge: Zimbabwe’s GDP is expected to rebound to a 5.1% growth rate after a two-year contraction. Continued implementation of disinflation policies has reduced annual inflation to 50% in August 2021 from a high of 838% in July 2020. Although an improved economic environment has eased social conditions, poverty levels remain high. The economic and social shocks have significantly narrowed the fiscal space to respond to the pandemic. The government capacity to undertake analysis of fiscal risks and manage such shocks remains limited. Therefore, the World Bank has been requested to provide support for managing fiscal risks and promoting the efficient use of public resource to support those in need, while maintaining stability.
Approach & Implementation: The project team reviewed the recently approved framework for managing guarantees and on-lending and identified the following areas for further improvement: (i) reporting and monitoring risks; (ii) risk evaluation including credit risk assessment scorecard; and (iii) additions to the legal framework. Scenario analysis and training were delivered to the Ministry of Finance and Economic Development (MOFED) staff to help identify and quantify fiscal risks from inflation. In addition, the team presented to MOFED an analysis of the distributional impacts of COVID-19 and effectiveness of social protection policies based on rapid household surveys.
Results:
The review of contingent liabilities showed increased transparency in reporting and monitoring; however, assessing the magnitude of the contingent liabilities in 2020 is challenging. Despite the data challenges, fiscal risks from inflation and contingent liabilities have been disclosed for the first time in 2021 and form an integral part of the 2022 budget proposal.
The economic and social impact of the pandemic on lives and livelihoods of Zimbabweans was significant as it was associated with a rise in unemployment, food insecurity, and poverty. The analysis of the distributional impacts of COVID-19 and effectiveness of social protection policies based on the household surveys showed that the coverage of safety net programs remains low relative to the needs, reaching less than a fifth of the population while the share of extreme poor alone is almost half of the population. The World Bank analysis will help inform the government’s policy on safety net programs.
Guatemala Strengthening Domestic Resource Mobilization
Challenge: The pandemic ended three decades of economic growth in Guatemala. In response, the government swiftly scaled-up safety net coverage from 5% to 80% of households, with poverty increasing from 45.6% to 47.0% (2020). Such fiscal measures increase fiscal pressures while revenue mobilization becomes as one of the foremost fiscal challenges. However, currently a political space for instituting tax policy reforms is limited, leaving improvements in tax administration as the only feasible option. This project seeks to strengthen the Tax Administration Authority’s capacity to identify, prevent and deter tax non-compliance.
Approach and Implementation: Based on the results of a pilot for a Compliance Indicators System (SIC) conducted by the Tax Administration Authority of Guatemala (SAT) through the support of World Bank, the project team has provided SAT with a set of recommendations to implement effective tax compliance controls such as streamlining processes for cross-checking information (using e-invoice, taxpayer registry, national ID, etc.) and analytics with a risk-based approach.
Results: The SIC pilot identified more than 8,000 taxpayers with relevant inconsistences, presenting a potential of increasing tax collection by around 1.6–2.4%. The government is currently issuing a new policy to sanction those taxpayers with recurrent inconsistences, excluding them from participating in public tenders. As a result of these actions, the government will implement standardized processes, information systems and personnel with capacity to structure an initial tax compliance risk management framework to identify, prevent and deter tax non-compliance.