1. law, govt and politics
2. government

The World Bank
For Official Use Only
Report No. 27341-PA
MEMORANDUM OF THE PRESIDENT
OF THE
INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT
TO THE
EXECUTIVE DIRECTORS
ON A
COUNTRY ASSISTANCE STRATEGY
OF THE
WORLD BANK
FOR THE
REPUBLIC OF PARAGUAY
November 26,2003
COUNTRYMANAGEMENT
UNIT
ARGENTINA, CHILE, PARAGUAY
Y URUGUAY
LATINAMERICA AND THE CARIBBEAN REGION
This document has a restricted distribution and may be used by recipients only in the performance of their
official duties. I t s content may not otherwise be disclosed without World Bank authorization.
CURRENCY EQUIVALENTS
Currency Unit: Guarani
EXCHANGE RATE
Guarani 6,100 = U S $ l (November 2003)
FISCAL YEAR
January 1 - December 31
ABBREVIATIONS & ACRONYMS
AAA
AIEPI
BCP
BNF
CAE
CAS
CDD
CEM
CIF
CFAA
CPAR
CPPR
cso
DGEEC
DO
ECLAC
ERL
ESW
IBRD
IDB
IDF
IFC
IF1
IMF
IP
FOB
FSAL
FTAL
FY
GDP
GEF
MDG
MIGA
MSC
NGO
OED
PARN
PER
Analytical and Advisory Assistance
Atenci6n Integrada a las Enfermedades Prevalentes de la Infancia
Central Bank o f Paraguay (Banco Central de Paraguay)
National Development Bank (Banco Nacional de Fomento)
Country Assistance Evaluation
Country Assistance Strategy
Community Driven Development
Country Economic Memorandum
Cost, Insurance and Freight
Country Financial Accountability Assessment
Country Procurement Assessment Report
Country Portfolio Performance Review
Civil Society Organization
D i r e c c i h General de Estadisticas, Encuestas y Censos
Development Objectives
Economic Commission for Latin America
Economic Recovery Adjustment Loan
Economic and Sector Work
International Bank for Reconstruction and Development
Inter-American Development Bank
Institutional Development Fund
International Finance Corporation
International Financial Institutions
International Monetary Fund
Implementation Progress
Free on Board
Financial Sector Loan
Financial Sector Technical Assistance Loan
Fiscal Year
Gross Domestic Product
Global Environment Facility
Millennium Development Goals
Multilateral Investment Guarantee Agency
Minimum Subsidy Concession
N o n Governmental Organization
Operations Evaluation Department
Natural Resource Administration Project
Public Expenditure Review
i
FOR OF'FICZAL USE ONLY
PETROPAR
PI
PIU
PRODECO
PRSP
TA
UN
UNDP
VAT
WBI
National Petroleum Company
Performance Indicators
Project Implementation Unit
Community Development Project (Proyecto de Desarrollo Comunitario)
Poverty Reduction Strategy Paper
Technical Assistance
United Nations
United Nations Development Program
Value Added tax
World Bank Institute
IBRD
Vice President
Country Director
Lead Economisflask Manager
David D e Ferranti
Axel van Trotsenburg
Peter M. Hansen
..
11
This document has a restricted distribution and m a y be used b y recipients o d y in
the performance o f their official duties. I t s contents m a y not be otherwise disclosed
without W o r l d Bank authorization.
Country Assistance Strategy
for
Republic of Paraguay
TABLE OF CONTENTS
EXECUTIVE
SUMMARY
INTRODUCTION
I. COUNTRYCONTEXT
POLITICAL SETTING
GOVERNANCE
AND bISTITUTIONAL WEAKNESSES
ECONOMIC
PERFORMANCE
11. PARAGUAY’S
DEVELOPMENT
CHALLENGES
GOVERNMENT’S
DEVELOPMENT
STRATEGY
BANKASSESSMENT
MEDIUM
TERMOUTLOOK
111. - WORLDBANKASSISTANCESTRATEGY
FEEDBACK
FROM CONSULTATIONS WITH CIVIL SOCIETY
PROPOSED
ASSISTANCE
PROGRAM,FY04-07
CAS OBJECTIVES
BANKSTRATEGY
BASE
CASELENDING
HIGHCASE
-
-
Low CASE
LENDING TRIGGERS
-
FIDUCIARYASSESSMENTS
AAA AND ESW
WORLD BANK INSTITUTE
OUTREACH
AID COORDINATION
IFC
MIGA
IV. IBRD EXPOSURE AND RISKMANAGEMENT
DEBTAND IBRD EXPOSURE INDICATORS
K E Y RISKSAND STRATEGY FOR MANAGING
THEM
EXPECTED
RESULTSOF THE CAS
CAS PROGRAM
MATRIX
(FY04-FY07)
ATTACHMENT TO CAS PROGRAM MATRIX-DESCRIPTION
OF PROPOSED INVESTMENT
PROJECTS AND DIAGNOSTIC
STUDIES
...
111
V
1
1
1
4
6
9
11
14
15
17
18
19
19
19
22
23
23
23
25
26
27
28
28
29
29
30
30
31
33
35
38
BOXES
BOX 1. PUBLIC PERCEPTIONS IN PARAGUAY .................................................................................
BOX 2. POVERTY PROFILE IN PARAGUAY ......................................................................................
3
7
TABLES
TABLE 1. PROGRESS ON MILLENNIUM DEVELOPMENT GOALS.........................................
TABLE 2. MEDIUM TERM PROJECTIONS, ADJUSTMENT SCENARIO ...............................
TABLE 3. PROPOSED LENDING, FY 04-07 ....................................................................................
TABLE 4. LENDING PROGRAM TRIGGERS, FY 04-07 ...............................................................
TABLE 5. PROPOSED ECONOMIC AND SECTOR WORK, FY 04-07 ......................................
9
16
22
25
27
ANNEXES
PROGRESS TOWARDS REACHING THE MDGS IN PARAGUAY.................................
46
EVALUATION OF BANK ASSISTANCE AND PORTFOLIO IMPLEMENTATION ...... 55
SUMMARY OF CONSULTATIONS WITH CIVIL SOCIETY ...
AID COORDINATION...............................................................
........................... 66
....................................
ANNEX A 1 PARAGUAY AT A GLANCE ..........
ANN.EXB2 SELECTED INDICATORS OF BANKPORTFOLIO PERFORMANCEAND MANAGEMENT
... 7 1
ANNEX B3 IBRDIIDA PROGRAMSUMMARY ....................................................................................... 72
ANNEX 1.
ANNEX 2.
ANNEX 3.
ANNEX 4.
ANNEX B4 SUMMARY OF NONLENDING
SERVICES ...................................... ...................................
ANNEX B6 KEY ECONOMIC INDICATORS .. ...................................................................................
ANNEX B7 KEY EXPOSURE INDICATORS ... ...................................................................................
ANNEX B8 OPERATIONSPORTFOLIO(IBRDLDA AND GRANTS)
.............................
..............................
73
74
76
77
This document was prepared by a World Bank team led by Peter M. Hansen. I t reflects the views and
contributions of the entire Paraguay team, in particular, Omar Arias, Carter Brandon, Sandra Cesilini, Juan
Gaviria, Maria Gonzalez de Asis, Jesko Hentschel, Lisandro Martin, Maria Luisa Masutti, Zeinab Partow and
Felipe Saez. Contributions are also acknowledged from the IFC and MIGA. Valuable assistance was
provided by Maritza Bojorge, Gloria Dure and Florencia Liporaci.
Special appreciation i s extended to officials of the Paraguay Government and to representatives o f Paraguayan
civil society who participated in several day-long consultations on the Bank’s past activities and the proposed
program of assistance.
iv
Country Assistance Strategy for the Republic of Paraguay
Executive Summary
Paraguay i s emerging from a prolonged period of economic stagnation that has
left i t s population impoverished. During this period, Bank lending was low due to poor
portfolio performance, economic management and governance. The Administration of
President Nicanor Duarte Frutos, which took office in August of 2003, i s determined to
reverse this negative trend and i s building a coalition of political parties to fight
corruption and introduce significant economic reforms. The Government has requested
active support from the international community, including the World Bank. This CAS
presents the Bank’s strategy for re-engagement with Paraguay.
Paraguay’s economy stagnated during the past five years, with per capita incomes
falling b y 15 percent in local currency terms, and from US$1810 to US$1170 as
measured b y the World Bank Atlas methodology. Poverty stood at 34 percent o f the
population in 2001 and i s now likely to be higher. Much o f the decline in per capita
income i s due to economic turmoil in the southern cone, which resulted in significant
devaluations for all countries in the region. But poverty increased in Paraguay also as a
result o f political instability, drift in economic policies and the inefficiencies o f a highly
informal and corrupt system. During this period, public finances weakened significantly
and, until lately, the Government has been unable to stay current with salaries, pensions
and debt service.
The political situation stabilized during 2003 with the election of President Duarte
Frutos on a campaign to fight corruption and improve economic management, with an
emphasis on social and fiscal responsibility. The Government’s development strategy
aims at (i)
a recovery of confidence in state institutions through a sustained fight against
corruption and the modernization of public administration; (ii)
sustainable growth
through a change in the economic model from triangular trade and public employment
towards agro-industry and export diversification; and (iii)
an increase in human capital
through higher investment in health and education and policies that enhance equity and
increase access to these services.
Although the political opposition controls one house o f Congress, all parties agree
that the economy has reached a breaking point and that fundamental changes are needed.
The President has capitalized on this situation by striking an agreement with all political
parties to approve a package o f core economic reforms on a priority basis. These include
a fundamental tax reform, rationalization of the government pension system, and
financial sector reforms to strengthen the banking system. These laws have been
prepared b y a quality economic team and sent to Congress. Assuming approval o f these
reforms, economic growth could reach 3.5 percent per annum (about one percent per
capita) b y 2007.
V
On the strength of these reforms, the Administration approached multilateral and
domestic creditors for support. I t has already reached historic agreements with domestic
bond holders to reschedule the Treasury bill stock and with the IMF on a Standby
Arrangement, the first in 46 years, which i s scheduled to be considered b y the IMF Board
on December 15,2003.
The proposed Bank assistance strategy i s closely aligned with the Government’s
development objectives. Overall, the strategy aims to restore confidence in the economy
and lay the basis for sustainable growth and poverty reduction. To this end, the CAS
supports (i)
the fiscal and financial reforms the Administration has sent to Congress; (ii)
improved governance and transparency in public administration; (iii)
sustained growth,
particularly in the rural areas where poverty i s concentrated and deepest; and (iv) social
inclusion, to improve the coverage and efficiency of basic social services to help
Paraguay meet the millennium development goals.
The proposed base case lending program for FY04-07 i s for US$325 million, of
which US$SO million, or about 25 percent, are envisaged for two adjustment operations,
the proposed economic recovery loan to support stabilization of public finances and help
finance the Government’s immediate financing needs, and a subsequent financial sector
loan to strengthen the banking system. The reforms to be supported by both operations
are essential for sustaining recently regained macroeconomic stability. An appropriate
macroeconomic framework i s currently in place for these loans. In addition, the base
case program includes investment projects that contribute to achieving the Government’s
development objectives in the areas of governance and public administration, economic
growth and social inclusion.
The proposed Bank strategy recognizes the actions the new Administration has
taken to confront corruption, tighten control over i t s finances and build a political
consensus for important economic reforms. The strategy i s nevertheless mindful o f the
long history o f political difficulties and the lack o f institutional capacity that has hindered
reform efforts in the past. In this high-risk / high-reward situation, the Bank’s reengagement strategy i s based on clear performance criteria, and new commitments w i l l
be proposed only in line with the Administration’s progress in building a credible track
record o f economic management and reform.
Paraguay’s continuation in the base case scenario w i l l be subject to satisfactory
progress on a set o f key triggers for public administration, fiscal and financial sector
reforms, and portfolio implementation. In the event these triggers are not met, the
lending program would revert to a set o f core investments aimed to support the
millennium development goals. L o w case lending would be limited to US$120 million,
about one-third o f the base case amount. High case lending could be possible in the
second half o f the CAS period, after the Administrations builds a sustained track record
and has taken incremental actions that would indicate the probability of faster economic
growth.
vi
The principal risk of the proposed strategy i s that the reform program could go off
track soon after an increase in Bank exposure has occurred. This risk i s mitigated b y the
strength o f the political consensus the new Administration has formed and the fact that i t
i s willing to use its political capital at the beginning of i t s term when i t i s strongest. The
Bank’s strategy aims to manage the risk of political backtracking through upfront policy
actions to the adjustment operations, for example, the approval of a banking resolution I’
savings deposit law which i s scheduled for approval by Congress prior to Board
consideration of this CAS.
Other risks facing the program include attempts by vested interests to block the
Administration’s so-far productive campaign against tax evasion and corruption. The
best strategy against such threats i s firm support to an Administration that recognizes the
need to regain international credibility and that can use such support as a evidence o f the
positive results its anti-corruption efforts can bring to Paraguay. In addition, there are
implementation risks of managing a larger portfolio of projects which w i l l need to be
managed carefully throughout the CAS period. The Administration’s decision to set up a
central unit for managing all external assistance i s a welcome step towards improving
implementation capacity, as are the principles for portfolio management that were agreed
during the last CPPR and are presented in Annex 2. Finally, payment risk to the Bank i s
also noteworthy, in view o f the three month suspension o f disbursements earlier this year
during the previous administration. This risk w i l l diminish to the extent the proposed tax
and pension reform laws are approved and implemented.
The planned assistance program, if implemented in support of strong policies,
together with support from other external partners, would help set the country on a new
development path. Indicative outcomes are presented in the CAS Program Matrix. Some
o f the highlights o f these indicators are:
A sounder financial sector that would lower the cost of potential bank failures and
provide a sounder basis for the mobilization o f domestic savings;
Improved transparency and governance in public administration, especially in the
Ministry of Finance which could act as a model for other ministries to follow;
Improved productivity in the rural sector, as evidenced b y the scaling up to the
national level of an improved extension model based on community participation
and improved soil management techniques by 2007; and
Gradual improvement in social indicators, as evidenced by an increase in the
secondary school enrolment rate from 33 percent to 42 percent by 2007, including
a narrowing o f the urban-rural divide, and decreases in the infant and maternalmortality rates by 10 percent b y 2007.
vii
MEMORANDUM OF THE PRESIDENT OF THE IBRD
TO THE EXECUTIVE DIRECTORS ON A
COUNTRY ASSISTANCE STRATEGY
OF THE WORLD BANK
FOR THE
REPUBLIC OF PARAGUAY
Introduction
1.
The last CAS for Paraguay was discussed in April 1997. I t s main objectives were
poverty reduction and state reform. I t recommended a program of 1-2 projects per year
up to about US$50 million per annum, provided that Paraguay maintained an acceptable
level of project performance (less than 25 percent problem projects) and a budget deficit
under 2 percent of GDP. The 1997 CAS built on a steadily increasing portfolio o f
projects during the preceding five years, during which nine investment operations were
approved for a total of US$350 million and which followed an eight year hiatus in
lending (from 1984-1992) during the final years of the Stroessner dictatorship.'
2.
In the event, country-Bank relations deteriorated considerably subsequent to the
last CAS. In early-1998, the Government failed to complete negotiations for an urban
project due to political in-fighting. Later that year, the Region suspendedpreparation o f
new projects due to the Government's non-compliance with its social obligations
associated with the Yacyreta Hydroelectric Project.* Problem projects increased to 50
percent o f the portfolio, and in 1999 the Government flip-flopped in its position regarding
the conversion of a failed sewage project into a vehicle for privatizing the water and
telephone companies. As a result, the Region downscaled the resident mission that had
been established in 1998 to a liaison office. Portfolio performance nevertheless began to
improve in 2000, and specific sector conditions permitted the approval o f two new loans
for community development and education during the past year and a half. A turnaround in country relations now appears to be occurring with the recent change o f
government in August 2003.
-
I. Country Context
Political Setting
Following several years of political volatility, including the assassination o f the
3.
Vice President in 1999, the resignation o f the then-President, and a four-year interim
presidency that presided over a period of steady erosion o f governance and economic
1
Stroessner was ousted by a military coup in February 1989, after which significant financial reforms
were introduced in 1990-91 (in particular, unification o f multiple exchange and interest rates), a
constitutional assembly approved a new Constitution in 1992, and the Bank prepared its initial set o f
yojects for the new democratic era.
A joint Argentine-Paraguay project on the Parana river which the Bank partially financed through loans
to Argentina.
1
decline, a new Administration took office in August 2003 that seems to have strong
legitimacy and willingness to set the country on a different development path.
4.
President Nicanor Duarte Frutos i s the first President of the post-Stroessner era to
be elected without questions of legitimacy. Also for the first time, the President was able
to pick a Vice President o f his own choosing, rather than having to accept a rival from
within the long-ruling Colorado Party. This combination i s proving to be a more
cohesive Executive, especially in i t s relations with Congress, and should improve the
effectiveness of public administration.
5.
President Duarte ran on a platform of fighting corruption and improving the
efficiency of the public sector. He i s perceived by the public to be personally committed
to these goals and has made a credible start by making a public disclosure of his personal
assets, along with requiring the same o f all of his cabinet. In addition, President Duarte
has made widely-respected appointments of several non-Colorado Party members to
important positions in the Cabinet, including the Ministers of Finance and Industry.
These moves have earned initial goodwill among the population as well as with the
opposition parties.
6.
The political balance of power also changed as a result o f the 2003 elections. For
the first time, opposition parties won a clear majority in the Senate, and the Colorado
Party no longer has an absolute hold on power. Making virtue o f necessity, President
Duarte has formed a working alliance with the opposition that culminated in early
October with the signing o f a political accord (Acuerdo Politico) in which all parties in
Congress agreed to pass six major pieces of legislation, including a fiscally responsible
budget, reform o f the tax code and of government pensions, a modern customs code,
financial sector reforms, including the public banks, and an eventual restructuring o f
public enterprises and the central administration. These proposed laws, most o f which
have already been sent to the Congress, are discussed further in Section 11.
7.
In general, the opposition has pledged i t s willingness to cooperate in passing these
laws that are widely acknowledged as needed to restore fiscal viability and to restart the
economy. Indeed, the most challenging opposition to these reforms i s likely to come
from within the Colorado Party, whose members have benefited during two generations
from the existing economic structures.
8.
The President and the opposition have also committed to change a large part of
the Supreme Court, which i s widely viewed as a source of corruption and impunity. As
o f mid-November, three o f the nine Justices have resigned, while impeachment charges
against another three have been introduced b y a coalition of all political parties in the
Congress. The outcome o f this process i s not yet certain. Yet, the “cleansing o f the
Court” i s widely supported by the population and i s viewed as a necessary condition for
restoring the rule o f law, as well as a precondition for renewed investment and the
eradication of corruption.
2
Over the past five years, civil society has become increasingly active and has been
9.
clamoring for better governance and public administration. The press, in particular, has
been a major critic exposing corruption in government and the judiciary. Experiments in
public participation in the formulation of laws have occurred, such as those fostered b y
the National Integrity Council (anticorruption commission) that was established with
WBI assistance (see Part 111). There i s a constant and growing demand for
decentralization of government services and decision-making. In general, the public i s
awakening after a long period of submission and non-critical behavior that was
characteristic of the 35 years of the Stroessner dictatorship, during which education and
economic freedoms were largely ignored, if not stifled.
10.
Yet, the very disappointing economic performance of the past decade has taken i t s
toll on the credibility o f Government and public institutions overall. As reported in the
following box, there i s an increased longing for a return to authoritarian rule under which
corruption was perceived to be not so widespread and poverty was less overt with a large
majority o f the population s t i l l living in the rural areas. As a result, the emerging
vibrancy of civil society i s vulnerable to domestic political events that are not predictable
and that present a threat to the continuation of democratic institutions if there i s not an
improvement in economic and social conditions, as well as governance.
Box 1. Public Perceptions in Paraguay
Only 40 percent o f the population believe democracy i s preferable to any other kind o f government
(third lowest in Latin America), down from 59 percent in 1996 (the second sharpest decrease in LA).
Forty-four (44) percent believe that an authoritarian government can be preferable to a democratic one
(highest percentage b y far o f any country in Latin America), up from 26 percent in 1996.
Paraguay’s population i s the most dissatisfied in Latin America with the way democracy actually
works (90 percent dissatisfaction rate).
Despite the high estimated level o f poverty (34 percent in 2001), only 11 percent o f the population
claims that their total family income does not allow them to cover their basic needs (the second lowest
in LA). This measure has nonetheless risen from 7 percent in 1996, as i t has in almost all o f Latin
America.
About 50 percent o f the population believes that privatization has been beneficial (about average for
Latin America), while nearly 70 percent believe that a market economy i s the only system that can
develop the country (second highest rating in LA, only slightly lower than in Brazil).
source: Latinobarometro, October 2003, Poll o f 17 Latin American countries
11.
