Dominican Republic Social Crisis Response Adjustment Loan

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The objectives of the Social Crisis Response Adjustment loan Project are to help the Dominican Republic cope with the current economic and social crisis and to stimulate overdue and continuing reforms in the social and electricity sectors. The Dominican Republic in early 2003 entered a period of financial crisis, precipitated b y a major bank failure, followed b y macroeconomic contraction, rapid currency depreciation and inflation, increasing incidence of electricity blackouts as power companies could not afford to import fuel, and social impacts in the form of substantial real declines in household incomes and cutbacks in social services benefiting the poor. The poor are most vulnerable to the fall in real incomes, as they lack the resources to absorb the higher cost of living. This has led to growing social tensions in the form of protests and violence. The Dominican Republic, once one of the fastest growing economies in the region, now faces an untenable fiscal situation and is at risk of further social unrest. The loan would support government actions in three areas. First, it would help build the response capacities and performance of social and electricity programs through improved targeting of resources to the poor, the protection of key social and electricity programs in the 2004 budget, and steps to accelerate the inclusion of the large group of undocumented Dominicans. Second, it would support a rapid response program in the electricity sector to "keep the lights on" during the current period of social tensions. And third, it would provide a stimulus for medium term reforms in the social and electricity sectors in such areas as targeting mechanisms, program evaluation, health reform, and electricity sector sustainability. The first category of risk is governance, in the context of the upcoming May 2004 Presidential elections, a period that could involve the misuse of social programs for election campaign purposes. Linked to that risk is that of ad hoc budget reallocations during the fiscal year, from protected to unprotected programs. The second category of risk is that of non- compliance with actions for the two floating tranches, including maintenance of a satisfactory macroeconomic framework. Finally, there is the risk of a surge in civil disturbances that would undermine consensus for social and electricity sector reforms, taking the country into deeper crisis. The loan is expected to be disbursed during the first six months of 2004 in three tranches.