C P S C P S C P S C P S C P S C P S C 2009 - 2013 C P S C P S C P S C P S C P S C P 7, S April C P 2009 C P S C P S C P S C P S C P S C 76505P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C COUNTRY P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C PARTNERSHIP P S C P S C P S C P S C P C P S C P S C STRATEGY C P S C P S C S C P THE FOR P S C P S C P S C REPUBLIC P SPARAGUAY C P S C P S C OF C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C Document of The World Bank | Report No. | INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT | COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF PARAGUAY | (FY09-13) March 31, 2009 | Argentina, Chile, Paraguay and Uruguay | Country Management Unit | Latin America and the Caribbean Region The last Country Assistance Strategy for Paraguay was discussed by the Executive Directors on November 26, 2003 (Report No. 27341-PA). CURRENCY AND EQUIVALENT UNITS (As of March 17, 2009) Currency Unit = Guarani US$1 = 5150 Guaranís WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 – December 31 2009 - 2013 April 7, 2009 IBRD RegionalVice President Pamela Cox Country Director Pedro Alba Country Manager Pedro Luis Rodriguez /Rossana Polastri Team Leader Maria Luisa Masutti Abbreviations and Acronyms AAA Analytical and Advisory Activities IFC International Finance Corporation ANNP State-Owned Port Operator/ Administración IFIs International Financial Institutions Nacional de Navegación y Puertos IMF International Monetary Fund APC Alianza para el Cambio INCOOP National Institute of Cooperatives AS Advisory Services JBIC Japan Bank of International Cooperation BCP Central Bank of Paraguay JICA Japan International Cooperation Agency BEE Business Enabling Environment JSDF Japan Social Development Fund BOP Balance of Payment LAC Latin America and the Caribbean Region CAF Andean Development Corporation / MIGA Multilateral Investment Guarantee Agency Corporación Andina de Fomento MOF Ministry of Finance CAS Country Assistance Strategy NGOs Nongovernmental Organizations CISNI Consejo Impulsor del Sistema Nacional PEP Private Enterprise Partnership/IFC de Integridad PETROPAR Paraguay Oil Company / Petróleos Paraguayos COPACO Public Telecommunications Utility /Compañía QAG Quality Assurance Group Paraguaya de Comunicaciones RAF Resource Allocation Framework CPI Consumer Price Index SEPA Sistema de Ejecución de Planes CPS Country Partnership Strategy de Adquisiciones CY Calendar Year SIAF Financial Management Integrated System DPL Development Policy Loan SMEs Small and Medium Enterprises ESW Economic and Sector Work SOE State-owned Enterprise FDI Foreign Direct Investment TA Technical Assistance GDP Gross Domestic Product TEKOPORA Conditional Cash Transfers Program GEF Global Environmental Facility UPAF Upper Parana Atlantic Forest HBS Household Budget Survey USAID United States Agency for International IBRD International Bank for Reconstruction Development and Development VAT Value Added Tax IDB Inter-American Development Bank VoIP Voice over the Internet Protocol IDF Institutional Development Fund WB World Bank IFA Integrated Fiduciary Assessment WHO World Health Organization Acknowledgements The World Bank Group greatly appreciates the Finance representatives who participated in the collaboration and contributions of the Government consultations, including Messrs./Mmes. Manuel of Paraguay in the preparation of this Country Caballero, Veronica Serafini, Raul Monte-Domec, Partnership Strategy (CPS). In particular, the and Pedro Espinola. World Bank Group thanks President Lugo and Cabinet members for their participation in the The CPS was prepared by Maria Luisa Masutti with Policy Notes discussions in June 2008 and in key inputs from Messes./Mmes: Debora Aquino, the Conference on Governance in August 2008, Alexandre Arrobbio, Yanina Budkin, Jasmin which provided important inputs to the CPS. Chakeri, Todd Crawford, Karem Edwards, Ruth Furthermore, the Bank received key inputs on the Gonzalez Llamas, Franz Drees-Gross, Gloria Dure, proposed program from the Economic Cabinet Frank Earwaker, Lyliana Gayoso, Hermann von Meeting chaired by President Lugo on February Gersdorff, Selva Olmedo, Carla Pantanali, Susana 12, 2009. We also thank the members of the Perez, Felipe Saez, Graciela Sanchez Martinez, international community in Paraguay, universities, Veronica Salatino, and Pedro L. Rodriguez who, think tanks, political establishments, governors together with the Country Director and the and majors, and civil society in general for their Country Manager, comprised the Core Team. contributions to the preparation of this program through the Client Survey and the consultations that were carried out in Asuncion and Coronel Oviedo on February 13 and 14, 2009. In particular, we would like to thank the Ministry of Table of Contents 9 EXECUTIVE SUMMARY 9 13 I. INTRODUCTION 13 15 II. THE COUNTRY CONTEXT 15 A. Political Context 15 B. Economic Developments and Outlook 16 27 C. Structural Challenges 22 III. THE GOVERNMENT’S ECONOMIC AND SOCIAL PROGRAM 27 29 IV. LESSONS FROM PREVIOUS ENGAGEMENT – THE FY03-07 CAS 29 31 V. THE COUNTRY PARTNERSHIP STRATEGY 31 A. Strategic Context 31 B. Portfolio 38 C. IBRD Financial Products and Services 39 D. Development Partners 40 E. Expected Results of the CPS 40 F. Risks 43 TABLES Table 1: Paraguay Key Economic Indicators, 2002-2007 16 Table 2: Medium term macroeconomic outlook (baseline) 21 Table 3: Alternative macroeconomic scenario 22 Table 4: Strategic Areas of Government Action and World Bank Group Support 34 Table 5 : Main Development Partners by Area of Focus 42 BOXES Box 1: Key Parameters of the Country Partnership Strategy 33 Box 2: GAC in Paraguay 36 FIGURES Figure 1: Real GDP growth 17 Figure 2: Overall fiscal balance 17 Figure 3: Poverty Incidence Figure 4: Inequality and extreme poverty 18 18 45 ANNEXES Annex 1: Paraguay Country Partnership Strategy Results Matrix Annex 2: Paraguay CAS Completion Report Annex 3: CPS Preparation Process Annex 4: Governance and Anticorruption in Paraguay Annex 5: Meeting the Millennium Development Goals Annex 6: Growth Prospects in Paraguay Annex 7: Principal Areas of Assistance by Donor Annex A2: Paraguay at a Glance Annex B2: Selected Indicators of Bank Portfolio Performance and Management Annex B3: IBRD/IDA Program Summary IFC & MIGA Program Annex B4: Paraguay – Summary of Nonlending Services Annex B6: Paraguay – Key Economic Indicators Annex B7: Paraguay – Key Exposure Indicators Annex B8: Paraguay – Operations Portfolio (IBRD/IDA and Grants) Paraguay – Statement of IFC’s Held and Disbursed Portfolio Executive Summary T he victory of Fernando Lugo, a former overall poverty levels, from 46.4 percent in 2002 to 35.6 Catholic bishop, in the presidential elections percent in 2007. Extreme poverty has also fallen from of April 20, 2008 ended 61 years of Colorado 21.7 percent to 19.4 percent during the same period, Party dominance. President Lugo heads a center-left although it increased between 2006 and 2007 due to coalition, the Alianza Para el Cambio (APC), consisting raising food prices and lack of spillovers from growth of a wide array of political organizations with a broad to formal employment. At the same time, Paraguay ideological base and organizational capacity. President has a very unequal distribution of income and assets. Lugo’s victory presents an historical opportunity for For instance, in Paraguay the richest 10 percent of the Paraguay to address longstanding governance, social population accounts for almost half of total income, and economic challenges and improve the living while 2 percent of the agricultural establishments standards of its population. Since this is the first time (about 6,400 farms) occupy almost 82 percent of the in recent history that there is an alternation of power agriculturally exploited land (namely, 20 million of the in Paraguay, the APC faces important challenges in 24 million hectares in agricultural use, or one-half of handling an administration that has responded for Paraguay’s total area of 40 million hectares). some 60 years to the interests of a single political tradition. The year 2008 started off buoyantly, but the global crisis hit in October mainly through a sharp reduction On the economic front, between the years 2004 and in trade (commodity export orders and prices fell 2008 Paraguay experienced its strongest economic and there was also a sharp reduction in re-exports expansion since the 1970s. GDP grew by 4.3 percent due to the depreciation of the Brazilian Real) and in 2006, by 6.8 percent in 2007 but slowed down to 5.8 workers’ remmittances. The guaraní rapidly lost a percent in 2008 due to the global economic crisis. This quarter of its value, and trade-related economic strong economic performance resulted in a decline in activity slowed down (i.e., all agricultural activities Executive Summary [ 9 ] � and the majority of services including re-exports). The on improving governance and reducing corruption, financial sector, mostly comprising foreign-owned addressing the needs of vulnerable groups and banks, has strengthened its capital position over the restoring growth in light of the global crisis. The past years but, as the impact of the global economic elements of the Government’s program are embodied crisis deepens, credit quality may deteriorate due to in the Ministry of Finance Economic and Social Plan for a slow down in the real sector. The outlook for 2009 2008-2013 and in the recently announced Anti-Crisis and beyond is very uncertain due to the sharp fall Strategy. Three major cross –cutting and inter-related in external demand for agricultural products, possible themes –governance, poverty and growth – emerge further declines in commodity prices, domestic from the Plan, and clear measures and objectives have uncertainty, and the impact of these developments on been identified for each of these themes. The Bank revenue collection. However, the authorities’ Medium concurs with the Government’s assessment of the Term Macroeconomic Framework is appropriate, challenges ahead and has developed the proposed and includes fiscal measures equivalent to about 2 Country Partnership Strategy (CPS) to support the percent of GDP this year to buffer the economy from Government’s objectives in each of the cross-cutting the global slowdown. themes with specific interventions as follows: On the social front, the administration inherited a • Governance. The Bank intends to increase its backlog in social services due to a combination of assistance to Paraguay in the governance area, which lack of funds and weak state institutions, which has is consistent with the utmost priority the authorities resulted in low standards of provision of basic services. have assigned to this area, as well as with the recent In the water and sanitation area, about 61 percent of selection of Paraguay as a pilot for the implementation the population has access to drinkable water (only of the Bank’s Governance and Anticorruption (GAC) 49 percent in rural areas), while only 8 percent of Strategy. In particular, the Bank will assist the authorities the population has access to network sanitation. On in obtaining concrete results in their anticorruption the education front, participation rates are among drive by supporting their adherence to the WB/ the lowest in Latin America (especially in secondary UNODC Stolen Asset Recovery Initiative (StAR). The education where desertion rates are high). The health Bank will further support efforts by the authorities to sector is confronted with very high maternal mortality increase the effectiveness of public investments, by rates, while according to World Health Organization assisting with the development and implementation (WHO), 39 percent of the population does not have of a governance framework for all Bank projects. Very access to health services. Addressing these needs in importantly, the Bank will support the Government’s a sustainable manner will require not only financial objective to initiate a sustainable process for building resources but also strengthening state institutions state institutions through a series of programmatic that are responsible for delivering basic services. Development Policy Loans (DPL) focusing on improving accountability of public enterprises, In the longer term, Paraguay faces the challenge initiating civil service reform, and strengthening the of diversifying its economy away from commodity internal control system for the public administration. exports to provide more rewarding jobs to citizens that today depend on low paying activities in the rural • Poverty. In close collaboration with other donors, and informal sectors. In addition, Paraguay needs to the Bank will support the authorities to: (i) enhance strengthen the ability of the State to provide social and social safety nets through non lending activities that economic services by collecting additional resources could be followed by an investment operation; (ii) in an equitable and non-distortionary manner. develop participatory mechanisms for land reform through an investment project; (iii) improve the The Lugo administration has developed a program for quality of secondary education and establishing Paraguay to transition to a modern economy based a scholarship program for Paraguayans to receive [ 10 ] Executive Summary � education abroad to improve the quality of future civil FY13. This amount implies a moderate increase in servants and leaders through lending; (iv) expand the Bank exposure, which is justified by the challenges coverage of water supply and sanitation through the the country is facing and by the strategic role the Bank recently approved Water and Sanitation Modernization has been called upon to play in helping Paraguay Project; (v) reduce vulnerabilities for the rural poor achieve progress in the agreed focus areas. The through the Sustainable Rural Development Project; proposed program will be front loaded, with about and (vi) expand community-based activities to cover forty percent of the indicative envelope devoted to the poorest 40 districts and vulnerable populations programmatic development policy lending and an in metropolitan Asuncion through an Additional additional 13 percent in pre-identified investment Financing for the Community Development Project. lending. This will help protect delivery of basic In addition, the DPL programmatic series will include services to vulnerable populations and infrastructure a component to help safeguard and improve key investment from the adverse impact of the global social programs. financial crisis. The reminder of the Bank’s indicative lending program has not been pre-identified, so as • Growth and Environment. To help mitigate the to maintain flexibility during implementation given effects of the global crisis on the economy and the the overall country and program risks, the changing poor, the Bank will provide quick disbursing funds nature of Paraguay’s needs, and the uncertainties through the proposed DPLs. In addition, the Bank surrounding the global financial crisis. There is, will help Paraguay make better use of its valuable however, an ongoing dialogue between the Bank hydroelectric assets perhaps through an investment and the authorities concerning possible lending for project to expand the power transmission grid. The financing safety nets and electricity. IFC will seek opportunities to engage with the private sector in transport, financial services and, more The indicative envelope will be reviewed at the time broadly, in supporting small and medium enterprises of the CPS Progress Report, taking into account the including through technical assistance to reduce level of absorption and implementation capacity, barriers to doing business. In addition, the Bank the Government’s ability to maintain a sound will support Government’s efforts to better define macroeconomic framework, the progress made in the longer term growth and diversification agenda the governance, poverty and growth agenda and the through analytical work and non-reimbursable TA. Bank’s lending capacity at that time. The CPS Progress Report will hence provide an opportunity to carry out The new administration and its shared vision offer an a comprehensive assessment of the progress achieved historic opportunity for the international community to in CPS implementation and reassess priorities. engage more deeply with Paraguay and contribute to achieve the country’s development goals. While carefully There are a number of implementation challenges monitoring the underlying risks, the Bank and the IFC for the Government’s Program that could put the CPS will aim at stepping up their involvement in Paraguay implementation at risk: under the CPS, both with lending and non-lending activities. The overall support would be selective, i.e., • Creating a legislative consensus on the focused on a few projects in areas where the World development agenda. Since the APC lacks a majority Bank has clear advantage and expertise, and where in Congress, the authorities will need to make a special proven implementation capacity exist. The Bank will effort to forge a consensus beyond its constituency work closely with others in the international community, to ensure that its economic and social agenda has as it will continue to be a minor player in Paraguay. legislative backing. Since in Paraguay Government implemented grants and loans have to be individually The CPS provides for an indicative lending envelop approved by Congress outside the budget process, of US$500 million over the five year period through such consensus should also encompass a political Executive Summary [ 11 ] � agreement on the role of external assistance in supporting the country’s development efforts. This would avoid past controversies that blocked the approval of external grants and loans, including those from the Bank. • Starting a process to improve key elements of the public administration. Since implementation capacity in line ministries and agencies is weak, transforming policy objectives into concrete outcomes is a challenge. Planning, financial management, and monitoring and evaluation capacity across ministries and agencies needs to be strengthened in the short- to medium-term. At the same time, opportunities for civil society to oversee, sponsor, or even implement Government’s activities will need to be further developed. The Bank will carefully monitor the above mentioned risks (as well as fiduciary and program-specific risks) while monitoring the delivery of expected outcomes under each of the three cross-cutting themes identified earlier (see Results Matrix in Annex 1). The steps that the authorities expect to take with Bank’s support, although small and specific, are expected to help reach a critical turning point in the country’s development agenda. [ 12 ] Executive Summary � Introduction 1. The election of Fernando Lugo as President of external shocks, and that the political environment the Republic presents Paraguay with an opportunity is volatile, the proposed CPS provides an indicative to tackle more effectively its long standing poverty program while it incorporates flexibility to ensure and governance issues. Whether Paraguay will responsiveness to the county’s needs, particularly be able to take advantage of this opportunity will those derived from the international financial crisis. largely depend upon Paraguay establishing a broad consensus on development challenges and vision, and the Government’s ability to implement change. The Bank’s Country Partnership Strategy (CPS) has been developed with the objective of assisting the new authorities weather the global economic crisis and implement reforms that lead to tangible results in strategic development areas, with a clear priority on issues pertaining to governance, poverty alleviation and growth. The CPS also intends to assist Paraguay develop a consensus on the policy agenda to address long-standing structural challenges through programmatic analytical work and its dissemination. The proposed strategy will cover the term of President Lugo, CY 2009 to CY 2013. Recognizing that Paraguay’s economy is subject to domestic and I. Introduction [ 13 ] � The Country Context A. POLITICAL CONTEXT opportunities for the poor in a sustainable fashion, to strengthen the management of the country’s 2. The victory of Fernando Lugo, a former Catholic vast hydroelectric resources, and to consolidate the bishop, in the presidential elections of April 20, 2008 country’s democratic process. The APC has also ended 61 years of Colorado Party dominance. With a adopted a pragmatic economic policy stance based margin of 10 percentage points above the Colorado on maintaining sound macroeconomic management candidate, the victory gave President Lugo and his and a balanced view of the role of the State, while movement strong legitimacy. His reputation as an anti- safeguarding the environment. Lugo’s victory, corruption champion and his life-long commitment therefore, opens up an opportunity for Paraguay to the poor confer President Lugo a strong moral to start tackling its long-standing governance, authority. corruption, and poverty issues. 3. President Lugo heads a center-left coalition, the 4. While the economy is likely to benefit from this Alianza Para el Cambio (APC), which includes one stance, and from reduced levels of corruption, main political party (the Liberals), three minor ones, significant economic policy reforms may be slow in and about one dozen political movements that span materializing. This is not only because addressing the a wide range of ideologies. Despite the range of backlog of needed structural reforms is a daunting political views, the coalition shares key priorities task in itself, but also because the Government faces that include a deep commitment to improve an uphill battle in obtaining the passage of reforms governance and government institutions and to in Congress, where it does not have a solid working reduce corruption, to improve the livelihoods and majority. II. The Country Context [ 15 ] � B. ECONOMIC DEVELOPMENTS AND were also very dynamic, advancing 6 percent on OUTLOOK average during the same period. While these sectors were driven mainly by the upsurge in commodity Economic Recovery (2003-2007) prices, productivity gains also played a role—even in the livestock sector which has traditionally been 5. Over the past four years, Paraguay experienced based on extensive practices. Also dynamic were its biggest economic expansion since the 1970s. assembling industries and communications, which Paraguay went through a period of economic grew on average more than 8 percent each during stagnation in the late 1990s and early 2000s, as a the period. And with free private sector entry into result of terms of trade shocks, a domestic banking ports and shipments, logistics also started to catch crisis and the economic turbulence in the Southern up, although large opportunities remain for further Cone. Between 2003 and 2005, supported by a efficiency gains. On the expenditure side, consumption successful stabilization program, the macroeconomic growth accounted for 82 percent of total GDP growth situation turned around, with growth averaging 3.6 between 2003 and 2007, with investment accounting percent during this period. Growth momentum for the rest. Investment was particularly dynamic in continued in later years, supported by a favorable the latter years of the period when it expanded very external environment and continuation of sound sharply. On the external front, import growth fully economic policies. GDP grew by 4.3 percent in 2006 offset export growth during this period. and by an exuberant 6.8 percent in 2007 (Figure 1), and was set to continue at a comparable pace in both 7. Prudent fiscal management from 2003 through 2008 and 2009. 2007 contributed to the recovery. The restoration of macroeconomic stability, which re-established 6. The resurgence of growth was driven by confidence and pushed up consumption, was agriculture and the recovery in domestic demand. anchored in a tight fiscal stance. But fiscal policy Between 2003 and 2007 agricultural production grew also contributed to recovery in an indirect manner: 7 percent per year on average. Related sectors, such as tax policy reforms, coupled with improvements in beef processing (accounted for under manufacturing) tax and customs administrations, brought about an Table 1: Paraguay Key Economic Indicators, 2002-2007 2002 2003 2004 2005 2006 2007 Real GDP growth (%) 0,0 3,8 4,1 2,9 4,3 6,8 CPI inflation (eop, % change) 14,6 9,3 2,8 9,9 12,5 6,0 Central government fiscal balance (% of GDP) -3,2 -0,4 1,6 0,8 0,5 1,0 Current account (% of GDP) 1,8 2,3 2,1 0,2 0,8 0,2 Public debt (% of GDP) 1/ 56,7 57,7 44,5 38,5 30,5 22,2 incl. Central Bank debt (% of GDP) 58,5 61,1 48,1 43,7 37,5 30,9 1/ Includes domestic and external public debt of the non-financial public sector. Source: Ministry of Finance and Central Bank of Paraguay. See Annex Table B6. [ 16 ] II. The Country Context � Figure 1: Real GDP growth Figure 2: Overall fiscal balance (annual % change) (% of GDP) 14 2 1.6 0.9 0.8 1.2 12 1 0.3 1.0 10 0 0.4 0.5 8 6 -0.4 -1 -1.2 4 2 -2 0 -3.2 -3 -2 -4 -4 2001 2002 2003 2004 2005 2006 2007 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2007 2004 Central Administration State-Owned Enterprises Source: Central Bank of Paraguay. Source: Ministerio de Hacienda. important first wave of economic formalization.1 While interest rate profile of central government external tax revenues remain significantly below comparable debt is highly favorable: 33 percent has a fixed middle income countries, these reforms supported a interest rate (most of it at 3 percent or less), while stabilization of revenues around 18 percent of GDP. the remaining two-thirds that carries variable interest Since the level of primary spending was maintained at rates is owed to multilateral and bilateral creditors. about 16-17 percent of GDP, it was possible to achieve The Government has observed a policy of providing an average primary surplus of 2 percent of GDP. Most no explicit sovereign guarantees to state-owned state-owned enterprises (SOEs) were also kept under enterprises since 2003. To counterbalance the effects a strict budget constraint 2 (Figure 2), although that was of the global financial crisis on the economy, the achieved primarily through cuts in investment rather Ministry of Finance plans to run small primary deficits than in recurrent spending. The resulting overall fiscal over the next few years. With limited domestic options surplus for the consolidated government was about 1 to issue long-term debt, 4 the government is likely to percent of GDP for the 2004-07 period. increase its external borrowing from multilateral and bilateral partners in the short- and medium-term. 8. Public debt levels are low. Sound fiscal policies, lower interest rates, higher growth, and the 9. Paraguay’s external position strengthened. The strengthened guaraní all contributed to a fall in public current account went from a deficit of 4.1 percent in debt. The public debt to GDP ratio, including domestic 2001 to a peak surplus of 2.3 percent in 2003, mainly on debt by both the government and the Central Bank of the account of stronger export performance.5 Between Paraguay (BCP), decreased rapidly from 59 percent 2003 and 2007, the surplus remained between roughly of GDP in 2002 to around 30 percent in 2007. 3 The 1 and 2 percent of GDP. Paraguay did not run large 1. This is the case for instance of commerce in informatics, a key activity in Ciudad del Este (the country’s second largest city and a well known center for intermediating goods from abroad mainly to the more protected market of Brazil under a legal tourist regime). 2. An exception to this is PETROPAR, the state-owned petroleum company, which has run up a significant stock of commercial debt due to subsidization of diesel fuel consumption. 3. While the government’s debt has been falling rapidly in recent years, the Central Bank accumulated debt through the issuance of significant amounts of sterilization bills. 4. Domestic bonds are of short maturity (less than 3 years) and are primarily bought by domestic banks. 5. The CBPY does not have a system to register re-exports through Ciudad del Este, and the country’s two large hydropower (co-owned with Brazil and Argentina, respectively) are treated as foreign companies. These make the BOP (and National Accounts) statistics very unreliable in Paraguay. II. The Country Context [ 17 ] � current account surpluses when commodity prices increased between 2005 and 2007. The increase increased in 2006 and 2007 because imports started was due to rising food prices and lack of spillovers to boom due to strong domestic demand and high oil from growth into poverty, suggesting that poverty is prices.6 The strong rise in international commodities a structural problem that requires a concerted and prices that began in 2007 resulted in a surge in foreign holistic effort to be addressed effectively. Moreover, exchange inflows, supported also by higher levels of the nature of poverty appears to have changed: worker’s remittances, and by increased corporate while moderate poverty used to be a primarily rural social responsibilities and infrastructure spending of phenomenon, it has recently become more prevalent the two hydroelectric plants. These put pressure on in urban areas.7 Paraguay also suffers from high the guaraní to appreciate from Gs.5,300/US$ at the income inequality. At 0.55, Paraguay’s Gini coefficient end of 2006 to below Gs.4,000/US$ in mid-2008. of income distribution is the fourth highest in Latin Between June 2007 and June 2008, the Central Bank America (Figure 4). The richest 10 percent of the accumulated US$1 billion in international reserves in population accounts for between 42 and 47 percent of an effort to moderate this appreciation. total income. Similarly, inequality in land distribution is among the highest in the world. Reducing poverty 10. Despite progress in recent years, poverty and and inequality in a sustained manner thus remains inequality remain high relative to other Latin an important challenge, particularly with regards to American countries. Incidence of moderate poverty access to productive assets, possibilities to accumulate peaked at 46 percent in 2002, and has since then fallen human capital, and labor market opportunities. to 35.6 percent. Extreme poverty has fallen from 21.7 to 19.4 percent during the same period (Figure 3). Macroeconomic outlook and the effects of This fall suggests that the recent economic growth has the global crisis been to some extent pro-poor. Despite this positive trend, poverty levels are now only back at the levels 11. The year 2008 started off buoyantly, but the observed in the late 1990s, and extreme poverty global crisis hit in October. This was mainly through Figure 3: Poverty Incidence Figure 4: Inequality and extreme poverty Brazil 7.9 50 Colombia 12.0 45 Paraguay 0.549 19.4 40 Panama 16.6 35 Bolivia 37.7 Guatemala 15.2 30 Ecuador 16.5 25 LAC 20 Nicaragua 14.9 15 Dominican R. 13.0 Chile 3.2 10 Mexico 13.8 5 El Salvador 12.8 Extreme 0 Peru Gini poverty 13.7 1995 1997 1999 2000 2002 2003 2004 2005 2006 2007 Costa Rica 3.7 1998 2001 Argentina 5.1 Uruguay 2.0 Año Venezuela 9.6 Moderate Extreme 0.40 0.42 0.44 0.46 0.48 0.50 0.52 0.54 0.56 0.58 Source: Staff calculations based on household survey data. Source: Staff calculations based on household survey data. 6. The economy is depends fully on oil imports, but has abundant hydroelectric production capacity. 7. This trend will need to be confirmed once the revised methodology for calculating poverty is in place. The World Bank is providing technical assistance to update the methodology. [ 18 ] II. The Country Context � a sharp reduction in trade (commodity export orders As a small open economy with limited access to and prices fell and there was also a sharp reduction international financial markets, Paraguay will be in re-exports due to the depreciation of the Brazilian affected by the ongoing financial crisis primarily on Real) and workers’ remmittances. The guaraní rapidly the real side. Falling commodities prices and a decline lost a quarter of its value, and trade-related economic in global demand for Paraguay’s exports represent the activity slowed down (i.e., all agricultural activities and main transmission channels and will especially affect the majority of services including re-exports). The the agriculture sector, a key driver of growth. Prices financial sector, mostly comprising foreign-owned for soy beans, one of Paraguay’s main exports, have banks, has strengthened its capital position over the already fallen 42 percent since their peak in July 2008, past years but, as the impact of the global economic and there are indications that demand for meat in crisis deepens, credit quality may deteriorate due to some of Paraguay’s main export markets has begun a slow down in the real sector. GDP growth which to decline. As a result, Paraguay’s current account fell advanced at rates higher than 7 percent mid-year, into deficit (estimated around 2.2 percent of GDP) in closed the year at 5.8 percent due to the global 2008 for the first time since 2001. The economy will crisis. also be affected by the fall in remittances and foreign direct investment, although the impact is expected to 12. The administration’s medium-term be less pronounced than in the case of trade.9 macroeconomic policy framework is appropriate. The administration is committed to continue 14. The effects of the financial crisis on Paraguay’s implementing prudent macroeconomic policies, currency have already become apparent. Mirroring and is focusing on fiscal sustainability, improved the devaluation of the Brazilian real as investors competitiveness and equitable growth – as laid out fled to safety, the guaraní depreciated sharply in the Government’s Strategic Economic and Social in recent months. In October the Central Bank Plan for 2008-13 presented in September 2008. reversed intervention policy course and began to sell A key objective of the Plan is to create fiscal space, international reserves in order to contain the slide in particularly on the revenue side, to allocate more the guaraní (Figure 5). While this intervention led to resources to priority social and investment programs, a loss of US$460 million in international reserves, at especially those aimed at reducing poverty. In order US$2.8 billion (or 3.7 months of imports) the Central to achieve this, the Government is committed to Bank’s foreign exchange cushion remains comfortable maintaining inflation within single digits, gradually and well above historical levels. increasing tax collections through better administration and the introduction of new taxes, and improving the 15. The deterioration in the real sector presents a efficiency of public spending. The plan also envisages significant risk for the financial sector. Since the last important reforms to SOEs that would help address banking crisis in the early 2000s, the level of financial the contingent liabilities that these companies intermediation has improved, and the banking sector represent.8 is generally considered to be sound, with an average capital adequacy ratio well above the regulatory floor 13. At the same time, the less favorable external of 10 percent.10 Dollarization remains high but is on environment presents an important challenge. a declining trend: 39 percent of bank credits to the 8. Due to the lack of audited information and the fact that many liabilities are in the form of short-term commercial credits, these contingent liabilities cannot currently be reliably quantified. 9. In 2007, remittances (as recorded in the balance of payments) reached US$200 million (approximately 2% of GDP), while foreign direct investment amounted to approximately US$240 million. 10. Even though the regulatory floor is above the Basel minimum of 8 percent of risk-weighted assets, it should be noted that Paraguay does not fully observe international capital adequacy standards. As a consequence, the ratio presented here tends to exaggerate the capital cushion of banks. II. The Country Context [ 19 ] � private sector are now denominated in US dollars, measures are equivalent to about 2 percent of GDP down from 47 percent in 2005. But credit grew fast and are targeted to buffer the economy from the between mid-2007 and end-2008, raising some global slowdown. The CPS will contribute to this concerns over the quality of banks’ credit portfolio. plan through the existing portfolio and the series of The expected economic slowdown will be more development policy loans. acute in agriculture (which accounts for 26 percent of outstanding bank credit) and the services sector. Medium-term outlook This may lead to an increase in non-performing loans, which currently account for 1 percent of banks’ loan 18. Under a baseline scenario, economic growth portfolio. Preliminary estimates suggest that banks will fall from an estimated 5.8 percent in 2008 to could withstand a moderate to significant deterioration -0.5 percent in 2009, in line with lower global and in their loan portfolio. To deal with higher credit risk, regional economic growth forecasts. On the supply commercial banks are already reducing and becoming side, the growth reduction will come primarily from a more cautious in their lending, which may restrict fall in agricultural production, caused by the decrease liquidity. in soy and other agricultural commodity prices as well as reduced yields due to the ongoing severe 16. The outlook for the non-banking financial sector drought. Activity in other sectors, especially livestock is uncertain. Cooperatives account for 30 percent of production and re-exports of manufactured goods total loans in the system and for 16 percent of total is also projected to slow down significantly. On the deposits, and they are interlinked with the banking demand side, there will be a significant slowdown in system through loans and deposits. Unlike banks, private consumption and investment. In the medium financial cooperatives fall under the supervision of term, as global growth recovers, Paraguay is expected the National Institute of Cooperatives (INCOOP), to converge towards a long-term growth rate of 4.5 whose supervision capacity is still weak. In addition, percent (Table 2). Key assumptions for this baseline the regulations applied to cooperatives are weaker scenario are (i) the successful implementation of than those applied to the banking sector. Information the Government’s priority spending programs in about the sector is scarce, outdated and of uncertain 2009 and the maintenance of higher levels of public reliability, making it difficult to adequately assess investment; (ii) the recovery in global economic potential risks. growth beginning in 2010; and (iii) a gradual recovery in commodity prices. 