The present thus represents a point of inflection for Paraguay, when sound
economic policies and honest leadership can pull the country out of its prolonged
economic stagnation and fortify democratic tendencies, or where failure on this front
could lead Paraguay back to more undemocratic structures. The initial steps taken b y the
Duarte Administration constitute a clear break with the political practices o f the past.
There are clear signs for optimism in terms of the ability of the Administration to restore
the trust and credibility o f the public in the integrity and effectiveness of government.
3
The continuation o f these efforts w i l l determine whether Paraguay has entered into a
virtuous cycle that w i l l enhance i t s capacity to overcome the serious governance
shortcomings that have plagued previous Administrations and that have stifled i t s
development efforts.
Governance and Institutional Weaknesses
12.
Paraguay i s renowned for corruption and contraband. Perceptions o f corruption
have increased during the past decade, such that the “controlled” corruption of the
Stroessner dictatorship has been “democratized” with many sharing the spoils, not just
the top. Transparency International consistently ranks Paraguay among the ten most
corrupt nation^.^ The IMF has estimated tax evasion, in particular customs and VAT, at
60 percent o f taxes due. A World Bank Institute survey of public opinion identified
Customs and the Judiciary among the most corrupt institutions in the country.
13.
As discussed in the 1996 Bank report, “Role of the State,”4 Paraguayan
institutions have highly developed the art of rent seeking. The base of the system i s the
patronage politics o f the Colorado Party, which “nominates” party faithful to public
institutions. This system contributes significantly to maintaining a working majority of
votes for the Party among the general population and creates a strong incentive against
5
“reform o f the state,” in particular, the privatization o f public enterprises.
14.
While public entities do not dominate the economy, they nevertheless occupy
important segments, including the electricity, telephone, water, cement and o i l import
companies, as well as the social security (pension and health) system and the national
university. Aside from employment (about one-third o f the total public sector), these
entities provide the opportunity for corruption through the widespread abuse of public
procurement, false billing and poor internal controls. A large number o f public banks
existed until 1998-99, but most of these f e l l into bankruptcy as the result o f the undercollateralization of loans largely financed with public funds, especially from the social
security system. A t present, there remains only one public bank, the Banco Nacional de
Fomento, which i s technically insolvent but surviving from day to day.
15.
A beginning has been made to attack the pervasiveness of a corrupt culture in
public administration. In 1999, an anti-corruption commission was formed with the
technical support of the World Bank Institute. The commission comprised an equal
number o f government and civil society representatives. Based on the results o f the WBI
survey of public opinion, the Commission decided to concentrate on three areas -customs, the judiciary and public procurement. The Commission developed a program o f
institutional reforms for each area during 2000 and, following a period of public
consultation, has been actively promoting the adoption of these reforms since then. The
main achievement o f the Commission to date has been shepherding the approval of a new
procurement law through Congress and raising awareness within Government and the
4
In 2003, Paraguay received a score of 1.6 on a scale of ten.
Paraguay - Role o f the State, Report No. 15044-PA, April 1996.
There are about 220,000 public sector employees among a working population of about 1 million.
4
public at large that concrete steps can be taken to reduce the institutional opportunities for
corruption. The Commission, which i s now known as the National Integrity Council, has
thus become an important agent for change that i s monitoring and pressing for improved
public policies and practices to reduce corruption.
16.
Corruption i s not the only institutional weakness in Paraguay, however. The basic
management systems o f government are also weak. For example, the social security
system has been run as an autonomous agency without transparency and only recently
has begun to provide information on i t s financial accounts to the Ministry o f Finance.
Within the central administration, the personnel management system i s at an embryonic
stage and i s only now pulling together a master roster of all public servants. A much
larger task i s to embark on the professionalization of the civil service, including
competitive entrance exams, career streaming and training. Also, while improvements
are being made in financial management systems, until this year the budgeting system has
been organized on a line item basis that obscured the linkages between expenditures and
results.
Governance has also been hampered by the emergence o f a multitude o f special
17.
interest groups that have been successful in pressuring the Government to accommodate
their interests, many o f which have contributed to a breakdown of law and order. For
example, groups o f “landless” campesinos invade rural properties demanding land. The
Government responds b y buying the land, but the campesinos often abandon the land
after cutting the trees. Campesinos block the highways demanding free seed, or
forgiveness of credits, a long-standing practice that has created a bad credit culture and i s
responsible in part for the lack of private credit to small farmers. Farmers’ organizations
block the highways until the Government reduces diesel prices. Fishermen block the
river objecting to the ban on fishing during the spawning season, until the Government
gives them a month o f food supplies. These practices often lead to violent confrontations
and deaths. In a less violent way, industrialists and businessmen have played the same
game b y demanding guaranteed re-financings from the Government, or b y simply not
repaying their debts to the public bank.
18.
Above all, the decline in the rule of law i s seen b y many observers and the public
at large as the greatest impediment to economic development in Paraguay. Civil court
procedures for the enforcement of private property rights and contracts are slow at best
and corrupt at worst. Public prosecutors are inexperienced, understaffed and function
without basic equipment such as telephones and faxes. The National Police similarly
function with an untrained and under-equipped force. According to a recent UNDP
report, one-third o f the police are untrained conscripts; sub-officials are required to
purchase their own arms; and the orientation of police services i s more along the lines o f
military command and control instead of providing physical security to the community.
As a result, and in combination with economic stagnation during the past five years, there
i s a growing incidence o f violent crime and lawlessness. Even more than education and
health, the Government has been increasingly unable to provide its most basic public
service--physical and judicial security - to i t s citizens and businesses.
5
Economic Performance
Paraguay i s a small open economy, heavily dependent on agricultural
19.
commodities and on regional conditions, particularly those o f its large neighbors, Brazil
and Argentina. This has left the Paraguayan economy vulnerable to events over which i t
has little control, including international commodity prices and political and economic
events in its neighbors. While economic management was gradualist and fairly prudent
in the years following the end of the military dictatorship in 1989, with balanced fiscal
accounts, small current account deficits and declining inflation, growth performance was
disappointing. The protracted slow growth since the mid-1990s i s a reflection of slow
progress with structural reform, widespread corruption and a decline in total factor
productivity associated with a shrinking investment ratio. Rather than pursuing reforms
that could assist the economy in weathering external shocks, consecutive Administrations
were generally unwilling to undertake the measures required to impart the needed
resiliency to manage shocks, to modernize the country’s productive structure, or to
address the major governance problems that hold back investment and private initiative.
20.
In recent years, this combination of factors was exacerbated by a series o f external
and domestic shocks. Major banking crises in 1995 and in 1997-98 led to the closure o f a
number o f domestic banks, the reduction of credit to the private sector, and a sharp drop
in private investment. On another front, Paraguay’s terms o f trade deteriorated
significantly over the last 5 years; the price of soybeans and cotton (the latter i s
Paraguay’s main labor-intensive agricultural product) declined b y 50 percent between
1995 and 2001, while oil prices rose. To a lesser extent, agriculture suffered from
droughts in 1999, 2000, and most recently in 2002. The economy has also been battered
b y adverse developments in i t s main trading partners, including the Brazilian devaluation
in 1999 and recession and financial turmoil in Argentina in 2001-2002. Both these
events had a significant negative impact on Paraguay’s trade with i t s regional partners
and led to significant devaluations of the Guarani to regain competitiveness.
21.
More fundamentally, structural weaknesses suggest an exhaustion o f Paraguay’s
prevailing economic model that was based on import-export trade to neighboring
countries (so called “triangular trade”), cotton monoculture for small farmers and public
sector employment. Triangular trade, which used to represent up to 20 percent o f GDP,
has fallen significantly as a result o f Mercosur tariffs and greater border controls on
smuggling. Paraguay has not yet developed a plan to replace this segment of GDP or to
reactivate the main triangular trade zone of Ciudad del Este. Other parts o f the exhausted
economic model include the continued use o f government to provide patronage jobs,
continued government support for low-return cotton production, and in general the
crowding out o f productive expenditure from the Government budget (which i s now
mostly salaries and pensions, with little on operations and investment). Privatization o f
the telephone and water companies was attempted in 2001-02, but was stopped by
Congress following accusations of corruption and protests b y campesinos who objected
to selling o f the national patrimony.
6
Despite the overall flatness of the economy, there are nevertheless a few sectors
22.
that have experienced vigorous growth during recent years. These include parts of
agriculture that remain internationally competitive (in particular, soybeans and meat
exports) as well as cellular telecommunications, in which foreign investment has been
significant. Agro-industry for export has also grown significantly, but transport costs for
Paraguay are the highest in the region (cif/fob ratio of 13 percent vs. 7 percent for the rest
of the region) and a deterrent on growth. Due to the vibrancy o f these sectors, Paraguay’s
economic situation appears to be improving somewhat in 2003. The recent increase in
soy and cotton prices i s leading to considerably higher export revenues and an expected
current account surplus this year. Increased exports and improved domestic confidence
since the April elections are also providing a boost to the general economy, and GDP i s
expected to grow b y 1.5 percent in 2003.
The combination of external vulnerability and a poor policy and institutional
23.
environment has resulted in an exceptionally poor growth performance since the mid1990s, with GDP growth averaging 1 percent per year, while annual population growth
rates stand at 2.6 percent. The outcome has been a secular decline in per capita GDP to
pre- 1990 levels with increasing poverty exacerbated by polarized income and land
distribution.6 See Poverty Profile in Box 2.
Box 2. Poverty Profile in Paraguay
The poor amounted to nearly 2 million persons in 2001(34 percent o f the population), almost half
o f whom constituted the extreme poor (16 percent). Recent estimates (still to be confirmed) point
to a further increase in the poverty rate, with a corresponding increase in extreme poverty.
Inequality i s high in Paraguay relative to other countries in the region. National surveys point to a
Gini coefficient o f 0.53 for the country as a whole. The wealthiest 10 percent consumes 90 times
what the poorest 10 percent consumes, one o f the worst ratios in the world. This i s partly a
reflection o f extreme inequality in land ownership. Ten percent o f the rural population owns twothirds o f the land, while 30 percent o f the population i s landless.
The incidence o f poverty i s particularly high among the young, who are also more prone to
unemployment than the average. Unemployment i s estimated at 24 percent for the population
between 15 and 24 years o f age.
The probability o f being poor rises with the number o f children in a household and for femaleheaded households. Similarly, those who speak only Guarani tend to have much lower incomes.
Poverty i s more widespread in rural than in urban areas. Three quarters o f the extreme poor and 56
percent o f the poor lived in rural areas in 200 1, while in the Greater Asunci6n area the poverty rate
was 26,percent.
While poverty and inequality have worsened, some non-monetary indicators o f welfare have
improved. The proportion o f households with one or more indicators of unmet basic needs
declined by 21 percent between 1992 and 2001. This improvement, unusual during a time o f
economic crisis, is largely due to significant gains in the education sector and to the trend toward
higher life expectancy.
Gross national income as measured b y the World Bank Atlas methodology fell from US$1810 in 1998 to
US$1170 in 2002.
7
24.
A Poverty Assessment was carried out in 2001-02.7 Its principal
recommendations were:
Economic growth i s the best overall strategy for reducing the number of poor,
since the poor benefit most from increases in basic public services that rise as a
result of increased government spending made possible by faster economic
growth and revenues. This assumes that the relative increase in spending on
social services that occurred during the past decade would continue.
0
The principal focus of poverty reduction efforts should be in the rural areas. The
efforts should include appropriate land taxation policies to force unutilized land
onto the market, concentrated patterns of resettlement (rather than stretched out
along roads) in order to improve the delivery o f public services to rural
communities, and focused technical assistance in agriculture.
The diverse social assistance programs should be concentrated into more focused
efforts, such as PROGRESSA in Mexico.
0
0
Expansion o f basic health, education and water services should continue to the
extent fiscally possible, as the poor remain relatively underprovided in these
services.
Poverty reduction goals need to take into account the fiscal realities of Paraguay.
25.
The Government prepared a Poverty Reduction Strategy Paper (PRSP) in 2002
with support from the UNDP and inputs from the IDB, the World Bank and others. While
Paraguay i s not a country that i s required to do a PRSP, the previous Administration
elected to design a poverty strategy as a means o f focusing i t s development strategy.
This strategy was discussed widely with civil society and with the various political
parties, and i s currently being reviewed b y the new Administration.
26.
Analysis indicates that i t i s unlikely that Paraguay w i l l be able to meet most o f the
Millennium Development Goals by the year 2015. The tendency in recent years has been
for a deterioration in some indicators, implying that without significant changes in
economic and social conditions and policies, only a few o f the MDGs are likely to be
achieved, for example, attaining universal primary education and gender equality. The
likelihood of Paraguay achieving the principal MDGs i s summarized in Table 1, and a
full assessment i s presented in Annex 1.
“Paraguay: Attacking Poverty,” Report No. 22703-PA (draft gray cover), Nov. 2002.
8
Table 1. Progress on Millennium Development Goals
Likely Outcome
Indicator
Eradicate extreme poverty and hunger
Reduce extreme poverty by 112
Halve under 5 malnutrition rate
Universal primary education
Achieve universal enrollment in primary education
0 Completion through grade 5
Gender equality and empowerment o f women
Equality in education
Political and economic participation
Reduce child mortality
Reduce under 5 mortality rates
Improve maternal health
Reduce maternal mortality
Combat HIV/AIDS, malaria and other diseases
0 Reduce the incidence of AIDS
Decrease the incidence o f other diseases
Ensure environmental sustainability
0 Reverse loss o f forest cover
Halve population without access to potable water
0 Halve population without access to sanitation
Unlikely
Possible
Likely
On track
Achieved
Improving
Unlikely
Off track but possible
n.a.
Possible
Highly Unlikely
Likely
Unlikely
-
11. Paraguay’s Development Challenges
27.
Paraguay’s poverty indicators and low prospects for attaining the MDGs reflect a
host o f long-term development challenges that w i l l require a sustained effort to
overcome. Chief among these i s that a large part o f work force i s functionally illiterate
due to low investment in education over decades. Even with the easing o f other
constraints, i t w i l l take time for the current generation o f school children to grow into the
workforce and for overall national productivity to increase at higher rates.
28.
Both the low level and limited effectiveness o f spending on social services in
Paraguay limits coverage and accessibility o f the population. Combined social spending
rose considerably during the 1990s, especially on education, but still amounts to only 6
percent o f GDP (excluding pensions). Spending on health and social assistance
programs, in particular, are under-funded when compared with other countries at similar
levels o f development. Basic public health services are concentrated in urban areas and
tend to provide higher complexity services for the 20 percent of the population covered
b y some sort o f health insurance.
29.
Reorienting services towards basic and preventive health w i l l require either
additional resources, or a major increase in the efficiency of delivery which would
include reforming the health provision o f the social security system. A similar pattern
can be observed in education, where overall enrolment rates in primary education are
9
high but in secondary education very low (3 1 percent), with striking differences between
urban (83 percent) and rural (17 percent) areas. Many small social assistance programs
exist which, combined, do not provide a social safety net for the poorest and vulnerable
population. Lastly, pension coverage of the poor i s absent, while today’s considerable
spending on pensions (3.5 percent o f GDP) insures only about 10 percent o f the
population working in the formal sector. Providing access to basic social services to the
growing indigenous population i s a further challenge that requires special attention.
30.
In terms of infrastructure, the population’s access to basic infrastructure services
i s probably the worst in the region. Only 23 percent of all roads are paved and less than
43 percent o f these paved roads are in good condition. Only 70 percent and 37 percent of
the population in urban and rural areas, respectively, are served b y water supply. The
coverage of sanitation networks i s much less. There are less than 5 fixed telephone lines
for every 100 inhabitants making i t the lowest coverage ratio in comparative terms. L e s s
than 1 percent of the population has access to internet connections.
3 1.
A challenge for the country i s how to maintain the existing assets and expand the
coverage of basic infrastructure. The yearly financing requirements of a modest
infrastructure program for roads, water, sanitation and basic telephone services would
require some US$150-200 million (compared to yearly investments o f US$40 million at
present) which i s far beyond the possibility of present public finances. The non-existence
of waste management facilities outside o f a few major cities i s an additional factor that
needs to be urgently addressed.
In the agricultural sector, the frontier has basically vanished in the eastern region
32.
as the push to expand soy production has resulted in nearly total deforestation o f the
native forests (less than five percent remain). Yet the expansion o f modern agriculture
has left the 300,000 small (and mostly poor) farmers behind, who continue with
subsistence farming based principally on cotton. The challenge here i s to increase their
productivity as well. Also, as a result o f deforestation, Paraguay has reached the
unthinkable point of becoming a net importer o f wood, creating an unneeded drain on the
balance o f payments, not to mention the loss o f employment in the previously strong
forestry sector.
33.
Paraguay’s capacity for domestic savings mobilization i s severely limited b y low
confidence in the financial system following eight years o f successive bank failures that,
to date, have cost about 11 percent o f GDP. Banking regulations and supervision are
weak and, as a result, financial intermediation i s low and interest costs and spreads are
very high. The lack of sound long-term savings mechanisms also limits the population’s
ability to save for old age and provide some self-insurance against old age poverty. The
major remaining public bank (BNF) i s unviable in its current structure and insolvent with
bad loans accounting for about 50 percent o f its portfolio.
34.
Within the public sector, the most entrenched feature of public finances i s the
structural deficit o f the Government pension system (Caja Fiscal), which i s currently
generating a deficit of 2 percent of GDP. Although the tax reforms that are being
10
proposed w i l l likely close the overall fiscal gap, the deficit on government pensions w i l l
take time to balance the government pension accounts.
35.
Another structural constraint on public finances i s the growing burden o f external
public debt, which has risen considerably to 45 percent of GDP due to large borrowings
in 1999 and to the large devaluations of the past few years. The cost of servicing this
debt now consumes about 20 percent of government revenues and limits the
Government’s ability to increase public investment via borrowing. Also, various public
utilities have problems of solvency or over-indebtedness and cannot mobilize the
required investments to expand the coverage and quality of service.
36.
A large informal economy, partly contraband trade but also a significant share o f
normal business activity, continues to operate outside the registered framework, mainly
to avoid taxes and high contributions to the inefficient social security system, but also to
avoid a complex and bureaucratic string of administrative regulations.
,
37.
O n the plus side, i t should be noted that Paraguay possesses a number o f
development assets which can be used in i t s favor, including a relatively young
population which provides a possible solution to grow out of the bind on the social
security system if new entrants can be enticed to j o i n the formal economy. Second,
Paraguay’s membership in Mercosur provides access to a large regional market. Third,
vibrant commercial farming and livestock sectors are oriented to export and remain
viable through all the turmoil of recent years. And, fourth, abundant electricity supply i s
available, although transmission and distribution costs are high due to a monopolistic
state energy system.
Government’s Development Strategy
38.
President Duarte Frutos and his team began working on the Administration’s
development strategy well before the election in April 2003. B y the time they took office
in August, the objectives of their strategy were well developed. These consist o f
i) A recovery of confidence in state institutions through a sustained fight against
corruption and the modernization o f public administration. B y putting emphasis
on improved governance, the Administration hopes to achieve greater formality in
the economy and to increase the international legitimacy o f Paraguay. Equally, i t
aims to facilitate greater participation of civil society in the formulation o f public
policy and the control of public expenditure.
ii)Sustainable growth through a change in the economic model from triangular
trade and public employment towards agro-industry and export diversification.
While improved efficiency o f public sector services and public investment can
play a supporting role in achieving this objective, the Administration recognizes
that clear and predictable rules, judicial security and equality o f opportunities are
essential for increasing private sector competitiveness.
11
iii)An increase in human capital through higher investment in health and
education, policies that enhance equity and increased access to these services, and
well targeted poverty reduction programs to include the most vulnerable groups.
39.
While keeping the above objectives in view, the Administration also faced the
primordial need to regain control of public finances and to put them on a long-term
sustainable basis. This immediate priority was based on the recognition that expenses
have been rising faster than revenues, that there i s an abnormally high share of rigid
expenses (salaries and pensions, which represent 90 percent of recurrent expenditure),
that the deficit in government pensions (2 percent GDP) i s crowding out needed
development investments, that debt service i s consuming an unsustainable share o f total
expenditure (20 percent), and that the tax system suffers from a major deficiency in the
form of multiple tax exemptions (42 separate laws) which are not only a cause for
revenue loss, but also create untold opportunities for tax evasion and corruption.
40.
The short-term severity o f the situation was brought home when the new
Administration took office and found itself facing a short-term financing gap of US$175
million (3.5 percent of GDP) in the form o f arrears and end-of-year debt service. O f this
amount, US$65 million represented arrears on existing debt service and US$115 million
o f debt service obligations falling due in the fourth quarter. About US$90 million of
these amounts are domestic bonds in arrears or with bunched maturities in December.
41.
