Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 66782-PY

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT

FOR

THE REPUBLIC OF PARAGUAY

FOR THE PERIOD 2009-2013

April 9, 2012

Argentina, Paraguay and Uruguay

Country Management Unit

Latin America and the Caribbean Region

This document is being made publicly available prior to Board consideration. This does

not imply a presumed outcome. This document may be updated following Board

consideration and the updated document would be made publicly available in accordance

with the Bank‘s policy on Access to Information.

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PARAGUAY - GOVERNMENT FISCAL YEAR

January 1 – December 31

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of March 21, 2012)

Guaraní 4,280

US$ 1.00

Weights and Measures

Metric System

Vice President:

Country Director:

Co-Task Team Leader:

Co-Task Team Leader:

Hasan A. Tuluy

Penelope Brook

Andrew Follmer

Rossana Polastri

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities

BCP Central Bank of Paraguay (Banco Central de Paraguay)

CCT Conditional Cash Transfer

CEP Council for State-Owned Enterprises (Consejo de Empresas Públicas)

CPPR Country Portfolio Performance Review

CMU Country Management Unit

CPS Country Partnership Strategy

DPL Development Policy Loan

EU European Union

FHU Family Health Unit

FONDES National Fund for Economic and Social Development (Fondo Nacional

para el Desarrollo Económico y Social)

FSAP Financial Sector Assessment Program

GAC Governance and Anti-corruption

GDP Gross Domestic Product

GEF Global Environmental Facility

GTZ German Agency for International Cooperation

IBRD International Bank for Reconstruction and Development

IDA International Development Association

IADB Inter-American Development Bank

IDF Institutional Development Fund

IFC International Finance Corporation

IMF International Monetary Fund

MAG Ministry of Agriculture and Livestock (Ministerio de Agricultura y

Ganadería)

MECIP Paraguayan Standard Model of Internal Control (Modelo Estándar de

Control Interno del Paraguay)

MSME Medium and Small Enterprises

NLTA

PEFA

PPIAF

PFM

Non-Lending Technical Assistance

Public Expenditure and Financial Accountability

Public Financial Management

Public-Private Infrastructure Advisory Facility

PPP Public-Private Partnership

PR Progress Report

SEAM Environment Secretariat (Secretaría del Ambiente)

SFLAC Spanish Trust Fund

SFP Secretariat of Public Services (Secretaria de la Función Pública)

SOE State-owned Enterprise

TA

TTL

Technical Assistance

Task Team leader

UMEP State Owned Enterprise Monitoring Unit (Unidad de Monitoreo de

Empresas Públicas)

UN United Nations

WB

Y-O-Y

World Bank

Year-on-year

ACKNOWLEDGEMENTS

This CPSPR was prepared under the guidance of Penelope Brook, Country Director, by

Andrew Follmer and Rossana Polastri (TTLs), John Barham, and Ricardo Habalian.

The Bank team greatly appreciates the collaboration and contributions of the Government of

Paraguay in the preparation of the Country Partnership Strategy (CPS) progress report. In

particular, the team thanks the Minister of Finance, Mr. Dionisio Borda, and his team for the

insightful suggestions during the progress report preparation and portfolio reviews. Special

thanks also to members of the international community in Paraguay, think tanks, and civil

society in general who were consulted.

Contributions are gratefully acknowledged from Marlo Acerbi, Alejandro Alcala, Diego

Arias, Alexandre Arrobbio, Daniel Benitez, Mikul Bhatia, Yanina Budkin, Eva Clemente,

Bruce Courtney, Robert Davis, Rafael De Hoyos, Carolina Diaz-Bonilla, Victor Dumas, Ruth

Gonzalez, Michele Gragnolati, Abid Hasan, Thomas Haven, Peter Holland, Jane Hwang,

Michel Kerf, Lizmara Kirchner, Friederike Koehler-Geib, Mariano Lafuente, Barbara Mierau-

Klein, Juan Martin Moreno, Arturo Muente, Zafer Mustafaoglu, Renato Nardello, Maria

Margarita Nunez, Luis Orlando Perez, Renan Poveda, Christophe Prevost, Tatiana

Proskuryakova, Robin Rajack, David Reinstein, Patrick Rittenauer, Benjamin Roseth,

Graciela Sanchez, Miguel Vargas-Ramirez, Alys Willman, and Tevfik Yaprak.

Administrative support was provided by Carla Cutolo.

REPUBLIC OF PARAGUAY

COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT

TABLE OF CONTENTS

EXECUTIVE SUMMARY ..................................................................................................... I

I. INTRODUCTION .............................................................................................................. 1

II. COUNTRY CONTEXT ...................................................................................................... 2

A. RECENT DEVELOPMENTS ................................................................................................... 2

B. OUTLOOK ........................................................................................................................... 3

III. PROGRESS TOWARDS CPS OUTCOMES .............................................................. 5

C. PROGRAM IMPLEMENTATION AND PORTFOLIO PERFORMANCE ........................................... 5

D. RESULTS TO DATE .............................................................................................................. 6

E. ADJUSTMENTS TO THE CPS RESULTS FRAMEWORK .......................................................... 12

IV. FUTURE ENGAGEMENT ........................................................................................... 13

V. PROGRAM RISKS AND MITIGATION ................................................................... 14

ANNEXES

ANNEX 1: UPDATED RESULTS FRAMEWORK ......................................................................... 16

ANNEX 2. SUMMARY OF CHANGES TO CPS RESULTS FRAMEWORK ...................................... 24

ANNEX 3. PARAGUAY IBRD LENDING AND GOVERNMENT-EXECUTED TRUST FUND

PROGRAM .............................................................................................................................. 27