17. In light of the evident deceleration of the economy, the Government has announced its 19. The authorities foresee running a counter- intention to implement an economic revitalization cyclical fiscal policy to counteract the effects of the plan for 2009.11 The plan consists of a set of monetary crisis. In the short term, tax collections will decrease and fiscal policies: (i) injection of liquidity into the as a result of lower imports. Revenue from VAT on financial system; (ii) fiscal expansion to safeguard imports, import duties, and excises (representing 55 priority social and investment spending programs; percent of total tax revenues) will fall, as will corporate (iii) provision of financing to the productive sectors income tax revenue from export and import related of the economy through a second-tier state-owned activities. Expenditures in 2009 are expected to development agency Agencia Financiera para el increase from the very low levels observed in 2008, Desarrollo (AFD); and (iv) mobilization of financing due to moderate public sector salary increases, an to ensure adequate resources for the plan, including expansion of social safety net programs and, most approximately US$300 million in fast-disbursing importantly, a significant increase in capital spending. IFI loans and lines of credit to the AFD. The fiscal Even though the public sector’s ability to execute non- 11. The plan is formally called Plan de Reactivación Económica. [ 20 ] II. The Country Context � wage spending, particularly investments, remains low, for 2009 is maintained throughout the projection there is a backlog of infrastructure programs initiated period, debt levels would be higher at 22.5 percent in 2008 that is expected to be implemented within in 2013. Sensitivity analyses suggest that the main the coming months. Overall, the base case scenario vulnerabilities of Paraguay’s debt position stem from foresees a primary deficit of 1 percent of GDP for low growth and a depreciation in the exchange rate, 2009 and an overall deficit close to 2 percent of GDP, as a large share of public debt is denominated in which will gradually improve as tax revenue recovers. foreign currency. Contingent liabilities – such as a Although Paraguay’s fiscal position provides some major recapitalization of banks, financial cooperatives headroom for countercyclical fiscal policy, the country or SOEs – also pose important risks. If the economy will need to rely on an estimated US$300 million grew on average 1.6 percentage points less than financial package of support from its international under the baseline scenario throughout the projection development partners, including the World Bank, the period, debt levels would reach 23.4 percent by Inter-American Development Bank (IDB), the Andean 2013. A contingent liability shock or a 30 percent real Development Corporation (CAF) and the Japan depreciation over the baseline would have a much International Cooperation Agency (JICA), to ensure greater impact on debt levels, pushing them up to 29 sufficient resources, especially if tax revenues are percent by the end of the projection period.13 affected more strongly than currently expected. The authorities have not requested support from the IMF, 21. There are important downside risks to the but have agreed to bi-annual Article IV missions. baseline scenario. An even more pronounced fall in commodity prices and a stronger reduction in 20. Paraguay’s debt burden and debt servicing Paraguay’s agricultural production resulting from indicators are manageable under reasonable the ongoing drought and/or a credit squeeze would assumptions. Under the baseline scenario, public have important effects on growth. Thus, a stress-test debt levels will remain sustainable. Public debt12 was performed on the base case with the following would increase from 19.3 percent of GDP in 2008 assumptions:: (i) commodity prices for soy fall by an to 22.9 percent in 2010, and would then gradually additional 10 percentage points in 2009 compared to fall to 19.1 percent by 2013. Under an alternative the baseline scenario and continue depressed in 2010; scenario in which the primary deficit expected (ii) production of soy, wheat, corn and meat falls an Table 2: Medium term macroeconomic outlook (baseline) 2008 2009 2010 2011 2012 2013 Real GDP growth (%) 5,8 -0,5 1,5 3,0 4,5 4,5 CPI inflation (eop, % change) 7,5 6,7 6,3 6,0 6,0 6,0 Central government fiscal balance (% of GDP) 2,8 -1,6 -1,7 -1,2 -0,7 -0,3 Current account (% of GDP) -2,2 -3,1 -2,9 -2,6 -2,8 -2,9 Public debt (% of GDP) 1/ 19,3 21,8 22,9 21,0 20,7 19,1 1/ Non-financial public sector, excl. Central Bank. Source: Government and staff projections based on RMSM-X model 12. Excluding BCP debt. 13. Details of this DSA are included in Annex 6 of the DPL document. II. The Country Context [ 21 ] � Table 3: Alternative macroeconomic scenario 2009 2010 2011 2012 2013 Real GDP growth (%) -2,0 0,5 2,5 3,0 4,5 CPI inflation (eop, % change) 6,5 6,2 6,0 6,0 6,0 Central government fiscal balance (% of GDP) -2,2 -1,6 -1,4 -0,9 -0,4 Current account (% of GDP) -5,0 -4,9 -4,4 -3,2 -2,7 Source: Staff projections based on RMSM-X model additional 10 percentage points; (iii) remittances competition, poor checks and balances among state from Paraguayan workers abroad fall by 50 percent. powers and limited accountability and transparency in Under this scenario, to the economy would shrink the public administration (Annex 2 provides a broader by2 percent and the current account deficit would description of governance). The recent presidential increase to 5 percent of GDP in 2009 and 2010 (Table elections are a clear indication that a healthier and 3).14 The exchange rate depreciation would be even more competitive political process is starting to get more pronounced than under the baseline scenario. underway, with the expectation of improved public This simulation suggests that Paraguay’s vulnerability debate and social consensus building. There are to external factors is very high. also increasing efforts in the public administration to offset the systemic practices of patronage and corruption. The initial steps towards the development C. STRUCTURAL CHALLENGES of a professional civil service is an important goal in this process. 22. Paraguay faces a number of important long- term developmental challenges which the new 24. Paraguay faces very serious challenges in the area of administration will have to address in order to corruption control. According to a recent assessment,15 transform Paraguay into a transparent, equitable and the perception of corruption is high in all governmental dynamic economy. These challenges broadly relate to institutions, including state-owned enterprises and the three areas – governance, poverty, and growth and two binational enterprises. According to this report, a environment. high degree of corruption is associated with campaign finance, and public contracts or concessions, although Governance large scale corruption also thrives in contraband and other illicit activities. Corruption also affects multiple 23. The public sector exhibits significant weaknesses aspects of daily life. These findings corroborate the in the formulation and implementation of public outcome of an earlier survey conducted by a public/ policies as well as in the delivery of public services. private Council established to promote integrity in Underlying these findings is the fact that Paraguay’s 2005 (the “Consejo Impulsor del Sistema Nacional institutions have suffered from limited political de Integridad—CISNI�). 14. The impact on the current account is dampened somewhat because imports will fall in response to lower domestic demand. 15. Evaluación de la Corrupción – Paraguay; Mimeo by Benjamin Crosby and Laurence Beck from Management Systems International, July 2008. [ 22 ] II. The Country Context � Poverty many peasants and indigenous people have migrated to cities and settled in marginal zones. 25. In spite of recent improvements in poverty and income inequality rates since 2002, both welfare 27. As the rural poor move to urban areas, they face a measures remain high relative to the rest of Latin shortage of minimum-standard housing, public services America (see para. 10). In addition, current official and employment opportunities. In the Asunción data shows no progress in poverty reduction when Metropolitan area alone, some 150,000 people live in seen over the last decade. Part of income inequality 78 informal settlements. Demographically, Paraguay originates through inequalities in access to basic is a young country with 2/3 of the national population opportunities among children. It is therefore useful below 30 years of age and some 36% below 15. One to focus social and economic policies on the need in three Paraguayans between age 7 and 17 works, to increase opportunities for all. A World Bank study often in an ill-defined and insecure environment. on the equality of opportunities in access to basic According to the 2001 Integrated Household Survey, services among children in Latin America shows some 38,000 minors between the ages of 5 and 17 that, although Paraguay is close to having universal worked as domestic servants in private homes. Only 3 access to electricity, it still has a long road ahead in 10 poor children between the ages of 5 and 9 have in education and water and sanitation. The study a national identity card, a circumstance that limits suggests Paraguay needs to focus on increasing access to public benefits and programs. coverage rates and, in particular, on paying close attention to the coverage rates of disadvantaged 28. Social Protection. Paraguay features limited risk groups. coverage through participation in the formal labor market. In addition, despite a decrease in formal 26. Social Exclusion. Indeed, Paraguay faces unemployment, underemployment and informality tremendous challenges in terms of social exclusion are on the rise. International experience has proven that condition many of the high expectations that that well targeted conditional cash transfers are an the new Government faces as it enters office. In the effective means of combating extreme poverty. The rural areas, as noted above, Paraguay has the highest most important effort Paraguay has made in this concentration of land ownership in the world. direction is through the conditional cash transfers While significant investments in capital and land program (TEKOPORA) which was initially introduced improvements are being made by some of the large in the poorest areas of the country. However, stakeholders, nonagricultural rural jobs are scarce. program coverage has so far been limited, due to Thus, about 24 percent of the rural population lives the large number of public social programs under in extreme poverty, and a total of 35 percent lives implementation which are competing for limited below the poverty line overall. Indigenous people management and financial resources. In the short- (about 87,000 people nationwide or about 1.7 term, therefore, Paraguay needs to focus on prioritizing percent of the national population) face particular social programs, with a view at concentrating its challenges: in the 412 indigenous communities resources on the most effective ones. Moreover, with registered nationwide, only 55 percent of residents the projected deceleration of the economy, a well have secure land access (either titled or with title in targeted set of social programs will be needed in process). Only 26 percent of these communities have order to protect the most vulnerable. their own health centers or posts. In addition, the habitat occupied by many indigenous communities 29. Health. The new Government faces urgent has undergone deforestation in recent year and challenges in the health sector, including high infant and consequent environmental degradation, and in many maternal mortality rates, and poor quality and limited cases cannot provide the communities with adequate access to health services. Provision of public health is sustenance. As a consequence of these problems, inadequate and has suffered persistent deterioration II. The Country Context [ 23 ] � over the last ten years. Paraguay has also been the pension system, with the objectives of making the exposed to epidemics that affect the population, such system more uniform and equitable, and of increasing as outbreaks of malaria, dengue, and yellow fever. The its coverage. deterioration in health outcomes has occurred despite an increase in Government spending for health by Growth and Environment US$18 per capita in 2007. The low impact of increased public spending is attributable to fragmentation in the 32. Paraguay’s long run growth performance has provision of public health care between the Ministry of been disappointing. GDP per capita grew by 1½ Health and the pension and health fund – with a vibrant percent on average since 1960, but over the past 25 but often unregulated network of private providers filling years, GDP per capita declined by a yearly average of in numerous gaps. Despite these overlaps, according to ½ percent. The recent growth acceleration between the WHO, almost 40 percent of the population does 2004 and 2008, the largest expansion since the 1970s, not have access to health services. Overall, public was welcomed, but sustaining it will be a challenge spending focuses substantially on inputs, particularly due to a number of weaknesses in the economic human resources, where incentives and tasks are not structure. While private investments have contributed always well defined. Finally, the sector is affected by a to the development of new products and opened new significant degree of politicization. markets over the past few years (e.g., beef exports to Israel and Russia, sesame exports to Japan, stevia 30. Education. In the last decade, Paraguay’s exports to the region, and organic sugar to Europe), education system has made considerable strides, the export base is still narrow and highly dependent including an improvement in system coverage at all on commodities. The investment in private ports and a levels, increases in the average educational level of public-private association for animal health has eased the population, and improvements in the sector’s some of the logistics and certification barriers faced internal efficiency. In addition, public expenditure on by products such as soy bean and beef. As noted education (around 4 percent of GDP) is one of the above, Paraguay has improved education coverage, highest in the region. Despite these achievements, particularly at the primary level. However, Paraguay’s participation rates in Paraguay are among the lowest economic potential is still constrained by weak human in the region, especially in secondary education where and physical capital, as well as the economic and desertion rates are high. Therefore, Paraguay needs to financial volatility the country has experienced (see carefully evaluate the results of educational reforms Annex 4 on Growth Prospects). and prepare a program for the near future, which is the focus of current efforts by both the Bank and 33. Agriculture. Beyond the macro trends described other donors. The medium-term agenda includes, above, agriculture in Paraguay is a story of three inter alia, an expansion in the coverage of middle sectors – a highly productive, mechanized agricultural level education (grades 7-9), improvements in equity sector focused on exports (concentrated on soybeans in access to the third cycle of elementary education and beef which together represent about 90 percent and middle level education, as well as improvements of registered exports) which exists alongside large in system efficiency and in educational quality in view extensions still under-utilized and a large number of increasing coverage. of poorly educated smallholders with little access to effective agricultural extension services, land and 31. Public Pensions. With only 0.6 percent of workers capital. Within small landholders, some are so poor in the lowest income quintile participating in the and deprived of land, human capital and basic services system, Paraguay is the country in Latin America with that they are unlikely to survive without significant the lowest coverage and the most inequitable access social assistance. Others, however, have had better to pensions. Therefore, in the medium-term, there is access to basic services—particularly education—and an urgent need for Government to gradually improve are slowly forming a small but successful middle class [ 24 ] II. The Country Context � in rural areas, devoting time to both agricultural and pending. In the water supply and sanitation sector, service activities. Among small landholders, the youth with only 61 percent of the population connected to has for the most part migrated to Asuncion or to piped water supply networks (and only 49 percent in Argentina, Spain or the United States. rural areas), service coverage in Paraguay remains low even in comparison with other lower middle income 34. Transport, Communication and Water. There countries. Only 8 percent of the national population are a number of infrastructure bottlenecks that has access to piped sanitation. limit social inclusion of the poor and the country’s competitiveness as an exporter. The paved network, 35. Business Climate. Paraguay’s overall ranking although accounting for less than 10 percent of the in the Doing Business indicator dropped from 108 overall road network, connects major trade centers in 2008 to 115 in 2009, which is below the average within the country and with Mercosur. The challenge for LAC and for lower middle income countries. ahead is to deploy an appropriate program of routine The downward change reflects lower rankings in maintenance to avoid losing this key investment. four areas: starting a business, registering property, The rural roads network comprises very few all- getting credit and trading across borders. While weather roads, providing rural communities with Paraguay continues to fare comparatively well in the limited access to markets and basic social services. first three areas, the deterioration in the latter area In river-based transportation, the key issue is the lack puts the country in the lowest quartile. Improvements of dredging and signaling, which imposes excessive in ranking were achieved in two areas: closing a logistic costs. This is currently an unfunded mandate business and enforcing contracts, although Paraguay for the public entity that administers the country’s continues to lag behind comparator countries in both state ports, Administración Nacional de Navegación of these areas. Paraguay’s poorest performance is in y Puertos (ANNR), which is also responsible for employing workers, trading across borders, and closing regulating private ports. The ANNR and the Ministry a business. The country also needs to consolidate its of Public Works are exploring ways to address this 2007 gains in the opening a business indicator, by issue, including the possibility of unbundling the modernizing the handling of relevant transactions by functions of ports and waterways regulator from the city of Asunción and other major cities. those of operating the country’s ports. In addition, the private sector (key river users such as private ports, 36. Electricity. While Paraguay is blessed with barges operators, and load owners) have expressed abundant hydropower generation capacity, key willingness to create a public-private partnership weaknesses in transmission and distribution hamper that would be responsible for river maintenance and the development of productive activities in both rural signaling. In telecommunications, despite a significant and urban areas, as well as the prospects for formal liberalization of the cellular network, fixed lines and exports. While electricity coverage reaches 93.8 fiber optic cable were until recently under the monopoly percent of all households (just below the LAC average of Compañia Paraguaya de Comunicaciones of 94.6 percent), average per capita consumption per (COPACO), the country’s state-owned enterprise. year was only 853 kWh, far lower than in Chile or in This monopolistic situation is responsible for the very Brazil. Moreover, system losses are very high and limited penetration of broadband internet and lack of well above the 13.5 percent weighted average for the affordable and good quality long-distance dialing. The LAC region. The authorities are currently discussing new administration has shown a strong commitment with Brazil possible ways of making the bilateral treaty to address this issue and, in March 2009, issued a on the Itaipú damn more flexible, thereby allowing resolution (with World Bank technical support) Paraguay to better utilize this important asset. that opened access to fiber optic. However, the liberalization of Voice over Internet Protocol (VoIP), 37. Environment. Paraguay has lost at least 80 over which COPACO still enjoys a monopoly, is still percent of its forests over the last 50 years and II. The Country Context [ 25 ] � losses of 500 ha/day occurred between 1966 and 1991. Of the remaining 2 million ha in the Upper Parana Atlantic Forest (UPAF, i.e. forests east of the Paraguay River), only an estimated 800,000 are still considered productive. This is due to destructive logging practices that have degraded the forests, and a result of deforestation that has fragmented much of the UPAF into unmanageably small remnant patches. While deforestation appears to have slowed recently in the east—due both to resource depletion and some success with a “Zero Deforestation� law—it is estimated to have increased in the Arid Chaco, which is home to 78 percent of Paraguay’s remaining native forests. With the right incentives and institutions, however, Paraguay could exploit its comparative advantage in forestry, as rates of return for key varieties in Paraguay appear to be higher than in other countries in the Southern Cone. To this end Paraguay started to promote forest conservation and payments for ecological services. The country has also started to reform its Forest Management Services by granting the institution greater autonomy. [ 26 ] II. The Country Context � The Government’s Economic and Social Program 38. The new Government’s vision is based on the in the public sector, the emphasis is on beginning need to improve governance and reduce corruption, a process to modernize the public administration address the needs of vulnerable groups, and restore through civil service reform and to increase growth in light of the effects of the international the efficiency and governance of state-owned financial crisis. The elements of a program to achieve enterprises (where alternatives ranging from these goals were outlined in various presidential appointing capable managers and re-launching addresses and are now embodied in the Ministry of investment programs, to recapitalization and Finance Economic and Social Plan for 2008-201316. The private public partnerships are being considered). Plan is part of a broader Government’s Program that the new administration is preparing and updating on » Poverty: Improving investments in the social the basis of submissions by the individual Ministries, sectors and focusing public spending on the and has been adjusted in light of the global economic extreme poor. While the emphasis will be on crisis (see para. 17). employment generation and poverty mitigation, a comprehensive agrarian reform and a 39. The main features of the program can be subsumed reorganization of the cadastre will also be launched. into three major cross–cutting themes below. While the specifics of this reform has not been developed, which has created uncertainty among » Governance: Strengthening state institutions to investors, the authorities are addressing the long improve policy making, public service provision, standing issue of lack of opportunities to access and the rule of law. Given past political interference land by the rural poor. 16. See httop://www.hacienda.gov.py?web-hacienda/index.php?c=218 III. The Government’s Economic and Social Program [ 27 ] � » Growth and Environment: Fostering growth with a focus on employment generation and on improving income distribution, without destabilizing the country’s macroeconomic framework or the environment. In light of the global financial crisis, the emphasis is on continuing sustainable macroeconomic policies and maintaining stability in the financial sector, while investing in basic public infrastructure, education and in improving the business climate to increase productivity and competitiveness. Also important for the administration is to better use the potential of the two hydro power plants that the country co-owns with Brazil and Argentina, respectively. 40. Assessment. The new Government has established an agenda to initiate a transition to a transparent, equitable and dynamic economy that will benefit from the support of the international community. The Bank agrees that substantial progress in the three cross-cutting themes and in the sub-areas identified in the Economic and Social Plan, is needed for Paraguay to reach a turning point in its development agenda. The CPS will therefore focus on assisting the authorities achieve progress in selected aspects of the three cross-cutting themes underpinning future Bank and IFC support. However, the Bank is a relatively small donor in Paraguay and, as such, it will be highly selective in its interventions with the expectation that these will be complementary to the efforts undertaken with the assistance of other international donors. [ 28 ] III. The Government’s Economic and Social Program � Lessons from Previous Engagement-The FY03-07 CAS 41. Starting in 2003, the Bank initiated a process of reached effectiveness and two additional projects reengagement with Paraguay after a long period of were approved but are still not effective17. With the inactivity. The Bank responded quickly and positively benefit of hindsight, implementation of the CAS to the professional management demonstrated by program would have been stronger if the Bank had the new administration upon its coming to office better taken into account various factors including: in April 2003 by preparing a new CAS for FY03-07 (subsequently extended to FY08). The program • The complexity of governance issues in Paraguay, included an Economic Recovery Loan for US$30M to particularly as they pertain to the relationship help address the financial crisis and meet significant between the executive and the legislature. The budgetary shortfalls at the time. The CAS also constitutional requirement that Congress approves envisaged engagement in new sectors such as health, each loan individually after Board approval led to roads, pensions and social protection, and provided substantial delays in the effectiveness of projects, support in preparing a strong package of financial and ultimately to the cancellations of the Maternal sector reforms. Child Basic Health Insurance Project, as well as the Strengthening of the Ministry of Finance Technical 42. Implementation of the CAS faced significant Assistance loan and the Financial Sector Technical difficulties and fell short of the expected outcomes. Assistance loan. Only US$146.5 million in loans were approved for the extended CAS period FY04-08 out of the base • The limited capacity of the public administration case envelope of US$325 million. Only five loans to plan, execute and monitor public investment 17. The Sustainable Rural Development Project for US$37 million and the Water and Sanitation Modernization Project for US$63 million IV. Lessons from Previous Engagement-The FY03-07 CAS [ 29 ] � operations. The establishment of quality project funding to the extent possible. In conclusion, the teams constitutes a serious challenge that affects 2003 CAS served as a tool for the Bank to maintain project implementation, particularly at the initial a seat at the policy table and had a limited but still stages. There is, overall, a low level of professional significant development impact. The shortfall in the capacity in the public sector and it has taken a delivery of the lending program limited the degree prolonged Bank involvement in sectors such as of partnership and risk-sharing arrangements that rural water supply and education to build strong lending instruments would have provided. Despite counterpart teams. In some cases, less intricate Bank’s efforts to re-engage under the 2003 CAS, project design would have reduced the difficulties the Bank’s presence in Paraguay remains limited. encountered in building implementation capacity. The outcomes and recommendations of the CAS Completion Report which carefully reviewed the • Limited Bank presence on the ground has 2003-2008 program (see Annex 5) formed part of the implied a lack of continuity in policy dialogue, dialogue with Government and informed the design and an inability to provide timely preparation of this CPS. or implementation support. To address this problem, project management was in some cases outsourced to external agencies, which was clearly unsustainable. The field office is being gradually strengthened to ensure there is sufficient local professional capacity to respond to implementation challenges. 43. The success of the AAA program was also lower than expected. A 2007 QAG assessment found the AAA program moderately satisfactory overall, and highly satisfactory in terms of its strategic relevance, coherence and integration. However, the program was rated only moderately satisfactory in terms of its likely impact, local participation, consultation and dissemination. Nonetheless, some AAA products were deemed useful by the Government (e.g., the FY08 Integrated Fiduciary Assessment, the FY08 Education Sector Study, and the FY08 and FY03 Policy Notes) and others added long lasting value to the development agenda in Paraguay as, for example, the FY07 Land Tax study, which is being used by the Lugo administration as a key input into its own tax policy reform program. Since the QAG panel report was issued, the Bank has increased its emphasis on client participation to improve ownership and has enhanced collaboration with other donors. 44. Many lessons can be drawn from the experience of the 2003 CAS, including the need to invest in building broad project ownership during the preparation stage, and that of leveraging technical assistance with grant [ 30 ] IV. Lessons from Previous Engagement-The FY03-07 CAS � The Country Partnership Strategy A. STRATEGIC CONTEXT series of Programmatic Development Policy Loans (DPLs) which will also provide the backbone 45. This CPS proposes an increased engagement of of Bank’s financial assistance over the coming the Bank as Paraguay initiates a new phase in its efforts years. While the focus of the DPLs will be on to surmount significant and entrenched development the new administration’s state modernization challenges. The process ahead will most probably agenda, it is expected that the DPLs will underpin be difficult and there are no guarantees of success. the governance reform efforts of the Lugo However, the new Administration’s key strategic priorities Administration. Parallel knowledge assistance on constitute a solid basis for the Bank to focus its support. broader governance issues will be addressed in In the near term, there is also strong coincidence in the context of the GAC initiative discussed below. the approach proposed by the authorities to mitigate The first operation in the programmatic DPLs the effects of the global financial crisis, which will also series is being presented to the Board together be an important focus of our partnership. The Bank’s with this CPS. proposed strategy also seeks to further strengthen the efforts undertaken by civil society to transform Paraguay • Supporting the poverty alleviation efforts, mostly into a more democratic, equitable and prosperous through the Bank’s continued engagement in society. In this context, and in order to ensure an investment lending and knowledge assistance in effective response to the emerging needs arising from the human development and social infrastructure changing domestic and external conditions, the Bank areas. The Bank’s past involvement in the proposes to focus on the following strategic initiatives: education, rural development, safety nets and water and sanitation sectors will provide the basis • Supporting ongoing efforts to introduce changes for an expanded and more effective dialogue with in the country’s governance structure around a the Lugo Administration on poverty alleviation IV. The Country Partnership Strategy [ 31 ] � and increased social equity. A new area for Bank reducing poverty and sustaining growth—both in involvement will be enhancing land access through the short and medium term. Specific targets identified participatory mechanisms, where the Bank can by the authorities in these areas (and the sub targets provide relevant international experience and associated with Bank’s assistance) are included in which is a top priority in the Government’s reform the program matrix. Details on the Bank Groups’s program. As part of the poverty alleviation agenda, indicative program by area of Government action are a Water and Sanitation Sector Modernization provided in Table 4 below. Project was approved recently, building upon a long tradition of Bank’s successful involvement in Governance the sector. 