To address this situation, the Administration took a number of measures to control
expenditure and increase revenues. On the expenditure side, i t withdrew US$30 million
o f requests for budget increases that the previous Administration had sent to Congress,
and put on hold any discussion of an increase in public sector salaries. I t also started a
census o f public employees and pensioners, in part to collect relevant data on personnel
capacity, but also to identify those receiving double salaries, of which 1650 have been
identified to date and eliminated from the payroll.
On the revenue side, the Administration took a series of measures to verify tax
42.
registration and the proper use of tax accounting books, to encourage delinquent
taxpayers to bring their payments up to date through the waiver o f fines, to eliminate 300
controllers for large taxpayers (which served mainly as a source of corruption), and to
remove all non-customs employees from Customs entry points (another source o f
corruption). These simple moves to improve tax administration have already yielded
significant benefits, with tax revenues rising b y 41 percent for the months of August
through October, compared with the same period in 2002.
In terms of the budget for 2004, the Administration sent a proposal to Congress
43.
that was recast in programmatic terms with identifiable objectives and results for each
program. Expenditure allocations were increased only for education and health, and
somewhat for agriculture. Overall, the budget aims for an "equilibrated" outcome o f 1
percent deficit with zero financing gap.
12
44.
The Administration also undertook some internal restructuring to integrate the
personnel and planning functions into Ministry o f Finance (they were previously separate
secretariats reporting directly to the President), which should improve control over the
largest element of expenditure. Finance also created a central unit to manage external
assistance, and the Economic Cabinet was streamlined from nine ministers to five
(finance, central bank, agriculture, public works and industry).
In addition, the Minister of Finance requested the Bank to prepare a “ministry of
45.
excellence” project to finance technical assistance for reengineering the ministry,
improving internal controls and audit, and to professionalize the civil service.
Regarding the long-term sustainability o f public finances, the Administration
46.
reached a political agreement with all the political parties on the need for key economic
reforms. This “Acuerdo Politico” was signed on October 6, 2003 with all political
leaders in Congress and committed them to pass the following laws on a priority basis:
A fiscally responsible budget for 2004 (as described above);
A tax reform that would eliminate exemptions, extend the VAT to sectors that to
date remained untaxed (e.g., agriculture and professional services), and introduce
a personal income tax;
m
Reforms in Government pensions that would reduce the benefit formulas for
new retirees, equalize the conditions for different types o f state employees
(teachers, military, civil servants, etc.), and eliminate the extra year-end pension
payment for retirees;
m
A modern Customs Code that would provide financial autonomy to the Customs
Service, streamline procedures and more clearly assign responsibilities;
Renegotiation o f public debt, in particular, rollover o f local Treasury bills whose
maturities are bunched towards the end o f 2003 (as described above);
Reorganization of the public banks, to create a single first-tier window aimed at
small farmers and a single second-tier window to channel external resources
through the commercial banking system for long-term development loans; and
Reorganization o f the public administration and of the public enterprises to
improve their efficiency, require financial discipline and incorporate private
capital to help finance infrastructure investment.
47.
Five of the above laws have already been sent to Congress (budget, tax, pensions,
customs and public debt). The bill on public banks i s expected to be sent shortly, and the
one on public administration and public enterprises during 2004.
13
48.
I t should also be noted that apart from the Acuerdo Politico, the Congress i s
scheduled to approve prior to Board consideration of this CAS an important financial
sector law that establishes a private sector funded deposit insurance scheme and a modern
banking resolution process. This law w i l l allow the Government to act rapidly in the case
of future banking crises to protect depositors and to limit the costs of bank failures, which
in the past have cost over 10 percent of GDP. This law w i l l need to be complemented
with improved provisioning standards and banking supervision, preparations for which
are underway. Furthermore, the Administration i s drafting a new anti-money laundering
law which w i l l play an important role in strengthening the governance of the banking
sector.
Based on the above actions, the Government has negotiated a 15-month Standby
49.
Arrangement with the IMF, which i s expected to be considered b y the IMF Board on
December 15,2003.
Bank Assessment
50.
In formulating the above legislative proposals, the Administration has gone far
beyond many of the more general recommendations that the Bank presented to the new
Administration in June.8 In this regard, the proposed policy reforms have far exceeded
the Bank’s expectations. I f approved in their current form, the legislation would
constitute the most important reform agenda that Paraguay has prepared in modern times.
If approved, they should be sufficient to allow both an increase in development
expenditures, as well as attainment of fiscal sustainability over the next few years.
The above proposals focus on fiscal and financial sector reforms, which are
5 1.
urgent for stabilization o f the economy. Paraguay nevertheless faces a much broader
development agenda. Based on the exchanges on the Policy Options Report, the Bank
believes that there i s a general coincidence o f views with the new Administration on this
agenda. Some of the additional or deeper policy areas where the Bank has advised the
Administration to turn i t s attention after i t has achieved the fiscal and financial reforms i t
has set in motion include:
Elimination of the untargeted subsidy on diesel fuel, which has cost the country
an average o f US$25 million per annum (0.5 percent of GDP) over the past four
years. Closely related would be an improved regulatory framework for petroleum
product distribution and using the user fees that are collected from the fuel tax to
fund higher budget allocations for road maintenance;
Prior to the change o f administration, the Bank prepared a Policy Options Report that analyzed the
sectors and themes that Bank had worked on in recent years and formulated policy recommendations for
the future. The Bank presented this report to the new Administration in late June in a day-long seminar
attended b y the President elect, Vice President elect, all members o f the new Cabinet and the economic and
social teams o f advisors. In this seminar, there was an excellent exchange o f views and considerable
coincidence on the policy recommendations. The Administration then distributed the Policy Options
Report to newly elected Congress.
14
Overhaul of the land tax, including market valuation of land values, to create a
meaningful source of revenue for local Governments and, more importantly, to
create a significant incentive for better land use, which would contribute to easing
the poor distribution of land in Paraguay;
m
Nationwide implementation of a comprehensive strategy for smallholder
agriculture based on participatory models and environmentally sustainable
cultivation practices;
Promotion of private-public partnerships for infrastructure development and
maintenance through, e.g., concession contracts for operation and construction,
performance based maintenance contracts, and minimum subsidy concessions for
expansion of water and sewerage (pilot successfully underway);
Opening o f public monopolies to competition and capitalization, in particular, for
basic telephone service, water, and electricity transmission and distribution.
While the Administration i s committed to these policies in general, the specifics
are still in the formative stage and need to be developed over the coming year.
Similarly, i t has not yet developed a policy for private sector development, other
than the general commitment to clear and predictable rules, judicial security and
equality o f opportunities.
fl
fl
Reorientation o f health services to focus on basic public health, focusing first on
maternal and child health, especially in rural areas;
Reduction in the untargeted subsidy to higher education (accompanied b y the
introduction of need-based scholarships) to shift resources to expansion o f
secondary education, for which quality improvements and coverage needs to be
improved significantly;
Within the context of a poverty reduction strategy, consolidation o f social
assistance programs, establishment of uniform eligibility criteria, and introduction
of a result-oriented monitoring systems.
Medium Term Outlook
52.
Paraguay’s immediate economic future depends heavily on the Government’s
ability to close i t s end-of-year financing gap and avoid falling into a protracted arrears
scenario. Given i t s agreement with i t s domestic bond holders and the prospects of
support from the international financial institutions, and assuming continued tight
management of public finances and passage of the proposed legislation as outlined above,
Paraguay could enter a period of renewed growth.
53.
Under this scenario, growth i s likely to be positive in 2003 and 2004, due to
favorable harvests and high commodity prices for soybean and cotton. For 2003, growth
i s projected at about 1.5 percent, rising to 2-2.5 percent in 2004. Provided the reforms
15
supported by the Acuerdo Politico are approved, and the Government maintains
credibility on both the macro and political front, growth could reach 3 percent b y 2005.
On this basis, i t i s believed that significant investor confidence w i l l return to Paraguay
and that private investment w i l l increase sufficiently to spur growth to 3.5 percent in the
medium term.
Table 2. Medium Term Projections, Base Case
Real Sector
Real GDP Growth (%)
CPI Inflation (%)
Gross Domestic Investment (% GDP)
Exports (% growth)
Imports (% growth)
2003
2004
2005
2006
2007
2008
1.5
7.5
19.0
12.5
4.0
2.3
7.0
19.0
-4.4
3.3
2.8
6.0
20.0
5.1
5.2
3.2
5.0
20.0
5.0
5.9
3.5
4.0
20.5
3.2
3.5
3.5
4.0
21.0
3.0
3.5
Central Government Finances
Revenues
Expenditures
Of which Interest payments
Primary Balance
Overall Balance
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Percent of GDp _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
16.1
16.5
17.2
17.5
17.5
17.6
17.6
17.5
17.6
17.5
1.7
2.4
2.4
2.5
2.4
0.2
1.3
2.1
2.4
2.3
-1.5
-1.1
-0.3
-0.1
-0.1
17.5
17.5
2.2
2.1
-0.1
Public Sector Debt (incl. Pub. Ent.)
49.8
47.3
46.4
43.1
39.8
36.9
Balance of Payments
Current Account (% of GDP)
4.3
1.o
1.3
0.6
0.0
-0.5
The scenario outlined above assumes that the Government w i l l attain fiscal
54.
sustainability within two years as a result of the proposed reforms, in particular the tax
reform which i s estimated to increase revenues b y 1.5 percent o f GDP as i t s measures
come into effect, aided b y continued improvement in tax and customs administration.
The proposed pension reform w i l l also contribute to fiscal sustainability through an
increase in contributions amounting to an additional 0.2 percent of GDP and through
reduced outlays over the medium term. Even allowing for some increase in capital
expenditures, primary surpluses should be possible on the order o f 2-2.5 percent of GDP,
allowing the gradual reduction of the debt burden. Increased efficiency in public
enterprises would also contribute to a decrease in total public debt. As the debt-to-GDP
ratio declines, the primary surplus could be eased to accommodate greater investment,
without jeopardizing debt sustainability. Further details are provided in Annex table B6.
Another key assumption i s the stability o f the exchange rate. While much of
55.
Paraguay’s debt i s on concessional terms (30 percent), i t i s almost entirely denominated
in foreign currency and i s highly sensitive to variations in the exchange rate. Mitigating
this sensitivity i s the fact that Paraguay enjoys significant dollar-denominated royalties
from the Itaipu hydroelectric plant that are somewhat higher than the Government’s hard
currency debt service.
16
56.
Paraguay will, of course, remain vulnerable to regional events in Argentina and
Brazil, but given the major devaluations of their currencies during the past few years, and
the tighter macro economic management currently in place, i t i s likely that there w i l l be
greater regional stability and growth over the medium term than during the past five
years. In addition, the banking sector reforms currently being put in place, together with
a clearly focused monetary policy and small fiscal deficits w i l l allow the economy to
withstand external shocks more easily than in the past.
57.
Given the more favorable regional and external environment, the main
determinant to renewed growth would appear to be the passage and implementation of
the Administration’s reform package. Without these policies, however, public finances
w i l l remain very weak and the Government w i l l face further renewed financing problems,
leading to continued low investment and probable stagnation o f the economy. Approval
of the Acuerdo Politico i s thus crucial for turning the corner and restarting growth.
58.
Nevertheless, while the above adjustment scenario implies a return to positive per
capita GDP growth, i t i s not sufficient to raise the income o f the average Paraguayan
back to the levels o f the early 1990s. For this to happen, growth of 6 percent per annum
would be required through 2010. Hence, more than the proposed reforms w i l l be needed
to make a significant difference to per capita income. In particular, the Government w i l l
need to find ways o f attracting higher levels o f private investment and improving the
efficiency of public expenditure. Improvements in governance conditions, particularly on
the primacy of the r u l e of law and sustained anticorruption measures would be crucial in
improving the investment climate and public sector performance. The Bank’s assistance
strategy has been designed with this broad agenda o f change in mind, building on many
o f the deeper reforms mentioned in the preceding section on Bank Assessment.
111. - World Bank Assistance Strategy
59.
The Bank’s assistance strategy in Paraguay i s essentially one of re-engagement
following a long period of low activity and little lending. The CAS of April 1997
became stillborn following the Bank’s decision in 1998 to halt preparation of new
projects due to the Government’s non-compliance with i t s social obligations under the
Yacyreta hydroelectric project. Poor portfolio performance and a lack of interest b y the
Government to continue borrowing from the Bank also contributed to this hiatus in
lending until FY02, when the first of two new loans was approved.’ Although no lending
occurred during five years, the Bank made sustained efforts to improve portfolio
performance during this period and carried out a minimum o f core economic and sector
work. I t also initiated an anti-corruption program that continues to thrive, and i t
contributed substantially to the preparation of a poverty reduction strategy that the new
Administration i s in the process of finalizing. A more extensive evaluation of the Bank’s
past program i s presented in Annex 2.
60.
The lessons from this experience can be summarized as follows:
Community Development (US$9 million) and Education Reform (US$24 million) i n early FY04.
17
A minimum field presence was essential for maintaining a dialogue with the
Government during this period and building contacts with civil society and the
private sector.” This dialogue provided the basis for reactivating the Bank’s
program today.
Proactive portfolio management was important for maintaining a minimum
acceptable level o f project implementation in an environment where the portfolio
was severely affected by prevailing governance and fiscal conditions, in
particular, the frequent rotation of project staff and shortfalls in counterpart funds.
Investment in governance and civil society organizations had high and lasting
payoff, e.g., the WBI-supported Anticorruption Commission was instrumental in
the passage of a new procurement law and in promoting social participation in
governance issues.
Feedback from Consultations with Civil Society
61.
In preparation for this CAS, a series of consultations were held with a wide range
o f Paraguay’s civil society and private sector, both in Asuncion, the capital, and in the
interior of the country. The views of civil society about the Bank’s operations and
Paraguay’s development priorities are presented in Annex 3, as well as on the Bank’s
regional office website. These consultations revealed that the public, especially in the
interior of the country, has little information about Bank operations and, as a result, often
misinformed views. For example, a recurrent theme was that the Bank should involve
local organizations in the design and implementation o f Bank projects, even though most
active or recently active Bank projects in Paraguay already work principally with or
through local organizations, such as the rural water juntas, farmers’ groups and schoolparent associations. The civil society representatives that participated in these
consultations also clamored for support to strengthen their organizations and for Bank
disbursements to be made directly to CSOs in Paraguay.
62.
In spite o f the information gap that was revealed b y the consultations, civil society
offered several good suggestions for improving Bank operations, including engaging
local groups to supervise Bank-financed construction in their communities (they claim
that local groups can supervise the control o f materials much more closely than
infrequent supervision missions that work mainly in the capital), incorporating
development of a national crop insurance scheme for smallholders in the Bank’s
financiaUagricultura1 sector work, and repetition of the consultation process at mid-point
in the CAS period (2005).
A complete l i s t of suggestions to improve Bank-civil society relations, as well as
63.
the Bank’s intentions for incorporating these suggestions in i t s operations during this
CAS period i s also presented in Annex 3. Primarily among these i s the recruitment of a
loAfter the resident mission was downsized to a liaison office in 2000, the ex-resident representative
stayed on i n Paraguay as an economist with shared duties in Argentina.
18
civil society specialist for the Paraguay country office, a more active information
dissemination program, and the seeking of an IDF grant to strengthen CSOs in Paraguay.
Proposed Assistance Program, FY04-07
C A S Objectives
64.
The objectives of the CAS are aligned closely with the new Administration’s
development priorities. They both assign initial priority to the need for fiscal and
financial stabilization as the sine qua non for regaining confidence in the economy and
getting back to a sustainable growth path. As discussed in the previous sections, until the
Government regains control over i t s finances, i t w i l l not be able to spend efficiently and
obtain a growth dividend from i t s limited resources. Similarly, without strengthening, the
banking sector w i l l remain a source of risk, and any recovery o f growth w i l l remain
vulnerable to new financial crises, just as during the past eight years when a series of
financial crises took a heavy toll on Paraguay’s growth.
65.
The second priority i s to support the Government’s efforts to restore confidence in
state institutions b y improving governance and transparency in public administration.
Improved governance i s another critical ingredient for growth in terms of raising the
confidence of the private sector to increase investment in Paraguay. Third, the Bank’s
assistance strategy aims to support the Administration’s goals of achieving sustainable
growth through improved infrastructure and increasing the productivity of the rural
sector, in particular that of small farmers among whom poverty i s highest. And, fourth,
the strategy would support the Government’s efforts to expand the coverage and
efficiency of basic social services (education, public health and waterhanitation), in order
to help Paraguay meet i t s millenniumdevelopment goals. This objective would include,
inter alia, improvements in the targeting o f social protection programs, including
pensions if possible. In sum, the CAS objectives are:
0
Fiscal and financial sector stabilization;
0
Improved governance and transparency in public administration;
0
Enhanced and sustained growth, in particular in rural areas where poverty i s most
concentrated and deepest; and
Social Inclusion - improved coverage and efficiency o f basic social services to
help meet the MDGs.
Bank Strategy
66.
The proposed Bank strategy recognizes the new economic and political situation
in Paraguay, in particular, the actions the new Administration has taken to confront
corruption, tighten control over its finances and build a political consensus for important
economic reforms. The proposed strategy i s nevertheless also mindful o f the long history
19
o f political difficulties and the lack of institutional capacity that has hindered reform
efforts in the past. In this high-risk / high-reward situation, i t i s proposed to proceed with
a re-engagement strategy that i s based on clear performance criteria and to approve new
commitments in line with the Administration’s progress in building a credible track
record of economic management and reform.
Within the above risk management framework, and in view of the bulge in the
67.
Government’s financial obligations towards the end o f this year, the Bank’s program
includes the proposed Economic Recovery adjustment loan (ERL) as an initial element o f
the overall assistance strategy. This loan would support the Government’s actions to date
and the significant economic reforms that i t has already sent to Congress, including the
reform of the Government pension system, the Customs Code and the tax legislation that
were described in the previous section. In view of the actions to date, the ERL would be
a one-tranche operation, in order to provide quick disbursing resources to help close the
Government’s end-of-year financing gap o f approximately US$175 million. The ERL
(US$30 million) would be part of a concerted effort among other multilateral and private
creditors to close this gap. This burden sharing effort includes a US$30 million social
sector loan from the IDB and US$90 million from domestic creditors in the form o f
rescheduled domestic Treasury bills that are either in arrears or falling due in December.
This package of creditor support would be accompanied b y an IMF standby arrangement.
68.
As part of a concerted package of support from multilateral and domestic
creditors, the ERL would enhance the chances of a successful outcome of the
Administration’s efforts to stabilize public finances and w i n legislative approval for i t s
economic reform proposals. This element of the Bank’s strategy would thus contribute to
the Government’s immediate priority objective of fiscal stabilization.
Provided substantial progress i s made towards approval of the tax and pension
69.
reform legislation supported by the ERL, the Bank’s strategy i s to proceed with the
second element o f i t s base case lending program, namely a financial sector loan (FSAL)
that would support an underlying reform of the banking system. This loan, which has
been prepared in close coordination with the IDB and the IMF, together with a
companion financial sector technical assistance loan (FTAL), would reduce the risk (and
cost) o f future banking crises by supporting an improved banking resolution mechanism,
the establishment of a private sector funded deposit insurance scheme, implementation of
international best practice banking regulations, enhanced banking supervision and
implementation o f a revised anti-money laundering law that i s currently under
preparation. I t should be noted that the legislation creating the banking resolution and
deposit insurance scheme i s scheduled to be approved prior to Board consideration o f this
CAS. The FSAL (US$50 million) would be a traditional two-tranche adjustment loan
that would disburse in step with implementation of these reforms. The FSALETAL
package would also proceed in tandem with a similar adjustment loan from the IDB that
would support reform o f the public banking sector in Paraguay.
70.
In sum, the first pillar o f the proposed Bank strategy i s to support key structural
reforms needed to stabilize public finances and strengthen the financial sector, both
20
necessary ingredients for macro stability. These operations w i l l provide financial
resources commensurate with the ambitious program of reforms that the new
Administration has submitted to Congress and which has been approved in part. In turn,
the stabilization of public finances and the strengthening of the banking system w i l l
provide the confidence necessary for private investors to increase their activities and w i l l
thus lay the groundwork for a sustained recovery of the economy.
71.
The second pillar o f the Bank’s strategy for FY04-07 i s to assist the Government
in improving governance and transparency in public administration. Support would be
provided through a series o f technical assistance loans and grants. The first of these
loans, already under preparation, aims to transform the Ministry o f Finance into a
“ministry of excellence” via overhaul of i t s internal controls, procedures, service
orientation towards the public, and a program for professionalization of the civil service.
