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Improving the Quality of Public Spending and Safeguarding Social Protections

Cash Transfers and Subsidies in the Dominican Republic

April 17, 2012

Living standards have substantially improved in Dominican Republic households.

World Bank support helped the Dominican Republic (DR) to ensure fiscal sustainability and improve key social protection programs when the Dominican economy was hit by the 2008-9 global economic crisis. Spending on the national Conditional Cash Transfers (CCTs) program increased by almost 13 percent in 2010, and the number of beneficiaries in the fully-subsidized National Health Insurance regime doubled in three years, reaching more than 20 percent of the population in 2010. In another boost for poor households, the inefficient, geographically-targeted electricity subsidies under the Programa de Reducción de Apagones were replaced by the means-tested Bonoluz subsidy program.
2 million

is the number of beneficiaries in the fully-subsidized portion of the National Health Insurance regime

Challenge

Following the domestic financial crisis of 2003, the Dominican Republic recovered to enjoy strong economic growth which averaged 9.5 percent during 2005-2007. Unlike most economies, the country was able to avoid recession in 2009 amid a wider international crisis, but slower growth was sufficient to threaten fiscal sustainability as lower revenues squeezed priority sectors. Skyrocketing oil prices further stressed the budget due to untargeted electricity subsidies as the government had to bear the burden of market price fluctuations rather than passing them on to consumers. Moreover, even before the crisis, about one-third of the population was poor. The main challenge for policy makers was to maintain government services, protect social expenditures and restore fiscal sustainability to avoid backtracking on recent reforms.


Approach

The Public Finance and Social Sector Development Policy Loan (DPL), aligned with the Country Strategic Partnership and the National Strategy for Development of the Dominican Republic, was signed in November 2009. The loan aimed to improve the quality and efficiency of public spending, and mitigate the impact of the ongoing global economic crisis on the DR´s public finances. Together with the Performance and Accountability of Social Sectors (PASS) DPLs that were prepared at the same time, the loan sought to fundamentally reshape the social protection system to reach those most in need while making efficient use of scarce public resources. The policy measures adopted to achieve these objectives included rationalizing social protection programs and improving targeting through updating and combining existing databases (e.g., between the National Civil Registry and the Social Cabinet), and launching a new household survey to identify poor households more accurately.


Results

Universal subsidies on gas and electricity were replaced by means-tested subsidies, and the government raised the electricity tariff and reduced the consumption ceiling below which electricity is subsidized. The previous system of subsidies was effectively dismantled in 2010.  Of the 450,000 poor and non-poor households that used to receive free electricity under the previous scheme (of which 196,000 were estimated to be poor), around 137,000 poor households now benefit from the Bonoluz subsidy, which is equivalent to 100kWh of electricity per month. Even though Bonoluz coverage of the poor has not yet reached the intended target, the new subsidy constitutes an improvement, as it ensures more efficient and more targeted use of public resources.

The number of poor households and drivers receiving the liquefied gas subsidy Bonogas, which was introduced in 2008, reached 780,000 by the end of 2010. The database sharing and coordination between the National Civil Registry and the Social Cabinet also led to an additional 82,000 recently documented individuals qualifying for some form of subsidy. The Administrator of Social Subsidies has centralized 10 different cash transfer programs using the Solidaridad debit card, which optimizes targeting and reduces the risk of fraud, since transactions are electronically controlled. In the Health sector, the number of beneficiaries in the fully-subsidized portion of the National Health Insurance regime doubled from one million in 2007 to two million by the end of 2010. Lowering the ceiling on subsidized electricity consumption from 700 kWh/month to 300 kWh/month and the 12 percent increase in the government-set electricity tariff helped reduce electricity losses, but higher oil prices and increased consumption offset these gains. Government transfers to the electricity sector rose to 1.3 percent of GDP in 2010, up from 1.1 percent in 2009. Other measures to improve fiscal sustainability have achieved progress, namely in advancing towards results-informed budgeting in the Health and Education ministries, and through tax administration measures that reduce evasion.


Bank Contribution

Under the Country Partnership Strategy, a US$500 million lending envelope was agreed upon for the fiscal years 2010-2013. Of this amount, US$150 million was earmarked for the DPL to provide budget support during the economic crisis in order to maintain better-targeted social spending within a fiscally sustainable framework. In terms of analysis and technical support, the Bank delivered analytical and advisory activities to support its work with the government, and it assessed the challenges and opportunities facing the Dominican Republic in improving public financial management and social protection. These activities include the Poverty Assessment (2006), Investment Climate Assessment (2008), Financial Sector Assessment Program Update (2010) and the Country Fiduciary Assessment (2007), Policy Notes on Growth and Equitable Development (2010), the Country Economic Memorandum on Quisqueya Island (2011), Improving the Quality of Public Expenditure in the Dominican Republic.


Partners

The Bank coordinated its response to the Government’s request for help during the economic crisis with other donors, principally the Inter-American Development Bank and the International Monetary Fund.  By agreeing on areas of policy reform, the Government was able to address some key institutional challenges and social demands and at the same time provide fiscal stimulus while mobilizing US$1 billion in budget support in 2009 to ride out the crisis. Over-lapping policy support in the DPL with the Bank’s social sector DPL series (PASS I and PASS II) helped the Government to advance more quickly on crucial social protection issues and at the same time enhanced monitoring and evaluation. The Bank also coordinated with various government ministries – including Economy, Finance, Education, and Health – and the Social Cabinet as well as institutions in the electricity sector on various implementation efforts.


Moving Forward

Initiatives to help the Dominican Republic improve public finances and social development have not ended since the closing of the DPL. An update of the Sistema Único de Beneficiarios (SIUBEN) poverty targeting database has taken place in the second half of 2011, covering 1.8 million households (about 60 percent of the country total), allowing better targeting of CCT beneficiaries. The Bank is currently involved in technical assistance and grant support for more efficient public financial management, and a new DPL on Performance and Accountability of Social Sectors (PASS III) was approved by the Congress in January 2012 to guarantee the continuity of reforms in social protection, health, and education, and the efficiency of public spending.


Beneficiaries

Altagracia Trinidad, a 37-year-old mother of two from Santo Domingo, works at home. Thanks to support from Solidaridad, Bonoluz and Bonogas, living standards in her household have substantially improved. She uses Comer es Primero cash mainly to buy basic food products such as milk, sugar, beans, oil and rice, which eases the financial pressure on her family. At the same time, she ensures that her children attend school, which is a condition of the cash transfer program. According to Señora Trinidad, Bonoluz and Bonogas are the most relevant for her household because they allow her to reach the end of the month without suffering utility cuts: “For us, under our previous budget, filling the [generator] gas tank meant no more than 20-25 days of use; Bonogas support allows us to acquire gas for more than two months, making it a service instead of a worry”.