49. The Lugo administration is placing governance • Supporting the Government’s sustainable at the forefront of its reform agenda. In particular, growth agenda with direct IFC assistance to President Lugo’s program emphasizes the need to private enterprises in the areas of trade financing break with past practices that enabled corruption and transport, as well as increased private sector and to establish a new standard of governance involvement in the infrastructure sector. In for the country based on improved democratic addition, the Bank will seek to provide assistance dialogue, increased accountability, transparency and to the new administration in some infrastructure integrity. Within this overall context, and in line with investments, particularly in the areas of transport Paraguay’s recent decision to become a pilot for and electricity that are deemed to have significant the implementation of the Bank’s GAC strategy, the potential for enhancing growth. Bank intends to significantly increase its governance assistance to Paraguay (See Box 2). The GAC provides 46. The proposed program, while clearly delineated, a broad framework for the various initiatives through has some built-in flexibility to allow the Government which the Bank will provide its governance assistance to make adjustments as the economic, political, and to the country. The main expected outcome of social environment evolves. Therefore, only the Bank support in this field will be that the current initial two years of the CPS indicative program will be administration will mark the turning point of a credible identified, with the outer years left open in order to process through which Paraguay will attain adequate accommodate future needs (see Box 1 below for key governance standards and institutional development. program parameters). • Lending. A series of three Programmatic 47. The CPS was prepared on the basis of extensive Development Policy Loans (DPLs), with a tentative consultations with the Government, the international envelope of US$ 200 million, will support fiscal community and civil society. This broad consultative management and public sector reforms, including process helped shape the CPS and informed its design improved accountability of public enterprises, civil (see Annex 6). In addition, during implementation of service reform and the overhaul of the internal the CPS, a special effort will be made to strengthen control system for the public administration. donor coordination for all activities, moving from Technical Assistance for supporting the authorities’ coordination to joint activities and missions and even reform efforts is being provided by several bilateral to seeking formal co-financing for our projects. donors including the EU, USAID and Japan. In addition, the DPLs will provide timely budget Program Objectives and Instruments support to ensure that critical social spending is not affected. This program will contribute 48. The Bank Group’s program will seek to make a to the Government plan’s overall objective of selective contribution towards helping the Government achieving sustainable and more equitable growth meet its broad objectives of improving governance, by providing direct support to three of its areas [ 32 ] IV. The Country Partnership Strategy � Box 1: Key Parameters of the Country Partnership Strategy • An average indicative Bank lending program of about $100 million per year up to a total of $500 million is projected for the five year period FY09-FY13. The CPS, however, does not propose a detailed lending program beyond FY10, with the identified program being about US$265 million, or 53 percent of the entire envelope. • There is a clear recognition of the significant risks involved in the implementation of the proposed strategy. The political environment, the country’s implementation capacity and uncertain external conditions constitute significant factors that could end up adversely affecting the viability of the proposed assistance scenario. Thus, it is proposed that intensive monitoring and flexibility be considered critical elements of CPS implementation. The Bank will engage the authorities periodically in order to assess progress and will be prepared to change the proposed partnership terms if adverse conditions would make the proposed strategy impracticable. • Up to 40 percent of the CPS envelope (i.e. $200 million) will be in the form of Programmatic Development Policy Loans (DPLs) in the governance area. The indicative program also includes about US$65 million in identified investment lending in the three thematic areas (see Table 4 below). • Non-lending support will also be provided in the form of AAA, grants and fee for services, when appropriate, in support of government priorities and the lending program. • The indicative envelope of $500 million over the FY09-FY13 period would increase Bank exposure in US dollar terms, but still leaving the Bank a relatively minor creditor. The indicative envelope would be revised at the time of the CPS Progress Report in the third year of implementation, subject to the level of absorption, implementation capacity and Government’s ability to maintain a sound macroeconomic framework, as well as the Bank’s lending capacity at that time. • At the proposed lending levels, and under the macro-framework presented in Annex Table B6, total IBRD debt is expected to remain below 3 percent of GDP and converge to 14 percent of total public debt over the medium term. Debt service to the World Bank is expected to represent less than 2 percent of total fiscal revenues. • The Bank plans to collaborate closely with IFC, particularly in sectors that could enhance growth or offer new opportunities to increase value added, such as finances, infrastructure, SME development, agribusiness and trade. IV. The Country Partnership Strategy [ 33 ] � Table 4: Strategic Areas of Government Action and World Bank Group Support 1. Governance 2. Poverty Reduction 3. Sustainable Growth and Environment 1. Identified Lending: • DPL I (FY09, $100m) • IFC Barge Project (FY09) • DPL II (FY10, $50m) • IFC Trade Lines (FY09) • DPL III (FY12, $50m) • Electricity (FY10, $tbd) • Land Access (FY10, $35M) • Education (FY10, $30M) • Safety Nets operation (FY11, tbd) Grants (underway/ • DFID Gov (FY08, $0.2M) • JSDF Indigenous Land • Environmental. Services. new), • Payments –FFS (FY08,$0.3M) (FY08,$1.7m) (FY08,0.2M) Fee for Services (FFS) • StAR program (FY09) • JSDF Indigenous • IFC Business Enabling Cost Sharing (CS) • IFC Business Enabling Communities. (FY08, Environment (CS) (FY09) Environment (CS) (FY09) $1.6m) • GEF for Biodiversity. • GAC support (to be mobilized) (FY10, $4.5M) • IDF for Congress (FY10, $0.4M) • TFSCB Statistics (FY09, $0.1M) • TFSCB Statistics (FY10, $0.4M) ESW and NLTA • Quick Response Note (tbd) • Quick Response Note • Quick Response Note • Programmatic. Public Sector. (Civil society FY10) (tbd) NLTA (FY10) • Programmatic Poverty • IFC Airports (FY09) NLTA (FY10) • Financial Sector NLTA • Programmatic. Safety. (FY10) Net & Labor (FY10) • Programmatic Growth • Health Service Delivery NLTA (FY10) (FY10) • State of the Environment. ESW (FY10) • Municipal service ESW (FY10) • IFC Business Enabling Environment (FY10) • Participatory Policy Notes (FY12) Source: Annex Tables B3 and B4 of focus: macroeconomic policy, state-owned • Other. Equally important would be to support enterprises and state modernization. The DPL the Government’s effectiveness agenda in the area series is also designed to assist the Government in of service delivery, by incorporating a governance its efforts to contribute to the anti-crisis plan from component into Bank-financed investment January 2009. operations --building on the successful experience of the Roads Maintenance Project, which includes • Non-Lending. The Bank’s program will contribute a Governance Action Plan which supports the to furthering the governance agenda through the supply side of governance and encourages social various GAC initiatives (See Box 2) participation, control and accountability. [ 34 ] IV. The Country Partnership Strategy � • IFC. The IFC aims to ease the microfinance Secondary Education project is included in the environment via improved regulation and a first two years of the indicative program under potential expansion in advisory services. In early the CPS. It is expected that this project will FY09, the Business Enabling Environment (BEE) contribute to improve educational coverage and of LAC’s Advisory Services (AS) Facility visited outcomes, particularly in the rural areas, and help Paraguay and presented to the Government and the authorities establish a scholarship program to to the private sector experiences in other countries develop a future cadre of Government officials. on simplifying processes for attaining construction The Bank and the authorities are also discussing and operating licenses. This was well received and possible Bank engagement in expanding safety the BEE team is prepared to work on this topics nets through non-lending activities that could be should the authorities request it. IFC is willing to followed by an investment operation. place an investment officer in the World Bank’s office if their program in Paraguay warrants it. • Non-lending. In terms of AAA, the Bank will continue an active engagement with the Poverty authorities in the poverty area. The successful poverty assessment non-lending TA, which 50. The Government’s broad and ambitious objective helped to improve poverty measurements and of reducing poverty entails, inter alia, a reduction also carried out, jointly with local researchers, an in poverty levels through employment creation, analysis of poverty issues, will be continued. This an improvement in social indicators, a decrease in will be supported by a programmatic dialogue on inequality through increased access to public services safety nets, and on the coverage of vulnerable and land, and a reduction in the incidence of child populations through the country’s formal health labor. Within these broad objectives, it is expected and pension systems. In addition, the Bank will that Bank support will contribute to improving living continue to mobilize grant funding, including conditions for the rural poor through improving from the Japan Social Development Fund, to access to and the effectiveness of social programs address the needs of vulnerable groups (two JSDF in education, water and sanitation, safety nets and grants supporting indigenous groups are currently access to land (see Annex 5 for country’s indicators ongoing). with respect to MDGs). Sustainable Growth and Environment • Lending. In the immediate term, and to mitigate the impact of the global financial crisis on the 51. The authorities’ key objective is to foster sustainable vulnerable population, the DPL series is expected to growth with a focus on employment generation and provide the resources needed by the Government managing better the country’s hydroelectric potential, to maintain the social programs already while safeguarding macroeconomic stability and included in the 2009 budget. In addition, the the environment. The Bank and IFC will support proposed additional financing to the Community this objective through programs for the short- and Development Project will continue past support medium-term. In the short-term, the focus will be to local communities, and the recently approved on safeguarding macroeconomic stability and, in Water and Sanitation Modernization Project will particular, on helping mitigate the effects of the global support an expansion in coverage of water supply financial crisis on economic activity, employment and and sanitation services. In the medium- term, the poor households by providing quick disbursing funds Bank program is expected to assist the authorities as part of the proposed programmatic DPLs. The in designing and implementing a market based IFC’s immediate focus will be on facilitating financial land reform through a proposed Land Access intermediation and helping the authorities improve and Administration operation. In addition, a the investment climate. The Bank and IFC will also IV. The Country Partnership Strategy [ 35 ] � Box 2: GAC in Paraguay The Paraguay GAC strategic objective is to establish the Bank as an advisor of choice for the Government of President Lugo in its mission to develop a viable governance path towards increased social equity, economic growth and stronger democratic institutions. The Bank recognizes there are important development partners that have been playing a proactive and substantive role in supporting governance related activities in Paraguay and the Bank will work in close coordination with them. Building on previous areas of involvement, the GAC Pilot seeks to engage the government in a multi- pronged GAC agenda dealing with: • Broad governance issues where the Bank can play a facilitating role in placing governance as a priority in the overall public policy agenda. In this area the Bank supported an International Conference on Governance and Development convened by President Lugo in August 2008 with the objective of presenting to the domestic political community relevant international experience in the handling of governance challenges. The Government has made two additional requests for assistance in: (i) facilitating the return of stolen assets through the StAR initiative: and (ii) improving the domestic investigative and sanctioning capacity to handle corruption. Both these activities respond to specific government needs and enjoy strong ownership by the new administration. The Bank envisages to take a leading role in both initiatives, while ensuring close coordination with other donors in the respective fields. • Country fiduciary agenda derived mostly from our recent Integrated Fiduciary Assessment (IFA). The IFA has provided the analytical basis for a reform agenda aimed at improving transparency and accountability in key government functions, i.e., public investment planning and implementation, civil service reform, state enterprise oversight and improved internal and external control mechanisms. This proposed agenda will be supported by a series of programmatic DPLs over the next years, together with a strong effort to coordinate the reform agenda with other development partners providing technical assistance support in these areas. • An investment portfolio agenda consisting in the mainstreaming of all Bank funded operations within the regular state structure (thus, doing away with PIUs and the outsourcing of project implementation to international agencies) and in increasing reliance on country systems in key fiduciary areas. This agenda faces significant governance challenges, as it has implied phasing out ring fencing arrangements which were customary in Bank operations and tackling the civil service, organizational and fiduciary challenges derived from the increased reliance in country systems. In line with this agenda, the Government has recently issued new civil service rules to attract qualified personnel in the handling of internationally funded investment projects. • A sector and project specific agenda. Starting with the path-breaking Road Maintenance Project, new operations are expected to develop explicit governance frameworks to deal with governance challenges in the respective sector. GAC-related incremental preparation budgets have enabled the conduct of governance related analytical work in the education, rural and water and sewerage sectors. It is expected that new operations in these fields will have a much stronger governance content. One specific challenge for the rural sector is the development of detailed frameworks to introduce increased transparency and accountability in community driven projects, users’ associations and the broader communities. In implementing the GAC, the Bank will seek to mobilize trust funds and other resources which would allow the country to make progress in the various areas and initiatives. [ 36 ] IV. The Country Partnership Strategy � launch programs for the medium-term aiming at indoor/outdoor air pollution). The Bank will either supporting interventions that unambiguously further support the environmental agenda through enhance growth prospects, or facilitating the internal a Global Environmental Facility (GEF) program, dialogue on how best to promote sustainable including a US$20m (US$4.5m GEF grant) program growth (See Annex 6 on Growth Prospects). Specific to conserve biodiversity in the Atlantic Forest of interventions would include: Eastern Paraguay. Looking forward, Paraguay has yet to commit a significant portion of its Resource • Lending. The Bank is considering to co-finance the Allocation Framework (RAF) for biodiversity and medium-term program to improve the electricity climate change under GEF-IV. The Bank will look for grid, jointly with other potential financiers (such opportunities to develop GEF projects, particularly as the European Investment Bank and, potentially, in areas that maximize synergies with Bank lending. private sector sources). In addition, there is The Bank further supports Paraguay’s participation ongoing dialogue on other possible infrastructure in the Forest Carbon Partnership Facility (FCPF) interventions (e.g., rural roads, public ports and and will seek to mobilize support for this initiative airports, and key waterways) but no specific from a bilateral donor. project has been identified so far. These initiatives will build on the ongoing Road Maintenance • IFC. IFC is renewing its engagement with Project which, among others, supports private Paraguay. So far this fiscal year, IFC has committed sector participation in road maintenance and will an additional trade line with a third local bank, and aim at increasing access to markets in the rural is pursuing additional operations with financial areas of San Pedro and Caguazu (the country’s institutions focused on SMEs, microfinance and two poorest departments). agribusiness and with a strong presence outside the capital city in order to maximize reach. As part • Non-Lending. The Bank will launch a programmatic of the strategy to improve transport services and dialogue on growth related issues in Paraguay, which trade in Paraguay, IFC has also committed and will consist of an exchange of experiences between disbursed this fiscal year a US $60 million loan to countries in a similar situation, and will lead to the the largest barge operator on the Parana-Paraguay preparation of short analytical reports on specific river system. Further, IFC is considering projects issues, such as the effects of contraband trade on in the agribusiness sector, as well as in the cellular the economy and the potential for diversification of telecommunications sector. Given the need to the agro-industry and export businesses away from improve infrastructure in Paraguay, IFC and the soy and beef products. Other donors are expected Bank will coordinate closely to identify projects that to be involved in this type of analysis, which will could be supported by the World Bank Group. On look at the big picture, but also focus on sustainable the Advisory side, IFC’s pipeline consists of two rural development and on the development of projects: one with a local microfinance institution, small cities. Given Paraguay’s financial sector helping it to expand its services and in turn access vulnerability to a potential economic downturn, to finance, and another one to simplify local the Bank will support the Government’s efforts to regulation in Asuncion to ease the cost of doing monitor these vulnerabilities, and take action to business for entrepreneurs. strengthen supervision when required, through a non-lending TA. Program Monitoring • Other. The Government has expressed interest in 52. Beginning in mid-FY10, yearly CPS review missions a country environmental assessment which would (or program discussions during the Annual Meetings) prioritize interventions in a range of environmental will review with the authorities progress made in the areas (such as deforestation, water contamination, implementation of the CPS and the proposed lending IV. The Country Partnership Strategy [ 37 ] � operations, as well as analytical work and non-lending addressing the challenges faced under the three areas activities for the ensuing years, in order to ensure their of focus (see paras. 49, 50 and 51) and that the extent continued relevance and jointly agree on the need to which the Bank Group contributed to these results. for changes to the indicative program. The program As the program is demand driven, the continued will take into account the Government’s needs, its interest by the Government in obtaining increased absorption and implementation capacity, as well as assistance form the Bank would be an indication integrity and the projects’ perceived impact. that the Bank is being responsive to the country’s assistance needs. Finally, the Government’s ability to 53. The flexible nature of the CPS creates a need for mobilize effectively the Bank’s financial and technical clear guidelines as to when and where – and how resources will be the key driver to the successful intensively– the Bank should be engaged in Paraguay. implementation of the CPS. Because of Paraguay’s financial circumstances following the global financial crisis and its development agenda, all future engagement will be demand- B. PORTFOLIO driven. However, the Bank will also ensure that its work in Paraguay serves the institution’s broader goals 56. The Bank’s portfolio in Paraguay is small, and meets institutional standards. For this purpose, consisting of two projects under implementation (the management will regularly monitor both the pace of Road Maintenance Project for US$74 million approved reforms and the overall macroeconomic environment in FY07, and the Secondary Education Project for to ensure that Bank resources are properly utilized. US$24 million approved in FY 2004), and three The Bank will also ensure that governance safeguards projects awaiting effectiveness pending Parliamentary are in place prior to utilizing Bank resources. This will approval (the US$37.5 million Sustainable Agricultural require regular monitoring of Paraguay’s reform efforts, and Rural Development Project approved in FY08, particularly in the various aspects that contribute to the US$9 million additional financing for Community improving transparency and governance. Indicators Development Project, also approved in FY08, and the for governance, social needs and millennium Water and Sanitation Sector Modernization Project)18. development challenges, and growth will be regularly Overall, the portfolio is considered satisfactory, monitored and benchmarked against other countries as indicated by the satisfactory rating of the two through non-lending work and in collaboration with projects under implementation and the two projects other multilateral agencies and bilateral donors. which have recently closed (the initial phase of the Community Development project and the Fourth 54. In addition to monitoring performance indicators, Rural Water Supply Project). However, the two project implementation of Bank projects will also be closely awaiting effectiveness for over six months have been monitored through bi-annual portfolio reviews, downgraded to unsatisfactory status given delays in despite the fact that the portfolio is currently very their approval by Parliament. small. In addition, the design of projects classified as “risky� will include self-regulating triggers which 57. From the beginning of 2006, the Government and would delay or suspend preparation in case of failure the Bank made a strong effort to improve portfolio to carry out reforms that are fundamental to the performance in a context of high fiduciary risk. Particular project’s success. focus was placed on institutional aspects of operations, ensuring not only fiduciary compliance but also 55. The success of the CPS will be measured in terms capacity building. A systematic financial management of Paraguay’s ability to take tangible steps towards and procurement assessment of the portfolio is 18. This project was almost unanimously approved by the upper chamber of Congress on March 26, 2009, but awaits approval by the lower chamber. [ 38 ] IV. The Country Partnership Strategy � carried out on a regular basis. In addition, the SEPA improvement in the external audit function. Despite (Sistema de Ejecución de Planes de Adquisiciones) is these efforts, external audit still exhibits considerable expected to be introduced as the portfolio grows in weaknesses, including the limited effectiveness size to ensure greater transparency in the procurement of follow-up on audit recommendations. The process. The system has been presented to the Government is also initiating reforms of the internal Government and is currently being implemented by audit function (Auditoria General del Poder Ejecutivo, the Road Maintenance Project. It will be subsequently AGPE); nonetheless, AGPE’s current institutional implemented by the Sustainable Agriculture and Rural capacity is still not sufficiently developed to allow it Development Project and the additional financing for to carry out its duties effectively. In procurement, the Community Development Project as soon as they modern legislation has been recently adopted. This, become effective. The expectation looking forward is together with the creation of the General Directorate for to continue deepening this effort in particular in the Public Procurement and the development of a public design of new operations. procurement system, has strengthened transparency. 58. However, the main challenge to portfolio 60. Despite these accomplishments and the performance continues to be posed by extensive commitment of the new Government to improve delays in obtaining Congressional approval of new public financial management and the accountability projects, as in Paraguay all externally funded loans and control environment, substantial challenges and grants require Congressional approval on a remain for both the authorities and the donor case by case basis outside of the budget process. community. In the areas of financial management The Executive is committed to increase the flow of and control, the initiatives undertaken are too information to Parliament on donor funded projects recent to show significant results and need to be and the Bank will support these efforts by ensuring monitored. More efforts are required to strengthen that information on planned Bank funded projects control agencies. The Bank will continue its dialogue is readily and widely available However, since with the authorities during the CPS period in order major improvements are needed in the institutional to identify opportunities to assist the Government in processes whereby the Executive and the Legislative planning and implementing reforms for improving branches approve external assistance, which are also public financial management and accountability. This at times politicized, this issue will continue to pose will be carried out by expanding non-project fiduciary serious consequences for the predictability and level work and by identifying opportunities for providing of development assistance. support through grant funding. 59. Progress in portfolio management was accompanied 61. IFC. During the last CAS period, IFC committed by positive steps towards strengthening financial and fully disbursed US $15 million to finance the management. The 2006 budget law prohibited the use expansion of a cellular telecommunication company. of outsourcing in the implementation of new projects. In FY08, IFC extended two trade lines of US $5 million This will initiate a strong effort to strengthen state each to two local financial institutions with the goal structures for the management of investment projects. of strengthening the financial sector while expanding In addition, an important tax and customs reform was access to finance for exporters. initiated in 2004, and technical improvements to the budget process were implemented in the areas of financial planning, cash management, and budget C. IBRD FINANCIAL PRODUCTS accounting. With the support of the IDB and the AND SERVICES United States Agency for International Development (USAID), the Comptroller General of the Republic has 62. IBRD offers a full array of financing and risk been strengthened, which has contributed to some management products, which could provide flexibility IV. The Country Partnership Strategy [ 39 ] � to Paraguay in managing its debt, including the ability weak financial and institutional capacity provides the to change the financial characteristics of existing and ground for a donor-driven set of investment programs. future loans as to better manage financial risks relating Through the proposed CPS, the Bank will support the to currency, interest rate, roll over and commodity Government’s efforts to assume the leading role in price volatility. Within this context, Paraguay may reviewing investment programs and particularly in want to consider engaging staff of the World Bank’s deciding which projects to include in the indicative Treasury to become fully aware of the flexibility, depth program for the latter part of the CPS period. and breadth of IBRD’s full menu of banking products and services, including IBRD’s technical assistance 65. In the past, the Bank has maintained an active in designing and implementing a broad strategy for dialogue with other international organization, public debt management aimed at reducing both including the IADB, and key bilateral donors, including market risks and overall costs of funding. the United States and Japan. In addition, the Bank has been in close consultations with the IMF team, which 63. IBRD recently introduced a new pricing and maturity carries out bi-annual Article IV consultations after structure that makes IBRD loans very competitive for the country successfully completed three successive Paraguay. This pricing structure currently stands for arrangements, and has maintained close ties with the USD borrowings at approximately LIBOR + 78 bps for IFC, particularly as it plans to step up its involvement loans with a fixed spread and LIBOR + 1 bps for loans in Paraguay over the coming years. The Bank has with variable spread, inclusive of a 25 bps front-end also coordinated with other relevant donors at the fee. In addition, the new pricing structure has become sectoral level and at the level of individual projects. more transparent and predictable, with the elimination For example, the Bank has engaged very closely with of the commitment fee and yearly waivers, while key partners in the policy areas covered by the DPL, retaining the existing flexibility to manage currency, including tax system, public sector financial control, interest rate, roll over and commodity price risks. expenditure management and human resources Furthermore, maturity of IBRD loans was recently management. Table 5 below provides details on key extended, allowing for maturities of up to 30 years. donors’ assistance programs and Bank collaborative This combination of pricing and extended maturities efforts. For details on principal areas of assistance by should be very attractive to the Government of donor, see Annex 7. Paraguay as it pursues its own developmental agenda throughout the new CPS period. E. EXPECTED RESULTS OF THE CPS D. DEVELOPMENT PARTNERS 66. Indicative outcomes and results indicators are presented in the annexed CPS Results Matrix. 64. A large number of international organization and Expected CPS outcomes as indicated in the Matrix will bilateral donors are active in Paraguay. Paraguay, be further refined as the needed information becomes however, lacks a formal aid coordination mechanism available, and are therefore subject to change. These and, up to recently, donor coordination has taken place changes will be reflected in the CPS Progress Report largely on an ad hoc basis. Since the appointment which will be prepared at the end of the third year of of President Lugo, the Government has made CPS implementation. The CPS Progress Report will concerted efforts to take the lead in coordinating take stock of program implementation at mid-term donor support, and the donor community now meets and the revised indicators will reflect the status of regularly, jointly with Government counterparts, to program implementation at that stage. A Client Survey identify a common strategy in support of the new will also be carried out at the time of preparation of administration. Efforts notwithstanding, Paraguay’s the CPS Progress Report. [ 40 ] IV. The Country Partnership Strategy � Table 5 : Main Development Partners by Area of Focus Key Areas of Focus Ongoing and/or Planned Support Collaboration with the Bank Inter-American • Governance • 93 programs (24 sovereign-guaranteed loans, 6 non • Progress in Development • Poverty and inclusion sovereign guaranteed loans, 40 technical cooperation grants, harmonizing fiduciary Bank (current • Growth and 17 FOMIN operations, and 6 small productive grants) totaling arrangements loans and Competitiveness US$716M in commitments, of which US$474M undisbursed. • Consultations and grants • The 2009 program amounts to US$366,6M. It includes a joint meetings with portfolio) PBL to improve the public administration (US$50M), a road counterparts on the project (US$65,6M), a rural sanitation project (US$48M) Education Project and and a liquidity facility for growth sustainability (US$200M). DPL programs Technical cooperation and FOMIN is programmed to be • Joint ESWIntegrated between US$9M and $10M. Fiduciary Assessment Japan - JICA priority areas -Over the 2002-2006 period annual support from JICA has • Consultations on civil International include: been in the range of JAP¥1.6-2.1 billion (or about US$15.6- service reform and Cooperation • Poverty Reduction, 21.1million), which has also been maintained for more recent agriculture Agency and including human years. Specific support included Technical Cooperation • Joint outputs for Japanese development and income Projects to help: previous pension/safety Bank for improvement for small • Poverty. Medical Education, Mental Health, Small nets work (including International farmers Cooperatives in the Southeastern Paraguay. joint missions) Cooperation • Economic • Growth. Agricultural Technology Center, Quality and • Possibly formal or Competitiveness for Productivity Center, and Improvement of Social Infrastructure. informal co-financing Growth • Governance. Strengthening of the Civil Service and, starting arrangement for DPL • Improve of the Public last FY, Local Government Capacity Building. Administration and Good • MERCOSUR. Regional Cooperation on Animal Health, Governance Impact of Tariff Unification on Paraguay, Tourism. • MERCOSUR • Environment. Starting last FY, Decentralization in • Conservation of Environment Management, Solid Waste Management. the Environment and Support also includes studies on Integrated Rural sustainable development Development for Small Farmers; and Civil Society Initiatives, including productive activities for low income women. - JICA (recently merged -JBIC’s most recent project supports the construction of with JBIC) is also the Iguazu hydropower station (JAP¥21.4 billion or US$215 providing support through Million) investment projects.. -JBIC also supported a feasibility study for export corridors in the Western and Eastern areas of Paraguay (completed, loan request in process) and a feasibility study for water supply in the metropolitan area of Ciudad del Este (March 2009) IV. The Country Partnership Strategy [ 41 ] � Table 5 : Main Development Partners by Area of Focus (cont.) Key Areas of Focus Ongoing and/or Planned Support Collaboration with the Bank European - In December 2007 - Pre-2007 support: • Joint ESW for the Union Paraguay and the • Poverty Reduction via general budget support(€28M Integrated Fiduciary EU signed a MoU on committed €14M disbursed, 7 to be disbursed in 2009) Assessment cooperation for 2007-13 • Joint Mission/ for €117 million in grants - Support on the Dec 2007 MOU: Meetings on Education supporting two sectors: • Education. Sectoral budget support (first financing program education and economic agreement of 54M € pending signature). Prevision of a • Continuous team integration. It builds on first €10M disbursement in 2009 consultation to ensure ongoing support for the • Integration. Project approach. first financing agreement synergies Government’s poverty of € 6M pending signature. reduction strategy. - The EU has two programs - TA: of Technical Assistance • Governance: State Reform (€.6M) under implementation • Growth: Competitiveness (€13M) on growth and governance - Civil Society: 25 contracts in 2009 in areas such as: - Furthermore, the EU • Agro-Ecological Production supports a number of • Strengthening of Peasant and Indigenous Communities social sector initiatives (support for the legalization of land distributions) implemented through • Fight Against Poverty, Education and Literacy (Teaching civil society, amounting for Adults) to about € 7M. • Civil Society Participation and Human rights. - Paraguay also benefits from TA and cooperation from the EU-MERCOSUR, and EU-LAC programs USA/USAID The US program focuses • 1st Threshold Program under the Millennium Challenge • Continuous team on economic growth Account focused on fighting corruption, financial consultation to ensure and social justice, while management, judiciary system, customs, and formalization synergies fighting corruption, ($34.6M completed in 2008) • Close coordination narcotics and other • 2nd Threshold Program approved, focusing on anti- on DPL and Integrated forms of illegality that corruption in law enforcement, customs, healthcare and Fiduciary Assessment undermine national judicial sectors ($30.3M) development • Debt for Nature Swap ($7.4M) • Democracy and civil society Programs • Peace Corps program • Support for competitiveness and formalization through Paraguay Vende and other initiatives • OPIC/Citibank have a program supporting SMEs ($95M). [ 42 ] IV. The Country Partnership Strategy � Risks 70. Social Risks. Despite high economic growth and advances in employment, the social situation is fragile, given the high levels of exclusion in the country. The lack of housing and social services, 67. Notwithstanding Paraguay’s economic expansion as well as the recent increases in food prices, are and strong performance over the past four years, a fueling tensions in the urban areas. In regions, use number of important risks must be acknowledged. of land in highly mechanized soybean production Some of these are external risks, others are country has fueled tension with poor small-scale farmers related risks, and we will only address those risks that and landless peasants. The political transition has could affect the delivery of the program under the generated high expectations, particularly among the CPS. poor, that urgent social needs will be met and the new Government is expected to implement social 68. Political and Governance Risks. The minority hold emergency measures. There is therefore a social of the APC coalition in the Legislative and its limited risk associated with the authorities not being able government experience may negatively impact on the to deliver on their program as quickly as the public Government’s ability to formulate and implement its expects, or in a manner that meets expectations. development agenda. This could engender social discontent leading to lack of support for the Government. Despite the fact that 69. This may have two operational consequences much of the Bank’s and other partners’ programs for the Bank’s program and, more generally, for all are geared to help improve social conditions in the programs of external assistance. First, the preparation short and medium-term, the social risk is assessed of new projects might take longer than expected while as high. consensus is being reached among Government and stakeholders. While in some sectors, such as education, 