The ministry o f excellence project would seek to integrate improved management
practices with one or two key line ministries, e.g., Education, which i s also attempting to
improve i t s management practices through the Education Reform loan; as such, the
ministry o f excellence project could serve as a starting point for a deeper process of
public sector reform. This project would be complemented b y a project to improve
financial management capacity at the municipal level, in particular, better application of
the land tax (impuesto inmobiliario) which i s the main (but vastly underutilized) source
of municipal revenue. Improved management capacity at the municipal level i s a
necessary prerequisite for eventual decentralization of public services, one of the central
desires of the Paraguayan public.
72.
The third pillar of the proposed strategy i s to support sustainable growth, in
particular, in the rural areas where the majority of the poor live, but also through private
sector development activities that would improve the general business environment.
Investment projects in support of the rural areas would include a scaling up of a
comprehensive agricultural extension and natural resource management model, support
for sustainable forest management to spur Paraguay’s huge potential in forest production
and export, an innovative program for maintenance o f secondary and rural roads, and
support for continued expansion o f water supply and sanitation in the rural areas. In the
latter two projects, innovative techniques would be used to harness private sector
involvement with the aim o f reducing costs and improving efficiency. These operations
w i l l be supported by diagnostic work on the rural sector and the climate for private sector
investment.
73.
Social inclusion i s the fourth pillar of our engagement over the coming years and
w i l l be closely aligned with the implementation of the Government’s poverty reduction
strategy. This would build - and also be dependent - on a successful rural-based growth
strategy as outlined above. Our activities would focus on supporting systemic reforms in
the social sectors that would increase effective delivery o f services benefiting in large
part the rural poor. Necessary cross-sectoral reforms would include (i)
improving
expenditure distribution to favor provision of basic services and assistance programs in
the poorest areas; (ii)
rationalizing human resource planning, especially in the education
and health sectors; (iii)
ensuring that user costs for services contribute to the effective
21
delivery o f services at the level at which they are collected while introducing exemption
policies for the poor; and (iv) introducing specific outreach activities to reach the
indigenous population in Paraguay. Our policy dialogue and lending activities would
concentrate o n (i)
introducing a maternal-child health insurance scheme, (ii)
assisting the
Government to rationalize (and expand) the many existing social assistance programs and
prepare the reform of the pension system; and (iii)
supporting the ongoing secondary
education reform (which introduces both supply side incentives as well as demand side
support) through the second phase of an adjustable lending program that began with the
recent education reform loan.
The relationship of these projects and the associated diagnostic work with the
74.
Government’s and the CAS’ objectives i s shown in the CAS Program Matrix at the end
of the main text. The attachment to the CAS Program Matrix provides a detailed
description o f each investment project and study included in the proposed program.
Base Case Lending
75.
The base case lending program aims to provide measured support to the
Administration for all four CAS objectives (stabilization, governance, growth and social
inclusion). I t consists o f the ERL and FSAL adjustment loans mentioned above, together
with 11 project loans (including the FTAL and three other TA loans to boost institutional
capacity), for total commitments of US$325 million over the three and one-half year
period, mid-FY04-07. Adjustment lending would represent 25 percent of the base case
lending program. The specific project proposals reflect the priorities of the Government
as expressed in a CAS consultation meeting with high-level Administration officials in
early October. Base case lending assumes that there i s continued improvement in project
implementation, particularly with regards to the appointment and evaluation of project
staff on the basis of merit. Moreover, problem projects should not exceed more than 20
percent o f the investment portfolio. Additional conditions for continuing in the base
case, which Paraguay currently i s considered to be in, are discussed under the Lending
Triggers section below.
Table 3. Proposed Lending, FY 04-07
Low Case
M i n i s t r y of Excellence TA
Health I1
Rural Investment
Education Reform I1
Water Sector Modernization
for a total o f US$120 million
Base Case
Economic Recovery
FSAL + F T A L
Ministry of Excellence TA
Health I1
Social Protection T A
Rural Investment
Forestry
Road Maintenance
Municipal Finance
Private Sector Development TA
Education Reform I1
Water Sector Modernization
for a total of US$325 million.
22
High Case
Base-case plus:
Land Administration
Municipal Services
Judicial Reform
Community Development 11,
and/or one or two adjustment
operations, e.g., Business
Development, Pension Reform,
Conditional Transfer Social
Protection, or Public Enterprise
Restructuring.
for a total of up to US$425 million
76.
Given the considerable uncertainties and risks that the Bank faces in Paraguay,
including the potential for a high reward outcome, i t i s proposed that the high and low
cases provide a much greater range of commitment alternatives than usual.
High Case
77.
In the event that the Government complies with the high case conditions (see
lending triggers below), the Bank would proceed with additional investment projects
and/or adjustment operations in amounts up to an additional US$lOO million, for a total
of US$425 million for the CAS period. Given the nature of the high case lending triggers
and the need to build a sustained track record of macro management and project
implementation, i t i s unlikely that Paraguay would enter the high case until the latter
years o f the CAS period. Nevertheless, some o f the possible operations in the high case
would be highly complementary to the base case (for example, a pension reform or
conditional transfer social protection adjustment loan to build on the social protection TA
project o f the base case, or the business development adjustment loan to build on the
private sector development TA project of the base case). Such high case operations could
therefore have very high marginal returns in supporting one or more o f the CAS
objectives. The Bank w i l l therefore work with the Government towards meeting the high
case conditions, with the aim of boosting Paraguay’s growth beyond the 3.5 percent
envisaged in the base case macro scenario.
Low Case
78.
In the event that the Government no longer meets the base case conditions, the
lending program would revert to a core set of projects that focus on the Millennium
Development Goals. These projects comprise the aforementioned operations in health,
small farmer rural development, education and water. In all cases, these projects
represent continuation of activity in areas where the Bank i s currently involved and
believes that its interventions are effective. The low case would thus assure continuity in
dialogue and working relationships with the ministries involved in these MDG areas.
Moreover, these projects would be phased equally over the CAS period, basically one per
year, thus minimizing the pace of further Bank exposure. The only non-traditional
project proposed for the low case i s the “ministry o f excellence” project for Finance,
since this project would strengthen the financial management capacity o f this core
ministry. In the low case scenario, lending would be capped at US$l20 million, or onethird o f the base case amount, for these projects.
Lending Triggers
79.
As mentioned, Paraguay i s currently considered to be in the base case, in view of
the strong actions the Administration has taken at the beginning o f i t s term to deal with
the difficult financing situation i t inherited as well as to lay the base for long-term
growth. Paraguay nonetheless needs time to build a track record of good economic
management and policy reform. The base case lending triggers, which focus on a limited
23
number o f factors mostly related to fiscal and financial stability, have thus been
constructed as a set of continuing conditions that could apply throughout the CAS period.
This would allow an assessment to be made at different points of time o f whether
Paraguay i s making reasonable progress towards these goals.
80.
For example, to remain in the base case, Paraguay should maintain a satisfactory
macroeconomic framework throughout the CAS period. Similarly, i t i s expected that the
Administration w i l l make continuous progress in implementing the procurement and
financial management action plans that have recently been agreed following the CPAR
and CFAA evaluations. These plans have a two year timeframe and provide a roadmap
for assessment during this period. Special emphasis has been placed on the tax and
pension reform legislation that the Administration has sent to Congress and i s being
supported b y the ERL. I t i s expected that these laws, which are essential for stabilization
o f public finances, w i l l be approved during the first half o f 2004. Their implementation
w i l l nevertheless occur over time. Similarly, the financial sector reforms that are equally
important for macro stability w i l l require a number of years to be fully implemented. A
road map for assessing their implementation w i l l be provided b y the FSAL and FTAL
operations that w i l l support these reforms. Maintenance o f satisfactory portfolio
implementation throughout the CAS period has already been mentioned.
One specific base case trigger that requires early action by the Administration i s
8 1.
to avoid further declines in the net assets o f Petropar, the national o i l import company.
Essentially this implies elimination of the untargeted subsidy on diesel fuel, which would
be appropriate in light of the considerable amount of quick disbursing funds that the Bank
strategy includes in the base case. Maintaining this minimum net asset position would
also be required throughout the CAS period as evidence that the Government does not
revert to losing money through the operations of Petropar. One other specific base case
trigger calls for the adoption of a national poverty reduction program, which i s expected
during 2004. These base case conditions are shown in the table on the following page.
As mentioned, moving to the high case w i l l take time (perhaps two years), not
82.
only in terms of building a track record on basic economic management, but also in terms
o f meeting the specific high case triggers. In general, the high case triggers are designed
to recognize actions that w i l l accelerate attainment o f long-term growth and equity goals
and move Paraguay to a higher growth path than envisaged in the base case scenario. T o
keep this possibility within reach, the base case program, if implemented, w i l l directly
support the Administration in meeting most of the high case triggers.
83.
For example, the social protection T A project w i l l assist the Government in
establishing a poverty monitoring and evaluation system. The land tax study would assist
in restructuring the land tax and improving equity in land distribution. The ministry o f
excellence TA project would support the design of changes to the civil service law and
the introduction of merit-based hiring. The road maintenance project would support
innovative contracts for associating the private sector in infrastructure maintenance.
High case adjustment lending would, nevertheless, also depend on the advancement o f
specific reforms to be supported b y such operations.
24
Table 4. Lending Program Triggers, F Y 04-07
Significant reduction in tax evasion as evidenced by
increase in V A T revenues as percent of GDP.
Maintenance o f a satisfactory macroeconomic
framework.
Poverty Triggers
Adoption o f a national Poverty Reduction Strategy
Program.
Progress in providing titles to indigenous
communities for already demarcated lands.
Progress in implementing the national PRSP as
evidenced by, for example, establishment o f a
poverty monitoring and evaluation system and
implementation o f an agreed cross-sectoral
beneficiary identification method.
Restructuring o f the land tax to convert i t into a
significant source o f revenue and to reduce
inequality in land distribution.
Governance and Public Accountability Triggers
Satisfactory progress in implementing agreed
Procurement Action Plan, including, for example,
establishment of agency procurement units and an
electronic information and procurement system,
and strengthened contract management.
Satisfactory progress in implementing agreed
Financial Management Action Plan, including, for
example, introduction of accrual accounting in
central administration and implementation o f
integrated financial accounting system (SIAF) in
decentralized agencies
Enactment o f revised legislation on declaration o f
assets, incl. enforcement mechanism.
Revisions to Civil Service law and establishment o f
merit-based criteria for hiring.
Structural and Sectoral Triggers
No decline in net assets (patrimonio neto) of
Petropar below level of December 3 1,2003.
Substantial progress on tax and Government
pension reform, leading to passage and
implementation o f these proposed laws.
Satisfactory progress on financial sector reform, as
evidenced by, for example, strengthened bank
provisioning standards, satisfactory
implementation of a new deposit insurance
scheme, and adoption of a modern (least cost)
banking resolution process.
Participation o f private capital in public
infrastructure, as evidenced by, for example,:
> Further expansion o f waterhanitation services
via existing minimum subsidy concession
(MSC) schemes with private operators;
taking to point of transaction two ~ u b l i c - ~ r i v a t e
partnerships in infrastructure investment.
No more than 20 percent o f projects rated
Unsatisfactory on either IP or DO, and an annual
disbursement ratio of about 20 percent.
No more than 15 percent o f projects rated
Unsatisfactory on either IP or DO, and an annual
disbursement ratio above 20 percent.
Fiduciary Assessments
As part of the Bank's core diagnostic work, a Country Procurement Assessment
84.
Review (CPAR) was carried out in 2002 in close consultation with the IDB." The report
was prepared in parallel with the approval of a new procurement law by the Congress and
11
Paraguay - Country Procurement Assessment Review, Report No. 25908-PA, January 2003.
25
contributed to the adequacy of this law, as well as to the ensuing regulatory decree. As a
result of this law, the Government established the Directorate of Public Procurement
which i s in the process of creating new norms and procedures to govern all state
procurement. Based on the CPAR, a procurement action plan has been agreed with the
Government that calls for full operation of the Directorate of Public Procurement and the
agency procurement units that will be established in other parts of the Government, a
well defined institutional and operational framework, development o f human resources,
operational manuals and standard documents, and development and implementation o f a
modern information and e-procurement system. The Bank w i l l monitor closely
implementation o f the action plan and continue to provide advice as necessary, in tandem
with the IDB which i s financing the activities of the Procurement Directorate.
85.
A joint Country Financial Accountability Assessment (CFAA) i s being conducted
in collaboration with the IDB and i s in the process of being finalized. This report
recognizes that significant advances have been made in public sector accountability as a
result o f the Financial Administration law of December 1999, including introduction of a
modern financial accounting system within the central Government. Nevertheless,
additional actions are needed, in particular, a change in the control environment of
government to increase awareness and personal responsibility for the management o f
public resources. On the basis of the draft CFAA, a preliminary financial management
action plan has been agreed with the Government that includes the introduction o f
commitment accounting to the existing financial management system and the extension
of the system to include all public enterprises and decentralized units o f government.
AAA and ESW
86.
The first priority for the proposed ESW program i s to complete the core
diagnostic work that remains to be done as a result o f the low level o f Bank activity
during the past CAS period. Apart from the CPAR and CFAA, a Poverty Assessment
was carried out in 2001-02 and served as an input to the Government’s poverty reduction
strategy. l2 Although not a core diagnostic study, the Bank prepared a Policy Options
report which was presented to the new Administration in June 2003, prior to its assuming
office. The Policy Options report consolidated the Bank’s knowledge on a wide range of
topics in Paraguay, and many of its recommendations are reflected in the Government’s
own program. Concerning the remaining core diagnostic work, an institutional and
governance review i s underway and w i l l be followed b y a public expenditure review and
a CEM.
87.
In addition to the core diagnostic work, the base case program includes a social
protection policy study (in process) and a health sector strategy study that i s about to
begin. A rural sector strategy that would draw on lessons learned at the local and
regional level to help shape the next generation of Bank interventions in the rural sector.
A closely related study on land taxation would aim to increase the effectiveness of the
existing land tax as a tool to moderate the extremely skewed distribution of land in
Paraguay, the highest in Latin America. This study would also serve as an input to the
’*
Paraguay - Attacking Poverty, Report No. 22703-PA, draft gray cover, November 2002.
26
municipal finance development project, since real estate taxes (impuesto inmobiliario)
are the principal source o f municipal revenue. More efficient land taxation would thus
contribute to setting the stage for greater decentralization of government spending in the
future. Another important part of the AAA program in the near term i s an assessment of
the private sector investment climate (possibly in collaboration with IFC) that would fed
into the private sector development T A project. The following table shows the proposed
ESW for the CAS period.
Table 5. Proposed Economic and Sector Work, FY 04-07
Low Case
Base Case
CFAA *
Social Protection Policy
Health Strategy
Institutional & Governance Review *
PER *
CEM *
Poverty Update
CFAA *
Social Protection Policy
Health Strategy
Institutional & Governance Review *
PER *
Investment Climate
Land Taxation
CEM *
Rural Sector Strategy
Financial Sector Update
Evaluation o f Secondary Education
Poverty Update
* Core diagnostic work
High Case
Base case plus:
Labor Market Study
Decentralization
Infrastructure Assessment
World Bank Institute
The WBI played a significant role in launching a comprehensive program against
88.
corruption directed b y a coalition of Government and civil society stakeholders in
Paraguay. Following a 1999 WBI survey o f the public perceptions o f corruption, the
Government invited representatives o f civil society and the political parties to form an
Anti-corruption Commission that received WBI orientation and training in how other
countries had approached the corruption issue. This Commission subsequently devised
an anti-corruption plan that focused on the areas of procurement, customs and the
Judiciary. Following consultations with civil society, the plan was adopted as the
National Integrity Plan in December 2000 and was instrumental in building the
momentum for the passage o f a new procurement law in 2002. The Commission, now
called the National Integrity Commission, continues to function as a credible entity that
meets regularly and plays an active role in the national public debate on corruption and
governance. 13
89.
During the current CAS period, WBI intends to reactivate its program o f support
to the National Integrity Commission b y supporting the Commission’s work in one o f its
three priority areas, namely, the Judiciary. In particular, WBI would include Paraguay in
a multi-country Learning Program that would analyze the main problems in the Judiciary
and aim to examine fundamental areas for judicial reform. I t would feature discussions
across different types o f stakeholders/participants within Paraguay, as well as across
13
The Commission’s w o r k i s currently being supported by a grant f r o m the IDB.
27
other countries in Latin America, regarding legal performance in their countries and areas
and initiatives for improvement. One objective in undertaking this program would be to
integrate Bank staff more closely into client-focused learning programs, as well as to
support a possible (high case) Judicial Reform Program for Paraguay. I f such a project
materializes, WBI would work on the anticorruption component o f the project, analyzing
issues on independence and accountability for greater transparency and better
performance in the Judiciary.
Outreach
90.
Paraguay i s s t i l l very much a verbal society in which personal contact i s essential
for the advancement of programs and new ideas. The Bank w i l l address this situation by
working closely with the Executive to increase the awareness of Bank programs, projects
and development issues among other branches of government. An example o f such
outreach was a recent presentation by the Regional Chief Economist to the Congress on
the Bank’s views on the development challenges facing Latin America in general, with
emphasis on the circumstances of Paraguay. Similarly, the Bank w i l l take advantage of
visits by technical missions to make presentations on other topics of interest.
91.
With regards to civil society, the Bank i s in the process o f recruiting a civil
society / social development specialist for the Paraguay country office. This person w i l l
have as a prime objective to extend Bank relations with civil society organizations,
contribute to the incorporation of participatory mechanisms in the design and
implementation of Bank projects, and, in general, to help get the Bank’s messages heard
and understood among a wider segment of the population.
Aid Coordination
Paraguay i s one o f the few lower-middle income countries that has no
92.
consultative group or formal aid coordination mechanism. The Government has mainly
engaged with donors on a one-on-one basis, and, until recently, the aid coordination and
management function has been split between the Ministry of Finance and the Secretariat
o f Planning and lacked a close coordination between the two. As a result, aid
coordination has been very weak in the past. The areas o f donor activities and interest
are shown in the partnership matrix attached to Annex 4.
93.
Despite shortcomings in the overall management of donor assistance and the lack
of a formal aid coordination mechanism, coordination between the Bank and some of the
major donors has been good. Coordination with the IDB, b y far the largest donor, has
been effective and several Bank-funded projects have been complementary to IDB
operations, for example, in maternal health, Bank and IDB financed similar programs but
with a different geographical coverage. In education, the IDB provided assistance at the
primary level, while Bank’s operations have been aimed at the secondary level. In
addition, the Bank and the IDB have collaborated effectively in the recent preparation of
the fiduciary reports on procurement and financial management. Coordination between
the Bank and the UNDP has also been good, with the UNDP administering the financial
28
management aspects of several Bank-funded loans and grants. Finally, coordination with
the IMF has also been constructive. Although Paraguay up to now lacked an IMF
program, collaboration and dialogue between the two institutions has been close and
constructive, particularly on the assessment of the financial sector adjustment loan and in
the preparation of the economic recovery loan.
94.
The new Administration has recognized the importance of improving the
management of external assistance and has taken a number of measures, including the
creation within the Ministry of Finance of a unit dedicated to the management of external
assistance (the Central Unit for Public Investment) and the decision to incorporate the
Planning Secretariat in the Ministry of Finance (for which legislation has been sent to
Congress). Improving coordination among donors w i l l be particularly important if the
Government wishes to mobilize additional external support to fund new poverty
reduction interventions as part of its poverty reduction strategy.
IFC
95.
At present, IFC has no portfolio balance in Paraguay. Due to economic and
political uncertainties, and institutional and governance issues, the climate for private
investment has been poor. IFC reviewed a number o f projects during the last CAS
period; however, none has thus far materialized due to the project structure or riskiness.
IFC’s only current involvement in Paraguay has been through i t s regional investment. A
US$25 million loan and equity investment was committed in FY03 to UABL for an
expansion of its river barge and terminal operations on the Parana and Paraguay Rivers
(the Hidrovia System). US$5 million of this investment has been committed, but not yet
disbursed, to UABL Paraguay to (i)
acquire additional barges and tugs to expand i t s
operation, and (ii)
construct to expand barge and terminal operations.
96.
Due to the past experience, IFC w i l l remain very selective in i t s activity in
Paraguay and continue to explore investment opportunities through regional projects.
IFC w i l l also look at opportunities for its direct involvement in Paraguay, as the
investment climate improves and may provide some advisory work through FIAS. The
new Government’s efforts to improve macroeconomic management, public governance
and regulatory framework are an encouraging trend towards an improved investment
climate.
MIGA
97.
Paraguay has been a member of MIGA since 1992. To date, MIGA has facilitated
an estimated US$10 million in foreign direct investment into Paraguay. In 1997, MIGA
issued a US$lO million guarantee against expropriation, transfer restriction, and war and
civil disturbance risks to Lloyds Bank, PIC.of the United Kingdom for a loan to expand
the lending operations o f i t s subsidiary. The additional funding was to enable Lloyds
Paraguay to increase i t s medium-term U.S. dollar lending, mainly to companies in the
automotive and textile industry. This guarantee has since been cancelled. MIGA
remains ready to underwrite suitable foreign investments in Paraguay over the upcoming
29
CAS period. MIGA’s on-line investment promotion services currently feature 80
documents on investment opportunities and the related legal and regulatory environment
in Paraguay.
In November o f 2003, at the request of the Ministries of Finance and Industry &
98.
Commerce, MIGA conducted a diagnostic mission to evaluate the institutional and
strategic environment for foreign direct investment (FDI) promotion in Paraguay. MIGA
met with over 50 members o f the private sector, public administration, and foreign
business communities to analyze the potential for proactive promotion of FDI into the
country. The resulting report, which w i l l be presented to the Government in early 2004,
w i l l analyze and make recommendations on how the country can improve flows of FDI.
The focus w i l l be on institutional improvements, particularly in ProParaguay, strategic
organization within the Government to prepare for and support the promotion process,
and a preliminary identification of target markets and sub-sectors from where investment
i s most likely to flow in the short to medium term. The report w i l l also note central
investment climate improvements that w i l l be required in the short term if the country
hopes to mount successful promotion campaigns. Further work in Paraguay or the
initiation of a long term technical assistance program w i l l depend on MIGA human
resource availability, counterpart and donor funding, and Government commitment.
IV. - IBRD Exposure and Risk Management
Debt and IBRD Exposure Indicators
Paraguay i s a low to moderately indebted country, with total debt service about 12
99.
percent o f exports and total debt-to-GDP of about 48 percent. The apparent difference
between these two measures of indebtedness reflects the fact that the great majority o f
Paraguay’s external debt i s on long maturities with reasonably low interest rates. Debt
service i s thus relatively low. The debt-to-GDP ratio rose somewhat during the past few
years due to devaluation of the Guarani, while the overall external debt stock remained
constant at about $2.7 billion.
100. With regard to IBRD exposure, Paraguay exceeds one o f the indicators, namely
the multilateral share of public debt service, which i s about 60 percent o f the total. This
high share i s due to Paraguay’s heavy reliance on multilateral lenders, in particular, the
IDB, which holds about one-third o f total public debt. The reverse side o f this coin i s
that the high share of multilateral exposure accounts for much of the long-maturity and
low-interest rate structure o f Paraguay’s public debt. Paraguay i s below the other IBRD
exposure indicators with debt service to the World Bank accounting for only 2 percent o f
exports and 17 percent of public debt service.
101. The real constraint on Paraguay’s creditworthiness i s not external, but rather the
fragile state of public finances, in which there i s a constant struggle to pay salaries,
pensions and debt service, with little left over for operating expenses and investment.
The severity of this position was highlighted late last year when the Government was
30
unable to stay current with payments to the World Bank, and disbursements were
suspended for three months from January through mid-April. The new Administration i s
keenly aware o f the structural weaknesses in public finances, which i s why i t has
assigned first priority to reform government pensions and the tax regime in order to put
public finances on a more sustainable basis from the beginning o f its term o f office.
Key Risks and Strategy for Managing Them
102. The overall risks of re-engaging with Paraguay on a meaningful level are high.
To start, there are a number of risks that are less present in countries where the Bank has
maintained a more continuous operational presence. The first such risk i s that in the
absence o f a long-standing dialogue on policy reform and in light of past policy reversals
(e.g., suspension o f the privatization program in 2002), the program may go off track
early on. This would be the case if the Congress does not complete its side o f the
“Acuerdo Politico” and approve the proposed tax and pension reform laws soon after
disbursement o f the ERL. The exposure risk would be even greater if this political
backtracking occurs after disbursement of the first tranche o f the FSAL. The lack of
experience in this type o f arrangements may entail some increased risk in comparison
with other countries familiar with adjustment type lending. O n the other hand, the good
record the authorities have demonstrated in managing the process provides the Bank team
with reasonable assurances of success in being able to deliver in this ambitious endeavor.
103. Mitigating this risk o f political backtracking i s the fact that the Administration i s
advancing i t s reform agenda at the beginning of its term when its political capital and
public standing i s high, not in the middle or end of i t s term as was the case with the
privatization program. Also, the Administration has succeeded in gaining the support o f
some of the main groups affected b y i t s proposals, such as the business organizations
with regard to tax reform and the teachers unions with regard to pension reform. Across
the political spectrum, all parties acknowledge the need for fundamental changes in the
management of the economy.
104. While these factors provide some comfort, the proposed strategy also attempts to
manage this risk through upfront prior actions required for the ERL and the selection o f
the base case triggers. Consideration of the ERL i s subject to prior approval of the
banking resolution and deposit insurance law that i s currently scheduled for approval b y
Congress prior to consideration of this CAS by the Bank Board. While approval o f the
tax and pension reform laws i s not a prior condition for consideration of the FSAL, the
proposed Bank strategy does expect that Congress w i l l make considerable progress in i t s
treatment of these laws before the FSAL w i l l be ready for Board consideration. And
passage of these laws i s certainly expected prior to release o f a second tranche of the
FSAL. Equally importantly, proceeding with most of the base case investment projects i s
subject to continued progress on the lending triggers, and the Administration i s keenly
aware of the negative image that would result if a Bank program o f re-engagement were
to go off track early on. The combination of these factors should thus provide sufficient
comfort to warrant taking the risk o f matching an ambitious reform program with an
ambitious program o f financial support.
31
105. A second risk of re-engagement concerns the ability o f the Government to
manage a considerably larger World Bank portfolio, while maintaining an acceptable
level of project implementation. This w i l l require a major improvement in
implementation capacity vis-&vis previous years. To manage this risk, the Bank w i l l
follow closely the measures the Ministry o f Finance has already taken to improve the
management of external assistance (namely, the creation of a central unit for investment
and the proposed incorporation o f planning into the Ministry). Second, b y financing
technical assistance to the Ministry of Finance as part o f the “ministry o f excellence”
project, the Bank w i l l directly support improvements in implementation capacity and
follow this process closely through supervision of the “ministry of excellence” project.
Third, the recent portfolio review agreement on generic portfolio issues, such as
appointment o f staff based on merit and access to counterpart funding (see Annex 3 for
the full set o f agreements), should provide for a more fluid implementation o f the base
case lending program.
106. Fiduciary risks are also noteworthy. In the area o f financial management, there are
two main risk areas - that pertaining to the overall management of public expenditure,
which has a direct impact on Bank-funded adjustment operations, and that pertaining to
the management of the Bank-funded portfolio of investment operations. The Country
Financial Accountability Assessment that i s nearing completion has resulted in an agreed
preliminary action plan that addressed the former. In addition, a number of reforms
supported by IDB-funded technical assistance projects are taking place in several key
areas including budgeting, anti-corruption and government auditing. The Bank w i l l
continue to monitor the implementation of these reforms during the CAS period and w i l l
complement IDB support through future interventions.
107. Financial management risks to the Bank’s investment portfolio have been
evidenced b y past problems with misappropriations of funds and weakness in the auditing
arrangements in a number o f projects. However, past problems have been detected early
on through active supervision, which w i l l continue in the future. Despite these
shortcomings, Paraguay’s record o f compliance with audit requirements has been
adequate.
108. Procurement under Bank projects has been relatively free of major problems,
although there have been allegations of corrupt procurement practices that have required
Bank and Government action. Implementation of the new procurement law and
modernization plan supported b y the IDB i s expected to bring about improvements,
although procurement risk w i l l continue, at least in the medium-term, until the reforms
are fully implemented: T o minimize the risk the Bank w i l l continue providing technical
advice for the creation and implementation of agency procurement units as called for b y
the new law and w i l l continue to provide close support and supervision. The Bank w i l l
further ensure that the principles of the procurement law are adhered to in Bank projects,
as long as they are consistent with the Bank’s guidelines.
32
109.
Other risks to the program are more of a general macroeconomic nature.
Paraguay, as a small open economy that trades considerably with its Mercosur partners,
w i l l remain vulnerable to regional shocks as occurred over the past four years when the
respective devaluations o f the Brazilian Real and Argentine Peso upset trading balances
and led to a compensating devaluation of the Guarani, as well as the financial crisis in
Uruguay which led directly to the closing of some financial institutions in Paraguay.
Paraguay i s also vulnerable to fluctuations in commodity prices, especially soy, cotton
and meat, that can impact economic activity and hence government revenues.
110. The best strategy for managing such risks i s for Paraguay to regain a strong fiscal
position that w i l l allow the Government to build up some precautionary balances, as well
as strengthening the financial system to withstand a possible further deterioration in the
quality o f commercial bank portfolios. The proposed CAS strategy of providing early
adjustment lending support to a new Administration that i s willing to spend i t s political
capital in seeking the approval of key reforms that w i l l strengthen the fiscal and financial
situation i s thus the best risk management strategy against the impact of future regional
volatility on Paraguay. Supporting policies that lead to a stronger fiscal position i s also
the best strategy for managing payment risk to the Bank, which i s still significant in light
o f the inability to stay current with IBRD debt service earlier this year during the last
months of the previous administration.
111. Finally, the Bank should not underestimate the forces of the informal economy
and other vested interests that w i l l aim to block the current crack down on corruption and
the improvements in governance that the Government i s proposing. Such forces could
force the resignation of current economic team and a reversion to policy drift. I t i s
difficult for the Bank itself to manage such domestic risks, other than b y providing
support, in concert with other multilateral institutions, to the reformers in government as
a signal o f international commitment to the reforms they are championing.
112. In the current Paraguay case, i t i s the President himself who i s at the political
forefront of the reform and anti-corruption effort and, due to the legitimacy of his
election, i s not likely to be forced from office or replaced during the current five-year
term (until August 2008). I t i s in the President’s own interest to keep a strong economic
team in place and to obtain approval of the proposed reforms on an expedited schedule.
To a limited extent, the Bank could support this initiative though more active outreach to
other branches of government and the public, stressing the importance o f sound economic
policies and the potential benefits of reforms that address key constraints to Paraguay’s
economic, social and institutional development.
Expected Results of the CAS
113. The proposed program b y no means addresses all o f the development agenda in
Paraguay, for example, the base case program does not include the restructuring o f public
enterprises, the opening o f infrastructure to private sector investment, or the creation o f
conditional cash transfer social protection programs, all o f which would only be
supported in the high case. Also, Paraguay’s development outcomes w i l l depend on a
33
host of factors other than the Bank’s program, in particular, the policies that the
Administration chooses to follow and the assistance programs of other external partners,
several o f which provide more assistance than the Bank. Yet, the proposed program i s
ambitious given Paraguay’s current context, and the outcomes could be highly rewarding
and help set the country on a new development path.
114. Indicative outcomes and intermediate results indicators are presented in the CAS
Program Matrix on the following pages. Some of the highlights o f these indicators are
listed below:
Stabilization of public finances and the increased likelihood of fiscal
sustainability over the medium term, as indicated by an increase in tax revenues
b y 1.5 percent o f GDP by the end of 2005;
0
A sounder financial sector that would lower the cost of potential bank failures and
provide a sounder basis for the mobilization of domestic savings, as indicated b y
the existence of a functioning privately-financed deposit insurance scheme b y
2005 and the increase of commercial bank capital to Base1 standards b y 2007;
Improved transparency and governance in public administration, especially in the
Ministry of Finance which could act as a model for other ministries to follow, as
evidenced b y the incorporation of public enterprises and decentralized agencies
into the central financial management system b y the end o f 2004 and the majority
o f public procurement taking place via internet b y the end of 2005;
0
Improved productivity in the rural sector, especially among small farmers where
poverty i s concentrated and deepest, as evidence b y the scaling up to the national
level of an improved extension model based on community participation and
improved soil management techniques by 2007; and
Gradual improvement in social indicators, as evidenced b y an increase in the
secondary school enrolment rate from 33 percent to 42 percent b y 2007, including
a narrowing o f the urban-rural divide, and decreases in the infant and maternalmortality rates by 10 percent b y 2007.
115. I t i s proposed that the program be reviewed in a mid-term progress report to the
Board in about two years.
34
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.
.
e
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.
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.
.
0
5
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c
4.
SI.
b
35
..
.S
0
31.
0
.
.
.
. . . . . . . .
. .
*
36
.
..
. .
.
. .
. . .
. .
.
37
. .
0
0
0
CAS Program Matrix
Page 4 of 10
Attachment to CAS Program Matrix
Description of Proposed Investment Projects and Diagnostic Studies
CAS Objective 1. Fiscal and Financial Stabilization
1.
The content and purpose o f the Economic Recovery Loan and the Financial
Sector Adjustment Loan are fully described in paras. 66-68 of the main text.
CAS Objective 2.
-- Governance and Transparency in Government
2.
The Government has set the recovery of confidence in state institutions as one o f
i t s primary development objectives. I t intends to achieve this objective via a fight against
corruption and the modernization o f public administration. For this purpose, the
Government has requested the Bank to prepare a “Ministry of Excellence ” project (FY04)
to convert the Ministry of Finance into a center of excellence and role model for
improving financial management, eliminating corruption, increasing transparency and
encouraging civil society involvement in the planning and monitoring of results.
The project would support the design and implementation o f the Ministry o f
3.
Finance’s reorganization, business reengineering, access of information and delivery of
services. I t w i l l also provide assistance to strengthen the budget, human resources,
procurement, internal control, anti-corruption and planning sub-systems and to expand
them within the rest o f the central Government and regions (7 Gobernaciones) to ensure
that these public institutions are capable o f responding to the Ministry’s improve rules
and practices. The operation would build on the recommendations from the Country
Financial Accountability Assessment (CFAA) and the Country Procurement Report
(CPAR). In both cases time bound actions plans have been agreed with the Government.
4.
A second project in the area of governance and public administration would be
the Municipal Finance Administration project (FY06), which would aim to strengthen
administrative and financial systems at the municipal level. Doing so i s a prerequisite for
greater decentralization of government services, which i s one o f the strongest desires of
civil society. In addition to training and systems improvements, the project would focus
on local resource mobilization at the municipal level via the real estate tax (impuesto
inmobiliario) which i s the main tax instrument available to municipalities, but which i s
highly ineffective due to poor assessment and collection practices. The project would
incorporate recommendations from the Land Tax Study (FY05), in particular, the
effective application of the impuesto inmobiliario to rural and agricultural lands which
are subject to municipal tax authority, but which currently pay extremely low effective
rates. Creating an effective land tax instrument would contribute to both greater local
government autonomy as well as to reducing the skewedness o f land distribution in
Paraguay.
38
CAS Program Matrix
Page 4 of I O
5.
A third governance project i s Judicial Reform (FY07-high case), assuming there
i s interest on the part of the Judiciary to pursue such a project following the outcome o f
the on-going IDF grant for judicial training. This project concept i s still tentative,
however, and may be substituted by another institutional development project following
the conclusions of the just-started Institutional and Governance Review (FY0405).
CAS Objective 3. Sustainable Growth
6.
Paraguay i s one o f the most rural and poorest of South American countries, with
44% of its population and 56% o f its poor in rural areas. The Bank strategy to address
this broad issue includes projects in the rural sector and infrastructure (especially in rural
water supply, sanitation, and roads), as well as links with human development (education,
health, and social protection) lending.
7.
Supporting small farmers. The Sustainable Rural Investment Project (FY05)
w i l l focus on scaling up the already promising results of the Natural Resources
Management Project through small farmer assistance in most o f the eastern part of the
country. The project w i l l promote decentralized watershed management planning, crop
diversification, risk mitigation, and community participation, largely through CDD-type
financing and cost-sharing combined ,with the reform of agricultural extension services.
8.
Promoting sustainable forestry and growth. Paraguay has long been a
traditional wood exporter, but uncontrolled deforestation for agriculture and livestock has
resulted in severe environmental degradation and in Paraguay becoming a net wood
importer and losing its growth potential in this sector. The Forestry Development Project
(FY06) would aim to reinvigorate forestry investment, growth and exports in a
sustainable manner b y (i)
introducing a reformed regulatory framework for sustainable
forest management (including transport regulations, pricing and royalties, plantations and
reforestation plans), (ii)
improving existing forest management practices, (iii)
strengthening institutions and transparency in the sector, and (iv) conserving and
protecting selected natural forest ecosystems through the incorporation o f GEF (Global
Environment Facility) resources.
9.
Improving property rights. The issue of land ownership i s a focal point, albeit a
difficult one, for achieving rural development in Paraguay. Land ownership i s among the
most skewed in South America, with 10% of the population owning two thirds of the land
and one third of the population owning no land at all. From a social perspective, this
issue lies at the core o f the country's income inequality; from an agricultural perspective,
i t lowers overall agricultural productivity, and from an environmental perspective, i t
drives the poor onto marginal lands, fueling deforestation and land degradation. To
address this issue, studies on land ownership and use (as part o f the proposed Rural
Sector Strategy) and land taxes (to better address both fiscal and land use objectives) w i l l
be conducted. In addition, ongoing monitoring o f the process o f titling demarcated but
39
CAS Program Matrix
Page 5 of 10
untitled indigenous lands will be performed. These studies w i l l shape the Land
Administration Project (FY07, high case), which will: (i)
develop a national strategy and
promote regulatory and institutional reforms
initiate the land regularization process; (ii)
~~
1
70,000 hectares i n the Eastern part of the country i s demarcated but not titled as indigenous lands. Part
o f this land has already been purchased but lacks proper titling. The completion of this titling process i s an
important social and rural development issue.
40
CAS Program Matrix
Page 6 of 10
to expedite the titling process; (iii)
strengthen the administration and management of
catastral information, and (iv) improve access to land through appropriate land taxation
and other financing to provide a menu of options for poor and indigenous communities.
Regarding infrastructure and business development, the CAS strategies are:
10.
0
0
0
0
Significant improvements in public infrastructure spending. Considering the
infrastructure bottlenecks and the deficit in investment and maintenance for basic
infrastructure in Paraguay, the interventions proposed in infrastructure w i l l focus
on expanding coverage of basic services and reducing logistic costs, with a focus
on improved quality and composition o f expenditures. The proposed projects w i l l
improve the condition and sustainability of the road network, expand coverage of
water supply and sanitation, and assist municipalities in developing priority
municipal level infrastructure.
Innovative Private Public Partnerships. Given the large financing
requirements of infrastructure, there needs to be an effort to mobilize privatepublic partnerships to improve the coverage, quality and affordability o f
infrastructure services. Innovative contracts are being developed in rural water
supply which would continue to be supported under the water supply and
sanitation projects. The minimum subsidy concession (MSC) program can be
expanded to extend water and sewerage systems in areas where the public water
entities do not operate. Under MSCs, the Government pays an agreed
competitively-bid subsidy to the private operator who offers to build and operate
the system for the lowest price. This approach has already been successfully
piloted in Paraguay with results that reduced investment costs by half. The
Government has also expressed interest in implementing performance-based road
maintenance contracts which could replace force account (udministrucion directu)
or traditional unit price contracts to maintain the core national road network and
some rural roads which can be supported under the road project. Substantial
savings on a per kilometer basis have been achieved in neighboring countries with
this system. Private sector concessions could be awarded for the maintenance of
selected high traffic volume corridors (“Plan Triangulo”), and eventually for some
new road construction and other infrastructure investments.
Support for Public Utility Companies. The Constitution supports the improved
efficiency of public utility companies and also of a market-opening strategy in
areas where public enterprises continue to operate in a monopoly position. In the
current fiscal tight environment, the Government i s interested in obtaining
technical assistance support with the reform of basic telephone service, the
importation and distribution o f diesel fuel, and eventually electricity distribution.
Business Environment Improvement. A key objective of all interventions
during the CAS period w i l l be to improve the business environment, simplify
procedures, improve the quality of Paraguayan products and adoption o f best
practice technical norms, increase access to financing and facilitate and promote
41
CAS Program Matrix
Page 7 of I O
exports as a lead engine for growth, and reformulate the assistance programs for
SMEs.
To support these infrastructure and private sector development strategies, the
11.
CAS includes the following projects and studies.
12.
Road Maintenance Project (FY06). This project w i l l focus on improvements in
planning and programming, improving the reliability of allocations for road maintenance,
prioritizing rehabilitation and new development within fiscal constraints, effective
monitoring o f expenditures, decentralizing the implementation of road maintenance
operations, and strengthening the capacity of the Departments and Municipalities to
oversee road maintenance operations. The key w i l l be to establish a reliable and
sufficient financing mechanism for road maintenance.
13.
Water Sector Modernization (FY07). This project would embark on a substantial
effort to expand coverage of water supply and sanitation in rural areas building on the
previous rural water supply and sanitation as well as reform o f urban water loans, support
the implementation o f a uniform financial policy regarding local contributions i s required
for all water supply and sanitation interventions, and promoting sustainable management
arrangements for the water utilities at the national and municipal levels.