71. Fiduciary Risk. The ineffectiveness of the control a well defined sectoral strategy is already in place, system, together with the inefficiency of the budget other projects are more likely to suffer preparation process and the lack of fiscal transparency, are the delays, such as land redistribution. The Bank will seek main challenges Paraguay faces in procurement and to carry out non-lending activities in areas of strategic financial management. These shortcomings, coupled priority for the authorities to help clarify options and with Paraguay’s underlying political and institutional unify views. In addition, project preparation should set weaknesses, are particularly harmful to the smooth as a critical priority the development of consensus and implementation of donor funded operations. As ownership of specific investment initiatives. Second, public sector investment depends crucially on IFIs there is also a risk that even if there is consensus on and bilateral donors’ lending and grants, continued a sector strategy, a highly fragmented Congress may weakness of the fiduciary environment would seriously fail to approve new investments (with Bank’s or other undermine the implementation of the Government’s donors’ support) once these have been prepared. To program. The Bank will ensure close supervision of mitigate such risk, the Bank will continue to increase the program under implementation over the CPS the knowledge available to the various stakeholders. period. The new administration’s strong commitment A Communication and Governance grant will be towards improving the integrity environment and implemented to help strengthen the communication the actions that it plans to undertake in the near skills of both the Government and the executing future –including those under the Programmatic agencies. Despite these efforts, this risk is assessed DPL—should lead towards a gradual improvement of as high, since the current institutional environment is fiduciary conditions in the country. In the meanwhile, conducive to suboptimal decision making in this area. the fiduciary risk is assessed as high. IV. The Country Partnership Strategy [ 43 ] � C 72. External Shocks and Natural Disasters. Paraguay is highly vulnerable to further deceleration of the world economy, and additional setbacks in international prices and demand for the country’s export products. C A sustained drop in growth could also affect the credit quality of the domestic financial system, and may particularly affect financial cooperatives. In addition, although not likely in the short to medium term, supply shocks related to higher international C oil prices could become a drag on the economy. Lastly, Paraguay’s economic activity is highly prone to natural disasters such as fires, droughts and floods. The Bank will help address the risks through flexibility C in its program, thereby allowing resources to be redirected quickly towards areas of need during the CPS implementation period.19 Also, in the past, the Bank has made available to the authorities of the treasury services it offers to help the country navigate C external shocks. A future area of engagement may consist, precisely, in a more active use of those services. Continued prudent economic management will be critical to reduce the likelihood and impact of C such shocks. The risk associated with external shocks and natural disasters is assessed as high. C C C C C 19. Other donors are actively helping Paraguay develop its natural disaster response capacity. [ 44 ] IV. The Country Partnership Strategy C � C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P A N N E X E S C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C 47 Annex 1: Paraguay Country Partnership Strategy Results Matrix 57 Annex 2: Paraguay CAS Completion Report 87 Annex 3: CPS Preparation Process 91 Annex 4: Governance and Anticorruption in Paraguay 94 Annex 5: Meeting the Millennium Development Goals 103 Annex 6: Growth Prospects in Paraguay 110 Annex 7: Principal Areas of Assistance by Donor 111 Annex A2: Paraguay at a Glance 115 Annex B2: Selected Indicators of Bank Portfolio Performance and Management 117 Annex B3: IBRD/IDA Program Summary IFC & MIGA Program 118 Annex B4: Paraguay – Summary of Nonlending Services 120 Annex B6: Paraguay – Key Economic Indicators 122 Annex B7: Paraguay – Key Exposure Indicators 123 Annex B8: Paraguay – Operations Portfolio (IBRD/IDA and Grants) Paraguay – Statement of IFC’s Held and Disbursed Portfolio Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles 21 CPS Outcomes 22 Milestones 23 Bank Group Program Goals 20 (and Partners) 24 I. Governance and Anticorruption: Strengthening state institutions to improve policy making, public service provision, and rule of law for investments and households. (Note: Translated from the Government’s Economic and Social Strategy 2008-2013) i. Fighting corruption and increasing transparency Breaking up with the • Widespread acceptance of WB practices that enabled corruption (including mini- -Possible GAC TF corruption opportunities payments) among public -StAR initiative in the past officials and the population -Road Project (FY05), - Water Project (FY09) • Weak public administration (low incentives, and Partners: burdensome processes) - USAID, IADB, JICA provides the grounds for corruption to thrive • Lack of transparency in key activities increase the perception of corruption (e.g., the handling of social spending in Paraguay by the ITAIPU hydropower plant) • Initial efforts to break • Number of high profile • Subscription to the WB/ practices have resulted in corruption cases successfully UNODC Stolen Assets higher level of denounces, brought to (domestic or Recovery Program; but capacity to investigate international) justice • Preparation of a plan for and punish corruption is low Baseline: 0 (2008) coordinating anticorruption due to: (1) uncoordinated Target: 5 (2014) action by the various agencies; actions by the Procuraduria, legal office of the President, • Number of ministries or • Agreement on governance prosecutor’s office, and line agencies formally adopting framework for roads (done) ministries; and (2) capture good governance practices and water sectors; of the justice system by Baseline: 1 (2006) • Implementation progress in politicians. Target: 3 (2013) all the above mentioned areas 20. Longer-term or higher-order development objectives identified by the country. Usually not achievable in the CAS period nor solely addressed by the CAS program. Only those to which CAS outcomes will contribute are included. 21. Critical issues and obstacles to achieving country development goals, providing the logical link to CAS outcomes. 22. Country results deemed achievable in the CAS period and which the Bank expects to influence through its interventions. Indicators of each outcome are included, with baselines and targets. 23. Progress markers of CAS implementation; outputs, actions, or outcomes expected to be realized during CAS implementation. 24. Ongoing and planned lending, grants, and guarantees; analytical and advisory activities. Includes IBRD, IDA, IFC, and MIGA. Partners included if cofinancing or other support of same CAS outcome. Annexes [ 47 ] Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles CPS Outcomes Milestones Bank Group Program Goals (and Partners) ii. Modernization of the Public Administration to improve service delivery . (Note: Translated from the Government’s Economic and Social Strategy 2008-2013) a. Strengthening • Ineffective internal • Increase effectiveness of • The Government has issued WB Financial Public Control control procedures and internal control and internal two decrees to upgrade the - Programmatic DPL environment; limited audit function Office of the Executive’s Internal - Public Sector AAA internal audit capacities Auditor (AGPE) to ministerial − PEFA Indicators for Internal level; and to strengthen the Partners Control and Internal Audit authority and independence - JICA (PI-20 and PI-21) have been of AGPE in order to establish - US/USAID upgraded a the standard internal control - IDB Baseline: D+ (IFA 2008) model (MECIP) and determine - EU Target: C (2013) criteria for selection of internal auditors throughout the central administration. • 50 percent of ministries and secretariats have established internal control committees, internal control norms, and trained staff to implement the MECIP; and their respective internal audit units (AIIs) have the number of employees and competitive hiring processes required by AGPE. b. Gradually • Weak state institutions, • Personnel recruitment and • Government introduces WB Professionalize Civil particularly the civil service promotions are based on competitive and transparent - Programmatic DPL Service due to lack of meritocratic merit and professional skills. processes for recruitment and - Public Sector AAA recruitment, lack of simple promotion of civil servants, and and clear remuneration − Percent of officials recruited the Civil Service Secretariat is Partners policies, and lack of competitively and supervised overseeing those processes. - JICA, USAID, IADB, controls over Human by Civil Service Secretariat • Amendments to the Civil CAF Resource Management (SFP). Service Law to strengthen policies. Baseline: 0, only some public servants’ professionalism consultants (2007) and to redefine the scope Target: 30% of all hires (2013) of public administration, as well as the rights, obligations, − Percent of civil servants and procedures associated to promotions supervised by SFP. recruitment, promotion and Baseline: 0 (2007) removal of public servants Target: 30% of all hires (2013) [ 48 ] Annexes Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Issues and CPS Outcomes Milestones Bank Group Program Development Goals Obstacles (and Partners) ii. Modernization of the Public Administration to improve service delivery. (Note: Translated from the Government’s Economic and Social Strategy 2008-2013) c. Restore Government • Ineffective − Finances and operations of SOEs • Government has issued a decree WB Oversight on State- provision of public are transparent and subject to to establish a Council for SOEs (CEP) - Programmatic DPL owned enterprises services by SOEs greater scrutiny by Government ensuring (i) public sector oversight - Public Sector AAA (SOEs) due to: and civil society on SOEs, and (ii) the definition of a Government policy for SOEs’ reform. Partners Note: Government - Discretionary • A Holding Agency of SOEs is legally - JICA, IADB program on SOEs is more management established to replace CEP. It has ambitious and aims ate practices; lack of the authority to: (i) elaborate SOE “efficient State-owned transparent financial corporate governance, including the enterprises (SOEs) to management. criteria for appointment and removal improve welfare and Mis-governance of high rank personnel; (ii) redesign competitiveness� arising in part from management evaluation mechanisms; the ineffective (iii) design a system of investment organization of the planning, and (iv) evaluate the state ownership financial situation of each SOE.+ function, and • The Holding Agency ensures that, beginning in 2010, all SOEs are subject to annual external audits by international audit firms, which are required to be prepared according to CEP/Holding standards, and published. • The Ministry of Finance establishes clear rules with respect to transfers and payments between SOEs and the Central Administration. • Projects in support of investments by ESSAP become effective (i.e., are approved by congress) - Low levels of • Improve public service delivery • ANDE satisfactorily implements WB investments, often for Water and Electricity by ongoing investment program and - Water Project (FY09) below depreciation increasing the share of capital develops (jointly with financiers) a - Electricity Transmission levels, by SOEs expenditure over total expenditure transmission investment program (FY10) due to lack of for ESSAP from 8.5% (2008 • Appropriate fiduciary management management baseline) to 20%, and for ANDE of public investments by ESSAP and Partners: capabilities and from 10.6% (2008 baseline) to ANDE - IADB, JICA, EIB, financial resources 20%. MERCOSUR, SPAIN Baseline: 8.5% ESSAP (2008) 10.6% ANDE (2008) Annexes [ 49 ] Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles CPS Outcomes Milestones Bank Group Program Goals (and Partners) II. Poverty: Improving investments in the social sectors (health and education) and focusing public spending on fighting extreme poverty. (Note: Translated from the Government’s Economic and Social Strategy 2008-2013) i. Employment generation and fighting poverty (especially in light of the effects of the global financial crisis on Paraguay) Extreme and overall • Large number of public • Focus the limited country • Gradually increase WB: poverty is kept at 2007 social programs under capacity and financial beneficiaries of the conditional - Programmatic dialogue levels despite the implementation, which resources on a few programs: cash transfer programs on social policy expected economic compete for limited human as follows: (1) 25,000 - Programmatic poverty slowdown resources and infrastructure. − Increase the number of beneficiaries by 2009, (2) assessment Source: DEEG beneficiaries (households) for 50,000 beneficiaries by 2011, - Possible safety nets Baseline: 20% & 36% the conditional cash transfer (3) 75,000 beneficiaries by operation (2007) program—Tekopora, PRO-PAIS 2012 - Additional Finance Target: 20% & 36% II, and Ñopotivo • In parallel improve targeting for a Community (2012) Baseline: 18,700 (2008) methods, and the supply Development Project Target: 75,000 (2012) of health, education, and (FY08) Note 1: Government nutrition that might be - JSDF for community program is more ambitious − Retool institutional capacity required for the program development of than the Bank in terms of to address other important • Launch a dialogue on the indigenous communities poverty targets as it was poverty concerns, particularly options that Paraguay has to - Road Maintenance produced prior to the crisis. those arising from the crisis, counteract the effects that the project (FY06) via decentralized mechanisms, Global financial crisis might Note 2: Poverty such as community driven have on poorest households Partners: measurement methodology projects (including, if appropriate, EU, IADB, GTZ, ILO, is expected to be revised for partnership with private sector UNFPA, UNDP, Mexico, the 2008 indicators) − Provide opportunities for in support of active labor Brazil, Chile, and other community groups or micro- market policies, vocational bilaterals enterprises to participate in education, etc.) maintenance agreements for • Effectiveness of the rural roads additional finance for community development • Process of Strengthening the Secretariat for Social Action (SAS in Spanish) begins [ 50 ] Annexes Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles CPS Outcomes Milestones Bank Group Program Goals (and Partners) ii. Integrated Agrarian Reform, and reactivation of small-scale (household) agriculture • Implement a • Weak consensus on − Launch participative • Consensus on options to WB comprehensive how best to address the approach to increase land enhance land access reached. - Sustainable Rural agrarian reform with landless problem, and weak access for vulnerable groups 2009 Development Project intermediation by the implementation capacity (e.g., low income or young • Participative options (FY08) state and participation for this agenda (including farmers, indigenous), and designed to complement - Land Access and of key relevant sectors: land access and agricultural provide appropriate support traditional practices. 2010 Administration project small-scaled (household) support services) services to them • Communities’ application (FY10) agriculture and and screening process - Programmatic agricultural enterprises • Number of communities advances. 2011 municipal development • Strengthening small/ benefitting from project- • Participative land-access dialogue. scale agriculture as sponsored land access support to communities starts - JSDF for titling land to suppliers of food, to opportunities and proper to be implemented 2012 indigenous communities ensure national food support service arrangements security and achieve Baseline 0 (2008) Partners growth with equity Intermediate 10 (2011) FAO, GTZ, and with insertion into Target 50 (2013) IFAD, IADB, IICA, Japan markets • Promote participation • Increased number of of the peasant sectors indigenous communities with through strengthening formal title communities, and taking Baseline 0 (2008) into account gender and Target 30 (2012) equity. • Promote cultural, social • Launch program to provide • Sustainable rural and territorial stability for integrated support to the development project declared indigenous populations rural poor in San Pedro and effective (2009) Caaguazu • Implementation Baseline 0 (2008) arrangements deployed Target 100 of which 5 • Community applications, indigenous communities screening (2013) Annexes [ 51 ] Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles CPS Outcomes Milestones Bank Group Program Goals (and Partners) iii. Increase enrollment rates and quality of secondary education • Managerial problems at all • Increase in enrollment • Continue support for the WB levels of the education sector rates at the pre-school, conditional cash transfer - Secondary education (Ministry, Departments, lower secondary, and associated with upper project schools), deficient supply upper secondary together secondary school attendance - Programmatic Social of service at the delivery with increases in quality of • Continue efforts to improve Protection dialogue level (lack of schools, lack secondary education secondary education of maintenance, lack of key Baseline (2005, gross enroll. curriculum and increase Partners: educational inputs), high rates) teacher’s skills through initial - EU’s education dropping out rates and low - Pre-schooling, 89% training and in-service training modernization program transition rates between - Lower secondary, 80% • Expand the achievements - IADB Primary lower and upper secondary - Upper secondary, 52% test for secondary students Education Strengthening education, and low student Target (2012, g.e.r) (SNEPE - Sistema Nacional Program achievement (quality) 2009 2011 2012 de Evaluación del Proceso Educativo) and participation Pre- 92 96 99 schooling of the country in international students assessments (TIMSS Lower 90 95 99 Secondary and/or PIRLS) Interme- 60 64 66 diate iv. Increase access to water and sewerage services for the entire population, including indigenous populations Population with access to • Lack of a sound strategy • Increase coverage of water • Framework for managing WB: sewerage for the sector, although the and sanitation system in the sector agreed (rural and Water Modernization Baseline: 8% (2007) framework for incentives to rural and urban areas and urban) Project Target: 20% (2013) providers so as to ensure in particular increasing the • Investment program for system efficiency and number of additional families water and sewerage approved Partners: Population with access to sustainability is advanced. (over 2007): • Increased level of public - Mercosur structural drinkable water - using sanitation systems in investment in the sector funds Baseline: 61% (2007) • Lack of a strategic the Asunción metropolitan materialized - Japan Target: 71% (2013) institutional framework for area: Target of 15,000 new - EU the sector at the national families by 2013 - IDB level, and lack of identification - Using water supply systems - Spain of concrete actions to in rural and indigenous areas: improve the efficiency of Target of 5,000 new families providers. Finally, lack of an by 2013 investment framework for the - Using basic sanitation in rural sector for the short, medium areas: Target of 4000 new and longer-term. families by 2013). [ 52 ] Annexes Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Issues and Obstacles CPS Outcomes Milestones Bank Group Program Development Goals (and Partners) III. Growth with equity: Fostering growth with a focus on employment generation and on improving income distribution, without destabilizing the country’s macroeconomic framework, and in an environmentally friendly manner. (Note: Translated from the Government’s Economic and Social Strategy 2008-2013) i. Appropriately responding to the global financial crisis, while safeguarding macroeconomic and financial stability • Strong external volatility • Adoption of a countercyclical • Adoption by congress of the WB coming from a sharp fiscal policy to mitigate the emergency, anti-crisis, package of - DPLs reduction in trade (the fall impact of the crisis on the $300M which is co-financed by - Programmatic public in commodity prices and most vulnerable population, IDB, CAF, Japan and the World sector reports export demand) and worker’s but maintaining a sustainable Bank. - Programmatic growth remittances. fiscal stance in terms of public • Gradually (as political economy notes debt to GDP: permits) expand the base of tax - Macroeconomic • Low overall tax revenues - The overall fiscal balance to payers by, for instance eliminating and financial sector and reliance on trade related move from surplus to deficit, VAT deductions from the profit tax monitoring taxes (VAT on imports, duties, but to avoid sharp increases paid by agricultural enterprises and excises) makes it difficult in the debt to GDP ratio the (the IMAGRO), improving Partners to smooth out fluctuations average deficit be around 1% administration for the 114 largest IMF, US Treasury, IDB, w/ sustainable fiscal deficits of GDP (2009-2011) firms and designating as VAT JICA, CAF (although debt to GDP is - Increased tax-to-GDP ratio withholding agents, increasing low). Baseline: 11.9% (avg 2004-08) excises. Target: 13.0% (2013) • Expenditure in personnel • Utilizing the fiscal headroom • Adoption by the Executive of accounts for about half of to increase targeting of public financial programs (which control total spending. Since it is spending, away from wages non-protected such as social protected the country tends and other recurrent spending programs and public investments) to cut social and infrastructure and towards capital and social that are consistent with social and spending during crisis. protection items: infrastructure priorities (for 2009 Low capacity to formulate, - Increase public investment/ and beyond) implement and monitor GDP ratio • Efficient institutional and capital and social spending. Baseline: 1.8% in 2008 operational mechanisms for public Chronic budget under- Target: 3.5% in 2013) entities responsible for social policy execution. - Increase coverage for the implementation are introduced. conditional cash transfer • Progress in introducing • Progress in supervising program Baseline: 2008: international supervision standards banks and microcredit 18,000 for cooperatives institutions has been made Target: 100,000 in 2013 • Given the lack of predictability of since the financial crisis of the • Financial sector supervision how the economic slow down will 1998-2003 period, but fast framework strengthened affect the financial sector, the CBPY growing and weakly supervise undertakes systemic risk analysis of cooperatives could pose potential scenarios and contingency a systemic risk to financial measures for each of them stability. Annexes [ 53 ] Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles CPS Outcomes Milestones Bank Group Program Goals (and Partners) ii. Moving towards a more sustainable pattern of growth, based in greater diversification of products and external markets; supporting investments in infrastructure and human capital, and improvements in the investment and business climate, that will unambiguously move the country in that direction in the short to medium term a. Infrastructure: • Country unable to • Investment program to • Carry out feasibility studies WB - Electricity: Start the process optimize the electricity interconnect generation including environmental and - Road maintenance to improve the country’s it generates (half of that facilities with domestic social assessments project transmission capabilities generated in ITAIPU and and potential foreign users • Initiate the construction of - Electricity transmission YACYRETA) for lack of launched. the first tranche of a major new project transmission capacity transmission line. - Possible additional - Airports: Increase air traffic infrastructure project potential and reduce its cost • Underutilized air • Exploration of ways in • Adoption by Parliament of - Programmatic AAA navigation assets for which the air traffic potential the simple airport concession on small cities/rural lack of investments (e.g., is maximized, including framework submitted by the development radars) and a frame-work possibly through private sector Ministry of Public Works in 2008 IFC to secure partnerships participation • Detailed analysis of options - Dialogue on Airports. with the private sector - Investment in logistic company for river - Roads: increase efficiency • Lack of basic systems • Improve the quality of road • First maintenance contracts transportation of public spending on roads, to implement regular infrastructure though the awarded to the private sector. by focusing resources maintenance programs of increase of km of road under 2009 Partners: on maintenance of main the road network systematic road maintenance • All maintenance contracts for Korea, IADB, JAPAN, CAF, network and basic rural the paved road network awarded. Chile, EU roads • Lack of strategic Baseline 25% of paved 2011 Percent of road spending planning and link with road network under routine • Toll network optimized. 2012 devoted to routine road budget resources maintenance in 2007 maintenance Target 50% by 2013 Source: MOPC Baseline:10 MUSD (2006) Target: 35 MUSD (2013) • Weak institutional • Achieve a 10 meter • Develop an strategy for the framework for regulating operational depth and 24 institutional framework of river - River navigation: reduce the river traffic, maintaining hour navigation all year round navigation (and the role of the time and cost of transporting the navigability of the in waters of Paraguayan and ANNR, the state’s port authority, merchandize through the river, and operating the shared jurisdiction in the in this framework) 2009 Parana/Paraguay river system state’s ports Paraguay and Parana rivers • Develop public-private sector schemes for financing and operating river maintenance 2010 - Telecommunications: • COPACO, the SOEs has • Number of internet users per • Enact decree on internet significantly improve quality a monopoly on fiber optic 1000 people increased liberalization (free provision of and cost of the country’s and has precluded the Baseline: < 4.1 (2006) fiber optic) internet network for voice use of VoIP Target: 7 (2013) and data [ 54 ] Annexes Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles CPS Outcomes Milestones Bank Group Program Goals (and Partners) iii. Sources of Growth and Overall Competitiveness Lack of consensus on • Domestic tension due to • Dialogue on sources • Participatory diagnostic WB group: country’s economic and the expansion of modern of growth (including prepared on major constraints - WB’s Programmatic social direction and on agricultural production the potential role of the to sustainable growth Growth Notes exploiting all potential and cattle ranching, modernization of agricultural - WB’s secondary sources of growth which is often blamed by enterprises) launched. education project local actors for rural- urban migration, and - IFC’s ongoing financial deforestation. sector operations - IFC’s ongoing Creating qualified new • Private investment faces • Enterprise investments are • Continuation of the cluster operations in logistics jobs by increasing in- many issues including fostered through gradual but work of the Ministry of - IFC’s possible country value added and/or an erratic legal and consistent improvements in Industry and Commerce, support to selected diversifying foreign partners judiciary framework and the business climate which essentially is a public/ agribusinesses inconsistent application private mechanism of dialogue - IFC BEE program of the rule of law. There Baseline: 17% of GDP (2007) to resolve business obstacles is also a lack of qualified Target: 18% of GDP (2013) faced by key industries Partners: labor, and in there is a • Start a program to simplify US, IADB, JAPAN, EU, significant amount of the opening of a business and UNDP red-tape for almost every the issuance of construction transaction. Financing licenses in Asunción. might be also an issue • Continue programs to for small and medium promote public/private enterprises. dialogue towards resolving business obstacles • Continue programs to support private sector development through the second-tier bank (AFD), and foster greater IFC (and IDB’s private arm) presence in Paraguay Annexes [ 55 ] Annex 1 Paraguay Country Partnership Strategy Results Matrix Country Development Issues and Obstacles CPS Outcomes Milestones Bank Group Program Goals (and Partners) iv. Safeguarding the environment Preventing further • Destructive logging • No of groups exposed to • Agreement with OAS and - GEF: Paraguay deforestation in the Upper practices that have conservation practices in the IDEA to promote payment Biodiversity Parana Atlantic forest, degraded the forests, and Upper Parana Atlantic Forest, for ecosystem services and while introducing good with this the habitat of Caaguazú and San Pedro sustainable agriculture. - IBRD: Sustainable environmental practices by many species. The zero Baseline: 0 (2007) • Extension of the Carbon Rural Development small farmers in Caaguazu deforestation law has Target: 15 (2013) Finance Assist Country Work (PRODERS, in portfolio) and San Pedro. slowed down the trends, • Ecological services identified Program but cash-strapped farmers and valued, from farmers’ land • Study of mitigation potential Promoting forest still cut trees illegally. selected in pilot areas in the country to participate in - Carbon Partnership conservation and payment • Decrease in unsustainable the Carbon Partnership Facility Facility for ecological services (PES). • Lack of enabling forest management practices (CPF). environment to and slow down of the - Carbon Finance Participating in the promote carbon finance expansion of the agricultural international carbon market. operations. frontier as a result of the - WBI Carbon Finance implementation of PES in pilot Assist Setting of environmental areas. priorities. • Strengthening of the national - WBI Development capacity at both institutional Market Place and technical level in order to enable the development - AAA: Cost of of Clean Development Environmental Mechanism (CDM) projects Degradation and State of and other mitigation activities the Environment • At least one carbon finance (CF) operation in a key sector. - An analytical tool to determine environmental priorities. [ 56 ] Annexes Annex 2 CAS Completion Report Date of CAS: November 26, 2003: Report No. 27341-PA Period covered by the CAS Completion Report: FY04-FY08 CAS Completion Report completed by: Frank Earwaker, Consultant, September 2008 Summary This document evaluates the achievement of CAS objectives in Paraguay together with the respective contributions of the Government and the Bank. The 2003 CAS was prepared at a time when Paraguay was emerging from a long period of economic decline and deepening poverty. After President Nicador Duarte Frutos was elected in April 2003 he espoused a far-reaching agenda of structural and policy reforms aimed at correcting fiscal imbalances, fostering growth and reducing poverty. At the same time, he sought to restore confidence in Government and encourage greater civic participation. The Bank responded positively and promptly by preparing a CAS based upon discussions with the new administration. Following upon a long period of low Bank activity in Paraguay and little lending, the CAS was structured in terms of re-engagement. It proposed a strong program of lending and AAA for the CAS period FY04-07. It was later on decided not to extend the CAS period to FY08 through a Progress Report, but rather to wait for the new administration to take office in order to synchronize the CSP period with the electoral cycle and design a new CSP which more adequately reflected the new administration’s priotrities The operational re-engagement of the Bank under the FY04-07 CAS began with an Economic Recovery SAL (ERL) that was presented to the Board in December 2003 along with the CAS. The ERL successfully provided financial support for the Government’s short- and medium-term action program in the areas of fiscal stabilization, deficit reduction, taxation, public administration, financial sector reform, pension reform and the fight against corruption. Results in terms of renewed economic growth and poverty reduction exceeded the targets of the CAS. The CAS envisaged substantial additional adjustment lending in the financial sector but that had to be scaled back because the financial sector reform agenda did not move forward on as broad a front as expected. At the same time, differences emerged between the executive and the legislature which made it difficult for the Government to get Congressional approval for external loans as required by the national constitution. As a result, some Bank loans were withdrawn or cancelled before loan signing/effectiveness. Of the 13 lending operations envisaged in the base-case CAS scenario only four were approved and became effective. It is now clear that the CAS overestimated the prospects for Bank lending under a new administration and actual lending fell far short of the CAS program. Nevertheless, the Bank was able to re-engage effectively with Paraguay. Even when projects were dropped, withdrawn or cancelled the Bank was able to achieve positive results in helping the reform agenda move forward with other instruments such as grant financing and analytic work. Project preparation work also contributed directly to progress with the Government’s reform agenda, particularly in areas such as financial management and budgeting. The program of AAA envisaged in the 2003 CAS was effectively delivered. An assessment of AAA in Paraguay by a QAG panel concluded that the program was highly satisfactory in terms of its strategic relevance to the issues confronting Paraguay. In many cases analytic work was undertaken in cooperation with other international agencies including the IMF, the IDB and the European Union. It has served to advance and enhance the policy dialogue with the Government. As a result, the Bank and Paraguay are now well placed to move ahead further with a broad-based policy dialogue backed by selective lending operations strategically targeted at areas where the Bank can contribute most effectively to foster growth and reduce poverty. Annexes [ 57 ] Annex 2 CAS Completion Report I. INTRODUCTION on critical policy issues.25 Following those discussions the Bank also prepared a CAS that was presented to 1. The FY04-07 Country Assistance Strategy for the Board together with an Economic Recovery SAL Paraguay was written at a time when the outlook in December 2003 – only four months after the for Paraguay appeared brighter than it had for many new administration took office. In parallel to those years past. The country was emerging from a long efforts, the Government reached an agreement period of economic stagnation during which time with the IMF on a 15 month stand-by arrangement. income per capita (according to the World Bank Atlas Other international and bilateral financial institutions, methodology) had fallen from US$1,810 in 1998 to including the IDB, were also forthcoming in extending US$1,170 in 2002 and 46 percent of the population support. had fallen below the poverty line. Poor economic performance had been exacerbated by declining world prices for soybean and cotton exports and by II. PARAGUAY’S NATIONAL financial turmoil in neighboring countries, including DEVELOPMENT GOALS a devaluation of the Brazilian currency in 1999 and an economic collapse of Argentina in December 3. The Government clearly explained its development 2001. strategy in a letter of development policy dated November 19, 2003 and delivered to the Bank in the 2. With the election of President Nicador Duarte context of an Economic Recovery SAL. Additional and Frutos in April 2003, a window of opportunity was more detailed information on economic and financial opened for reforms that could arrest and reverse policies were contained in a Letter of Intent dated the economic decline of Paraguay. The new December 5, 2003 and delivered to the IMF in the administration espoused a structural reform agenda context of a 15 month stand-by agreement. that focused on five key areas: (i) correcting fiscal imbalances; (ii) restoring confidence in government; 4. In its letter of development policy the Government (iii) fostering economic growth with social equity; candidly acknowledged that many years of economic (iv) reducing poverty; and (v) encouraging greater stagnation had exacerbated poverty and insecurity in civic participation in government. The Government Paraguay. It also acknowledged serious shortcomings moved quickly to build a coalition of support for in the ability of the Government itself to provide basic its reform agenda and also sought the support of infrastructure and social services. The situation called the international financial community. The Bank for a radical change in the country’s development responded promptly by preparing Policy Notes that model and, in articulating the vision, objectives and served as a basis for discussions with the Government strategic guidelines for a medium-term program 25. “Policy Options for the New Administration� Report No. 25894-PA; June 6, 2003 [ 58 ] Annexes Annex 2 CAS Completion Report of action, the Government identified four strategic extended to sections of the population that were objectives. underserved. Likewise, basic infrastructure services including low-income housing were to be provided to 5. The first strategic objective was to restore lower-income communities. confidence in the State and its representatives. To that end, the Government undertook to modernize III. THE BANK’S PROGRAM OF SUPPORT the public administration, make it more efficient, more transparent and less prone to corruption. In particular, 9. The program proposed in the CAS was broadly state institutions were to operate within a clearly supportive of the Government’s program while defined rules-based framework and their performance recognizing that progress would depend critically would be assessed on the basis of results. upon the effectiveness with which the authorities pursued structural and policy reform. Since there had 6. A second strategic objective was to foster an active been a long period of low Bank activity in Paraguay participation of the citizenry in building democratic and little lending, the CAS was structured in terms institutions. In that context, the Government would of re-engagement. The proposed strategy took into seek to involve civic society in the processes of account a long-history of political difficulties and policy formulation and program implementation. institutional weaknesses that had obstructed reform The country’s “social capital� would be enhanced by efforts in the past. In a situation which was recognized strengthening the institutional framework of citizen to be “high risk / high reward� the CAS incorporated cooperation. clear performance criteria according to which lending would be tied to the administration’s progress in 7. A third strategic objective was to revitalize matters of economic management and reform. A economic growth and employment by investing in base case lending scenario was proposed subject to physical and human capital within the context of a compliance with key triggers in public administration, sound macroeconomic framework. The need to fiscal and financial sector reforms and portfolio strengthen financial sector institutions and restore implementation. If the triggers were not met, lending sound management to fiscal and monetary policy was to revert to a core program of investments in was clearly understood. In particular, there was an support of the millennium development goals. The urgent need to regain control of the public finances CAS also included a high case scenario although it and place them on a basis that would be sustainable was acknowledged that Paraguay was unlikely to meet in the long-term. the criteria for the high case until the latter years of the CAS period at best. Within those constraints, the 8. The fourth strategic objective was to fight poverty, proposed program of Bank assistance was based on corruption and insecurity. Programs of basic health four pillars. care, and education were to be strengthened and Annexes [ 59 ] Annex 2 CAS Completion Report 10. The first pillar was to support key structural reforms environment and thereby foster private sector needed to stabilize the public finances and strengthen development. At the same time, special attention was the financial sector. An Economic Recovery SAL was to be given to increasing production and productivity presented to the Board at the same time as the CAS in rural areas where the majority of the poor live. A and it provided financial support commensurate wide range of initiatives was envisaged, including with an ambitious program of reforms that the investments in rural roads and in water supply and new administration had submitted to Congress for sanitation. Agricultural extension and natural resource approval. The intention was that a stable structure of management were to be upgraded and support would public finances and a strengthened banking system be provided for sustainable forestry management would bolster the confidence of private investors and with a view to developing Paraguay’s huge potential thereby lay the foundation for sustained economic for forestry products. recovery. Analytic work was also envisaged to advance the Bank’s dialogue on key economic reforms. 