Municipal Services and Infrastructure (high case -*FY06). This project w i l l assist
14.
the Government to support development of priority municipal level basic infrastructure,
strengthening the human resource capabilities at the municipal level and integrating
proposed infrastructure interventions with sectoral strategies in roads, water supply and
sanitation, and solid waste. The proposed Project w i l l develop and implement poverty
monitoring mechanisms in the participating municipalities which would allow to followand the impact of the proposed interventions. For Project preparation complementary
resources w i l l be sought from the Cities Alliance fund.
Technical Assistancefor Private Sector Development (FY07). This project would
15.
support an initiative to improve the competitiveness of Paraguay b y reactivating the
business environment. The TA would support three initiatives led by the Ministry of
Industry including: (i)
improved regulation and control o f product falsification, (ii)
streamline SME and micro-enterprise support programs, including reciprocal guarantees,
development of export networks, launching a national quality program, and a certification
program, and (iii)
improving the business environment, assessing investment bottlenecks,
and strengthening the regulation o f business services. This project could also include a
component to improve the efficiency of services, lower costs to the public, and reduce the
opportunities for corruption and mismanagement of funds. In a high case, we could
support a proposed Business Development Adjustment Loan (FY06), to assist the
Governments efforts in this area.
Investment Climate (FY05) - An investment climate assessment w i l l be
16.
implemented following the standard methodology and instruments that the Bank i s
42
CAS Program Matrix
Page 8 of 10
employing throughout the world. This assessment w i l l be useful as a benchmark to
evaluate confidence and major bottlenecks.
Znfrastructure Assessment (high case - 06) - An infrastructure assessment would
17,
be carried out to build on the PER for infrastructure considering that the sector
knowledge base i s s t i l l to be developed.
CAS Objective 4. Social Sectors and Inclusion
18.
The proposed work program in education, health, social protection and
community development constitutes the fourth pillar of this CAS, social inclusion. The
proposed activities would be closely aligned with the implementation of the Paraguay
Poverty Reduction Strategy (PRS) which i s currently in the final stages o f validation.
Obviously, poverty reduction and social inclusion cannot not be carried by social policies
alone and a successful implementation o f the Paraguay’s PRS hinges crucially on
revitalizing growth, especially in the rural areas. But improving protection of the poorest
as well as assisting them in education and improving their health w i l l be necessary for
today’s poor to be able to benefit and participate in a revitalized economy.
I
19.
For social services to reach the poor in Paraguay, a number o f reforms are
necessary which go beyond sector investments and sector policies and which are central
to this CAS. Such necessary cross-sectoral reforms would include (i)
improving the
overall expenditure distribution to favor provision of basic services and assistance
programs in the poorest areas; (ii)
improving budget planning and execution; (iii)
rationalizing human resource planning and introducing incentives for staff to delivery
quality services; (iv) ensuring that user costs for services contribute to the effective
delivery o f services at the level at which they are collected while introducing exemption
policies for the poor; and (v) introducing specific outreach activities to reach the
indigenous population in Paraguay.
20.
Over the CAS period, the Bank would be working with Government in four areas:
(i)
Improving the quality of education and increasing enrolment rates in
secondary school i s at the heart o f the Government’s reform agenda in the
education sector. Overall enrolment rates in primary education are high but in
secondary education very l o w (3 1 percent), with striking differences between
urban (83 percent) and rural (17 percent) areas. The reform, which the Bank
i s already accompanying through an approved First Education Reform Project
(FY04), includes the (i)
development of a comprehensive and culturally
appropriate program to improve access to education by the rural and
indigenous population, especially at the secondary level; (ii)
improvement of
sector efficiency and management capacity, including planning and
management o f human resource, information, evaluation, and supervision
systems at the central, state and local levels; (iii)
improvement o f teacher and
leadership capacity through improvements in teacher training nationwide and
preparation of a core group o f education leaders; and (iv) provision o f
43
CAS Program Matrix
Page 9 of 10
opportunities for extremely poor children (scholarships) and alternatives for
rural and working children (alternative, flexible secondary school programs).
The proposed work program during this CAS period would support the
ongoing reforms through an Evaluation of Secondary Education ESW as well
as through the second phase o f the adjustable program lending Second
Education Reform Project (FY07).
(ii) Increasing efficiency and equity in the health sector i s central to our health
dialogue which would be guided by the results of a Health Sector Review
(FY05). While health outcomes in Paraguay are poor, especially in rural
areas, basic public health services are concentrated in urban areas and tend to
provide higher complexity services for the 20 percent of the population
covered b y some sort of health insurance. Health service productivity i s low
and unequal across regions. Reorienting services towards basic and
preventive health w i l l require additional resources and/or a major increase in
the efficiency of delivery which would include reforming health provision of
the public insurance scheme. A proposed Second Health Project (FY05)
would assist Government in implementing a maternal-child health insurance
scheme for today’s poor and uninsured, especially in rural areas, b y
strengthening health provision of local health councils. Such a shift towards
primary care would necessitate key changes in health sector financing,
including a reform of the current user cost system and human resource
management, comprising the introduction of incentives for quality delivery of
services.
(iii) Introducing fundamental reforms to the pension system and creating a
basic safety net for the poorest would be guiding our work program with
respect to social protection. A Social Protection Study (FY04) w i l l include a
detailed analysis of Paraguay’s social security and assistance system. Social
assistance spending i s very low compared with countries at similar levels of
income per capita, being spread over a large number o f small programs and
hence reaching only a small fraction of the poor. In parallel, social security
expenditures are very high (3.5 percent) but they are absorbed almost entirely
for spending on pensions which benefit few and do not reach the poor. A
Social Protection Technical Assistance Project (FY05) would assist
Government to rationalize (and expand) the many existing social assistance
programs and prepare a comprehensive reform of the pension system. In the
high case lending scenario, such technical assistance would support a Social
Protection Adjustment Loan which would support a fundamental overhaul of
the pension and social assistance system, including the creation of a safety net
for the poorest, including those elderly poor without pension coverage today.
(iv)
Finally, promoting the social and economic empowerment of vulnerable
and marginal communities i s an important element for improving social
inclusion and strengthening social services and social protection in Paraguay.
The country‘s poverty gap (2.9%, the highest in South America) indicates the
44
CAS Program Matrix
Page 10 of 10
need to promote poverty targeted interventions for the most poor and
disadvantaged sectors of the population. To address this, the Community
Development II Project (FY07, high case) w i l l improve the capacity o f and
financial resources available to community organizations and local
Governments in both rural and urban areas. The project would be a scaling-up
of the recently launched Pilot Community Development Project, assuming
implementation of the pilot project goes well.
45
CAS :Annex I
Page 1 of 9
Annex 1. Progress Towards Reaching the MDGs in Paraguay
Background
1.
The Millennium Development Goals (MDGs) were agreed to by the leaders of all
United Nations member countries in September 2000 in the Millennium Declaration, as
modifications of the International Development Goals (IDGs) originally established by
the OECD Development Assistance Committee in 1996. Seven of the goals focus on
specific aspects of the multiple dimensions of poverty and the eighth focuses on
strengthening the support of the international community to achieve these goals. Many o f
the goals specify quantitative targets and indicators to measure progress toward reaching
the goals.
2.
This note summarizes the progress and challenges faced b y Paraguay to achieve
the MDGs. The United Nations has committed to reporting the progress o f reaching the
MDGs in collaboration with other institutions, including the World Bank, the IMF,
OECD and other regional agencies.' This report relies on Government statistics and
recent assessments made by UNDP, the World Bank and ECLAC.*
3.
In the last decade, the stability and sustainability of economic progress in
Paraguay has been threatened by weak governance and institutions, increasing poverty,
and a deterioration o f the environment. In 2002, a National Poverty and Inequality
Reduction Strategy was developed with the objective to reduce poverty, especially in
rural areas, on the basis of sustained economic growth, improvements in human capital,
attention to vulnerable groups, environmental sustainability and strengthening o f the
social fabric with greater gender equality and civic participation. The strategy pledges for
greater inter-institutional and inter-sectoral coordination of public agencies and calls for
support from the international community. I t i s explicitly linked to the MDGs, using the
same timeline and targets. Hence monitoring o f progress towards the MDGs i s key to
inform the public policies outlined in the strategy.
4.
While Paraguay has made important progress towards reaching some of the
MDGs, there are several areas in which the country i s off-track or even falling behind.
The following describes the situation o f the country in each of the goals, highlighting key
challenges to accelerate progress.
1
Implementation o f the United Nations Millennium Declaration; Report o f the Secretary General, United
Nations General Assembly, 2002. See Annex 1.
The World Bank projections are made using the SimSIP program, which include assumptions about the
rate of population growth, urbanization growth, estimates o f the elasticity o f poverty and other social
indicators, as well as GDP growth between 1998 and 2015. The population and urbanization growth
assumptions are based on UN projections and the elasticities are calculated from world and LAC panel
regressions. See Hicks and Wodon (2002).
46
CAS Annex I
Page 2 of Y
Goal 1: Eradicate Extreme Poverty and Hunger
Target: Cut in half from1990 to 2015 the fraction of the population in extreme poverty
5.
One o f the indicators to measure this goal i s the fraction o f the population living
on incomes below $l/day PPP. Data for this indicator are not available for Paraguay.
However, since an income of $l/day i s not sufficient to buy the basic national food
basket, the national indigence line' i s a more appropriate indicator to monitor this goal.
Consistent poverty figures with national coverage have become available only in recent
years precluding the use of a base line from the early 1990s. Poverty rates have increased
since 1995. In 1995, 13.9 percent o f the population had incomes below the national
indigence line and by 2001 this fraction had increased to15.6 percent, while total poverty
increased from 30 percent to 34 percent during this period. Preliminary results from the
2002 household survey suggest that there might have been an increase in poverty.
Chronic malnutrition in children under age 5, the indicator used to monitor hunger, has
also increased. B y 2001 4.6 percent of children under age 5 had low weight for their age
up from 3.7 percent in 1990.
6.
Thus, the country has been moving off-track to meet this key goal. The SimSlP
simulations find that on the basis o f a projected 2.6 percent annual GDP growth through
2015 and no major new efforts Paraguay i s unlikely to reduce poverty and extreme
poverty b y 50 percent b y 2015. A recent UNDP assessment also deems unlikely for the
country to meet the goal. However, expectations are s t i l l favorable to the country
reaching the hunger reduction target. Both UNDP and WB SimSIP assessments find that
the country i s s t i l l likely to halve the under 5 malnutrition rate despite the increase seen
recently.
How much longer Paraguay takes to achieve this goal w i l l depend on whether
7.
sustained growth and considerable improvements in social policy are realized. This w i l l
require maintaining macroeconomic and political stability, strengthening governance and
institutions, an increase in investment, growth in agriculture and exports through rural
development that improves productivity of the poor, support to local development
projects and increased civic participation from vulnerable groups. Strengthening the
institutions and programs which provide services to the poor through decentralization and
greater transparency and accountability and improved coordination between the many
government agencies and actors in these programs w i l l be necessary to ensure that
resources are used effectively.
' Income below that needed to buy the basic basket o f food sufficient to meet nutritional and caloric needs.
47
CAS Annex 1
Page 3 of 9
Goal 1: Reduce Poverty and Hunger
Population Below Hational Entreme
Poverty Line 1%)
20
Cronic Malnutrion (wtkge) in Children
under 5 (%)
5.00
4.00
I
5
0
I
~
I
1995
I
I
I
.
-
6.00 ..............................................................
,
,
'
I
I
2000
I
I
I
I
I
2005
I
I
,
,
I
2010
I
I
,
,
,
2015
,
-
1 .oo
0.004
1990
I
I
. ....
..............................
.
A60
1
I
I
I
I
I
I
,
,
1995
,
,
I
2000
I ,
2005
I
I
,
,
,
I , , I
2010
2015
I
,
,
Goal 2: Universal Primary Education Completion
Target: Ensure that all children complete the cycle of basic education by 2015
8.
Reforms to the public education system in Paraguay began in 1994. These
reforms included a change in the starting age for primary education from 7 to 6 and an
extension in the length of primary education from 6 to 9 years. However, enrollment in
the first and second cycles (grades 1-6) f e l l from 93 percent in 1990 to 90 percent in
2001. The enrollment in the third cycle (grades 7-9), however, did increase significantly
from 27 percent in 1990 to 53 percent in 2001. The UNDP and WB assessments find that
achieving a 100 percent enrollment in primary education by 2015 i s s t i l l likely.
Completion through grade 5 seems also on track to reaching the goal, having increased
from 70 percent in 1990 to 78 percent in 2000.
Among the key challenges to achieve this goal are reducing high repetition rates,
9.
socio and geographic differences in education quality and expanding equal access to
education b y improving educational infrastructure. Policy priorities include evaluation of
current programs in order to replicate successful strategies and promoting programs that
reduce repetition and drop-out rates. Strengthening training programs for teachers,
extending the number of hours in classes and developing community participation are
also key elements of the required educational policy package.
Goal 2: Universal Primary Education
Primary Education Completion Rate 1%)
% Enrolment in Primary and Secondary
School
40
20
04
1990
I
48
,
I
,
,
I
1995
,
I ,
I
,
2000
I
I
,
,
I
2005
, ,
I
I
,
2010
,
I
, ,
2015
1
CAS Annex I
Page 4 of 9
Goal 3: Gender Equality and Empowerment of Women
Target: Ensure gender equality in access to all levels of education by 2015
10.
The targets for this goal points to equality for girls and boys in access to primary
and secondary education, and greater economic and civic participation o f women.
Equality in education has basically been achieved in Paraguay, with near equal
enrollment in priniary and secondary education of girls and boys, as well as near equal
literacy rates. Although data i s fragmentary less equality exists in the economic sphere
and even less in political participation. Just over 40 percent o f working age women
participate in the non-agricultural labor sector compared to 75 percent o f men. Also,
female political participation has almost doubled since 1989. Women’s seats in Congress
have risen to 13 seats in 2003, but still only 8 percent of the seats are filled b y women.
Actions to facilitate the equal participation of women in the labor market and in
11.
political institutions are needed. Further development of the office of the Secretary of
Women through greater coordination with other departments and programs can favor
improvements in the status o f women. Labor market interventions that improve job
opportunities for women are also important, as well as child care programs that can allow
more women to work. Additionally, promoting better access o f women to the benefits of
public programs w i l l favor their empowerment. More research i s also needed on the
economic status of women, as many statistics do not look at women separately.
%Women of Total Labor Force and
Parliament
Ratio of Girls to Boys in Primary and
Secondary School Enrolment
101
1
0 99
0 98
0 97
0 96
0 95
0 94
0.93
50
40
30
20
10
0
j
i II
1998
2001
Seats Held in Parliament
Goal 4: Reduce Mortality of Children under 5
Target: Cut in two thirdsfrom1990 to 2015 the under 5 mortality rates
12.
The Millennium Development Goal calls for a 2/3 reduction o f the mortality rates
of children under 5 years old. The indicators for this goal include infant mortality (deaths
per 1,000 births) and under 5 child mortality (deaths per 1,000 births). While the recent
UNDP assessment deems likely that the country can meet this goal, the World Bank
49
CAS Annex I
Page 5 of 9
SimSIP analysis indicates that Paraguay i s far behind and unlikely to achieve this goal by
2015.
13.
Administrative records o f the Ministry of Public Health and Social Well-Being
indicate that the registered infant mortality rate has fallen from 30.4 per 1,000 births in
1990 to 19.7 in 2001. Also, the registered under 5 mortality rate has dropped from 40 to
25 in the same period. However, while there have been improvements in official
registers, these figures may be affected b y significant underreporting. The General
Statistics Office of Surveys and Census (DGEEC) estimates that the infant mortality i s
much higher than registered. The registered rates are about half of DGEEC adjusted rates.
In any case, both sources indicate that the country i s off-track to meet the 2/3 reduction
by 2015.
New data and analysis i s needed to clearly ascertain the trends and main causes of
14.
infant mortality so as to better inform the public policies needed to accelerate progress
towards this MDG. One central challenge to further reducing child mortality i s
strengthening the emphasis on preventive rather that curative care with scaled up costeffective interventions including improved education and health of mothers. Paraguay has
a multitude o f programs ran b y both the Government and NGOs aimed at reducing infant
mortality. Decentralization could improve delivery of services, and increased
participation of the NGOs i s desired. A recent careful impact evaluation o f a particularly
innovative one, the Cuban doctors intervention, suggest that integrated primary health
care interventions with active local participation can indeed constitute a cost-effective
strategy (Molinas and Galiani, 2003). Improving the monitoring system and registered
data i s a top priority, as well as increasing the demand for services through community
development programs. The AEPI', a program o f integrated attention o f prevalent infant
illnesses, could be instrumental to further strengthen coordination of the many existing
programs in the country.
Registered and Estimated Infant Mortali
Deaths per 1,000 births
PA-
50
40
20
0
.
38.1
20.2'
10
1990
1995
-registered
estimated
Mortality of Children under age 5,
deaths per 1,000 births
---
2000
- -.j
I
--.
I
2005
2010
2015
.registered trend
1990
estimatedtrend
1995
2000
2005
2010
2015
AIEPI was established in 1997 in the Department of Children's Health, within the Ministry o f Health and
with support from many NGOs.
50
CAS Annex 1
Page 6 of 9
Goal 5: Reduce Maternal Mortality
Target: Cut in threefourths from1990 to 2015 the maternal mortality rate
15.
Data limitations again preclude to clearly ascertain whether maternal mortality
rates have declined or increased since 1990. According to administrative health records,
the country seems to be off-track to meet this goal. During 1990-1997 the registered rate
fell from 150 to 102 (a 67 percent decline) and increased to 160 in 2001. Also, the
proportion o f births attended by a medical professional f e l l from 66 percent in 1990 to 61
percent in 1998. However, as with infant mortality, many maternal deaths remain
unregistered. The DGEEC estimates that maternal mortality fell from 341 per 100,000
live births in 1990 to 187 in 1997 (a 54.8 percent decline). There are not recent estimates
o f the adjusted rates. In any case, these figures indicate that the target for maternal
mortality i s unlikely to be reach. The country's challenges lie in not only reducing the
overall mortality rate, but reducing the gap in mortality rates that exist between areas.
For example, in Asuncion in 2001, the maternal mortality rate was 21 per 100,000 live
births, while in the mostly rural Caazap6 the rate was 214 per 100,000 live births.
16.
The main causes of maternal deaths are preventable, such as hemorrhages during
birth and pregnancy, which could be greatly reduced by improving on the low rate o f
births attended b y health professionals, especially in rural areas. As with child mortality,
programs that expand services provision as well as increase the demand for pre-birth
preventive services are vital to reducing maternal mortality in the country. Many
programs have been established to target maternal mortality, as part of the National
Reproductive Health Plan of 1997-2001, however limited funds and coordination
problems continue to limit effectiveness.
Goal 5: Improve Maternal Health
Registered and Estimated Maternal
Mortality
Deaths per 100,000 live births
Births Attended by Trained Personnel (%)
200
1990
-registered
-estimated
1995
2005
2000
- -.~
2010
2015
.registered trend
1990
estimatedtrend
1995
2000
2005
2010
2015
Goal 6: Combat HIV/AIDS, malaria and other diseases
The incidence of HIV/AIDS remains low in the country however, again, i t i s
17.
suspected that a high level of cases are unregistered. The majority of cases are sexually
transmitted and the reported use o f condoms b y women i s very low (just above 6 percent
o f all women reported using condoms in 1998), indicating that HIV/AIDS could become
51
CAS Annex
Page 7 of 9
a larger problem in the future. A recent National Program to combat AIDS has defined a
2001-2004 strategy to reduce the incidence of the disease and to improve the quality of
life for those already infected.
Malaria has been decreasing since 1980, although an epidemic between 1997 and
18.
1999 increased the number of infected cases from 23 to 412 per 100,000, i t has not
caused any deaths since 1989. A network o f vigilance has been established in
communities to combat the disease at the local level.
The incidence of tuberculosis has been slowly falling from 51 per 100,000 people
19.
in 1990 to 35 in 2000, but i t i s believed there this may mask an increase in the number of
unregistered cases. Mortality rates from tuberculosis have risen slightly from 3 to 4 per
100,000 people between 1990 and 2000, but there has been increasing success with
DOTS treatments'. There are important differences in incidence and mortality rates
between geographical areas and socio-economic status. The National Program to Control
Tuberculosis has been working to increase treatment by DOTS through public and private
institutions.
20.
The main challenges to fighting these myriad of potentially epidemic
diseases in Paraguay lie in improving institutional capacity to provide prevention and
treatment services, as well as the quality and availability of technology and trained health
staff. The expansion and improvement plans are constrained b y .limited funding.
Goal 6: Combat HlVlAlDS and other Diseases
Use of Condoms by Women
% o f all Women
10
Per 100,000 Inhabitants
TI
8
5.2
6.2
1996
1998
1
1990
1990
1992
1994
1995
-incidence
2000
-mortaYy
Goal 7: Ensure Environmental Sustainability
Target: Reduce by half the proportion of population without access to safe drinking
water or sanitation.
DOTS i s a treatment plan that combines five elements: political commitment, microscopy services, drug
supplies, surveillance and monitoring systems, and use of highly efficacious regimes with direct
observation of treatment. Dosages are closely monitored by health personnel to ensure the full course o f
medications have been received by the patient.
(World Health Organization website,
http:llwww.who.intlgtbldotslwhatisdots. htm).
52
\
CAS Annex 1
Page 8 of 9
2 1.
This goal includes integrating sustainable development practices into policies, and
increasing access to safe drinking water and sanitation to improve the lives of slum
dwellers. The proportion of land covered b y dense forest has declined reaching an
estimated 7 percent in 1997. Paraguay has made considerable improvements in the
proportion o f the population with access to safe drinking water. Between 1992 and 2001
the proportion has increased from 25.4 percent to 52.5 percent so the country i s well on
the way to reach one of the targets for this goal. However, there remain challenges to
improve access in rural areas, which was only 21 percent in 2001 compared with 80
percent in urban areas. These figures are among the lowest in Latin America. A strategy
i s underway for reaching poor and rural communities, including innovative interventions
for peri-urban areas and larger rural communities. Sustained financial support i s needed
to achieve meaningful progress towards this MDG.
22.
The targets calls for reducing b y half the proportion of population without access
to safe drinking water or sanitation. The country appears off-track to reaching a 50
percent reduction in the proportion of the population without access to sanitation.
Between 1992 and 2001, the percentage o f the total population with access to the
adequate quality sanitation network increased only 2 percentage points, from 7.2 percent
to 9.2 percent, while the urban population with access fell from 18.3 percent to 16.9
percent during the same period.'
23.
Among the main challenges to improve access to safe water and sanitation are
limited financial resources for expansion of service networks and difficulties in
coordinating the administration and maintenance of current infrastructure. There i s also a
need to reverse the loss o f environmental resources which requires strengthening the
support to the newly created Ministry of Environment.
Goal 7: Ensure Environmental Sustainability
Population with Access to Potable
Water (%)
70
60
50
40
30
20
10
;
Population with access to
SanitationfSewage
20.00
lono
I
0.00
I
0
1992
1997
2002
2007
2012
t
1390 1995 2000
2005
2010
' Measurements of access to sanitation vary by country and region so are not fully comparable.
53
2015
CAS Annex 1
Page 9 of 9
Summary
24.
While Paraguay has made some important progress towards the MDGs, there are
s t i l l many areas in which the country i s off-track or falling behind. Completion rates in
primary education have been increasing and are currently on track to reach universal
completion. Gender equality in education has been achieved, although the country i s far
behind from gender equality in the economic and political participation spheres. Data are
lacking on the HIV/AIDS situation, but tuberculosis has been decreasing and country
programs seem to be successful at continually reducing incidence per 100,000 people.
While under registration of child and maternal mortality makes i t difficult to completely
assess recent and prospective progress, the country seems unlikely to reach the child
mortality reduction target by the 2015 without major additional efforts on this front.
Poverty has been increasing recently putting the country off-track to reach the poverty
reduction target. Although the target o f halving the population with hunger b y 2015 i s
still possible, child malnutrition rates have risen recently. Finally, i t appears that the
country i s on track or likely to reduce the proportion of the population without access to
safe water, but i s far behind reaching the access to sanitation target.
25.
Strengthening of decentralization, scaling up successful initiatives and better
coordination of the various Government and private programs with incidence in the
MDGs i s vital to accelerate the country’s progress toward achieving these goals. The
country faces financial and technical constraints to expanding successful programs so the
commitment and support from the international community i s also necessary.
54
CAS Annex 2
Page 1 of 5
Annex 2. Evaluation of Bank Assistance and Portfolio Implementation
Previous Bank Assistance and Overall Evaluation
1.
The Bank has not played a major role in Paraguay, where i t i s only the fourth
largest official lender, after the IDB (by far the largest lender), OECF Japan and Taiwan.
Since lending began in 1952, IBRD/IDA lending has typically involved one or two
operations per year. IDA lending ended in 1977. Overall, the Bank’s operational
experience has been mixed. During the period from 1952 to 1984, lending centered on
regional agricultural developments, transport, education, water supply and sanitation, and
industrial credit. Although the projects’ physical objectives were largely achieved, the
pace o f implementation was slow and institution building efforts were generally less
successful. Two notable exceptions were in the water supply and education sectors,
where projects built successfully on Paraguay’s strong tradition o f community
participation.
2.
This was followed by a hiatus in Bank lending between 1984 and 1992. In 1984
the Bank suspended lending to Paraguay due to disagreements on macroeconomic issues.
In 1989, at the end of the Stroessner regime, the Bank resumed preparation o f new
projects and launched an intensive program o f economic and sector work (ESW) to
update i t s knowledge base. Although the ESW was well focused, many o f the Bank’s
recommendations were not adopted b y Government, for example the need to improve
financial regulation and supervision and improve management o f public enterprises,
including privatization. Most of these recommendations were not translated into action.
Similarly the impact o f the 1998 Green Cover Policy Notes prepared for the new
Administration o f President Cubas was limited, as Cubas resigned six months after the
report was issued.
3.
Bank lending resumed in 1992 with the approval of two operations. A new
Country Assistance Strategy (CAS) followed in 1993, proposing a US$270 million
program for FY94-97, focusing mainly on private sector development, agricultural
development and poverty alleviationhuman resources development. A total of nine loans
focusing on basic needs were approved between 1992 and 1997, the majority o f which
experienced implementation difficulties mainly due to weak public sector capacity, lack
o f familiarity with Bank procedures and the institutional complexity o f the projects.
4.
A transitional CAS was prepared in 1997, focusing mainly on short-term
objectives that were attainable within the country’s policy and institutional constraints.
The 1997 CAS recommended a cautious base-case scenario strategy, with a maximum of
one or two loans per year, mainly for poverty-oriented projects with an emphasis on
piloting. The 1997 CAS, however, become rapidly inoperative as the Bank decided in
1998 to halt preparation o f new projects due to the Government’s non-compliance with
Yacycreta social obligations and poor portfolio performance. The Bank’s Resident
Mission in Asuncion, which was established in 1998, was downsized to a Liaison Office
in 2000. In FY02/03, the program was reactivated with the approval of two operations
(Community Development Project and Education Reform Project).
55
CAS Annex 2
Page 2 of 5
5.
The Operations Evaluation Department (OED) prepared a Country Assistance
Evaluation (CAE) in 2001, which viewed the overall outcome o f Bank assistance to
Paraguay in the past decade unsatisfactory, due to i t s modest relevance and negligible
efficacy. In reality, the projects approved and implemented during this period, mainly
focusing on basic needs, were appropriate for the country’s realities and relevant to i t s
development agenda. Unfortunately, the implementation record was spotty, thereby
limiting the efficacy and impact of the operations. The serious implementation problems
that Bank funded operations have faced since 1992 are largely attributable to underlying
governance problems, poor institutional capacity and insufficient social and political
ownership for the administrative and economic reforms the Bank supported. Both the
efficacy and efficiency of the Bank’s assistance are rated as low in the OED report.
The report also points out that implementation has been slow across the board and
6.
that, because o f the long intervals in which there was no new lending to the country,
Paraguay has started to exhibit many of the characteristics of new borrowers, including,
inter alia, the lack o f qualified professionals who are familiar with Bank policies and
procedures. Further, in view of the Bank’s past difficulties in achieving ownership and
institutional development objectives, lack o f progress in key structural reforms and the
limited impact of ESW, the OED report rates the institutional development impact of
Bank assistance as negligible and sustainability as unlikely. The report nevertheless
admits the positive experiences in education and rural water supply, where projects built
successfully on Paraguay’s strong tradition of community participation.
Lessons Learned
7.
While the Bank’s decision not to invest heavily in Paraguay limited i t s exposure,
i t also reduced its influence. As a result, overall Bank effectiveness in Paraguay was
constrained not only by the adverse policy environment and systemic problems, but also
by the Bank’s limited role as a donor and b y two long periods o f hiatus in lending.
8.
Further, experience from the past indicates that Bank lending had limited impact
in the absence o f a minimum program o f reforms by the authorities to get on the path o f
sustained growth and poverty reduction. In addition, program reversals are to be expected
when there i s low political commitment to reforms. This was the case with the failure o f
the privatization program in 2002, which was not a part of the 1997 CAS strategy, but
evolved from the restructuring of the Asuncion Water and Sanitation Project. The
restructured project intended to support the privatization of the water and
telecommunication companies, following the enactment of privatization legislation.
Ultimately, low political commitment to the privatization process was the main cause for
program reversal.
9.
Active follow-up by the country office i s often critical for project implementation
in countries facing the same implementation difficulties as Paraguay. Since its
establishment, the local office has been substantially involved in portfolio management in
order to improve portfolio performance. Responsible portfolio management, including
semi-annual portfolio reviews (CPPRs) and the restructuring o f two projects during the
56
CAS Annex 2
Page 3 of 5
1998-2001 period, coupled with active supervision, improved portfolio performance from
“one of the ten worst” in 2000, to acceptable during the past three years (less than 25
percent o f active projects rated as problem projects), in line with the 1997 CAS
performance trigger.
10.
In retrospect, the decision to maintain a minimum presence in the country despite
the absence o f new lending proved to be the right one.2 Minimum field presence was in
fact essential for maintaining a dialogue with the previous Government and the new
administration, building contacts with civil society and the private sector, as well as for
providing a basis for reactivating the program under the present CAS.
The engagement by the World Bank Institute (WBI), which inter alia led to the
11.
establishment o f the Anti Corruption Commission, has generated important benefits,
including the recent passage of a new procurement law and a constructive dialogue with
civil society.
Finally, the lack of a common donor position on key reforms and governance
12.
issues has limited the impact and effectiveness of past Bank assistance. Donor
coordination efforts need to be substantially increased in the future if external resources
are to be effectively utilized by Government (see Annex 4).
Current Portfolio and Implementation Issues
13.
Paraguay has a small ongoing portfolio, comprising six active projects for a total
value o f US$176 million, of which US$85 million were undisbursed as o f 30 September
2003. O f the six active projects, four are rated as satisfactory, one i s rated unsatisfactory
on implementation progress (Asuncion Sewerage Project), and one has yet to become
effective (Education Reform Project). Although several implementation bottlenecks
remain to be addressed, as described in detail below, the general health o f the portfolio
has improved with respect to previous fiscal years. The general good standing of the
current portfolio therefore provides comfort to move ahead with new lending under the
upcoming CAS period.
The portfolio review carried out on October 2,2003 identified a number of
14.
systemic issues affecting the portfolio, and singled out measures to address these
problems and improve overall portfolio performance. The main generic issues affecting
the portfolio include the following:
High Turnover of Staff at the Project Units. PIU Directors and other key PIU
staff have often been appointed on the basis of political affiliation rather than
1
Four projects were closed over the last three fiscal years (Land Use Rationalization, Private Sector
Development/El Nino, Eight Highway and Secondary Education Improvement). O f these, the first two
projects received an overall unsatisfactory rating by OED, and the latter two received an overall
satisfactory rating.
2
After the Resident Mission was downsized to Liaison Office, the former Resident Representative stayed
on in Paraguay, working half-time between Paraguay and Argentina as a country economist.
57
CAS Annex 2
Page 4 of 5
qualifications, and they tend to be replaced whenever a new Minister i s appointed
(this was particularly problematic during the past Presidential period, e.g. seven
Ministers o f Agriculture were appointed in five years). The high turnover of
project staff considerably slows down the pace o f implementation and inhibits
capacity building in project management and administration;
Luck of Timely and Adequate Availability of Counterpart Funds. This has been
the source o f considerable delays in project implementation in the past, due to
increasing fiscal constraints.
Cumbersome Proceduresfor the Flow of Funds to the Projects. The main issue
i s that the Special Accounts are hosted in the Banco Central de Paraguay (BCP)
and i t takes the PIUs about 20 to 30 days to access the funds. This negatively
impact the projects’ ability to disburse and implement quickly.
Delays in Effectiveness and Project Start-up. The delays stem largely from the
current legislative practices, requiring all projects to be approved on an individual
basis b y Congress before they can become effective. Both IDB and the Bank have
flagged this as a major hindrance to project execution.
Limited Disbursement Capacity and Limited Knowledge of Bank Procedures.
The general weakness in project administration i s particularly noticeable in the
disbursement area. Close supervision o f procurement has also been necessary.
To address these constraints, the Bank has agreed with the new Administration on
15.
a series of measures that w i l l improve the administrative climate for future Bank
operations in the country. To address the issue of high staff turnover at the Plus, the
Government proposes that the new Central Unit for Public Investments (Unidud Central
de Inversidn Pu’blicu), mainly charged with aid management and donor coordination
functions, issue norms on the selection, appointment and performance o f staff for
externally financed projects. This would ensure that project staff w i l l be hired on the
basis o f competitive processes and i t s performance assessed on a yearly basis.
Concerning counterpart, the Government has committed to provide 100 percent of
counterpart funding for externally financed projects starting in 2004. To address the issue
posed by the cumbersome procedures for the flow of funds to the projects, Government i s
preparing a revised manual o f Treasury procedures and the Bank w i l l be given the
opportunity to comment on the draft manual, completion o f which i s expected in the
medium-term.
16.
The Government also recognized the difficulties posed b y the current legislative
requirements on the timeliness of project effectiveness and start-up, and i s identifying
options to resolve the issue, including informing early and more extensively members o f
Congress on the operations that are going to be presented for their approval. Finally, in
order to address the delays created b y the lack o f knowledge of Bank procedures, and
particularly b y the repeated rejection of improperly completed withdrawal applications,
the Bank w i l l train the administrative officer in the Asuncion office in the Bank’s
58
CAS Annex 2
Page 5 of 5
disbursement procedures and this person w i l l be available to assist project staff. As a
complementary measure, LOA w i l l field a disbursement mission on a semi-yearly basis
to assist the project units.
17.
The main generic issues affecting portfolio performance and the agreed actions
are summarized in the table below.
Agreed Actions
Issues
Staff Turnover at the Project Units
Central Unit for Public Investments to issue norms
on technical nature of appointments, hiring by merit
and qualifications, and to conduct annual evaluation
of performance
Commitment to provide 100% o f counterpart funds
for externally funded projects, starting with the
2004 budget
Completion in the medium-term of a revised manual
of Treasury procedures, incorporating comments
from the Bank
Various options explored, including the provision of
more extensive and early information to Congress
on upcoming operations to be presented for
approval
Training of a disbursement assistant in the Bank’s
office in Asuncion to screen withdrawal
applications. Fielding of a disbursement mission
twice a year to provide troubleshooting support to
project units.
Lack o f Availability of Counterpart Funds
Cumbersome Procedures for Flow of Funds
Delays in Effectiveness and Project Start-up
Limited Disbursement Capacity
59
CAS Annex 3
Page 1 of 6
Annex 3. Summary of Consultations with Civil Society
1.
Building on an open relationship with leading civil society organizations (CSOs),
the Bank i s starting a wide program of civil society organizations activities throughout
the country. To ensure that the analysis on which its assistance strategy would be based i s
as sound, and reflective as possible of the experiences of most of the Paraguayans, the
Bank turned to its partners in civil society.
2.
In September and October of 2003, the Bank held three consultative meetings
with representatives of leading Paraguayan Civil Society Organizations (CSOs). The
purpose o f the consultations was to strengthen the Bank’s support to Paraguay b y hearing
directly from grass-roots organizations its opinions about governance, economic growth
and social policies, among other issues. The CSOs are the vehicle to hear the poorest
and most vulnerable people in the country, that w i l l be the focus of the 2003 CAS. In
each o f the discussions, Bank management and staff sought to provide for an open and
candid discussion about the role of the Bank, the quality of its assistance. In addition the
Bank sought to receive practical suggestions that can help i t to improve i t s effectiveness.
3.
The first meeting was held in the capital, Asuncion, and the two others in the
interior, in the cities of Villarica and Bella Vista Sur. A diverse variety o f organizations
participated in the discussions, including faith groups, trade unions, farmer cooperatives,
small and medium enterprises federations, academic community, women organizations
and youth alliances, local and international NGOs, the press, and groups representing
indigenous people, the unemployed, students, teachers and other professionals. Local
and regional (departmental) government officials were also present.
Despite the number o f organizations and variety of interests represented, a
4.
number o f common themes emerged. First, there was remarkable convergence around
the proposition that the Bank’s assistance could have greater impact on poverty with
increased participation of civil society. Second, in terms of where the Bank should focus
i t s support, CSOs in each of the consultations identified governance as the main target,
with issues of agriculture and land titles, access to a good quality o f health and education,
access to adequate infrastructure in rural and urban areas, access to mechanisms of credit
for the poorest, especial environmental compensations and social monitor o f the public
expenditures as the key areas where an improved and more open public sector could most
effectively support the development process.
View of civil society on the development objectives and priorities for Paraguay
5.
In addition to specific issues about improving and making more productive the
partnership between the Bank and civil society in Paraguay, there was a great deal o f
valuable discussion about three key policy areas to be pursued in coordination b y
Government, civil society and the international community: (i)
governance; (ii)
economic
growth, and (iii)
social inclusion.
60
CAS Annex 3
Page 2 of 6
6.
There was broad recognition that these policy goals can not be pursued in
isolation, and that latter two o f these priorities - economic growth and social inclusion are impossible without clear and determined efforts on the first, good governance. Here
also there was a great deal of discussion about reducing corruption and even the basic
ethic and civic values on which public policy rests.
7.
Corruption was identified as one of the most challenging problems o f the country.
I t i s perceived as a major hindrance to achieve sustainable development, and as limiting
the full effectiveness of projects financed b y the World Bank. In particular, inadequate
transparency in bidding documents and deep political clientelism were recurrent themes.
Wider and more consistent publication of bidding documents was one common suggested
response. Fixing the overlapping administrative jurisdictions and diffusion of
responsibilities which many felt characterize institutional system was another. Here,
many suggested administrative decentralization and increased autonomy to local
Governments in the design of their development strategies as a practical policy step. This
i s fully consistent with a broader feeling by participants that more decentralization to the
local level - and to community groups and NGOs would contribute to better and more
efficient policymaking, including World Bank supported projects. Finally, i t was
emphasized that the efficient decentralization of jurisdictions should be performed
together with the corresponding decentralization of resources.
8.
The formation o f ethic and civic values that encourage the exercise of a
committed and responsible citizenship and foster industriousness as the irreplaceable
source o f economic growth are perceived as indispensable requisites for the sustainable
development o f Paraguay. Education would play a substantive role in this, b y including
the family in formal education and in the development of a curricula that would help
prepare students to meet the particular needs of their communities. This, i t was thought,
would promote a greater sense of belonging to the whole of society, and o f shared
responsibilities on the development of the country.
Regarding economic growth, substantial attention was placed on supporting
9.
agriculture, including through direct assistance to small farmers and land titles. Specific
ideas included increasing access to credit and crop insurance, improving technical
capacity and information, and reforming the system o f land and property titles, especially
with the indigenous people.
10.
There was also much discussion about strengthening agricultural infrastructure.
One example i s the need to improve communications between different regions o f the
country, as informal contact among small producers throughout the country i s difficult
due to the precarious infrastructure of the existing rural roads. A second i s the lack o f
coordination o f agricultural production that would allow for producers to benefit from
comparative advantages. I t i s estimated that the implementation of policies for fostering
geographical integration among small producers would increase the volumes produced
based on crop complementary planning, reduce production costs, socialize technical
expertise, and design joint strategies to access markets.
61
CAS Annex 3
Page 3 of 6
11.
The consultations were particularly useful in providing space to address how
vulnerable segments of the population, such as indigenous people, women, children and
youth more generally, are affected b y the lack of jobs and economic opportunities.
Poor, or virtually nonexistent, access to basic social services such as health care
12.
and education was a consistent theme. In health, the situation was essentially
characterized as “inequitable, exclusionary and discriminatory”. And while the
educational system i s perceived to be in better condition, i t was felt that coverage and
quality i s still far from satisfactory. I t was also raised the lack of bilingual education in a
Country where the poorest are mainly guarani speakers.
13.
Paraguay i s receiving a lot of money from the international organizations (donors
and multilateral financial institutions) but the CSOs has not control over it, producing a
lack of balance o f power among the civil society depending of the their relationships with
governmental leaders.
14.
The CSOs during the consultations recognized their co-responsibility in the
country main problems, e.g., the passive attitude o f the CSOs facing corruption and lack
o f participation. The CSOs self assessment concluded that they need to improve the
quality o f social inclusion by reverting the inadequate information about the programs,
the lack o f participation in decision making, the unsuitable focalisation o f social
programs and the cultural obstacles for accessing public services.
The Role of the Bank
15.