13. The fourth pillar for Bank support focused on the Government’s program for social inclusion – 11. A second pillar of Bank support was to assist the closely linked to poverty reduction and rural-based Government in its effort to improve governance and growth. Support was to be provided for systemic the transparency of public administration. It was social sector reforms to better target the rural poor envisaged that support would be provided though a including outreach to the indigenous population. A series of technical assistance loans and grants. In that program of lending and AAA was proposed in such context, a loan to transform the Ministry of Finance areas as education reform, maternal and child health into a “ministry of excellence� by professionalizing insurance, social protection and pension reform. the civil service staff, upgrading internal procedures and controls and by reorienting its institutional goals towards service to the public, was viewed as a flagship IV. CAS OUTCOMES project to be followed by similar initiatives in other ministries and at other levels of government including 14. The 2003 CAS was results based. Explicit country municipalities which would then be better prepared to performance indicators were specified in a CAS accept responsibility for decentralized public services. Program Matrix, which is included at the end of this It was envisaged that the operations program would completion report as Attachment 1 along with actual be supported and complemented by analytic work outcomes. No clear distinction was made in the CAS including a land tax study and an institutional and between overall country indicators and indicators governance review. specific to the CAS itself. 12. A third pillar of the CAS was to support sustainable 15. Actual outcomes for the country performance growth by helping to improve the business indicators were mixed. In broad terms the outcomes [ 60 ] Annexes Annex 2 CAS Completion Report for fiscal and financial stabilization were generally macro level and at the sector level, underpinned by good, as were the outcomes with respect to sustainable a high-quality program of analytic and advisory work. growth. By way of contrast, outcomes in the areas of Overall project implementation has been good and in governance and social inclusion fell far short of the some sectors, such as transport and water supply, the targets in many cases. Bank has helped with the introduction of innovative development strategies. Even when projects were 16. It is clear in restrospect that the CAS was overly withdrawn or cancelled, the Bank was able to contribute optimistic with respect to the structural and policy to moving the reform agenda forward by mobilizing reforms that could be successfully implemented by a other intruments such as grant financing. During the new administration. Notwithstanding the bold reform CAS period the Bank deepened its engagement in agenda that was articulated by President Nicador Duarte Paraguay and became a strong partner. The Bank’s Frutos when he first took office, the administration recent broader involvement in issues of governance underestimated the challenges in delivering such and the adoption of Paraguay as a pilot country for an ambitious program, particularly those related to the GAC initiative is further evidence of a deeper and governance and institutional competence. Not only broader country relationship. did outcomes fall short of targets but progress was slower than envisaged in many areas. Pillar 1: Fiscal and Financial Stabilization 17. It is also clear in restrospect that the CAS Overview overestimated the prospects and possibilities for new lending in areas where the Bank had previously only 19. This pillar of the CAS was clearly perceived as a limited presence. The CAS proposed a base-case an urgent priority driven by the difficult economic lending program of thirteen operations but only four circumstances confronting the Government when of them were approved and became effective. In it took office in August, 2003. Country outcomes many cases the shortfall was directly related to the were good as evidenced by a consistently strong inability of Government to obtain legislative approval economic performance throughout the CAS period. for projects that were well prepared and ready for The indicative indicators that were targeted in the CAS implementation. In other cases, the high priority were largely achieved as shown in Attachment 1. CAS given to reforms such as those in the financial sector outcomes were good overall. Although a flagship and social security diminished as time passed. Economic Recovery SAL was outstandingly successful, a follow-up Financial Sector Adjustment Loan had to 18. However, when due allowance is made for the initially be reduced in scope and content because the pace ambitious targets, steady and significant headway was of reform was slower than anticipated. Analytic work made in the overall country relationship with Paraguay. undertaken by the Bank was strategically relevant and The country dialouge has flourished both at the of high quality. Annexes [ 61 ] Annex 2 CAS Completion Report Macroeconomic Performance and the expectation is that quantitative targets for end-December 2007 will also be observed.� It is 20. By most indicators Paraguay has performed particularly noteworthy that the relative size of better than anticipated during the 2004-07 CAS public sector debt has declined much more rapidly period. It can be seen from Table 1 below that real that was anticipated in the CAS. It now stands at a GDP growth has averaged 4.4 percent compared with manageable 20 percent of GDP. only 3 percent projected in the CAS. The driving forces behind that growth have been threefold. First, The Bank program of support macroeconomic management was generally sound. Second, the strong performance of neighboring 22. In parallel to the CAS, the Bank prepared an countries, particularly Argentina and Brazil, had a Economic Recovery Structural Adjustment Loan ripple effect. Third, Paraguay has benefited from (ERL) in the amount of US$30 million to support strong commodity prices with exports growing at the Government’s reform program. The CAS close to 35 percent a year in nominal dollar terms. and the ERL were presented to the Board together However, by the same token, Paraguay is now in December 2003, just four months after the new even more vulnerable to external shocks because administration took office. By providing financial imports have also grown at a rapid pace that may be support for the Government’s short- and medium- unsustainable if the external economic environment term action program in the areas of fiscal stabilization were to deteriorate. Another crisis in neighboring and deficit reduction, taxation, public administration, countries or a roll-back in commodity prices would financial sector reform, pension reform and the have serious repercussions for Paraguay. fight against corruption, the ERL contributed directly to fiscal and financial stabilization as well as other 21. Macroeconomic management was generally objectives identified in all four pillars of the CAS. sound during the CAS period. The IMF affirmed that performance under the 2003 stand-by arrangement 23. The ERL was structured as a single tranche was satisfactory and largely achieved the objectives operation to help Paraguay more effectively finance the of restoring stability and starting a reform process to large financing gap that was revealed in 2003. A set of create conditions for sustained growth and poverty policy actions was identified as a condition for Board reduction. Another stand-by arrangement was presentation and a second set of benchmark indicators requested by the Government on a precautionary was identified to assess the continuity of progress in basis and it was approved in May, 2006. In the the reform program after the formal closing date context of a fifth review of the arrangement in of the loan. It was anticipated that follow-up loans, December 2007, IMF staff stated that “All quantitative such as a planned Financial Sector Adjustment Loan, performance criteria established for end-September would provide a vehicle for monitoring and ensuring 2006 under the IMF-supported program were met, continuity of the Government’s reform program. [ 62 ] Annexes Annex 2 CAS Completion Report Table 1: Projected macroeconomic indicators and actual outcomes CAS November 26th 2003 Latest estimates Real Sector 2004 2005 2006 2007 2004 2005 2006 2007 Real GDP growth (%) 2,3 2,8 3,2 3,5 4,1 2,9 4,3 6,8 CPI Inflation (%) 7,0 6,0 5,0 4,0 2,8 9,9 12,5 6,0 Gross Domestic Investment 19,0 20,0 20,0 20,5 16,8 17,5 17,5 18,9 (% GDP) Exports (% growth) -4,4 5,1 5,0 3,2 31,9 17,1 31,5 56,5 Imports (% growth) 3,3 5,2 5,9 3,5 26,9 22,8 31,7 39,6 Central Government Finances (% GDP) Revenues 16,5 17,2 17,5 17,5 18,4 18,3 18,4 17,9 Expenditures 17,6 17,5 17,6 17,5 16,8 17,5 17,8 17,0 Of which interest payments 2,4 2,4 2,5 2,4 1,1 1,2 1,0 0,8 Primary Balance 1,3 2,1 2,4 2,3 2,7 2,0 1,5 1,8 Overall Balance -1,1 -0,3 -0,1 -0,1 1,6 0,8 0,5 1,0 Public Sector Debt (% GDP) 47,3 46,4 43,1 39,8 34,4 29,4 24,3 19,9 Balance of Payments Current Account (% GDP) 1,0 1,3 0,6 0,0 2,0 0,5 -1,7 5,1 24. An implementation completion report for this 25. Fulfillment of the fiscal stabilization objective in operation found the achievement of project objectives particular was highly satisfactory. An overall fiscal to be satisfactory or highly satisfactory. By providing deficit amounting to 3.1 percent of GDP in 2002 was early support to the administration’s economic and turned around to a surplus in 2004 that exceeded the institutional reform agenda, the ERL helped the target established by the IMF Stand-By arrangement. Government avoid a severe financial crisis, meet its The improvement was the result of a strong increase short-term debt obligations and gain time to restore in public revenues together with tight control over a fiscal balance. public spending. Annexes [ 63 ] Annex 2 CAS Completion Report 26. Tax policy objectives were also met satisfactorily. 30. Collectively, these achievements constituted a During 2004 tax revenues increased by 36 percent propitious beginning for the new administration and (or 2 percent of GDP) over the previous year as a vindicated Bank support through the ERL. result of efforts to reduce evasion and corruption, and increase efficiency. The approval of a Tax Reform Law 31. The CAS envisaged additional follow-up in July 2004 was an important breakthrough which support for financial sector adjustment with a introduced new revenue instruments, broadened the financial sector adjustment loan (FSAL). A Program value-added tax and extended the coverage of the Document proposing a two-tranche FSAL in the company income tax to agriculture and ranching. amount of US$60 million was distributed to the Board of Executive Directors in August 2004 but it was 27. Progress in putting the public sector pension system subsequently withdrawn to allow the Government on a sound financial footing was also satisfactory. further time to submit a new banking law to Congress In December 2003 Congress enacted measures to and thereby satisfy a condition of Board approval. reduce the financial deficit of the system and introduce A draft banking law, satisfactory to the Bank, was greater consistency between pension plans. Specific eventually submitted to Congress in December 2004. changes included raising the contribution rate from However, Board presentation of the FSAL was also 14 to 16 percent and raising the mandatory retirement conditioned upon other financial sector reforms age to a uniform 62 years across the board. which did not proceed as smoothly as anticipated. To better manage perceived risks to the program posed 28. Financial sector objectives were also met by uncertain progress with the reform agenda, the satisfactorily. The enactment of a Deposit Guarantee Bank and the Government agreed to a strategy of and Bankruptcy Law would make it easier to resolve risk mitigation whereby Bank support for Paraguay’s another banking crisis if one were to arise in the financial sector reforms would be restructured on a future. The public sector’s contingent liabilities were programmatic basis. Under this approach, a sequence thereby effectively reduced. of three single-tranche programmatic financial sector loans was envisaged. They were to be presented to 29. Finally, there was satisfactory progress in meeting the Board in line with measurable progress in the the program objectives with respect to a more reform program. Bank support was to be back-loaded efficient and less corrupt public administration. A new to reflect the perceived increased risk. Customs Code was adopted in 2004 to modernize procedures and curtail corruption. Public procurement 32. The first of this sequence, a programmatic practices were improved and information on public financial sector adjustment loan (PFSAL I) in an procurement was posted on the internet. A census amount of US$15 million, was approved in April 2005. of public sector employees was undertaken to help It provided up-front support for prior reforms. The rationalize the management of human resources. Government encountered a long delay in securing [ 64 ] Annexes Annex 2 CAS Completion Report Congressional approval for the loan and the deadline 34. Among the achievements of PFSAL I which still for effectiveness had to be extended beyond the remain in effect, the following merit particular mention. customary 18 month Bank policy deadline. The The Central Bank established specific criteria to identify delay in Congress did not necessarily reflect a lack troubled financial institutions so that measures may of Congressional support for financial sector reform. be taken to improve their financial condition. Financial Other Bank loans were similarly blocked at the time institutions were prohibited from pledging their assets as well as loans from other international and bilateral as security for deposits held by persons in the same financial organizations. The situation was reflective of institution. The Government reached an agreement a wider political confrontation that resulted in a stale- with commercial banks to renegotiate public bonds. mate between the executive and the legislature. As a The Central Bank established norms concerning asset result, some other Bank loans had to be cancelled. In classification, loan loss reserves, accrued interest parallel to PFSAL I, a Financial Sector Strengthening payments and refinancing operations as they apply Technical Assistance Loan was designed to assist to bank lending. The Central Bank also approved Paraguay with the modernization of its financial a strategic plan to improve banking supervision. A system by strengthening the Superintendence of draft banking law was submitted to Congress in 2004 Banks, streamlining the settlement of payments and although it has not yet been enacted. Amendments to monitoring the progress of other financial reforms. simplify the draft law are currently being considered. However, the loan was withdrawn after the Central A draft law to combat money-laundering was also Bank decided that did not wish to finance technical submitted to Congress in 2004 although it took until assistance with loan funds. December 2007 for Congress to approve a new penal code for money laundering. Under Paraguayan law, 33. Notwithstanding these difficulties, the the implementation of the new penal code will be implementation completion report for PFSAL I delayed for one year to allow for the training of judges indicated that the Government has remained in and prosecutors. compliance with the reforms supported by the loan and there have also been advances in other areas that 35. The Bank closely coordinated the design of PFSAL were to be supported by subsequent Bank loans.26 I and the broader underlying program with both However, overall progress was insufficient to justify the IMF and the IDB. At the time of loan approval, moving forward with additional Bank support for the IMF had had in place a stand-by program which the program although the Bank continued its policy included structural benchmarks for financial sector dialogue with the Government and stood ready to reform. The IMF continued to monitor financial sector provide an effective response to new financial sector developments under a follow-up stand-by arrangement initiatives. which the Government entered on a precautionary 26. “Implementation Completion and Results Report� Report No: ICR0000525; June 28, 2007 Annexes [ 65 ] Annex 2 CAS Completion Report basis. The IDB has focused, in particular, on assisting 38. A public expenditure review was also undertaken Paraguay with the consolidation of state owned banks in 2006.28 It advocated revenue raising measures to and with developing a regulatory framework for the provide additional resources for needed investments cooperatives sector. in basic infrastructure and social services which are presently insufficient for economic growth. At the 36. The operational program in support of fiscal and same time it underscored the importance of controlling financial stabilization was accompanied by analytic the growth of current expenditures, especially with work in key areas. A review of the Paraguay country respect to public sector wages. It noted that public AAA was undertaken by a QAG panel which found employment, in addition to consuming an overly large that, in terms of its strategic relevance, the program proportion of public spending is structured according was highly satisfactory. This finding was particularly to patronage rather than discharging the functions of applicable to the analytic work in the areas of fiscal the state. It also advocated strengthening the presently and financial stabilization. weak budget process to better prioritize investments and facilitate the effective delivery of public services. 37. In 2005 a Financial Sector Assessment was The effectiveness of the review was enhanced by a undertaken at the request of the Government and in concise executive summary which clearly identified the context of the joint IMF-World Bank Financial Sector the principal recommendations for policy makers. Assessment Program (FSAP).27 The Assessment noted that the recovery of the economy provided a window 39. Of particular significance was an Integrated of opportunity to address key financial vulnerabilities Fiduciary Assessment (IFA) undertaken by the that would otherwise pose an obstacle to future Bank with support from the IDB and the European growth. It advocated a more comprehensive effort Union.29 The Assessment was the first of its kind in to financial sector reform that would contribute to Paraguay and it incorporated the indicators-based building trust in the financial system. It made specific methodologies of PEFA and of OECD-DAC which recommendations for strengthening the prudential provided crucial insights into the efficiency and regulation of the fast-growing credit cooperatives credibility of the budget and procurement processes. sector, drastically restructuring the BNF (a publicly In the absence of lending, the IFA has become a key owned bank), overhauling insolvency procedures, instrument for a continuing policy dialogue with the regulating pension funds and upgrading the payments Ministry of Finance. Seminars were held with the system. Those issues continue to figure prominently Ministry to review the results of the IFA and non- in the policy and reform dialogue between the lending technical assistance was mobilized to help Government, the IMF, the IDB and the Bank. the Ministry design an action plan. The collaborative 27. “Financial Sector Assessment Paraguay� FSAP Report No. 36218; May 2006. 28. “Paraguay Public Expenditure Review� Report No. 32797-PY; May 31, 2006. 29. “Paraguay Integrated Fiduciary Assessment� April 2008. [ 66 ] Annexes Annex 2 CAS Completion Report manner in which the IFA was undertaken enabled the The Bank program of support Government to take ownership of the process and of the product. That, in turn, made it a more effective 42. The most prominent instrument of Bank support instrument for improved fiscal management. for improved governance and transparency was a project for the modernization of the Ministry of 40. Other analytic work that clearly had a bearing Finance. The scope of the proposed project was on fiscal and financial stabilization as well as other ambitious and the goal was to transform the Ministry pillars of the CAS included (i) a study of Real into a “ministry of excellence� by streamlining its Property Taxation which constitutes a major, but as internal procedures, professionalizing the staff and yet underutilized, source of revenue for sub-national strengthening a tradition of service towards the government and (ii) a Country Financial Accountability public. It was envisaged that improved management Assessment (CFAA). Both tasks contributed effectively practices within the Ministry of Finance would be to the country dialogue. Technical assistance to the linked to similar improvements in line ministries Ministry of Finance for improved governance and such as Education which was also aiming to improve transparency (reviewed under Pillar 2 below) also management practices with Bank assistance from contributed to better fiscal management. an ongoing Education Reform Loan. Hence, the modernization of the Ministry of Finance was Pillar 2: Governance and Transparency in envisaged as a stepping stone to parallel changes in Government other ministries and eventually to other levels of the public administration including municipalities. Overview 43. The modernization loan was approved by the 41. The CAS was strongly supportive of the Government Board on April 5, 2005 in an amount of US$7.5 in its desire to restore confidence in state institutions million. There was a considerable delay before the by improving governance and transparency in the loan was signed because the Government first waited public administration. However, country outcomes for Congress to approve a financial sector adjustment were mixed and generally fell short of the targeted loan to which the modernization loan was linked. indicative indicators (see Attachment I). Paraguay Once the loan was sent to Congress, it became clear improved its relative ranking in the Corruption Index that prospects for timely Congressional approval were of Transparency International but did not rise from remote and the Bank decided to cancel the loan in the fifth to the fourth quintile as targeted. The Bank March 2007. program of assistance likewise fell short of the CAS objectives but nevertheless helped the authorities 44. In part, the lack of Congressional approval for the improve governance and transparency in a number modernization loan reflected differences between of key areas. the executive and the legislature that resulted in a Annexes [ 67 ] Annex 2 CAS Completion Report stalemate. However, there was also widespread 46. The Bank also provided support for improved resistance to the idea that Government should borrow management efficiency in the Ministry of Education. externally to finance technical assistance especially One of the primary objectives of the Education Reform when grant funding is available from many bilateral APL that was approved in June 2003 was to assist donors for that purpose. In addition, the ambitious Paraguay improve the management and efficiency scope of the project may have provoked resistance of the education system by “creating additional from a conservative and cautious bureaucracy. capacity for sector analysis, planning, monitoring and evaluation, and improving management and 45. Yet the cancellation of this loan did not presage an end development of human resources�.30 The project to modernization and reform in the Ministry of Finance. successfully pursued that objective during the CAS The modernization agenda continued to move forward period. By June 2008, the revised closing date, a in a number of areas, albeit at a more moderate pace, model for the selection and contracting of personnel and the Bank continued to play a role with resources had been designed, approved and implemented from trust funds in some cases. An IDF grant remained nationwide. Certification and accreditation policies active until 2007 and it financed a number of initiatives had also been designed and approved and will start that had been identified and targeted in the course to be implemented in 2008. The entire administrative of loan preparation. In part it financed analytic work planning and budgetary systems have been re- aimed at enhancing the broader framework of fiscal engineered and, in Decmber 2008, the new system management such as public sector deficit financing, an will be introduced to the Ministry of Education and analysis of social expenditures within the budget and to the Department of Asuncion on a pilot basis. It is the adoption of multi-year budgeting. Other initiatives anticipated that the improved planning and budgetary financed by the IDF grant were more administrative systems will increase efficiency and contribute to and organizational. They included the development of greater transparency and the better management of guidelines for public hearings on contracting; a seminar human resources. on procurement; the design of security systems for an electronic data base; a workshop on monitoring and 47. The CAS also envisaged a deeper extension of evaluation and the purchase of hardware and software governance and public sector reform to improve for that purpose; equipment, training and technical fiscal management at the municipal level. However, assistance for the Transparency Office of the Ministry a municipal finance project proposed in the base case and; the design of a data base for the management program was not prepared. In part, that was because of human resources. Supervision revealed that all the project would focus on a better application of those initiatives were effective in helping the Ministry the real property tax which is the main (but greatly of Finance improve its operational efficiency. underutilized) source of municipal revenue. Until a 30. Project Appraisal Document; Report No:25630; page 3. [ 68 ] Annexes Annex 2 CAS Completion Report study of the real property tax was undertaken, the procurement and on customs. The Bank focused on analytic underpinning of the project could not be put the judiciary and, in that context, mobilized an IDF in place. grant to support Paraguay’s legal and judicial reform. The grant focused on assisting the Supreme Court in 48. A real property tax study was finalized towards the three areas as follows: (i) strengthening the judicial end of the CAS period.31 It concluded that the current function; (ii) improving the administrative framework yield of the tax is far below international norms. To of the judiciary; and (iii) strengthening the public increase the yield without incurring the expense registries and judicial statistics. The grant effectively and long gestation period of creating a full national complemented technical assistance provided by the cadastre, it proposed a revision of the property tax law IDB, UNDP and USAID and successfully achieved its based on the principle of self-assessment of property strategic objective of strengthening the capacity of values that has worked well in many other countries. the Supreme Court and the Council of Magistrates to A self-assessment system could quickly develop a perform their functions. market value tax base that would greatly improve the revenues of local government while, at the same time, 50. IDF grants were also mobilized in support create incentives for the more effective and efficient of Paraguay’s civil service reform and to assist use of rural land resources. The study provides the National Congress streamline its internal valuable source material that could constitute a strong procedures and gain ready access to legislative analytic base for addressing governance issues at the information. With respect to civil service reform, grant local level in Paraguay going forward. funds were successfully employed to strengthen the National Secretariat for Public Administration (NSPA) 49. The World Bank Institute has also been active by helping to develop an action plan for training key in Paraguay ever since 2000 when the Government personnel and for upgrading personnel data. As a invited the WBI to give orientation and training result, in 2004, the NSPA designed and carried out a to representatives of civil society on how other national census of public employees to provide up- countries have approached the issue of corruption. to-date and reliable information for the management With WBI support, a Government-sponsored of human resources. Support for the modernization Anti-Corruption Commission (later renamed the of Paraguay’s Congress began in 2005 and continued National Integrity Commission) developed a plan beyond the end of the CAS period. It includes support to combat corruption in the three areas of customs, for (i) improving the channels of communication by procurement and the judiciary. The Commission updating the Congressional website, (ii) adopting presented its plan to the donor community and the best practices from internationally recognized IDB responded with support for additional work on legislative bodies including the establishment of a 31. “Paraguay Real Property Tax� (in two volumes); Report No. 37456-PA; May 16,2007 Annexes [ 69 ] Annex 2 CAS Completion Report congressional research center, (iii) accessing the Resources Management Project (PARN) and a Global Legal Information Network (GLIN) system and thorough evaluation of its outcome. Although that (iv) increasing transparency and efficiency through project dated from the mid-nineties, the loan was not an electronic document management system, closed until 2006. Hence, a significant part of project modernizing the Library of Congress and establishing implementation took place during the period of the a workflow management system to manage and 2003-07 CAS. Notwithstanding implementation monitor legislative initiatives. problems which had resulted in delays and necessitated major restructuring after a mid-term review, the project Pillar 3: Sustainable Growth achieved most of its objectives satisfactorily. As a result of the project, the implementation completion Overview report concluded that improved natural resource management and more sustainable approaches to 51. Growth is a multi-sector endeavor and the agriculture are now an accepted paradigm in Paraguay program envisaged by the CAS for this pillar was while participatory decision-making and working with correspondingly multi-faceted. It included support smallholder farmers and indigenous peoples is more for the development of infrastructure; investment in commonplace.32 The infrastructure development agriculture and forestry; and support for private sector component of the project was also rated satisfactory development. Progress was made in all of these areas and some 400 km of local roads were rehabilitated. but at a slower pace than had been envisaged in the However, the institutional development component CAS. Nevertheless, country outcomes were generally of the project was rated unsatisfactory due principally good with respect to indicative targets as documented to an overly ambitious attempt to decentralize while, in Attachment I. CAS outcomes varied greatly from at the same time, coordinating many agencies and sector to sector. In sectors where the Bank had a long- attempting to strengthen weak institutions. standing presence progress was generally satisfactory. However, the CAS was not able to move forward in 53. The successor project that had been anticipated new areas such as private sector development and for FY05 was prepared as a Sustainable Agriculture municipal development. and Rural Development Project (SARD) in 2006- 07 and a loan for US$37.5 million received Board Agriculture and Forestry approval in January 2008. The project drew upon the lessons learned from PARN and also from the 52. A sustainable rural investment project was experience gained from an ongoing Community programmed for FY05 but was postponed to Development Project (PRODECO). Whereas the allow for the completion of an ongoing Natural 2003 CAS had envisaged that the micro-catchment 32. Implementation Completion Report No. 38266; December 28, 2006 [ 70 ] Annexes Annex 2 CAS Completion Report model for agricultural extension and natural resource Taxation already cited above. That study cites management would be expanded nation-wide, the evidence pointing to a considerable underutilization project area was delimited more manageably to of land and it suggests that the absence of significant 39 municipalities in the two poorest departments tax revenues from rural land enables underutilized of the Eastern Region of Paraguay. Other lessons land to be held without cost. A conclusion of the incorporated into the successor project included an study is that a well structured reform of land taxation effective and transparent process of participatory and could well enhance the efficiency of land use in rural decentralized planning and decision making; flexibility areas. It also suggests that, in view of the widespread to accommodate the culturally-defined decision deforestation that has occurred in the past, a new making mechanisms of different ethnic groups; land tax exemption for natural forests managed in a and strong support from technical agencies to the sustainable manner could be an effective instrument beneficiaries. The PARN further effectively included to encourage environmental conservation. indigenous people as project beneficiaries. This is a positive lesson from experience and indigenous Infrastructure communities will continue to be actively included as beneficiaries under PRODERS. 56. A loan in the amount of US$74 million for a Road Maintenance Project was approved in August 54. The implementation difficulties encountered with 2006 as envisaged in the CAS. In many ways the PARN and the delay in preparing a successor project project marked a new beginning for the Bank in the serve to underscore the need for careful project road sector of Paraguay, notwithstanding a history design and preparation even at the cost of extending of previous loans for highways in the eighties and the time-horizon. A Forestry Development Project, nineties. Whereas earlier projects had focused on initially programmed for FY06 was put on hold pending building new roads, the 2006 project is concerned a clearer definition of the Government’s position with road maintenance. The development objective vis-à-vis the regulatory framework for sustainable of the project is to establish a sustainable road forestry management including transport regulation, management strategy that ensures the upgrading and pricing and royalties, plantations and reforestation. maintenance of the road network making optimal The projecthas now been cancelled. Meanwhile, GEF use of scarce resources. That involves developing resources have been mobilized to support a Maracayú the institutional capacity of the Ministry of Public Nature Park Reserve project and more GEF finance is Works, arresting the deterioration of the priority road proposed for supporting biodiversity in areas that will network and improving access for the poorest rural overlap the SARD project. communities. With Bank assistance, Paraguay has been able to fundamentally reshape its approach to 55. Analytic work in support of lending for agriculture prioritizing road maintenance. and forestry included the study of Real Property Annexes [ 71 ] Annex 2 CAS Completion Report 57. As with many other Bank loans, it took longer been introduced. Altogether this is an extraordinary than anticipated to obtain the approval of Congress achievement that few other LAC countries have been but the loan became effective in January 2008. able to attain. A Water Sector Modernization project Notwithstanding the delay, the Ministry of Public that was planned for the last year of the CAS period is Works has moved forward with a number of project actively being prepared and is anticipated for FY09. activities including the preparation of a Road Strategy, the establishment of a Road Planning Directorate 59. However, other planned projects have not and the adoption of an action plan to improve materialized. A Technical Assistance Loan for Private procurement and financial management. In addition, Sector Development was not pursued because the bidding has begun for the design of a Road Plan, a authorities do not favor financing technical assistance budget monitoring system and a new toll system. by borrowing from abroad. A Municipal Services and Several elements of an Improved Governance Infrastructure Project was also not pursued, in part Framework have been put in place and the overall because it was linked to a reform of the Real Property progress of the project is judged to be satisfactory by Tax that would increase municipal revenues and Bank supervision staff. provide additional resources for local roads, water supply, sanitation and solid waste management. The 58. The Bank has had a long association with Bank finalized a study of the Real Property Tax in 2007 Paraguay in water supply and sanitation. A fourth but it may take time for the authorities to consider its rural water supply and sanitation project dating recommendations and take action. from 1997 was still under implementation during the first part of the CAS period. The project was 60. The Bank also undertook a study of the Investment innovative in that: (i) it developed a sustainable Climate in Paraguay for submission to the new model for service delivery through local private administration that takes office in 2008. The study participation via minimum subsidy concessions; (ii) was based on information from a 2006 survey of it increased access to water supply and sanitation 613 private registered firms operating in Paraguay, for indigenous populations; (iii) it introduced low- of which 25 percent were located in the capital, cost piped sewerage for small towns; and (iv) it Asuncion. Hence, the data related exclusively to the provided for technical assistance to local Water User formal sector of the economy. Many firms cited unfair Boards through a second-tier system of water user competition from the informal sector as an obstacle associations. Most importantly, in October 2004, to business because informal businesses did not have the Government adopted a uniform national policy to comply with the same standards as the corporate for financing water and sewerage investment in rural sector. The study constitutes a valuable source of areas based on financial policies developed by the information to help the Government identify and Fourth Rural Water and Sanitation Project. In addition, relieve perceived bottlenecks that constrain private innovative schemes for private sector inverstment have sector development. [ 72 ] Annexes Annex 2 CAS Completion Report Pillar 4: Social Inclusion which constitutes a substantial improvement albeit short of the 44 percent end-of-project target. Also Overview by end-2007, the complete redesign of alternative secondary education programs was well under way 61. The CAS envisaged a broad program of Bank based on results from a first round of field testing. support for the Government’s Poverty Reduction The final redesigned modules are expected to be Strategy, particularly as it affected education, health, completed by mid-2008. A program of scholarships social protection and community development. for low-income students has been introduced and the Country outcomes with respect to indicative targets end-project target of 4,500 scholarships was already for these sectors were mixed as evidenced in reached by 2006. Overall project implementation has Attachment I. Likewise, CAS outcomes varied greatly been successful in reaching its development goals. from sector to sector. There was good progress in meeting objectives in education and community 63. The Bank also successfully completed an development, but outcomes with respect to health evaluation of secondary education as envisaged in the and social security fell short of the CAS objectives. CAS.33 The work was done in close collaboration with the Ministry of Education and with other stakeholders The Bank Program of Support including the IDB. The collaborative nature of the work enhances its value as a tool for education 62. An Adaptable Program Loan in the amount of management and planning in Paraguay. It will also US$24 million for an Education Reform Program serve to underpin a second phase of the adjustable was approved in July 2003 and was implemented program lending which is being prepared for FY09. during the CAS period. The development objectives of the program were to improve the management and 64. The CAS also envisaged a strong program of efficiency of the system and to improve education Bank support for the health sector in Paraguay. outcomes and equity of opportunity in secondary Analytic work on the health sector was effectively education. Improvements in management and efficacy delivered in 2006.34 Several conclusions from the were successfully achieved as indicated in the section report fed directly into a Maternal-Child Basic Health above on governance. Substantial progress was also Insurance project for which a loan of US$22 million was made with respect to expanding access to secondary approved by the Board in April 2005. However, when education and improving the quality of education. The the Government submitted the loan to Congress it was net enrollment for secondary schools increased from a rejected. The reasons for the rejection are threefold. base of 33 percent in 2001 to 40 percent by end-2007 First, it reflected a stand-off between the executive 33. “Educación Media en el Paraguay� Report No. 42665-PY; February 7, 2008. 34. “Health Service Delivery in Paraguay� Report No. 33416-PY; January 25, 2006. Annexes [ 73 ] Annex 2 CAS Completion Report and the legislature that affected many other projects elderly. It also reviewed issues relating to the financial as noted elsewhere. Second, the structure of health management of social protection policies. The study care finance is a contentious issue in Paraguay. Third, was well received and many of the findings were there were perceptions that a previous Bank loan for incorporated into a National Strategy to Fight Poverty a Maternal Health and Child Development Project that was adopted by the Government in 2006 and had failed to achieve the expected results. Indeed, later into a Strategic Plan for Reform of the Pensions the implementation completion report for that earlier system that was adopted by the Ministry of Finance project rated the outcome as unsatisfactory and the in 2007. sector report on health service delivery concluded that the project fell significantly short of its service delivery 67. The CAS also envisaged that the Bank would goals. That shortfall is reflected in the low utilization finance a Social Protection Technical Assistance Project. of installed capacity in health facilities which is less Preparatory work was begun but, by end-2005, it than 50 percent in Paraguay. became clear that the authorities were disinclined to finance technical assistance by borrowing externally 65. Nevertheless, the effort that went into preparing and project preparation was suspended. Nevertheless, the Maternal-Child Basic Health Insurance Project the Bank’s preparatory work effectively assisted the has been fruitful in assisting the Government move Government redesign the social security system as forward with a number of initiatives that were documented in a paper delivered to the Government conceived as part of the project. The Ministry of in June 2006 and entitled “Paraguay: Resultados de Health now deploys mobile medical teams to deliver la Asistencia Técnica del Banco Mundial 2004-2005 medical services to less accessible areas. A health al Sector de Seguridad Social�. In addition, the Bank, insurance manual that was written as part of project in cooperation with the IDB, assisted the Government preparation is now in use to establish a health service in designing a conditional cash transfer program delivery network. (TEKOPORA) as well as the operational framework of a Fund for Social Equity that was established in 2005. 66. Social protection was another area identified in the CAS for Bank support. Analytic work on 68. In 2002, just prior to the CAS, the Bank had social protection policies, including the pension approved a loan of US$9 million for a Pilot system, was delivered in 2004 as envisaged in the Community Development Project (PRODECO) CAS.35 The study sought to articulate a strategic vision and the project was implemented during the CAS for social protection policies that would embrace period. PRODECO has proven to be one of the programs devoted to the alleviation of poverty and most successful social sector initiatives for addressing those that seek to provide economic security to the the development potential of the very poor in 35. “Paraguay: Defining a Strategy for Social Protection Policy� Report No. 27352-PA; May 24, 2004 [ 74 ] Annexes Annex 2 CAS Completion Report Paraguay. The project sought to test a decentralized, of results, transparency and social participation, bottom-up development approach as a means of although a recent ex-post review of procurement has enhancing incomes and increasing the quality of life also highlighted the need to strengthen the oversight of poor rural and marginalized urban communities of community-procured TA services. PRODECO is in three Departments in the south of the country. recognized as a key contributor to the country’s The project provides grant finance for small-scale poverty reduction strategy in the three departments demand-driven initiatives prepared and submitted by where it operated. On that basis the Board approved beneficiary groups. Eligible initiatives include income additional funding of US$9 million in March 2008 so generating projects such as artisan workshops as that the program may be extended to a further five well as community development projects that would departments. complement productive investments. An important component of PRODECO has been to strengthen the capabilities of local communities to design, implement V. OVERALL BANK PERFORMANCE and monitor income-generating and community development initiatives. The Lending Program 69. Supervision ratings have been consistently 71. The CAS was structured in terms of the Bank re- satisfactory both for the development objective of engaging with Paraguay after a long period of little the project and for implementation progress. By lending. A base case program of thirteen loans was end-2006 it had already surpassed the quantitative envisaged for a total of US$325 million. In the event, beneficiary targets defined at project appraisal. Some only seven loans were approved during the FY04-07 500 sub-projects had been approved benefiting more CAS period and in FY08, but three of them were either than 5,100 families and almost 30,000 persons. Those withdrawn or cancelled prior to loan effectiveness. Of figures compare with an original target of 3,700 the remaining six projects proposed in the CAS, three families and 18,500 persons. Nearly 30 percent were dropped. Another three were postponed and of the sub-projects benefit vulnerable and socially are likely to be approved in the following CAS period. marginalized groups (including indigenous peoples, Total lending in the FY04-08 period amounted to only women and youths). That figure exceeds the original US$146.5 million – less than half of the base-case target by a factor of 75 percent. scenario notwithstanding the fact that the triggers for base-case lending were substantially met (see 70. A mid-term evaluation of the project and other Attachment 4). monitoring data reveal that the project has been able to decentralize decision making to the local 72. In retrospect it would appear that the base-case level. Reviews of the quality of supervision show that lending program proposed in the CAS was overly- the project has effectively contributed to a culture ambitious given the country situation at the time. The Annexes [ 75 ] Annex 2 CAS Completion Report administration of President Nicador Duarte Frutos to progress with the Government’s reform agenda, began its term of office in 2003 with far-reaching particularly in areas such as financial management plans for reform and it was right for the Bank to and budgeting. In addition, the program of AAA was respond positively. In order for the reform program very successful as indicated in the corresponding to be effectively implemented with financing from the section below. Bank, however, the executive branch would need to work in close cooperation with the legislature and this Portfolio Quality proved to be a stumbling block. Since Congress, in accordance with the constitution, must approve all 75. Over the 2003-08 period the total active portfolio external borrowing, the Bank program was particularly of projects under implementation in Paraguay vulnerable to the deadlock that quickly emerged. averaged only five projects. Because the active portfolio is so small, performance problems that 73. Even if Congress had been supportive the successful may be encountered with just one or two projects implementation of an active lending program would appear to have a large effect on the total portfolio in have been a challenging task after a long period in percentage terms. It can be seen from Table 2 below which the Bank had only a minimal operational that the percentage of projects classified as problem presence in Paraguay. The Bank underestimated projects or projects at risk has varied greatly from the support it would need to provide in order that year to year from zero to 100 percent. Hence, the Paraguay may reactivate and execute a lending analysis of aggregated portfolio data is not particularly program on the scale envisaged. The resident mission illuminating in the case of Paraguay. in Asunción was not strengthened commensurately with its expanded responsibilities and it had to rely 76. Nevertheless, operational experience over the on back-up support from the Buenos Aires office. In past several years points to a number of special some cases project supervision had to be outsourced circumstances in Paraguay that frequently impact the to the UNDP. Those shortcomings are only recently performance of projects financed by the Bank and being addressed. by other external donors. The fact that Congress is constitutionally required to approve each and every 74. Yet it would be a mistake to infer that the shortfall external loan can result in a long interval between in actual lending signified a failure of the Bank to loan approval by the Board and loan effectiveness. reengage effectively with Paraguay. Even when Bank policy requires loans to become effective projects were dropped, withdrawn or cancelled within 18 months of Board approval. In exceptional the Bank was able to achieve positive results in circumstances the Regional Vice President may helping the reform agenda move forward with other approve an extension of the effectiveness deadline. instruments such as grant financing and analytic work. The deadline for many loans to Paraguay had to be Project preparation work also contributed directly extended beyond 18 months. [ 76 ] Annexes Annex 2 CAS Completion Report 77. Experience shows that Paraguay has institutional AAA weaknesses and governance constraints which adversely affect the pace of project implementation. As 78. The program of AAA envisaged in the 2003 CAS a result, closing dates frequently have to be extended was delivered in full with the sole exception of a beyond the time envisaged at appraisal. That, in turn, Poverty Update that was postponed until FY09 (see means that follow-up projects are pushed back until Attachment 3). In addition to the CAS program, other later in the CAS period and may be deferred beyond the major analytic work was also undertaken. Reference CAS period altogether. The Secondary Education and has already been made to an Integrated Fiduciary Community Development projects are cases in point. Assessment which has become the single most A longer-than-expected implementation period may important vehicle for advancing the Bank’s policy sometimes be necessary in order for the development dialogue with the Ministry of Finance. The Bank also objectives to be attained and fully secured. That may, prepared Policy Notes for the incoming administration however, also increase supervision costs. of 2008. The Policy Notes review policy options Table 2: Paraguay --Selected Indicators* of Bank Portfolio Performance and Management (Data as of May 27, 2008) Fiscal Year Indicator 2003 2004 2005 2006 2007 2008 Portfolio Assessment Number of Projects Under Implementation a 5 4 7 6 4 4 Average Implementation Period (years) b 6.3 5.1 3.6 3.2 2.9 3.3 Percent of Problem Projects by Number a, c 20.0 25.0 0.0 33.3 50.0 0.0 Percent of Problem Projects by Amount a, c 20.7 19.5 0.0 19.1 74.4 0.0 Percent of Projects at Risk by Number a, d 60.0 100.0 14.3 50.0 75.0 50.0 Percent of Projects at Risk by Amount a, d 52.9 100.0 15.9 39.6 93.0 63.8 Disbursement Ratio (%) e 15.2 19.6 27.8 26.5 23.7 8.5 Portfolio Management CPPR during the year (yes/no) yes yes yes yes yes yes Supervision Resources (total US$) 539 718 536 617 590 319 Average Supervision (US$/project) 107.8 179.5 76.6 102.8 147.5 79.8 Annexes [ 77 ] Annex 2 CAS Completion Report Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED/IEG by Number 34 8 Proj Eval by OED/IEG by Amount (US$ millions) 768.0 241.0 % of OED/IEG Projects Rated U or HU by Number 39.4 42.9 % of OED?IEG Projects Rated U or HU by Amount 41.5 24.7 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. Sources: SAP and Business Warehouse in many sectors, including sectors where the Bank the program reflected, to a large extent, the reluctance already has an operational presence or where it may of the authorities to engage proactively with other develop an operational presence in the future. stakeholders. Nevertheless, and irrespective of the cause, unsatisfactory participation, consultation and 79. An assessment of the Paraguay program of AAA dissemination is a shortcoming that can seriously was undertaken by a QAG panel which concluded detract from the overall effectiveness of the AAA that the program was highly satisfactory in terms of its program. Accordingly, the Bank has taken steps to strategic relevance to the issues confronting Paraguay. strengthen this aspect of AAA in Paraguay. The AAA was also rated highly satisfactory in terms of the coherence and the integrated nature of the 81. Since the QAG panel made its assessment, the program. The internal quality of the work was also Bank has undertaken additional analytic work with found to be fully satisfactory. a heightened emphasis on client participation, consultation and dissemination. In that respect, 80. However, local participation, consultation and the Integrated Fiduciary Assessment (IFA) already dissemination were identified as areas in which referred to in paragraph 35 above was of particular the AAA program fell short of its otherwise high importance. From its very inception the IFA could standards. The QAG report made it clear that the count upon the support and participation of senior moderately unsatisfactory rating for these aspects of staff from the Ministry of Finance including the Vice [ 78 ] Annexes Annex 2 CAS Completion Report Minister of Administration and Finance and the supervision costs. In terms of project preparation, Director of Budget. Workshops were held to agree however, Paraguay appears to be relatively high cost upon a calendar of activities and upon the areas of and its unfavorable ranking is made more significant responsibility for the Government and for the Bank- by the relatively high spread between comparator IDB team respectively. A follow-up action plan to the countries. This may reflect preparatory work done on IFA has also been agreed on a participatory basis. In projects that are dropped from the program before the absence of lending, the IFA has become a key Board presentation. On the other hand, preparatory instrument for pursuing a dialogue with the Ministry work done on projects that do not move forward of Finance on policy and structural reforms. is not necessarily lost. It may very well contribute directly and indirectly to the achievement of the Program Costs overall objectives of the CAS. 82. The cost of AAA in Paraguay is in line with other Collaboration with other donors comparator countries in Latin America and elsewhere although the spread between them is not very great. 83. The Government does not have an established Paraguay also compares favorably with respect to framework for coordinating donor assistance. Table 3: Comparative Costs of Bank Program (FY07-08, U$S Thousand) Country Average Supervision Average Preparation Average AAA Supervision Cost Preparation Cost Cost Cost Ranking Cost Ranking Cost Ranking AAA Report per Project per Project Paraguay 79 6 391 2 132 7 Argentina 85 4 239 5 155 1 Bolivia 87 3 370 3 133 6 Chile 78 7 166 8 135 5 Dominican Republic 71 8 216 6 117* 8 Moldova 83 5 319 4 145 2 Peru 101 1 443 1 141 4 Tunisia 99 2 184 7 144 3 * Only one AAA during FY07-08. Costs reflect FY07 actuals plus FY08 estimates. Source: Business Warehouse as of May 20, 2008 Annexes [ 79 ] Annex 2 CAS Completion Report Nevertheless, the Bank endeavors to coordinate VI. LESSONS LEARNED its operational and analytic work with other donors on an ad hoc basis as appropriate. In some cases 85. The Bank has effectively re-engaged with Paraguay there are Bank-wide agreements with other agencies and re-engagement has produced positive results in for working together on AAA of common interest. assisting Paraguay make progress with its reform Reference has already been made to an Integrated agenda. Fiduciary Assessment (IFA) which was undertaken within the framework of the Public Expenditure and • Lesson: The Bank should continue with a policy of Financial Accountability program (PEFA). The fact engagement in Paraguay. that PEFA is an international partnership between the World Bank, the European Community, the UK’s 86. The effective delivery of the Bank’s assistance Department for International Development, the Swiss program is affected by the uncertainties that prevail in State Secretariat for Economic Affairs, the French terms of Government policy priorities and legislative Ministry of Foreign Affairs, the Royal Norwegian prospects. It is also subject to higher transaction Ministry of Foreign Affairs, the IMF and the Strategic costs because of institutional weakneses and a fragile Partnership with Africa undoubtedly engaged the fiduciary environment. interest of the Paraguayan authorities and motivated them to cooperated proactively in the IFA. Other • Lesson: The Bank should seek to expand its analytic work done jointly with other donors include operational program in Paraguay gradually to mitigate a 2006 Financial Sector Assessment based on the potential risks. joint IMF-World Bank FSAP and a Country Financial Accountability Assessment (CFAA) prepared jointly 87. The successful implementation of an expanded with the IDB. lending program would require strong support from the Bank. 84. Where warranted, the Bank has also cooperated on occasions with other agencies in specific project work. • Lesson: Staff and budget resources devoted to the A Community Development Project has defined a Paraguay program, including the resident mission in common strategy with two complementary grants from Asunción need to be strengthened in order to manage the Japan Social Development Fund (JSDF) targeted the risks posed by a fragile institutional, fiduciary and at indigenous areas in Eastern Paraguay. Similarly, a governance environment. Sustainable Agriculture and Rural Development Project has also coordinated with the JSDF and with other 88. Issues of governance in Paraguay are complex, donors that are active in rural development including particularly as they concern the relationship between KfW, IFAD and the IDB. There is liason with the IDB in the executive, the legislature, the judiciary and civil many projects financed by the Bank. society. Experience shows that the CAS program may [ 80 ] Annexes Annex 2 CAS Completion Report encounter difficulties as a result of these complexities supply has allowed the Bank good access to key if they are not fully understood or resolved. decision makers and has thereby enhanced the effectiveness of economic and sector work. • Lesson: The Bank should consult widely with multiple stakeholders, including civil society to ensure • Lesson: The Bank should continue to expand and that there is a broad consensus with the objectives sustain an active operational presence in key sectors. of the CAS and the instruments for attaining those objectives. 92. Experience shows that there are significant risks associated with implementing a CAS program in 89. Experience in Paraguay shows that CAS objectives Paraguay. can be successfully attained with a variety of instruments including lending, technical assistance, • Lesson: The CAS should be designed to mitigate the use of grant finance and AAA. If one of these risk by undertaking fiduciary assessments and approaches (such as lending) encounters obstacles, by employing instruments such as programmatic other instruments can be mobilized to advance the adjustment lending or adaptable program lending CAS objectives. that can facilitate risk management where the sector policy framework is incomplete. • Lesson: The Bank should adopt a flexible approach in designing and implementing the country assistance strategy to Paraguay. It should be selective in matching instruments to changing policy priorities and political circumstances. 90. Technical assistance can play an important role in enabling Paraguay to move forwards with a program of structural and policy reform. However, experience shows that there is resistance to financing technical assistance with external loans. • Lesson: The Bank should seek to finance technical assistance by mobilizing grant funds wherever possible. 91. In a small country such as Paraguay, a sustained commitment in sectors such as transport and water Annexes [ 81 ] Attachment 1 Paraguay: CAS Program Matrix (FY04-FY07) Indicative Outcomes and Results Indicators for CAS Period Actual outcomes 1. Fiscal and Financial Stabilization • Issuance of new series Treasury bills to refinance domestic debt by • New Treasury bills issued in 2006 and 2007. mid-2004. • Tax revenues increased by 1.8% GDP between 2002 and • Increase in tax revenues by 1.5 percent of GDP by end-2005. 2005. • Reduction in deficit of govt. pension system by 0.5 percent of GDP • Caja Fiscal deficit increased from 1% of GDP in 2002 to by 2006. 1.2% in 2006 (in 2007 it fell to 0.3%). • Deposit Guarantee Fund established in December 2003. • Initiation of bank deposit guarantee system financed by As of 2007, the Fund had collected US$23 million in commercial banks by 2005. insurance premiums. Government bonds to back up the fund were issued in 2007. • Capitalization of banks averages 13%, with official capital • Gradual increase in commercial bank capital to Basel requirements at 10%, in line with Basel standards. standards by 2007. • A new second-tier bank (AFD) was established in 2005, and the first-tier public bank BNF has been restructured • Consolidation and restructuring of public banks completed by (thereby reducing public financial institutions from seven 2006. to two focused ones). 2. Governance and Transparency in Government • Improvement in rating of Transparency International Corruption • Paraguay has risen within the fifth quintile and, by 2007, Index from fifth to fourth quintile by 2007. had moved closer to the fourth quintile. • Improved MOF performance in service delivery by end-2005, as • Offices dealing with customer complaints have been evidenced by declining trend in number of complaints received established within Hacienda. Data on the number of by soon-to-be established office of Customer Service. complaints is not available. • Majority of public procurement contracts advertised and awarded via e-Procurement website by end-2005. • Procurement contract are posted on internet but awards • Improved budget efficiency via continuation of recently introduced are handled manually. results-oriented budget process. • Incorporation of decentralized entities in SIAF accounting system • Results-oriented budgeting is no longer practiced but by end-2004. budget efficiency is nevertheless gradually improving. • Introduction of meritocratic system for hiring and promotion of • Not achieved civil servants by 2007. • Not achieved • Approval of rules for selection and evaluation of judges by 2005. • Not achieved [ 82 ] Annexes Attachment 1 Paraguay: CAS Program Matrix (FY04-FY07) Indicative Outcomes and Results Indicators for CAS Period Actual outcomes 3. Sustainable Growth • Full functioning of Single Window for Exporters by end–2004. • Successfully implemented in 2006 • Scaling-up of micro-catchment model for agricultural extension • Not achieved. The model will be extended to a further two and natural resource management to national level by 2007. Departments under the Bank-supported PRODERS project • Completion of market analysis to identify a competitive niche for that was approved in January 2008. forestry exports by 2005. • Not achieved. • Reformed regulatory framework for reforestation and forestry • Forestry Law enacted in April 2008 defines institutional management in place by end-2006. framework for sector. • Doubling of funding for road maintenance by 2006 budget. • Funding for road maintenance has averaged US$8 million • Increase percentage of roads in good condition from 40 percent in recent years. to 50 percent by 2007. • An estimated 14% of roads were in good condition by • Reduction in time to register new businesses by 2007. 2007. • Achieved: The time required to register a new business • Improved access to urban and rural water, from 70 and 30 percent decreased from 74 days in 2004 to 35 days in 2007. at present to 80 percent and 50 percent by 2007. • Largely achieved: In 2007 access was 80% in urban areas and 45% in rural areas. 4. Social Inclusion • Reduction in extreme poverty rate from 16 percent to 14 percent • Not achieved: Extreme poverty increased to 19% in 2007 by 2007. • Secondary education dropout rate was 8.7% in 2005. 2007 • Reduction in secondary education drop-out rate from 11 percent data not available. to 9 percent by 2007. • Overall net secondary school enrollment rate was 39% in • Increase in secondary school enrolment rate from 33 percent to 2006. (56% in urban areas and 20% in rural areas). 42 percent by 2007, with narrowing urban-rural divide. • Not achieved. Bank loan rejected by Congress. • Introduction of a basic maternal-child health insurance by 2006, • From 2000 to 2005, infant mortality decreased by 13% and with focus in rural areas. maternal mortality decreased by 12%. • Decrease in infant and maternal-mortality rates by 10 percent by • TEKOPORA program of conditional cash transferred 2007. (Note: differences in actual databases preclude certainly re introduced in 2005. 17,000 households covered by end- absolute levels). 