With respect to identifying an increased role for civil society in helping the Bank
in its support to Paraguay, participants focused on: i)
design and implementation o f
projects, ii)supervision of projects, and iii)capacity building among CSOs.
First, the design of investment projects would require a more in-depth evaluation
16.
of i t s potential social and environmental impact, and a more accurate knowledge of
Paraguayan political culture and regional particularities. The Natural Resources
Management Project (PARN) and the Pilot Community Development Project
(PRODECO) projects were cited as examples o f designs which suffered from inadequate
understanding of, and sensitivity to, local concerns.
17.
Second, many participants expressed concern about the capability of the
supervision mechanisms employed b y the Bank to prevent irregularities in the
management o f the disbursed funds. The lack of periodicity, scarce knowledge o f local
usage, and insufficient depth o f supervision missions result in unrealistic evaluations,
Many participants offered that increased participation of local CSOs, including through
the establishment of formal monitoring committees, could improve the quality and
transparency o f the supervision process.
Many believed that the Bank could do more to welcome the contributions o f the
18.
skilled and committed Paraguayan civil society. Experience has amply demonstrated that
62
CAS Annex 3
Page 4 of 6
the participation of civil society in the design, implementation and monitoring of the
projects increases efficiency, while saving resources in administrative expenses. In this
context, participants requested: (i)
better access to information; (ii)
more training
opportunities; and (iii)
direct management of disbursed funds.
19.
Third, CSOs representatives asked that the Bank provide more, and more timely,
information to enable their adequate participation in Bank projects from inception
through implementation. Toward this end, participants reminded staff that i t i s necessary
to diversify the dissemination channels as computers and other technological equipment
are not o f commonly available in Paraguay.
20.
Related to the above, participants also stressed that the need for training and other
forms o f capacity building to ensure their most effective participation in WB projects.
Although this was a common request, i t came more frequently from organizations from
within the interior of the country and rural areas, where there i s a lack o f technical
knowledge which compromises the ability to compete on public biddings, access
government programs and/or take part on initiatives undertaken b y the World Bank.
2 1.
Moreover, many CSOs’ representatives indicated that real participation requires
adequate financing. In their perception, the lack o f financing sources i s the bigger
obstacle that civil society faces for achieving a true impact on public policies and in the
development process o f the country. In this context, and in light of the growing attention
paid to increasing scrutiny in the use o f public funds, they have requested the Bank to
consider a project design that would allow direct disbursement o f resources to civil
society.
There was a welcome recognition b y civil society represented in the consultations
22.
that the Government’s stated commitment to the fight against corruption and for widely
shared economic growth provides potential opportunities for a more active participation
of civil society in the change process. Nevertheless, there was very clearly a wait-andsee attitude among many to determine whether these commitments w i l l materialize into
real improvements in access to and influence on decision-makers.
W o r l d Bank’s comments on the views of civil society
The quality o f the interventions and the commitment of the participants in the
23.
consultations have made dear that civil society in Paraguay can make a major
contribution to the development process in their country.
24.
The Bank i s already working in cooperation with its CSOs partners to strengthen
coordination and information sharing between the Bank, the Government and civil
society, and i s considering approaches to support capacity building in the NGOs and
other groups which could participate in the preparation and implementation o f Banksupported projects. More formally, the Bank i s working toward the creation o f a
coordinated “Monitoring Committee” made up of Bank staff, international, organisations
63
CAS Annex 3
Page 5 of 6
(UNDP, GTZ) CSOs and local Government to provide additional supervision and control
o f projects.
25.
Indeed, as useful as the consultations were in generating new ideas and proposals
for cooperation, they were equally important in demonstrating the extent to which even
sophisticated representatives of civil society are unaware of how the Bank provides
support, particularly with respect. In this regard, in thinking together about new
approaches to intensify communication between the Bank and civil society, i t was helpful
to identify areas where collaborative work i s already underway, and this could be built
on.
26.
For example, local communities are already working with the Bank towards
execution o f a number o f Bank supported projects. A Rural Water Supply and Sanitation
Project i s administered b y local “Sanitation Boards”; PARN, which works directly with
associations o f farmers in the planning of micro river basins and with small lowresources groups of rural producers; and PRODECO, which i s jointly administered civil
society organizations and the local Government.
Even in project design, there are interesting examples about which many
27.
participants were unaware. For instance, a dynamic consultation involving teachers
unions, parents and other crucial stakeholders contributed substantially to the
development of the last Secondary Education Reform project.
Actions proposed by the Bank to strengthen its relationship with CSOs
W i t h the goal of contributing to the consolidation of a mature civil society, able to
28.
actively participate in the activities of the Bank and to provide suggestions for the
sustainable development of the country, the Bank recognizes the need to: (i)
increase the
initiatives o f information transmission to civil society; (ii)
develop training programs for
CSOs; and (iii)
deepen the dialogue between CSOs and the Bank.
29.
T o secure these objectives, the Bank intends to
a
H i r e a Civil Society and Social Development Specialist for the Paraguay office to
improve this incipient relationship between WB and the Paraguayan citizens.
a
Create a section in the Bank’s Paraguay web page for civil society, which would
provide information related to: projects under implementation, possibilities for
civil society involvement in Bank supported projects; findings of the Social
Monitor, scheduling of supervision missions; results o f the Small Grants Program,
and any other relevant information for CSOs.
a
Circulate written information on the Bank’s activities on a regular basis; and
a
Design a proposal to apply the Institutional Development Fund (IDF) for
strengthening o f CSOs in Paraguay.
64
CAS Annex 3
Page 6.0f 6
Evaluate the current social monitor initiative (that monitors four current Bank
projects until the second semester 2003) and widen this initiative if i t i s
considered by the Government, the Bank and the civil society an adequate tool for
improving social auditing mechanisms.
Integrate Paraguayan civil society in the participatory discussions in the region,
especially about PRSP, integration and equity, empowerment and social
accountability.
Develop a common strategy for including social development and participatory
issues in the Mercosur Agenda.
Dissemination among civil society nation-wide of studies produced b y the WB in
sensitive issues like, civil society profile, gender review, indigenous people, etc.
Disseminate the results o f the small grant program in the past two years, evaluate
the main results of the program and help in learning process around these
experiences and use this knowledge provided b y the grassroots organizations in
the loans’ design and execution.
Provide technical assistance to CSOs’ using the synergies of the southern cone
initiatives.
65
CAS Annex 4
Page 1 of 3
Annex 4. Aid Coordination
1.
Paraguay i s one of the few Bank clients that has no consultative group or formal
aid coordination mechanism. The Government has never requested any particular donor
to take the leadership in aid coordination, and no donor has taken up this challenge,
although the local donor representatives do meet on an ad hoc basis on topics such as
health and decentralization. The Government has mainly engaged with donors on a oneon-one basis. In addition, the aid coordination and management function within
Government has been split between the Ministry o f Finance and the Secretariat o f
Planning in the Presidency and lacked a close coordination between the two. As a result,
aid coordination has been very weak in the past.
2.
In designing its projects, the Bank has coordinated with the IDB, b y far the largest
donor, and several Bank operations have been complementary to IDB-funded projects.
For example, Bank projects have financed secondary education, while IDB projects have
financed primary education; in maternal and child health, the Bank has been active in six
departments and the IDB in others. In addition, there has been good collaboration
between the Bank and the IDB in the preparation of two joint fiduciary assessments, the
Country Procurement Assessment Report and the Country Financial Accountability
Assessment. Coordination between the two institutions on macro-conditionalities has
been limited, however. Coordination between the Bank and the UNDP has been good,
with the UNDP administering the financial management aspects o f several Bank-funded
loans and grants. The relationship has been facilitated b y the location of the Paraguay
country office in the UN House.
3.
Although Paraguay,lacked up to now an agreement with the IMF, collaboration
between the Bank and the Fund has been close and constructive, and has taken place in
the form o f frequent dialogue and consultations both at headquarters and in the field.
Such close collaboration has been particularly evident in the ongoing preparation of the
Financial Sector Adjustment Loan as well as in the preparation of the Economic
Recovery Structural Adjustment Loan.
The limited impact of past donor assistance i s partially attributable to the lack o f
4.
efforts on the part o f both Government and donors to better harmonize and coordinate
their programs and to reach common positions on structural and sectoral reforms. I t i s
therefore imperative that donor coordination be improved in the future if the country i s to
utilize donor financing more effectively and to attract higher levels o f external support.
This w i l l be particularly important if the Government wishes to mobilize additional
external support to fund new poverty reduction interventions as part of the recently
prepared Poverty Reduction Strategy Paper (PRSP), once i t i s formally adopted b y the
Government.
5.
Optimally, the Government should take a leadership position in the coordination
and management of foreign aid. The new administration has recognized the importance
of increasing donor coordination efforts and has taken a number o f administrative
measures, including the creation within the Ministry o f Finance o f a unit dedicated to the
66
CAS Annex 4
Page 2 of 3
management of external assistance (the Central Unit for Public Investment) and the
decision to incorporate the Planning Secretariat in the Ministry o f Finance (for which
legislation has been sent to Congress).
The attached Partnership Matrix provides an indication of the distribution o f
6.
external assistance and interests by donor.
67
Enterprise Privatization
Decentralization
ministration
68
1% 1 I I I I I
CAS Annex A1
Page 1 of 2
Annex A1
Paraguay at a Glance
POVERTY and SOCIAL
2002
Population, mid-year (millions)
GNI per capita (Atlas method, US$J
GNI (Atlas method, US$ billions)
11/21/03
Paraguay
Latin
America
& Carib.
LowermiddleIncome
5.8
1,170
6.4
527
3,280
1,727
2,411
1,390
3,352
2.6
3.2
1.5
2.2
10
12
78
6
111
113
110
76
71
27
9
86
11
130
131
128
49
69
30
11
81
13
111
111
110
DeVel0m”t diamond‘
Life expectancy
T
Average annual growth, 1996-02
Population I%)
Labor force (%)
Most recent estimate (latest year available, 1996-02)
Poverty (% of population below national poverty line)
Urban population (% of total population)
Life expectancy at birth (years)
infant mortality (per 7,000 live births)
Child malnutrition (% of children under 5 )
Access to an improved water source (% ofpopulatlon)
Illiteracy (% of population age IS+)
Gross primary enrollment (% of school-age population)
Male
Female
34
57
71
25
GNI
per
capita
Gross
primary
nrollment
1
Access to improved water source
-
Paraguay
Lower-middle-income group
~
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1982
1992
2001
2002
GDP (US$ billions)
Gross domestic investmenuGDP
Exports of goods and services/GDP
Gross domestic savingslGDP
Gross national savingsiGDP
5.4
25.6
12.1
18.0
19.2
6.4
22.9
28.1
12.4
12.7
6.8
19 8
27.4
10.8
15.7
56
18 6
33 6
13 6
16 9
Current account balance/GDP
interest paymentsiGDP
Total debffGDP
Total debt service/exports
Present value of debffGDP
Present value of debtiexports
-9.3
0.8
24.0
17.9
-0.9
3.6
25.3
24.2
-4.1
1.8
41.2
14.2
17
19
48 4
11 6
1982-92
1992-02
2001
2002
2002-06
3.3
0.2
12.7
1.5
-1.0
-8.0
2.7
0.1
-0.4
-2.2
-4.8
0.1
15
-1 1
37
1982
1992
2001
2002
25.9
26.0
16.4
48.1
24.5
25.9
16.5
49.6
29.0
18.7
14.1
52.3
29.4
18.2
14.0
52.4
74.9
7.1
19.8
81.1
6.5
38.6
79.6
9.6
36.4
76.8
9.6
38.6
1982-92
1992-02
2001
2002
3.7
3.4
0.7
3.1
2.1
2.8
0.8
0.5
2.2
-9.8
-6.0
-0.6
1.4
-7.4
-0.7
0.2
3.4
6.3
3.8
12.3
2.4
3.3
-2.5
-4.1
7.8
-11.0
-16.0
-1.6
-4.1
-4.4
-7.3
-15.0
(average annual growth)
GDP
GDP per capita
Exports of goods and services
STRUCTURE of the ECONOMY
(% of GDP)
Agriculture
Industry
Manufacturing
Services
Private consumption
General government consumption
Imports of goods and services
(average annual growth)
Agriculture
Industry
Manufacturing
Services
Private consumption
General government consumption
Gross domestic investment
Imports of goods and services
Economic ratios.
Trade
T
Domestic
savings
+
Investment
1
Indebtedness
-**Paraguay
~
Lower-middle-income group
-20
P
G
D
I
-GDP
Growth of exports and imports (77)
lo
T
* 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.
69
I
CAS Annex A1
Page 2 of 2
Annex A-1 (Continued)
PRICES and GOVERNMENT FINANCE
Domestic prices
(55 change)
Consumer prices
Implicit GDP deflator
1982
1992
2001
2002
5.1
15.1
14.7
7.3
1.7
14.6
12.0
Government finance
I% of GDP, includes current grants)
Current revenue
Current budget balance
Overall sufplus/deficit
TRADE
(US$ mi//ions)
Total exports (fob)
Soy products
cotton
Manufactures
Total imports (cif)
Food
Fuel and energy
Capital goods
(US$ millions)
Exports of goods and services
Imports of goods and services
Resource balance
Net income
Net current transfers
1982
13.4
2.1
-0.6
17.2
1.6
-1.1
16.0
0.9
-3.2
1992
2001
2002
2,118
137
209
1,461
1,988
751
145
404
1,883
356
84
1,210
2,499
1,032
181
491
1,917
341
36
1,274
2,162
877
154
418
1982
1992
2001
2002
670
1,209
-539
2,362
2,453
-91
1,876
2,495
-619
1,878
2,159
-281
32
2
-28
62
175
166
95
280
-506
-57
-278
94
Financing items (net)
Changes in net reserves
382
124
-303
360
327
-49
-12
-82
136.0
614
1,500.0
723
4,105.9
641
5 7 1 5.9
1982
1992
2001
2002
1,298
147
47
1,633
213
39
2,820
205
27
2,706
216
25
Total debt service
IBRD
IDA
142
16
1
626
62
1
266
25
2
218
26
2
Composition of net resource flows
Official grants
Official creditors
Private creditors
Foreign direct investment
Portfolio equity
8
91
152
37
0
43
-84
-168
118
0
1
-29
82
0
-7
-30
-8
-30
99
44
6
37
10
27
52
10
43
-33
21
-54
0
27
15
12
11
0
9
14
17
-3
11
-14
EXTERNAL DEBT and RESOURCE FLOWS
(US$ millions)
Total debt outstanding and disbursed
IBRD
IDA
World Bank program
Commitments
Disbursements
Principal repayments
Net flows
Interest payments
Net transfers
10
0
9e
97
w
99
deflator
-GDP
01
02
"0"CPI
I Exporl and import levels ( U S mill.)
I
Current account balance
Memo:
Reserves including gold (US$ millions)
Conversion rate (DEC, local/US$)
2o T
115
5
Export price index (1995=100)
Import price index (1995=100)
Terms of trade (1995=100)
BALANCE of PAYMENTS
I
Inflation (%)
S Exports
Imports
Current account balance to GDP (%)
3 T
1
Composition of 2001 debt (USS mill.)
G 462
A *05B 27
D 913
F 807
E: 406
A . IBRD
B .IDA
C - IMF
D - Other multiiateral
E - Bilateral
F - Private
G - Short-term
11/21103
70
I
CAS Annex B2
Annex B2
Selected Indicators of Bank Portfolio Performance and Management
As of 11/14/2003
Indicator
Portfolio Assessment
Number of Projects Under Implementation a
Average Implementation Period (years)
Percent of Problem Projects by Number
Percent of Problem Projects by Amount as
Percent of Projects at Risk by Number a , d
Percent of Projects at Risk by Amount a,
Disbursement Ratio (Yo)e
Portfolio Management
CPPR during the year (yedno)
Supervision Resources (total US$)
Average Supervision (US$/project)
Memorandum Item
Proj Eva1 by OED by Number
Proj Eva1 by OED by Amt (US$ millions)
% of OED Projects Rated U or HU by Number
of OED Projects Rated U or HU by Amt
2001
2002
2003
2004
6
5.9
0.0
0.0
16.7
23.0
28.6
5
5.3
20.0
32.8
40.0
59.1
21.2
5
6.3
20.0
20.7
60.0
52.9
15.2
6
5.6
16.7
17.9
50.0
45.7
9.2
Since FY 80 Last Five FYs
27
4
592.0
165.0
37.0
50.0
43.8
45.8
As shown in the Annual Report on Portfolio Performance (except for current FY).
Average age of projects in the Bank's country portfolio.
Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).
As defined under the Portfolio Improvement Program.
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.
a.
b.
c.
d.
e.
71
CAS Annex B3
Annex B3
IBRDDDA Program Summary
As of 11/14/2003
Proposed IBRDADA Base-Case Lending Program a
Fiscal year
Proj ID
US$(M)
2004
PY Economic Recovery Loan
PY Financial Sector Adj. Loan
PY Financial Sector T.A.
PY Ministry of Excellence T.A.
Total
30.0
50.0
7.0
10.0
2005
2006
2007
Strategic Rewards b
(H/WL)
lmplemenfafion b
Risks (H/WL)
H
H
M
H
H
H
L
M
M
M
H
M
L
M
97.0 (c)
PY- Health Project II
PY Social Protection Monitoring TA
PY Sust, Rural Investment
Total
25.0
PY Forestry
PY Road Maintenance
PY Municipal Finance Administration
25.0
H
M
50.0
H
20.0
H
M
H
M
M
M
M
M
M
10.0
30.0
65.0
Total
95.0
Secondary Education 111
Rural Water
Private Sector Development T.A.
Total
25.0
30.0
13.0
68.0
Overall Total
325.0
(c) Excludes Education Reform Project ($24 million) approved in July 2003 as part of 1997 CAS allocation
72
CAS Annex B4
Annex B4
Summary of Nonlending Services
As of 11/14/2003
Product
Completion FY
Cost (US$OOO)
Audience a
Objective
Recent completions
Poverty Assessment
Financial Sector Review
CPAR
Policy Options for the New Adm.
02
03
03
03
303.0
GIDIB
KGlPD
135.8
133.8
GIDIB
GIDIB
KGIPS
KGIPD
Underway
CFAA
Social Protection
Health Strategy
Inst. Development Assessment
04
04
05
05
88.2
259.5
115.0
165.0
GIDIB
GIDIB
GIDIB
GIDIB
KGIPS
KGIPS
KGIPS
KGIPS
Planned
PER
Investment Climate
Land Taxation
Evaluation of Sec. Education
Financial Sector Update
CEM
Poverty Update
05
05
05
06
06
06
07
165.0
115.0
115.0
85.0
165.0
85.0
85.0
GIDIB
GIDIB
GIDIB
GIDIB
GIDIBIPD
GIDIBIPD
GIDIBIPD
KGIPS
KGIPS
KGIPS
KGIPS
KGIPD
KGIPDIPS
KGIPD
a. Government, donor, Bank, public dissemination.
b. Knowledge generation, public debate, problem-solving.
73
CAS Annex B6
74
CAS Annex B6
75
CAS Annex 8 7
Annex B7
Paraguay Key Exposure Indicators
-
Actual
Indicator
1998
1999
Estimate
2000
2001
2002
Projected
203
2004
2005
2006
2125
2641
2519
2359
2481
2654
2507
2552
2470
28
476
29
-29
-37
-60
-85
-35
-30
206
185
259
224
215
203
TDO/XGS
59.9%
114.5%
108.5%
125.7%
132.1%
125.7%
128.0%
120.2%
110.7%
TDO/CDP
24.7%
34.1%
32.6%
34.4%
44.4%
49.8%
48.8%
46.4%
43.1%
TDS/XGS
5.8%
8.0%
11.3%
14.2%
11.6%
12.3%
11.1%
10.1%
9.1%
32.3
27.8
27.9
28.1
27.6
IBRD DS/public D S
16.2
17.5
11.3
9.3
11.9
17.4
16.7
17.1
17.2
Preferred creditor DS/public
51.7
62.9
43.2
47.6
58.6
Total debt outstanding and
disbursed (TDO) (US$m)
Net disbursements (US$m)
Total debt service (TDS)
262
266
218
(US$mla
Debt and debt service indicators
(%I
Concessional/TDO
IBRD exposure indicators (%)
DS (%)
0.9
1.4
1.3
1.3
1.4
165
182
20 1
205
216
238
Share of IBRD portfolio (%)
0.1
0.1
0.2
0.2
0.2
0.2
0.2
0.3
I D A TDO (lJS$m)
31
30
28
27
25
24
22
20
IBRD DSKGS
IBRD 'TDO (US$m)
2.1
1.9.
273
1.7
1.6
311
328
Of which present value o f
guarantees (US$m)
IFC (US$m)
Loans
Equity and quasi-equity
MICA
MICA guarantees (USSm)
76
19
77