2007 (11.3% of poorest population). • The establishment of a coherent social assistance system that • Not achieved. effectively reaches the poorest by end-2006 • Financial separation of health and old age pension insurance within social security system (IPS) by 2006. Annexes [ 83 ] Attachment 2 Comparison of programmed and actual lending FY04-08 Product envisaged in 2003 CAS US$ (million) Status of Delivery as of May 2008 US$ (million) Economic Recovery SAL Economic Recovery SAL FY04 30.0 Financial SAL Programmatic Financial SAL FY04 15.0 Financial TAL Withdrawn unsigned Ministry of Excellence TA Cancelled for lack of timely approval by Congress Health II Cancelled after being rejected by Congress Social Protection TA Dropped Rural Investment Sustainable Agriculture and Rural Development 37.5 Project (PRODERS) FY08 Forestry Now planned for FY09 Road Maintenance Road Maintenance FY07 74.0 Municipal Finance Dropped Private Sector Development TA Dropped Education Reform II Now planned for FY09 Water Sector Modernization Under preparation for FY09 325.0 146.5 [ 84 ] Annexes Attachment 3 Comparison of programmed and actual AAA 2003-08 Product envisaged in 2003 CAS (base case) Status of delivery as of May 2008 CFAA Done: Report No. 30084-PY; August 26, 2004 Social Protection Policy Done: “Defining a Strategy for Social Protection Policy� Report No. 27352-PA; May 2004 Health Strategy Done: “Health Service Delivery in Paraguay� Report No: 33416-PY; January 25,2006 Institutional & Governance Review Done: Report No: 31763-PY; June 2005 PER Done: Report No. 32797-PY; May 31, 2006 Investment Climate Done: Policy Note No. 4; 2008 Land Taxation Done: “Paraguay Real Property Tax� 2 volumes Report No. 37456-PA; May 16, 2007 CEM Done: “Development Policy Review� (draft) Report No. 29607-PA; June 30, 2004 Rural Sector Strategy Done: Joint with FAO Financial Sector Update Done: “Financial Sector Assessment� Joint IMF-World Bank FSAP; May 2006 Evaluation of Secondary Education Done: “Educación Media en el Paraguay� Report No. 42665-PY; February 7, 2008 Poverty Update Now planned for FY09 …….. Integrated Fiduciary Assessment (PEFA) …….. Policy Notes for new administration in 2008 Annexes [ 85 ] Attachment 4 Lending Program Triggers, FY 04-08 Triggers for Continuation in the Base Case Status as of May 2008 Macroeconomic Triggers • Maintenance of a satisfactory macroeconomic framework. Achieved with support from an IMF stand-by program which the Government now treats as precautionary. Poverty Triggers • Adoption of a national Poverty Reduction Strategy Program. Achieved: National Strategy for the Fight against Poverty • Progress in providing titles to indigenous communities for adopted in 2006 already demarcated lands. Achieved: Land titles of four communities in Caaguazú have been fully regularized; nationwide, 45 are in the pipeline as of May 2008. Governance and Public Accountability Triggers • Satisfactory progress in implementing agreed Procurement Partially achieved. Agency procurement units have been Action Plan, including, for example, establishment of established, and information on public procurement is agency procurement units and an electronic information disclosed electronically. However, an e-procurement and procurement system, and strengthened contract system is not yet in place and contract management has management. not been significantly strengthened. • Satisfactory progress in implementing agreed Financial Management Action Plan, including, for example, Partially achieved: Commitment stage has been introduction of accrual accounting in central administration introduced in the budget, but SIAF has not been extended and implementation of integrated financial accounting to decentralized agencies. system (SIAF) in decentralized agencies. Structural and Pectoral Triggers • No decline in net assets (patrimonio neto) of Petropar below Not achieved: Net Assets of Petropar declined from level of December 31, 2003. US$-22.5 million in 2003 to US$-83.7 million in 2006. • Substantial progress on tax and Government pension reform, Achieved: Strategic Plan for Reform of the Pension System leading to passage and implementation of these proposed adopted in 2007. Tax Reform Law enacted in July, 2004. laws. Achieved. Deposit insurance fund is operational and had • Satisfactory progress on financial sector reform, as evidenced US$23 million in reserves as of May 2007. Resolution 8 by, for example, strengthened bank provisioning standards, was issued and partially implemented, but changes in satisfactory implementation of a new deposit insurance provisioning and risk classification have been postponed. scheme, and adoption of a modern (least cost) banking New bank resolution practices have been adopted and resolution process. successfully applied. Portfolio Implementation Triggers • No more than 20 percent of projects rated Unsatisfactory on Achieved: These ratios vary greatly from year to year. either IP or DO, and an annual disbursement radio of about For the period FY03-08 the average ratio of unsatisfactory 20 percent. projects was 20 percent and the average annual disbursement rate was also 20 percent. [ 86 ] Annexes Annex 3 CPS Preparation Process The CPS was prepared on the basis of an extensive was sharpened to include a process to review the consultations process initially (during the third quarter needs for reforms in higher education, while starting of 2008) focused on strategic policy direction at the with a small program of scholarships abroad. Also, country or sectoral level, followed by consultations on Civil Society participants proposed that the dialogue the proposed CPS itself. Key results of the consultations on safety nets, which might lead to project preparation processes include: when the authorities consider it appropriate, be enhanced with a discussion on the type of training • The initial client survey offered important insights and retraining needs to enhance labor mobility, on the perception (positive and negative) that key particularly during the current economic slowdown. stakeholders had about the work of the World Bank Civil Society also encouraged the Bank to clarify the in Paraguay. It also indicated a number of broad areas ways in which it can assist the authorities in increasing where the Bank could serve as a development partner their participation in the public investment program— for Paraguay. especially in those programs that are co-financed by the World Bank—and the Bank agreed to prepare a • During the Policy Notes discussions in June 2008, quick response note for civil society on this matter. the elected Government expressed strong interest in working with the World Bank in areas such as: A. Strategic Dialogue: land access and rural poverty, the modernization of the public administration and the management of • Strategic discussions on policy direction took place state owned enterprises, regulation, infrastructure with the new Government prior to its coming to office. (transport, water, and electricity), as well as safety In particular, the newly elected President, Fernando nets and education. Follow-up meetings, including Lugo, chaired a one day seminar in Asuncion in June a detailed discussion on the CPS with the enlarged 2008 to discuss the findings of fourteen Policy Notes economic cabinet in February 2009, helped to better prepared by the Bank on topics ranging from fiscal define areas of Bank support as well as the instruments management and the wage bill, to social inclusion and to be used (e.g., existing portfolio, new lending, and infrastructure. The seminar, and bilateral discussions non-lending technical assistance). Consultation with between Bank and the elected government team the international community on the draft CPS helped organized the day before, generated a close dialogue the Bank to better define some of the issues and on key aspects of the new Government’s program and understand potential synergies with multilateral and in defining the framework for future Bank support. bilateral programs. • To continue with its strategic engagement, the Bank, • Discussions with Civil Society provided ideas for jointly with other donors, assisted the Government in enhancing a number of the proposed activities. For organizing a high-level seminar on governance and instance, the focus of a proposed Education operation development. The seminar, with key note speaker Annexes [ 87 ] Annex 3 CPS Preparation Process including Ricardo Lagos (former President of Chile), stakeholders with a tool to openly engage on country included participants such as the vice President of priorities and direction, and to discuss the role of the Oriental Republic of Uruguay and Directors of social and infrastructure policies. the World Bank and the Inter-American Development Bank, and addressed a large audience, comprising, • A Client Survey was completed in August 2008 to inter alia, the media, academia, political figures and better understand the overall situation in Paraguay and private sector representatives. At the strategic level, how the Bank is perceived by its main interlocutors, the seminar provided the elected authorities and key and other key stakeholders. The Survey provided Box 1 : 2008 Client Survey – Aligning World Bank’s Priorities in Paraguay Objectives: A client survey was conducted in August 2008 to assist in understanding how stakeholders in Paraguay perceive the Bank and better inform the preparation of the CPS. Methodology: Mail-in quantitative surveys were sent to 453 potential participants in June 2008. Potential participants were drawn, among others, from the office of the President, Prime Minister, Minister or State Secretary, federal government staff, Parliamentarian members or staff, bilateral or multilateral agencies, private sector, NGOs, academia, the media, professional associations and the judiciary. The response rate was fairly low at 34%. As 93% of respondents were from Asuncion, comparisons among geographic locations were not possible. The process was managed on the ground by a local professional services company. Overall Findings: Governance is identified, overwhelmingly, as key development priority in Paraguay. The Bank’s focus on governance is therefore validated by survey findings. However, education emerges as key contributor to poverty reduction and faster growth.. Therefore, stakeholders would like to see the Bank play a significant role in education, an area where the Bank has been successfully involved in the past. Stakeholders recognized the value of Bank involvement in other critical area such as infrastructure, governance and poverty. Going forward, Paraguay wants the bank to focus on tangibles - i.e. access to education and basic infrastructure – to reduce poverty. Perceptions of the Bank: Overall perception of the Bank and its efforts to collaborate and include stakeholders is very positive. There is a call for greater Bank involvement in Paraguay. However, NGO respondents have a negative perception of the Bank on certain issues (albeit number of respondents in this category was very low), which is often picked up by the press in articles against the Bank in general or specific government interventions supported by the Bank in the past. Perceived weaknesses: Not enough is being done to prevent corruption in Bank projects. The Bank is technocratic in light of political realities, and its flexibility is a concern. Finally, the Banks’ ability to adapt knowledge is somewhat low. Familiarity with the Bank: Familiarity with the Bank is low among certain groups of stakeholders (NGOs, media). This might explain the respondent NGO’s negative perceptions of the Bank on certain issues. There is a need to increase Bank awareness among stakeholders, as higher familiarity is correlated with more positive views of the Bank. [ 88 ] Annexes Annex 3 CPS Preparation Process very useful information and was a valuable guide to representative of the IDB, welcomed the proposed the Bank as it seeks to move forward in increasing technical focus and praised the important role that its support to Paraguay. A summary of survey’s the World Bank has been playing as a leading source objectives, methodology and main finding is provided of knowledge for both the Government and the entire below (see Box 1 below). donor community in Paraguay. • The main message emerging from consultations with B. Consultations on the Proposed CPS: civil society in both Asuncion and Coronel Oviedo is a call for the Bank to help incorporate civil society’s Consultations with the international community views and participation in the Government’s public and with civil society were carried out by the Bank, investment program, particularly those programs in partnership with the Government of Paraguay, in with financial support from the Bank. It was explained December 2008 in Asuncion and in February 2009 that the Government’s program supported by the in Asuncion and Coronel Oviedo (the third or fourth World Bank has involved civil society in various ways largest city in the country, and a place where it is (e.g., directly, as in the Community Development easy to invite participants from a vast rural part of the Project, and less directly, as in the Road Maintenance Eastern side of the country). Project), and it was evident that the mechanisms of engagement promoted by the Bank were not clear • Consultations with the donor community were to civil society representatives. In this regard, it was very positive. The representatives of the international proposed that the Bank commission a policy note community were supportive of the Bank’s approach to address this issue in FY10. This would serve the as outlined in the CPS and expressed appreciation purpose of both explaining the type of government- for the Bank’s transparency and for its openness civil society partnerships that were forged in the past, in collaborating with them. In particular, the and opening a dialogue on new way in which this European Union, Spain, Germany and Uruguay collaboration can take place in the future. Members concurred with the Bank on the need to support of civil society also noted the need for the Bank to the state modernization agenda through a series facilitate the consensus building dialogue over public of development policy lending operations (DPLs). policy priorities, such as, for example, on the effects Some donors questioned whether governance of the global financial crisis in Paraguay and on the should be given as much prominence in the CPS, but appropriate response to the crisis. . It was suggested it was agreed that the CPS’s focus on governance is this could take place in the context of the Bank’s appropriate given that the Government’s program proposed dialogue on growth. itself is heavily centered on this issue. The question of whether the CPS was excessively loaded with • Members of the central or local Government, who non-lending TA was raised, but most, including the attended the consultations, facilitated significantly Annexes [ 89 ] Annex 3 CPS Preparation Process the dialogue and helped the Bank explain to the various audiences how it operates in order to support a country’s development agenda. In particular, we would like to thank: o The representatives of the Minister of Finance that took part in the meetings, including: • Mr. Manuel Caballero, Viceminister for Economy and Trade • Ms. Veronica Serafini, Head of the Social Unit of the Ministry of Finance • Mr. Raul Monte-Domec, Head of the Subnational Unit of the Ministry of Finance • Mr. Pedro Espinola, the recently appointed Advisor to the Executive Director for Argentina, Bolivia, Chile, Paraguay, Peru, and Uruguay. o The representatives of subnational governments in Coronel Oviedo, including: • The major of the city of Coronel Oviedo • The Governor of the Department of Caaguazú [ 90 ] Annexes Annex 4 Governance and Anticorruption in Paraguay Context dictatorship during most of the second half of the 20th Century, Paraguay started in the early nineties a 1. Paraguay presents serious challenges in the areas timid transition to democracy under the same party of governance and control of corruption. The recent –the Colorado Party – that had been the cornerstone Presidential elections had a strong focus on the need of the dictatorship and had a firm grip over all state to improve governance and bring about significant activities. Since the nineties, there has been a steady change in what is perceived as a critical handicap for progress toward political competition and democratic moving into a more advance phase of development. processes. However, there has been limited progress The Lugo Administration obtained a strong mandate in removing the pervasive culture of patronage, from the electorate to improve governance conditions clientelism and political control in the management in the country and has shown a strong commitment and of Government that continues to be the legacy of determination to take serious steps in that direction. the Stroessner’s dictatorship. One dimension of this culture is the exorbitant powers provided to Congress 2. The root of the problem can be traced back to over the selection and salary scales of civil servants. Paraguay’s history and political economy. Under a As a result, Paraguay’s civil service is amongst the Box 1: Governance Assessments According to a recent assessment36, the perception of corruption is high for all powers of government, including the state-owned enterprises and the two hydro power plants jointly owned by Paraguay with the governments of Brazil and Argentina, respectively. The lack of transparency and controls over social spending in Paraguay by the Itaipú binational enterprise particularly noteworthy. Corruption affects multiple aspects of daily life of a Paraguayan citizen, including transit policy “fees� and “payments made to ease the handling of key processes by a highly complicated bureaucracy. According to this report, large corruption is associated mainly with campaign finance, and government’s contracts or concessions. Although cronyism, patronage, and traffic of influences are present and frequently visible in day to day life, it is the corruption associated with illegal activities on a large scale, such as contraband, money laundering, and drugs, which influences the politics and economy of the country the most, even though it is less visible. Complementing these results are the findings of a 2005 comprehensive survey to diagnose the incidence of corruption conducted by a public/private Council established in 2005 to promote integrity (namely the “Consejo impulsor del Sistema Nacional de Integridad—CISNI�), which signals that the political parties are perceived as the most corrupt institutions in the country. Others institutions perceived as fostering corruption include the Customs Administration, the Supreme Court, the General Prosecutor’s office, and congress37. 36. See Evaluación de la Corrupción – Paraguay; Mimeo by Benjamin Crosby and Laurence Beck from Management Systems International, July 2008 37. See Patrones de Comportamiento y de Desempeño Institucional, Gobernabilidad y Corrupción en el Sector Público en Paraguay, 2005. CISNI, September 2006 Annexes [ 91 ] Annex 4 Governance and Anticorruption in Paraguay weakest and most politicized in Latin America, despite political system has more systematically abided by the fact that Paraguay’s expenditure on public sector constitutional rules. As clearly reflected in the recent salaries is well above the regional average (Figure 1). presidential elections, there is growing impatience An independent diagnostic of the key manifestations in society as a whole for the slow progress achieved of corruption is presented in Box 1 below. in the areas of control of corruption, government effectiveness and the prevalence of rule of law in 3. Over the past ten years, Paraguay has made some resolving social and political conflict. The decision progress in selected areas of governance. The Bank by the electorate to vote out the Colorado Party and through WBI played an important role in helping the bring a broad opposition coalition to govern the country define its first Anti Corruption Strategy in country is a reflection of both the increased maturity the late 1990 and, as a result, there has been some of Paraguayan democratic institutions and the strong tangible progress in the areas of public procurement urge by the citizenry that there is a need for radical and customs. Despite this progress, overall change in all the dimensions of governance. achievements remain limited and public distrust in the state and its institutions is deeply rooted. Paraguay 4. During the last Administration, there was a significant has, however, shown some relative improvement effort to improve governance effectiveness which had in the drive and strength of its civil society, and has been seriously eroded to the point that the state’s exhibited an increase in social and political openness short term financial viability was at stake. Improving and an improvement in political stability as the tax collection and strengthening the revenue base became a critical priority. The Duarte Administration achieved an important success in this area, as Figure 1: Quality of the Civil Service evidenced by an average budget surplus of 1% of (índice de desarrollo del servicio civil) GDP since 2004. This effort has been complemented Brazil by important initiatives aimed at modernizing fiscal Chile institutions. The strengthening of the Ministry of Argentina Costa Rica Finance and its various dependencies was identified Uruguay Colombia as a key priority and an area in which the Bank played Mexico Venezuela an active role. Dominican R. Bolivia Guatemala 5. Despite some accomplishments in modernizing Nicaragua Ecuador fiscal institutions, most institutions and fiduciary Peru Paraguay systems remain weak. There is wide scope for Honduras collusion in public procurement, despite the progress El Salvador Panama made in increasing transparency and improving 0.0 0.2 0.4 0.6 0.8 1.0 competition. The new Government will continue to Source: Iacoviello and Zuvanic (2005). face challenges in the fiscal area, including the need to [ 92 ] Annexes Annex 4 Governance and Anticorruption in Paraguay develop a fiscal framework to evaluate and prioritize expenditures and to introduce further improvements to public expenditure management. The budget process remains very weak, while treasury and payments systems are rudimentary. In addition, the new Government will have to address the issues of i) reforming public employment and compensation and ii) improving the management of the public investment program. 6. There are also new demands for action in other critical governance areas. The strong stance taken by the new Administration regarding the treatment of corrupt practices is very quickly straining the Government’s ability to investigate and sanction corruption. There is also a growing concern that a dysfunctional judiciary may soon become a bottleneck for the type of progress the Government is expecting to achieve in the anticorruption front. There is also the need to make progress in other areas that may help prevent corruption, including improving transparency and access to information on public decision and activities and introducing civil service reform. In all these areas there will be a need to ensure coordination with other donors who are also actively assisting Paraguay in handling this far reaching, emerging agenda. Annexes [ 93 ] Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up PARAGUAY INDICATORS Indicators the Millennium of Advances Declaration base mean Goal 1: Eradicate extreme poverty and hunger base year point year current year target Target 1 A: Halve, 1.1 Proportion of Percentage of population in 13,9 1995 21,7 2002 19,4 2007 between 1990 and population below $1 (PPP) extreme poverty 2015, the proportion of per day people whose income 1.2 Poverty gap ratio Poverty gap ratio 14,3 1997/8 22,7 2002 14,3 2007 is less than $1 a day 1.3 Share of poorest Share of homes of the 2,1 1999 2,4 2003 3,5 2007 quintile in national poorest quintile in the total consumption home income Target 1 B: Achieve 1.4 Growth rate of GDP THIS INDICATOR IS NOT full and productive per person employed AVAILABLE employment and 1.5 Employment-to- Activity rate 69,2 1995 61,2 2002 60,8 2007 decent work for all, population ratio Employment rate including women and Open unemployment rate, young people population aged 15 -24 96,6 1995 89,2 2002 94,4 2007 6,2 1995 18,6 2002 12,2 2007 1.6 Proportion of Percentage employed 10,7 1999 15,1 2003 14,9 2007 employed people living people in extreme poverty below $1 (PPP) per day 1.7 Proportion of own- Percentage of own-account 18,3 1995 38,3 2002 36,7 2007 account and contributing workers family workers in total employment Target 1 C: Halve, 1.8 Prevalence of Estimated percentage of 3,7 1990 4,6 2000/01 4,2 2005 between 1990 and underweight children children under 5 with 2015, the proportion of under-five years of age overall malnutrition people who suffer from 1.9 Proportion of THIS INDICATOR IS NOT hunger population below AVAILABLE minimum level of dietary energy consumption Registered percentage of 28,0 2000 34,5 2003 30,2 2006 undernourished pregnant women [ 94 ] Annexes Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up of PARAGUAY INDICATORS Indicators the Millennium Advances Declaration base mean Goal 2: Achieve universal primary education base year point year current year target Target 2 A: 2.1 Net enrolment ratio in Net pre-school registration rate 17,0 1992 56,0 1998 66,8 2006 Ensure that, by primary education Net registration rate for 1st 93,0 1990 91 1997 92,3 2006 2015, children Grade to 6th Grade everywhere, boys and girls alike, Net registration rate for 7th 27,0 1990 44,0 1997 55,6 2006 will be able to Grade to 9th Grade complete a full 2.2 Proportion of pupils Completion rate of primary 74,7 1995 84,4 2002 90,2 2007 course of primary starting grade 1 who reach education, population aged 15 schooling last grade of primary to 24 Survival (retention) rate up to to 70,0 1990 78,0 1997 81,3 2005 5th Grade 2.3 Literacy rate of 15-24 Literacy rate, population aged 96,5 1995 98,0 2002 98,8 2007 year-olds, women and men 15 - 24 Goal 3: Promote gender equality and empower women Target 3 A: 3.1 Ratios of girls to boys Ratio gross joint enrolment 0,96 1996 0,95 2001 1,00 2006 Eliminate gender in primary, secondary and primary, secondary and tertiary disparity in tertiary education education for men and women primary and 1,03 1995 1,03 2002 1,02 2007 secondary education, 3.2 Share of women in Percentage of women in 41,9 1995 41,4 2002 40,3 2007 preferably by wage employment in the wage-earning non-agricultural 2005, and in all non-agricultural sector employment levels of education 3.3 Proportion of seats Percentage of positions held 4,6 1989- 8,0 1998- 13,6 2008- no later than 2015 held by women in national by women in the National 1993 2003 2013 educational levels parliament Parliament by 2015 Goal 4: Reduce child mortality Target 4 A: Reduce 4.1 Under-five mortality rate Estimated under 5 mortality rate 45,0 1990 41,0 1995/96 48,1 2002 by two-thirds, 4.2 Infant mortality rate Registered child mortality rate 30,4 1990 19,7 1997 18,0 2006 between 1990 and 2015, the under- Estimated child mortality rate 59,4 1980 39,1 2000 23,8 2020 five mortality rate 4.3 Proportion of 1 year-old Coverage of MMR vaccination of 71,0 1990 71,4 1999 80,1 2007 children immunized against 1-year old children measles Annexes [ 95 ] Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up PARAGUAY INDICATORS Indicators the Millennium of Advances Declaration base mean Goal 5: Improve maternal health base year point year current year target Target 5 A: Reduce 5.1 Maternal mortality ratio Registered maternal 150,1 1990 101,8 1997 121,4 2006 by three quarters, mortality rate between 1990 and Estimated maternal 192,0 1995/96 - - 169,6 2002 2015, the maternal mortality rate mortality ratio 5.2 Proportion of births Registered percentage of 83,4 1996 85,5 2001 86,5 2006 attended by skilled health institutional births personnel Estimated percentage of 53,3 1990 56,3 1998 74,1 2004 institutional births Target 5 B: 5.3 Contraceptive Contraceptive prevalence 32,7 1990 41,1 1998 50,5 2004 Achieve, by 2015, prevalence rate among women (%) universal access to Contraceptive prevalence 44,1 1990 57,4 1998 72,8 2004 reproductive health among married or partnered women (%) 5.4 Adolescent birth rate Specific fertility rate among 97 1990 87 1998 65 2004 adolescents aged 15 - 19 (births per 1,000 women) 5.5 Antenatal care Percentage of live births of 3,0 1995/96 3,4 1998 1,6 2004 coverage (at least one visit mothers with one antenatal and at least four visits) check-up Percentage of live births of 8,7 1995/96 9,0 1998 7,5 2004 mothers with four antenatal check-ups 5.6 Unmet need for family Percentage of women 67,3 1990 55,6 1998 49,5 2004 planning aged 15 - 44 not using contraceptives [ 96 ] Annexes Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up PARAGUAY INDICATORS Indicators the Millennium of Advances Declaration base mean Goal 6: Combat HIV/AIDS, malaria and other diseases base year point year current year target Target 6 A: Have 6.1 HIV prevalence among HIV prevalence among persons 1,19 2006 - - 1,17 2007 halted by 2015 and population aged 15-24 aged 15 - 24 d (%) begun to reverse years HIV prevalence among pregnant 0,0 1992 0,2 1997 0,2 2007 the spread of HIV/ women aged 15 or more (%) AIDS HIV incidence rate among 0,48 1990 3,50 1998 11,47 2007 persons aged 15 - 19 (%) HIV incidence rate among 1,01 1990 19,86 1998 36,74 2007 persons aged 20 - 24 (%) 6.2 Condom use at last Prevalence of condom use 15,7 1995/96 21,2 1998 31,8 2004 high-risk sex among women aged 15 - 24 at last sex of last 3 months Women aged 15 - 24 with - - - - 35,9 2004 spontaneous and comprehensive knowledge of condom use in all sex for HIV/AIDS prevention 6.3 Proportion of Women aged 15 - 24 with - - - - 2,4 2004 population aged 15-24 spontaneous and comprehensive years with comprehensive knowledge of the three ways to correct knowledge of HIV/ prevent HIV/AIDS (%) AIDS Women aged 15 - 44 with - - - - 2,2 2004 spontaneous and comprehensive knowledge of the three ways to prevent HIV/AIDS 6.4 Ratio of school THIS INDICATOR IS NOT attendance of orphans to AVAILABLE school attendance of non- orphans aged 10-14 years Target 6 B: 6.5 Proportion of Percentage of HIV positive - - - - 24,29 2006 Achieve, by 2010, population with advanced population with advanced universal access to HIV infection with access infection with access to retroviral treatment for HIV/ to antiretroviral drugs medications AIDS for all those who need it Annexes [ 97 ] Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up PARAGUAY INDICATORS Indicators the Millennium of Advances Declaration base mean Goal 6: Combat HIV/AIDS, malaria and other diseases base year point year current year target Target 6 C: Have 6.6 Incidence and death Registered rate of incidence of 0,79 1990 0,4 1998 0,22 2007 halted by 2015 and rates associated with malaria (per 1,000 inhabitants) begun to reverse malaria the incidence of malaria and other 6.7 Proportion of children THIS INDICATOR IS NOT major diseases under 5 sleeping under AVAILABLE insecticide-treated bednets 6.8 Proportion of children THIS INDICATOR IS NOT under 5 with fever who are AVAILABLE treated with appropriate anti-malarial drugs 6.9 Incidence, prevalence Estimated prevalence associated 118 1990 - - 106 2003 and death rates associated with tuberculosis (per 1,000 with tuberculosis inhabitants) Registered rate of incidence 51,4 1990 35,1 1998 34,9 2007 associated with tuberculosis (per 100,000 inhabitants) Registered rate of incidence 23,5 1990 15,6 1998 20,9 2007 associated with pulmonary tuberculosis BK(+) Estimated rate of incidence 76,0 1990 70,0 2003 71,0 2006 associated with tuberculosis (per 100,000 inhabitants) Registered mortality rate 3,0 1990 3,3 1997 3,9 2006 associated with tuberculosis (per 100,000 inhabitants) Estimated mortality rate 11,0 1990 - - 13,0 2003 associated with tuberculosis ( per 100,000 inhabitants) 6.10 Proportion of Percentage of pulmonary 76,8 2000 85,3 2003 91,3 2006 tuberculosis cases detected tuberculosis cases BK(+) and cured under directly detected and cured under directly observed treatment short observed treatment short course course (DOTS) [ 98 ] Annexes Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up PARAGUAY INDICATORS Indicators the Millennium of Advances Declaration base mean Goal 7: Ensure environmental sustainability base year point year current year target Target 7 A: 7.1 Proportion of land area Estimate of the native forest land - - - - 46,7 2002 Integrate the covered by forest area of Paraguay principles of sustainable Percentage of protected land area 4,26 2000 13,92 2003 13,99 2005 development into to maintain biological diversity country policies 7.2 CO2 emissions, total, CO2 emissions (Gigagrams), per 3865,81 1990 - - 18548,99 1994 and programs and per capita and per $1 GDP sector reverse the loss (PPP) of environmental resources 7.3 Consumption of ozone- THIS INDICATOR IS NOT depleting substances AVAILABLE 7.4 Proportion of fish THIS INDICATOR IS NOT stocks within safe AVAILABLE biological limits Target 7 B: Reduce 7.5 Proportion of total THIS INDICATOR IS NOT biodiversity loss, water resources used AVAILABLE achieving, by 2010, a significant 7.6 Proportion of terrestrial THIS INDICATOR IS NOT reduction in the and marine areas AVAILABLE rate of loss protected Target 7 C: Halve, 7.7 Proportion of species THIS INDICATOR IS NOT by 2015, the threatened with extinction AVAILABLE proportion of people without 7.8 Proportion of Percentage of the population 39,1 1995 53,3 2002 69,3 2007 sustainable access population using an with access to network (drinking) to safe drinking improved drinking water water water and basic source Percentage of the population with 66,5 1995 75,9 2002 85,1 2007 sanitation improved water source Target 7 D: 7.9 Proportion of Percentage of the population with 18,7 1995 18,2 2002 24 2007 By 2020, to population using an access to basic sanitation have achieved improved sanitation facility a significant Percentage of the population with 47,2 1995 54,4 2002 66,3 2007 improvement in access to improved sanitation the lives of at least 7.10 Proportion of urban 100 million slum population living in slums dwellers Annexes [ 99 ] Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up of PARAGUAY INDICATORS Indicators the Millennium Advances Declaration base mean Goal 8: Develop a global partnership for development base year point year current year target Target 8 A: Develop Some of the indicators THIS INDICATOR IS NOT further an open, listed below are monitored AVAILABLE rule-based, separately for the least predictable, non- developed countries (LDCs), discriminatory Africa, landlocked developing trading and financial countries and small island system developing States Includes a Official Development THIS INDICATOR IS NOT commitment to Assistance (ODA) AVAILABLE good governance, 8.1 Net ODA, total and to the THIS INDICATOR IS NOT development and least developed countries, AVAILABLE poverty reduction – as percentage of OECD/DAC both nationally and donors’ gross national income internationally Target 8 B: Address 8.2 Proportion of total THIS INDICATOR IS NOT the special needs of bilateral, sector-allocable AVAILABLE the least developed ODA of OECD/DAC donors countries to basic social services (basic education, primary health Includes: tariff care, nutrition, safe water and and quota free sanitation) access for the least developed countries’ 8.3 Proportion of bilateral THIS INDICATOR IS NOT exports; enhanced official development AVAILABLE program of debt assistance of OECD/DAC relief for heavily donors that is untied indebted poor 8.4 ODA received in THIS INDICATOR IS NOT countries (HIPC) landlocked developing AVAILABLE and cancellation of countries as a proportion of official bilateral debt; their gross national incomes and more generous ODA for countries 8.5 ODA received in small THIS INDICATOR IS NOT committed to island developing States as AVAILABLE poverty reduction a proportion of their gross national incomes Market access THIS INDICATOR IS NOT AVAILABLE [ 100 ] Annexes Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up of PARAGUAY INDICATORS Indicators the Millennium Advances Declaration base mean Goal 8: Develop a global partnership for development base year point year current year target Target 8 C: Address 8.6 Proportion of total THIS INDICATOR IS NOT the special needs developed country imports AVAILABLE of landlocked (by value and excluding developing countries arms) from developing and small island countries and least developed developing States countries, admitted free of (through the duty Programme of Action for the Sustainable 8.7 Average tariffs imposed THIS INDICATOR IS NOT Development by developed countries on AVAILABLE of Small Island agricultural products and Developing States textiles and clothing from and the outcome of developing countries the twenty-second 8.8 Agricultural support THIS INDICATOR IS NOT special session of the estimate for OECD countries AVAILABLE General Assembly) as a percentage of their gross domestic product 8.9 Proportion of ODA THIS INDICATOR IS NOT provided to help build trade AVAILABLE capacity Debt sustainability THIS INDICATOR IS NOT AVAILABLE Target 8 D: Deal 8.10 Total number of countries THIS INDICATOR IS NOT comprehensively that have reached their AVAILABLE with the debt HIPC decision points and problems of number that have reached developing countries their HIPC completion points through national (cumulative) and international measures in order 8.11 Debt relief committed THIS INDICATOR IS NOT to make debt under HIPC and MDRI AVAILABLE sustainable in the Initiative long term 8.12 Debt service as a Debt servicing as percentage of 4,8 1995 12,2 2001 5,1 2007 percentage of exports of exports of goods and services goods and services Annexes [ 101 ] Annex 5 Meeting the Millenium Development Goals (As of February 2009) Goals and Targets extracted from Indicators for Follow-up of PARAGUAY INDICATORS Indicators the Millennium Advances Declaration base mean Goal 8: Develop a global partnership for development base year point year current year target Target 8 E: In 8.13 Proportion of population THIS INDICATOR IS NOT cooperation with with access to affordable AVAILABLE pharmaceutical essential drugs on a companies, provide sustainable basis access to affordable essential drugs in developing countries Target 8 F: In 8.14 Telephone lines per 100 Percentage of the population with 11,5 1995 13,8 2002 17,8 2007 cooperation with the population access home landline telephone private sector, make available the benefits 8.15 Cellular subscribers per Percentage of the population with 5,0 1999 31,7 2003 78,2 2007 of new technologies, 100 population access to cellular phone at home especially Percentage of the population with 2,1 1997 6,3 2003 11,2 2007 information and access to personal computer at /98 communications home Percentage of the population 1,0 2000 1,8 2003 3,0 2007 with access to personal computer /01 connected to internet at home 8.16 Internet users per 100 Percentage of the population of 7,9 2005 8,0 2006 11,2 2007 population internet-users aged 10 or more Has reached the target or is about to reach it Insufficient progress to reach the target if the prevailing tendency continues Insufficient progress to reach the target if the prevailing tendency continues No progress or deterioration is observed Insufficiency or absence of data Not included in the report Prepared by: DGEEC and the United Nations System Paraguay [ 102 ] Annexes 1 Annex 6 Paraguay Growth Country in Prospects Paraguay38 Partnership Strategy Results Matrix 1. Paraguay’s long-run growth performance has Figure 1: Per capita income been disappointing. GDP per capita grew by 1½ (in ‘000 of constant 2002 US$) percent on average since 1960, but over the past Paraguay relative to Latin Am. (lhs, %) 25 years, GDP per capita declined by ½ percent on 3.5 Paraguay 1 0.9 average per year. The improvement in the 1970s 3.0 Latin America 0.8 was largely related to the construction of the Itaipú 2.5 0.7 hydropower plant, with important spillovers to the 2.0 0.6 economy, and to the development of agriculture in 1.5 0.5 0.4 the eastern part of the country. Higher growth in the 1.0 0.3 1970s contributed to bridge the gap with other Latin 0.2 0.5 American countries, but then the gap stagnated in the 0.1 1980s. Paraguay fell behind throughout the 1990s 0.0 0 60 64 68 72 76 80 84 88 92 96 00 04 and has only now returned to the same per-capita income relative to the rest of Latin America where it Source: World Bank Development Indicators. started 45 years earlier.39 2. The recent growth acceleration between 2004 also, new products such as stevia, sesame seeds and and 2008, the largest expansion since the 1970s, sugar cane, are now important source of income was welcomed, but it highlighted a number of for small and medium farmers). The challenge of a weaknesses of the economic structure.40 At the growth strategy is, thus, to find a mixture of policies aggregate level, as demand accelerated over the that will lift sustainable growth upwards over the long past years, the economy started to show signs of run, while at the same time help diversifying in terms overheating. Analyses prepared by the IMF suggest of both products and markets. that current growth may be higher than its potential. Equally important, while some diversification occurred Growth Accounting and Determinants41 (the demise of cotton production was met with a major supply response by country producers to opportunities 3. The growth accounting methodology allows that arose in the world market for soy bean and beef; analyzing the contribution of factor accumulation 38. Prepared by Pedro L. Rodriguez, Country Manager, LCC7 39. The trend is similar if GDP per capita is measured in purchasing power parity or at market exchange rates. 40. For example, as construction demand accelerated in 2006, the state-owned cement company, which enjoys a monopoly given the recent ban imposed on clinker imports, collapsed due to lack of maintenance and continued political interference on the company’s operations. This situation paralyzed the construction sector—which is a key channel of transmission from the export boom into employment generation. 41. This section relies heavily on the comprehensive analysis of growth accounting and growth determinants in Latin America and the Caribbean developed by Loayza, Fajnzylber, and Calderon (2005). It extends their results for the most recent period not covered in their paper. Annexes [ 103 ] 1 Annex 6 Paraguay Growth Country in Prospects Paraguay Strategy Results Matrix Partnership and productivity to growth. Table 1 summarizes the 4. The contribution of total factor productivity findings of a growth breakdown made by Loayza et. has been negative during the 1980s, as in other al. (2005) for the period 1960–2000 and extends their Latin American countries, but, unlike them, it results for 2000-2006. In the first breakdown, TFP is has not recovered until the early 2000s. Negative constructed as the residual of the contribution of labor productivity growth was a common trend in Latin force and of capital. In the second breakdown, labor is America during the 1980s (17 countries experienced adjusted by increases in education accomplishments. such negative TFP according to Loayza et. al.), but Finally, in the third breakdown, both labor and capital most countries showed positive TFP contribution are adjusted for their level of utilization, proxied by during the 1990s. Paraguay is one of the few countries the employment rate. in the region that was unable to recover from the fall in its productivity growth of the 1980s. The continued Table 2 . Growth Accounting, 1960-2000 (percentage) 1961-70 1971-80 1981-90 1991-00 2001-06 2003-06 Simple GDP 4,3 8,9 2,8 2,0 2,8 3,7 Labor 1,4 2,1 1,9 1,8 0,6 0,5 Capital 2,1 4,7 2,9 1,7 1,0 1,1 TFP1 1,9 5,3 -0,5 -1,1 1,3 2,1 Adjusted for Human Capital GDP 4,3 8,9 2,8 2,0 2,8 3,7 Labor 2,0 2,9 2,9 1,9 0,6 0,5 Capital 2,1 4,7 2,9 1,7 1,1 1,2 TFP1 0,9 3,9 -2,2 -1,2 1,2 2,0 Adjusted for Human Capital and Input Utilization GDP … … 2,8 2,0 2,8 3,7 Labor … … 2,7 1,3 0,7 1,1 Capital … … 2,8 1,5 1,2 2,0 TFP1 … … -1,7 -0,2 0,9 0,6 Sources: Loayza, Fajnzylber, Calderon (2005); and author’s estimates after 2000 [ 104 ] Annexes 1 Annex 6 Paraguay Growth Country in Prospects Paraguay Strategy Results Matrix Partnership negative TFP growth in the 1990s may reflect the Paraguay until recently. The lack of macroeconomic political uncertainty in this period which has reduced stability became a significant constraint on the overall the incentives to invest in Paraguay, as suggested by performance of the economy during the 1990s period Fernandez and Monje (2004). By contrast, Paraguay and contributed negatively to growth for the entire experienced positive TFP growth since 2000, and period of analysis—Trade shocks over the 1995-2003 all the more so since 2003. As is shown in the next period, and financial sector instability between 1998 section, this is related to better terms of trade, but also and 2003 explain instability during these years. Thus, to improvements in the macroeconomic situation and maintaining the achieved macroeconomic stability, to the implementation of structural reforms. and reducing overall macroeconomic volatility, will continue to be an important component of the growth 5. Another methodology to assess growth agenda for Paraguay. performance consists in studying the determinants of growth, such as structural and stabilization 7. By contrast, structural reforms have generally policies and cyclical factors. Loayza et al. (2005) have been supportive even during bad times. The estimated the impact of such factors over 1976–2000 contribution of structural reforms has been positive for a panel of Latin America countries. Table 3 presents although their contribution to growth fell during the the coefficients of these models, as well as the results second half of the 1990s. Over the entire period of for Paraguay and extends the analysis to the most analysis, the contribution of structural policies has recent period. According to the model, the decline of generally been higher than in other Latin American per capita GDP growth in the early 1980s is explained countries, reflecting mostly Paraguay’s increased mainly as a correction after the overheating of the late trade openness, improved education, and financial 1970s, combined with growing economic instability deepening. Strengthening policy efforts in all these and a negative terms-of-trade shock. The economy areas should also remain high on the growth recovered somewhat in the late 1980s, in part because agenda. of improved terms of trade, higher trade openness, and a favorable exchange rate. The continued deterioration 8. While a consensus is reached over the sources of economic growth during the 1990s was caused of growth and the policies that are to be used to mainly by the succession of banking crises that affected foster it, there are a number of sectoral policies Paraguay from 1996 until 2002. Since 2000, economic that are important in any case. These include five growth recovered, following a cyclical upturn after the important areas: banking crises, but also because of improved terms of trade and structural reforms. • Transport. The high costs of transport and logistics, together with access to finance, are the major 6. Economic instability has been one of the main obstacles to private sector development, especially for factors explaining the poor performance of export industries. The share of costs associated with Annexes [ 105 ] 1 Annex 6 Paraguay Growth Country in Prospects Paraguay Strategy Results Matrix Partnership Table 3. Growth Determinants, 1976-2005 Econometric growth regression Contribution to chage in GDP growth Determinant Variable Coeff. Stdev 81-85 86-90 91-95 96-00 01-05 76-80 81-85 86-90 91-95 96-00 Dependant variable Change in growth rate of GDP per capita Convergence Factors: Initial GDP Per Capita -0,0176 -3,8 -0,65 0,11 -0,06 -0,04 0,17 Cyclical Reversion: Initial Output Gap -0,2371 -8,52 -1,83 0,99 -0,05 -0,19 0,27 Structural Policies and Institutions: Education Secondary enrollement 0,0172 6,7 0,43 -0,01 0,31 0,44 0,35 Financial Depth Private domestric credit/GDP 0,0066 4,28 -0,03 -0,16 0,36 0,18 -0,21 Trade Openness Structurally adjustment consumption/GDP 0,0096 3,14 -0,11 0,34 0,54 -0,01 0,12 Government Burden Log of government consumption/GDP -0,0154 -3,18 -0,15 0,05 -0,04 -0,30 0,19 Public Infraestructure Log of main telephone lines per capita 0,0071 2,71 0,25 0,15 0,18 0,26 0,05 Total: 0,39 0,37 1,35 0,57 0,5 Stabilization Policicles: Lack of Price Stability Inflation rate. In log (100+Inf. Rate) -0,0048 -1,89 0.00 -0,05 0,04 0,04 0.00 Cyclical Volatility Std. Dev. Of output gap -0,2771 -3,76 -0,18 0,68 0,19 -0,04 0,23 REER Overvaluation Log Index. Overvaluation If > 100 -0,0061 -3,9 -0,06 0,30 0,05 -0,01 0,12 Banking Crises Frequency of years under crisis: 0-1 -0,0289 -7,42 0.00 0.00 -0,58 -2,31 1,73 Total: -0,24 0,93 -0,30 -2,32 2,09 External Conditions: Terms of Trade Growth rate of terms of trade 0,072 4,98 -0,85 0,76 -0,40 -0,35 0,26 Other Period shift Specific to 5 year periods -1,45 0,44 -0,64 -0,13 … Intercept 0,1216 2,79 No. Countries / No. Observations 78 /350 Projected change -4,63 3,62 -0,10 -2,46 3,29 Actual change -8,64 1,99 -0,20 -2,45 2,82 Memorandum Average GDP growth per capita -1,97 0,02 -0,18 -2,63 0,18 Change of GDP in Latin America and the Caribbeans -3,6 1,7 1,8 -0,6 … Contribution of structural policies in Latin America and the Caribbeans -0,68 0,15 0,39 0,07 … Contribution of stabilization policies in Latin America and the Caribbeans 0,23 0,39 0,87 0,61 … Source: Loayza and al. for the panel estimation of the model and the results until 2000; author's estimation for the extension in 2000-05. [ 106 ] Annexes 1 Annex 6 Paraguay Growth Country in Prospects Paraguay Strategy Results Matrix Partnership transport is by far the largest among the logistical road network planning, as well as a modernization of costs faced by private sector enterprises. The main the toll system, and improved budgetary execution. causes for high transport costs include factors such In terms of fluvial transport, there is a urgent need to as the poor condition of the road network, lack of improve dredging and signaling as well as customs coordination among operators and users of fluvial processing. Air transport could benefit, among others ports, and a lack of dredging and signaling along things, from integrated multi-modal sector planning, the fluvial transport system. The inefficiency of the and a separation of the roles of sector planning, customs system further contributes to increasing regulation and airport operations under efficient costs. Currently only 14% of the total road network operators. is in good condition, which largely corresponds to the total proportion of the network which is paved. • Telecommunications. Paraguay continues to face While 50% of imports and 47% of exports (2006) bottlenecks in fixed-line telecommunications services are transported by river, the lack of sufficient due largely to underinvestment and inefficiencies dredging and signaling along major waterways in the public telecoms monopoly (COPACO) that (particular the Río Paraguay) imposes additional undermine growth opportunities in information transport costs estimated at US$150 million/year, technologies and call centers as well as the use of since barges cannot be fully loaded and – in many the internet for e-government and in schools. At areas – can only operate during daylight. Finally, air only 0.9%, the depth of broadband penetration lags transport is also plagued by institutional weaknesses significantly behind MERCOSUR partners such as in sector planning and airport operations as well as Brazil (4%), Argentina (6.6%) and Chile (8.8%) 42. underinvestment in airport infrastructure which limit COPACO’s monopoly on fiber optic cable access has airfreight volumes and passenger traffic. In view of led to internet access charges that are approximately the current constraints and the importance of the 10 times higher than those in the US or 12 times transport sector to private sector development, it will higher than those in Korea 43. While COPACO charges be necessary to strengthen management of the road about US$0.41/minute for calls to the US and Canada network, and to prioritize the allocation of scarce and about US$0.66/minute for calls to Europe, resources to rural roads and to the overall network average prices from Latin American countries that maintenance. In the medium-term, important steps have liberalized internet access 44 run about US$0.03 may include an improvement in the systems used for and US$0.05 respectively. 42. Source: CISCO broad band barometer, IDC, CONATEL, December, 2007. 43. Charges for 1 Mb/s service from COPACO under a 1 year contract run about US$600/month, while 1.44 Mb/s services (without a time-bound contract) by VERIZON (USA) run about US$60/month and 2 Mb/s, services (without a time-bound contract) from Korea Telecom cost about US$50/month. 44. Chile, Perú, Panamá, El Salvador, Guatemala, Colombia, Argentina, México, Brazil, Bolivia, and República Dominicana have been used for comparison. Annexes [ 107 ] 1 Annex 6 Paraguay Growth Country in Prospects Paraguay Strategy Results Matrix Partnership • The Electricity Sector. While Paraguay is blessed neighboring markets. Important priorities in a reform with abundant hydropower generation capacity agenda for the short term include (i) development of (primarily from the Itaipú and Yacyretá dams), key a coherent national policy for land administration and weaknesses in transmission and distribution hamper land access combined with financing to promote land the development of productive activities in both rural acquisition and productive investments by small (or and urban areas, as well as the prospects for true landless) farmers: (ii) efficient agricultural extension formal exports. While electricity coverage reaches services specifically targeted to small farmers ideally 93.8% of all households (just below the LAC average through cooperation with agricultural enterprises and of 94.6%), average per capita consumption per year cooperatives which could transfer know-how; and was only 853 kWh, far lower than in Chile (2.745 (iii) the creation of rural off-farm employment. In the kWh/capita/year) or in Brazil (2.166 kWh/capita/ medium-term, it will be important to develop a strategy year). Moreover, system losses (31.1% overall -- 8.1% of agricultural diversification and to attract additional in transmission and 23% in distribution) are very high investment to rural areas in order to encourage local and well above the 13.5% weighted average for the processing of agricultural products. Perhaps the LAC region. single greatest weakness in terms of natural resource management in Paraguay lies in the forestry sector. • Agriculture and Natural Resources. The agriculture Paraguay has lost at least 80 percent of its forests over sector is the mainstay of Paraguay’s economy, the last 50 years and losses of 500 ha/day occurred representing approximately 21% of GDP and 55% of between 1966 and 1991. Of the remaining 2 million exports. It also employs about 32% of the national ha in the Upper Parana Atlantic Forest (UPAF, i.e. labor force. During 1991-2005 the agriculture sector’s forests east of the Paraguay River), only an estimated share of GDP grew at a rate of 3.7% annually and 800,000 are still considered productive. This is due experienced a shift in production, away from cotton to destructive logging practices that have degraded and increasingly concentrated in soy and beef, which the forests, and a result of deforestation that has together represent about 90% of total exports. Although fragmented much of the UPAF into unmanageably overall productivity in the sector has increased, that small remnant patches. While deforestation appears of small farmers has deteriorated, thus contributing to have slowed recently in the east -- due both to to an increase in extreme poverty in the rural areas. resource depletion and some success with a “Zero The uneven distribution of agricultural land, a high Deforestation� law -- it seems to have now moved concentration of both production and exports in a west into the Arid Chaco, which is home to 78 percent few products, and the lack of off-farm employment of Paraguay’s remaining native forests. and processing of agricultural crops in rural areas, are among the most pressing challenges. Paraguay’s • Business Climate: Paraguay’s overall ranking land ownership GINI coefficient is the highest in the dropped from 108 in the 2008 report to 115, which world. The sector is also faced with limited access to is below the average for LAC and for low-middle [ 108 ] Annexes 1 Annex 6 Paraguay Growth Country in Prospects Paraguay Strategy Results Matrix Partnership income countries (see Table 1). The change reflects in the lowest quartile. Improvements in ranking stronger downward shifts in four areas: “starting a were achieved in two areas - “closing a business� business�, “registering property�, “getting credit� and and enforcing contracts�, but Paraguay continues “trading across borders�. While Paraguay continues to lag behind comparator countries in those areas. to fare comparatively well in the first three areas, Paraguay’s weakest areas are “employing workers�, the deterioration in the latter area puts the country “trading across borders�, and “closing a business�. Table 4: Doing Business in Paraguay: A comparison Area of Doing Business Paraguay LAC average Low-middle income countries (average) overall ranking 115 92 103 Starting a Business 82 93 104 Construction Permits 96 79 102 Employing Workers 177 88 95 Registering Property 70 99 95 Getting Credit 68 73 85 Protecting Investors 53 81 91 Paying Taxes 102 107 102 Trading Across Borders 138 89 99 Enforcing Contracts 103 113 100 Closing a Business 116 99 105 Annexes [ 109 ] 1 Annex 7 ParaguayAreas Principal of Assistance Country Partnership Strategy by Donor Results Matrix Development Governance & Poverty Reduction Sustainable Growth Challenges Anticorruption Modernization of the State/Tax and Expenditure Management Social Inclusion / Participation Macro Management/Financial Environmental Management/ Agrarian Reform / Rural Water and Sanitation Consensus Building Partner Poverty Alleviation SME Development Activity Anticorruption Development Vulnerability Education Transport Forestry Health Power IBRD X X X X X X X X X X X X IFC X X IDB X X X X X X X X X X X X X X IMF X X UNDP X X X X X X X X UNICEF X X X X X X UNFPA X X X PAHO X EU X X X X X X X IFAD X X X FAO X X X IICA X X X CAF X MERCOSUR X X X X X Taiwan X X X X X Japan / JICA X X X X X X X X X X X X X Germany / GTZ X X US/USAID X X X X X X X Spain X X X Korea X X X X X X Chile X X X Source: Staff assessment based on consultations with International Community, UNDP, and data from the External Debt Department of the Ministry of Finance. [ 110 ] Annexes 1 Annex A2 Country Paraguay at Partnership Strategy Results Matrix a Glance Latin Lower- America middle- POVERTY and SOCIAL Paraguay & Carib. income 2007 Population, mid-year (millions) 6,1 563 3.437 GNI per capita (Atlas method, US$) 1.710 5.540 1.887 Development diamond* GNI (Atlas method, US$ billions) 10,5 3.118 6.485 Life expectancy Average annual growth, 2001-07 Population (%) 1,9 1,3 1,1 Labor force (%) 3,6 2,1 1,5 Most recent estimate (latest year available, 2001-07) GNI Gross per primary Poverty (% of population below national poverty line) 36 .. .. capita enrollment Urban population (% of total population) 58 78 42 Life expectancy at birth (years) 72 73 69 Infant mortality (per 1,000 live births) 32 22 41 Acces to improved water source Child malnutrition (% of children under 5) 4 5 25 Access to an improved water source (% of population) 61 91 88 Paraguay Lower-middle-income group Literacy (% of population age 15+) 95 90 89 Gross primary enrollment (% of school-age population) 104 118 111 Male 106 120 112 Female 103 116 109 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1987 1997 2006 2007 Economic ratios* GDP (US$ billions) 3,5 8,9 9,3 12,2 Gross capital formation/GDP 25,1 26,5 19,6 18,0 Trade Exports of goods and services/GDP 26,4 44,0 53,7 50,9 Gross domestic savings/GDP 16,5 11,7 15,1 15,0 Gross national savings/GDP 14,4 14,3 24,8 21,1 Current account balance/GDP .. -7,3 0,8 0,2 Domestic Capital savings formation Interest payments/GDP .. 1,1 1,8 1,3 Total debt/GDP .. 27,7 36,9 29,1 Total debt service/exports 22,0 6,3 7,3 6,4 Present value of debt/GDP .. .. .. .. Indebtedness Present value of debt/exports .. .. .. .. Paraguay Note: 2007 data are preliminary estimates. Lower-middle-income group * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Annexes [ 111 ] 1 Annex A2 Country Paraguay at Partnership Strategy Results Matrix a Glance (average annual growth) 1987-97 1997-07 2006 2007 2007-11 Growth of capital and GDP (%) GDP 3,6 1,8 4,3 6,8 4,2 GDP per capita 1,1 -0,2 2,4 4,8 2,2 25 20 Exports of goods and services 11,9 3,0 14,6 9,6 2,0 15 10 STRUCTURE of the ECONOMY 1987 1997 2006 2007 5 (% of GDP) 0 -5 02 03 04 05 06 07 Agriculture 27,3 18,5 20,2 22,0 -10 Industry 22,5 22,7 20,4 20,0 -15 Manufacturing 14,1 15,4 13,7 12,8 -20 GCF GDP Services 50,1 58,8 59,3 58,0 Household final consumption expenditure 76,4 76,9 73,7 74,1 General gov't final consumption expenditure 7,1 11,4 11,2 10,8 Imports of goods and services 34,9 58,8 58,2 53,9 Growth of exports and imports (%) (average annual growth) 1987-97 1997-07 2006 2007 20 Agriculture 4,4 3,8 3,4 14,3 15 Industry 3,4 0,5 1,8 1,0 10 Manufacturing -0,5 0,4 2,5 -1,2 5 0 Services 3,5 1,4 5,7 5,3 -5 02 03 04 05 06 07 Household final consumption expenditure 3,9 0,6 1,3 11,6 -10 General gov't final consumption expenditure 9,6 0,3 4,0 5,3 -15 Gross capital formation 6,5 -1,3 19,8 -6,7 Exports Imports Imports of goods and services 14,0 -0,4 16,5 10,8 PRICES and GOVERNMENT FINANCE 1987 1997 2006 2007 Inflation (%) Domestic prices (% change) 25 Consumer prices 21,8 6,9 9,6 8,1 20 Implicit GDP deflator 30,3 4,3 8,5 10,2 15 Government finance 10 (% of GDP, includes current grants) 5 Current revenue 8,1 16,9 18,3 17,6 0 Current budget balance 1,5 2,3 4,6 4,6 02 03 04 05 06 07 Overall surplus/deficit 0,7 -2,3 0,5 1,0 GDP deflator CPI [ 112 ] Annexes 1 Annex A2 Country Paraguay at Partnership Strategy Results Matrix a Glance TRADE (US$ millions) 1987 1997 2006 2007 Export and import levels Total exports (fob) 803 3.328 4.401 5.471 (US$ mill.) Soy products 125 494 439 890 7.000 Cotton 101 73 34 47 6.000 5.000 Manufactures 450 2.239 2.495 2.686 4.000 Total imports (cif) 1.049 4.192 5.022 6.027 3.000 Food 532 1.252 533 451 2.000 1.000 Fuel and energy 103 267 691 715 0 Capital goods 14 928 1.754 2.577 01 02 03 04 05 06 07 Export price index (1994=100) .. 116 96 113 Exports Imports Import price index (1994=100) .. 128 126 153 Terms of trade (1994=100) .. 91 76 74 BALANCE of PAYMENTS (US$ millions) 1987 1997 2006 2007 Current account balance Exports of goods and services 1.036 3.983 5.154 6.324 to GDP (%) Imports of goods and services 1.304 4.847 5.406 6.487 2 Resource balance -267 -864 -252 -163 1 Net income -93 33 -96 -184 0 -1 01 02 03 04 05 06 07 Net current transfers 27 181 426 373 -2 Current account balance -334 -650 78 26 -3 Financing items (net) 347 867 309 701 -4 -5 Changes in net reserves -13 -216 -387 -727 Memo: Reserves including gold (US$ millions) .. 846 1.703 2.462 Conversion rate (DEC, local/US$) .. 2.177,9 5.635,5 5.032,7 Annexes [ 113 ] 1 Annex A2 Country Paraguay at Partnership Strategy Results Matrix a Glance EXTERNAL DEBT and RESOURCE FLOWS (US$ millions) 1987 1997 2006 2007 Total debt outstanding and disbursed 2.522 2.461 3.422 3.561 794 217 18 IBRD 372 143 234 217 IDA 44 33 19 18 809 Total debt service 239 279 421 450 1131 IBRD 65 36 39 38 IDA 1 2 2 2 Composition of net resource flows 592 Official grants 15 23 12 7 A - IBRD D - Other E - Bilateral Official creditors 60 145 -15 -36 B - IDA multilateral F - Private C- IMF G - Short-term Private creditors 35 84 -10 61 Foreign direct investment (net inflows) 5 236 171 244 Portfolio equity (net inflows) 0 0 0 0 World Bank program Commitments 0 40 74 30 Disbursements 19 41 32 11 Principal repayments 37 28 28 29 Net flows -18 14 4 -18 Interest payments 30 11 13 11 Net transfers -48 3 -8 -29 [ 114 ] Annexes 1 Annex B2 ParaguayIndicators* Selected of Bank Portfolio Country Partnership Strategy Results Matrix Performance and Management As Of Date 02/23/2009 Indicator 2006 2007 2008 2009 Portfolio Assessment Number of Projects Under Implementation a 6 4 4 4 Average Implementation Period (years) b 3,2 2,9 3,4 4,0 Percent of Problem Projects by Number a, c 33,3 50,0 0,0 50,0 Percent of Problem Projects by Amount a, c 19,1 74,4 0,0 40,1 Percent of Projects at Risk by Number a, d 50,0 75,0 50,0 75,0 Percent of Projects at Risk by Amount a, d 39,6 93,0 63,8 88,3 Disbursement Ratio (%) e 26,5 23,7 10,0 4,7 Portfolio Management CPPR during the year (yes/no) YES YES YES NO Supervision Resources (total US$) 677 626 380 274 Average Supervision (US$/project) 85 89 76 68 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 34 4 Proj Eval by OED by Amt (US$ millions) 768,0 101,8 % of OED Projects Rated U or HU by Number 39,4 33,3 % of OED Projects Rated U or HU by Amt 41,5 14,7 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank’s country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank’s portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. Annexes [ 115 ] 1 Annex B3 Paraguay Country Proposed IBRD/IDA Base-Case Strategy Partnership Program Lending Results Matrix As Of Date February 23, 2009 Fiscal year Proj ID US$(M) Strategic Rewards Implementation b (H/M/L) b Risks (H/M/L) Identified Lending 265,0 2009 Public Sector DPL 1 100,0 H H 2010 Land Access and Administration 35,0 H H Public Sector DPL 2 50,0 H H Secondary Education III 30,0 H M Electricity Transmission a/ H M 2012 Public Sector DPL 3 50,0 H H 2011-2013 Lending to be identified 235,0 tbd tbd Overall Result 500,0 a. Amount to be determined [ 116 ] Annexes 1 Annex B3 Country Paraguay - MIGA Program, IFC andPartnership FY 2006-2009 Strategy Results Matrix as of 1/31/09 2006 2007 2008 2009 IFC Commitments (US$m) 0 0 0 63,4 Sector (%) Infrastructure -- -- -- 95 Financial Sector -- -- -- 5 Investment instrument(%) Loan -- -- -- 95 Guarantee -- -- -- 5 MIGA guarantees (US$m) Annexes [ 117 ] 1 Annex B4 Paraguay Country Summary Partnership of Nonlending Strategy Results Matrix Services As Of Date February 23, 2009 Product Completion Cost Audiencea Objectiveb FY (US$000) 1. Recent completions ESW/Dialogue Land Taxes FY07 202 BB PD Public debate Joint Integrated Fiduciary Assessment FY07 173 BB Gov/Donor Knowledge - Follow Up FY08 237 BB Gov/Donor Public debate Education Sector Study FY08 153 BB PD Prob. solving Policy Notes FY08 409 BB Gov/PD Public debate Mercosur Trade Study FY09 130 BB Gov Public debate Transport Sector Assmt FY09 80 BB PD Public debate Social Protection Dialogue FY09 40 BB Gov Knowledge Grants Institutional Support to Congress FY08 400 TF PD Prob. solving Social Capital Strenghtening for Poor Comunities FY08 867 TF PD Prob. solving 2. Underway ESW Programmatic Poverty Assesment FY09 300 BB Gov/PD Knowledge - with women in the economy grant FY10 25 BB Gov/PD Knowledge Fee For Service Payments System (w/ FFS) FY08-12 319 FFS Gov Prob. solving Grants JSDF Indigenous Land Regularization FY08-12 1710 TF PD Prob. solving JSDF Development of Indigenous Communities FY08-12 1599 TF PD Prob. solving DFID Governance Dialogue FY08-09 170 TF PD Public Debate Compensation for Environmental Services FY09-12 200 Dev IDEA/PB Prob. solving Market Place [ 118 ] Annexes 1 Annex B4 Paraguay Country Summary Partnership of Nonlending Strategy Results Matrix Services As Of Date February 23, 2009 Product Completion Cost Audiencea Objectiveb FY (US$000) 3. Envisaged ESW Quick Response Notes (civil society, taxation, FY10-13 TBD BB Gov/PD Public Debate pensions, etc) Programmatic Public Sector Reviews (civil service, FY10-11 TBD BB Gov/PD Knowledge SOEs, PER) State of the Environment Report FY10 TBD BB Gov/PD Knowledge Municipal Service Provision in Asuncion FY10 TBD BB PD Knowledge Programatic Dialogue on Sources of Growth FY10-11 TBD BB PD Public Debate Health Service Delivery (regulation) FY10-11 TBD BB Gov/PD Knowledge Programatic Social Protection Dialogue FY10-11 TBD BB Gov/PD Knowledge (CCTs, labor market, etc.) Financial Sector NLTA FY10-13 TBD BB/TF Gov Knowledge Programatic Poverty NLTA (continued from 2. FY10-13 TBD BB Gov/PD Knowledge above) Participatory Policy Notes FY12-13 TBD BB Gov/PD Public Debate Grants to be mobilized GEF in Support of Biodiversity and the North FY09-14 4500 GEF PD Prob. solving Atlantic Forest IDF for Congress 2 FY09-13 400 TF Congress Prob. solving TFSCB Country Statistical Strategy FY09-13 103 TF Gov Prob. solving TFSCB Statistical Capacity Building FY09-13 394 TF Gov Prob. solving Governance TFs (actual mobilization depends FY09-15 1500 TF Gov Prob. solving on awards rules) JSDF for Inclusion of Vulnerable Groups FY10-15 1000 TF PD Prob. solving Communication for Development Grant FY10-13 200 TF Gov Prob. solving (to be mobilized) a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. Annexes [ 119 ] 1 Annex B6 Country Paraguay - Partnership Key Economic Strategy Results Matrix Indicators Actual Estimate Projected Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 National accounts (as % of GDP) Gross domestic producta 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 Agriculture 21,7 21,1 20,2 22,0 22,0 20,0 19,8 19,8 19,8 Industry 21,2 20,7 20,4 20,0 19,4 19,7 19,6 19,6 19,3 Services 57,1 58,2 59,3 58,0 58,5 60,2 60,6 60,6 60,8 Total Consumption 84,8 84,6 84,9 85,0 88,9 89,1 88,2 86,9 86,6 Gross domestic fixed investment 18,7 19,3 19,1 17,4 17,6 15,7 16,2 17,0 17,4 Government investment 4,0 4,1 4,2 3,8 2,6 4,0 4,6 4,8 4,9 Private investment 14,7 15,2 14,8 13,6 15,0 11,7 11,6 12,2 12,5 Exports (GNFS)b 46,0 51,2 53,7 50,9 56,4 51,0 52,3 54,4 55,1 Imports (GNFS) 50,0 55,6 58,2 53,9 60,5 55,8 56,7 58,3 59,1 Gross domestic savings 15,2 15,4 15,1 15,0 11,1 10,9 11,8 13,1 13,4 Gross national savingsc 17,8 17,8 24,8 21,1 13,0 12,9 13,4 14,5 14,8 Memorandum items Gross domestic product 6.950 7.473 9.275 12.222 15.421 14.277 14.290 14.581 15.237 (US$ million at current prices) GNI per capita (US$, Atlas method) 1.080 1.240 1.490 1.710 2.070 2.260 2.320 2.270 2.310 Real annual growth rates (%, calculated from 94 prices) Gross domestic product at market prices 4,1 2,9 4,3 6,8 5,8 -0,5 1,5 3,0 4,5 Gross Domestic Income 5,7 1,3 4,5 8,4 9,3 0,6 1,1 2,7 4,0 Real annual per capita growth rates (%, calculated from 94 prices) Gross domestic product at market prices 2,1 0,9 2,4 4,8 4,0 -2,2 -0,2 1,2 2,7 Total consumption 2,6 2,8 -0,3 8,9 10,5 1,9 -1,2 -0,4 1,9 Private consumption 2,5 2,0 -0,6 9,5 11,3 0,7 -0,8 -0,3 2,2 Balance of Payments (US$ millions) Exports (GNFS)b 3.489 4.045 5.218 6.324 8.701 7.274 7.471 7.937 8.392 Merchandise FOB 2.861 3.352 4.409 5.471 7.951 6.510 6.699 7.126 7.538 Imports (GNFS)b 3.406 4.158 5.406 6.487 9.334 7.966 8.109 8.503 8.998 Merchandise FOB 3.105 3.814 5.022 6.027 8.763 7.410 7.543 7.923 8.390 Resource balance 83 (113) (188) (163) (633) (692) (638) (566) (606) Net current transfers 131 160 426 373 374 314 319 332 346 Current account balance 79 (11) 219 26 (344) (404) (405) (359) (394) [ 120 ] Annexes 1 Annex B6 Country Paraguay - Partnership Key Economic Strategy Results Matrix Indicators Actual Estimate Projected Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net private foreign direct investment 32 47 179 194 209 105 110 115 121 Long-term loans (net) -30 -138 -25 -96 -48 199 -1 131 -4 Official -80 -40 -15 -67 -34 217 94 139 29 Private 50 -98 -10 -29 -14 -18 -95 -9 -33 Other capital (net, incl. errors & ommissions) 99 248 14 603 678 -690 259 220 407 Change in reservesd -180 -146 -387 -727 -495 790 38 -107 -130 Memorandum items Resource balance (% of GDP) 1,2 -1,5 -2,0 -1,3 -4,1 -4,8 -4,5 -3,9 -4,0 Public finance (as % of GDP at market prices)e Current revenues 18,4 18,2 18,3 17,6 17,8 16,6 17,2 17,7 18,3 o/w tax revenues 11,9 11,8 12,0 11,4 12,2 10,8 11,0 11,6 12,3 o/w royalties 4,3 3,9 4,0 3,6 3,2 3,5 4,0 4,0 4,0 Current expenditures 12,9 13,5 13,7 12,9 12,4 14,2 14,2 14,2 14,2 o/w personnel spending 7,2 7,2 7,5 7,2 7,3 7,8 7,6 7,5 7,3 Current account surplus (+) or deficit (-) 5,5 4,8 4,6 4,6 5,4 2,4 3,0 3,5 4,1 Primary surplus (+) or deficit (-) 2,7 2,0 1,5 1,8 3,4 -1,0 -0,9 -0,5 0,1 Capital expenditure and Net Lending 3,9 4,0 4,2 3,7 2,6 4,0 4,6 4,8 4,9 Foreign financing -1,6 -1,1 -0,6 -1,0 0,0 1,7 1,4 1,6 1,5 Monetary indicators M2/GDP 14,4 15,0 15,3 18,2 17,2 17,9 18,2 18,2 18,2 Growth of M2 (%) 24,6 16,1 15,3 40,2 10,3 10,3 10,1 9,2 10,8 Total private sector credit growth (%) 13,0 14,0 6,8 46,3 48,6 … … … … Price indices( YR94 =100) Merchandise export price index 100,4 91,8 96,1 113,3 131,5 120,5 121,7 122,8 123,7 Merchandise import price index 80,8 104,9 126,0 153,4 171,7 154,6 157,3 159,6 162,0 Merchandise terms of trade index 124,3 87,6 76,3 73,8 76,6 77,9 77,4 77,0 76,3 Real exchange rate (US$/LCU)f 58,4 56,4 62,0 69,3 76,9 70,2 68,5 67,9 67,7 Consumer price index (% change) 4,3 6,8 9,6 8,1 10,2 7,0 6,5 6,0 6,0 GDP deflator (% change) 11,8 8,1 8,5 10,2 10,2 7,0 6,5 6,0 6,0 a. GDP at market prices b. “GNFS� denotes “goods and nonfactor services.� c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. “LCU� denotes “local currency units.� An increase in US$/LCU denotes appreciation. Annexes [ 121 ] 1 Annex B7 Paraguay Key Country Exposure Partnership Strategy Results Matrix Indicators As of 3/23/2009 Actual Estimate Projected Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 Total debt outstanding and 3.331 3.054 3.022 3.092 3.088 3.267 3.437 3.427 3.456 disbursed (TDO) (US$m)a Net disbursements (US$m)a -30 -138 -25 -96 -48 199 -1 131 -4 Total debt service (TDS) (US$m)a 478 476 421 435 445 530 528 503 506 Debt and debt service indicators (%) TDO/XGSb 88,0 69,2 51,6 44,0 32,9 41,6 42,8 40,4 38,6 TDO/GDP 47,9 41,7 32,6 25,3 20,0 22,9 24,0 23,5 22,7 TDS/XGS 12,6 10,8 7,2 6,2 4,7 6,8 6,6 5,9 5,7 Concessional/TDO 26,3 25,8 25,8 25,1 IBRD exposure indicators (%) IBRD DS/public DS 13,9 11,8 12,3 12,8 14,4 11,8 12,8 15,3 14,2 Preferred creditor DS/public 90,2 84,6 79,9 80,8 72,9 80,3 83,8 94,8 96,7 DS (%)c IBRD DS/XGS 1,2 0,8 0,6 0,6 0,5 0,6 0,7 0,7 0,6 IBRD TDO (US$m)d 246 223 234 227 222 297 329 369 371 Of which present value of guarantees (US$m) … … … … … … … … … Share of IBRD portfolio (%) 0,2 0,2 0,2 0,2 0,2 0,3 0,3 0,4 0,4 IDA TDO (US$m)d 22 21 19 18 17 15 14 12 11 IFC (US$m) Loans 0,0 0,0 15,0 0,0 0,0 61,0 .. .. .. Equity and quasi-equity /c 0,0 0,0 0,0 0,0 0,0 0,0 .. .. .. MIGA MIGA guarantees (US$m) Source: Central Bank of Paraguay and staff estimates. a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. Excludes debt of Itaipu and Yacyreta b. “XGS� denotes exports of goods and services, including workers’ remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. [ 122 ] Annexes 1 Annex B8 Country Partnership Paraguay Operation Strategy Results Portfolio (IBRD/IDA Matrix and Grants) As of 1/31/2009 (In US Dollars Millions) Committed Outstanding FY Committed Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2009 Banco Continent 0,00 0,00 0,32 0,00 0,00 0,00 0,32 0,00 2009 Interbanco 0,00 0,00 0,39 0,00 0,00 0,00 0,20 0,00 2003/ 2009 UABL 60,00 0,00 0,00 0,00 60,00 0,00 0,00 0,00 Total Portfolio: 60,00 0,00 0,71 0,00 60,00 0,00 0,52 0,00 Annexes [ 123 ] 1 Annex B8 Country Partnership Paraguay Statement Strategy of IFC’s Held Results Matrix and Disbursed Portfolio Closed Projects 47 IBRD/IDA * Total Disbursed (Active) 34,5 of which has been repaid 1,9 Total Disbursed (Closed) 830,6 of which has been repaid 793,1 Total Disbursed (Active + Closed) 865,1 of which has been repaid 795,0 Total Undisbursed (Active) 119,0 Total Undisbursed (Closed) 0,0 Total Undisbursed (Active + Closed) 119,0 Active Projects Difference Between Expected and Actual Last PSR Supervision Rating Original Amount in US$ Millions Disbursements b/ Project Project Name Development Implementation Fiscal IBRD IDA GRANT Cancel. Undisb. Orig. Frm ID Objectives Progress Year Rev'd P069269 PY Pilot Community S S 2002 18 9 Development Project c/ P073526 PY Education Reform MS MU 2004 24 1,5 1,5 Project P082026 PY Road Maintenance S MS 2007 74 71,0 38,1 P088799 PY Sustainable Agric. U U 2008 37,5 37,5 1,0 and Rural Devlp. Overall 153,5 119,0 40,5 Result a. A $63M Water Project is expected to be approved on March 25,2009, the last project to be approved under the previous CAS. b. Intended disbursements to date minus actual disbursements to date as projected at appraisal. c. Additional Finance was approved for this project in June 2008. [ 124 ] Annexes C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P C P S España World BankS C P S C P S C P S C P S C Paraguay 2028 c/ Brasilia PBuilding C P S CUrano Asunción S -C P S C P S C P S C P S C P 5th Floor C595 C P S Ph: Fax: P 595 21 664 000 S002 C P S C P S C P S C P S C 21 664 P S C P S C P S C P S C P S C P C P S Cwww.bancomundial.org.py C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C C P S C P S C P S C P S C P S C P S C P C P S C P S C P S C P S C P S C P S C