ANNEX 4. AAA PROGRAM IN PARAGUAY, FY10-FY13 ........................................................ 28

ANNEX 5. OPERATIONS PORTFOLIO (IBRD/IDA AND GEF GRANTS) .................................... 29

ANNEX 6. PARAGUAY: IFC INVESTMENT OPERATIONS PROGRAM ........................................ 30

ANNEX 7. IFC COMMITTED AND DISBURSED OUTSTANDING INVESTMENT PORTFOLIO ........ 31

ANNEX 8. SELECTED INDICATORS* OF BANK PERFORMANCE ............................................... 32

ANNEX 9. PARAGUAY AT A GLANCE ..................................................................................... 33

ANNEX 10. GROWTH AND POVERTY TRENDS IN PARAGUAY 2003-2010 ............................... 35

ANNEX 11. FINANCING GAP .................................................................................................. 38

ANNEX 12. DEBT SUSTAINABILITY ANALYSIS ....................................................................... 39

i

EXECUTIVE SUMMARY

The development goals defined in the CPS remain aligned with the Government’s

agenda for the second period of the strategy. The CPS envisioned three main goals:

supporting the transition to a modern economy through improving governance and reducing

corruption; addressing the needs of vulnerable groups; and restoring growth in the aftermath

of regional financial crisis. This last goal was achieved successfully in 2010, with Paraguay

registering an impressive 15 percent growth rate. However, the benefits of strong recovery

were not shared by a large portion of the population, thus highlighting the need to

increasingly focus on equity going forward.

The 2009 CPS was not a joint Bank-IFC CPS as the IFC was not engaged in Paraguay at

the time the CPS was prepared. However, the IFC has made significant progress since re-

engaging with Paraguay in 2009, nearly tripling the size of its Paraguay portfolio between

FY08 and FY12. Paraguay has proven an opportune environment for innovative IFC work.

High poverty and inequality rates continue to be major development challenges in

Paraguay despite noticeable improvements over the last decade. Sound macroeconomic

management and a number of key social reforms have contributed to a declining trend in

poverty. Nevertheless, poverty and inequality rates remain high. Poverty was 34.7 percent in

2010, while the extreme poverty rate of 19.4 percent places Paraguay among the poorest

countries in Latin America. Inequality is also among the highest in the LAC region, with a

Gini coefficient of 0.512. Rural households account for a disproportionate amount of the

poor, and extreme poverty--in particular--is mainly a rural phenomenon. The Government‘s

policy agenda has a strong focus on poverty alleviation through policies that promote growth

with inclusion while at the same time strengthening safety nets.

Changing economic realities and experience with the current portfolio will inform the

strategy’s implementation in the remainder of the CPS period as the Government seeks to

contain the effects of global economic turbulence, drought and outbreaks of foot and mouth

disease that severely affect Paraguay‘s second largest export, beef.

There has been important progress under the CPS, but implementation challenges

remain. The lending program is on track and has responded strategically to evolving

government priorities. To date three operations for a total of US$ 300 million have been

approved. Financial and knowledge services were critical in providing timely support during

the global economic crisis of 2009. The lending program has a strong focus on basic

infrastructure services, complemented with analytic and advisory activities (AAA) work on

other sectoral areas during the first period of the CPS. The remainder of the CPS will continue

to focus on infrastructure and support government efforts to foster growth with inclusion

Bank Portfolio performance, in particular the pace of implementation, has remained a

challenge. Complex project design, delays in effectiveness, frequent staff turnover in project

implementation units, and limited procurement and safeguards capacity are the main reasons

for a relatively low disbursement rate. In coordination with the Government, the Bank has

worked to improve implementation through capacity-building activities and intensified

implementation support. As a result of this concerted effort and reflecting the project cycle,

implementation has improved by midpoint of the CPS.

ii

Overall progress toward expected CPS outcomes as defined in the results matrix has

been satisfactory. Among the most important results are sound macroeconomic policies

supportive of growth and investment, greater access to health and education services, and

improved targeting of social protection programs. However, structural and governance

weaknesses need to be addressed to sustain the achievements to date.

Pillar I: Improved Governance and Anti-Corruption: The current Government

established improved governance as a priority at the outset, requesting Bank support to

improve the effectiveness of public investments, develop a governance framework for all

IBRD-financed projects, and strengthen public institutions through DPL support focused on

strengthened accounting in public enterprises, civil service reform, and stronger internal

system of controls for the Government. Paraguay was also chosen as a pilot country under the

Bank‘s Governance and Anti-Corruption (GAC) Strategy.

While the objectives related to strengthening governance have been largely achieved under

Pillar I with DPL support, significant challenges remain. The remainder of the CPS period

will be used to consolidate these gains and focus the dialogue on the next phase of this effort.

Pillar II: Poverty Reduction: Moderate and extreme poverty levels fell significantly during

recent years, yet have remained relatively high. Reducing poverty remains a top priority and

challenge. Total poverty fell from 44 percent in 2003 to 34.7 percent in 2010. The reduction

of extreme poverty has been more volatile, and in 2010, extreme poverty rose from 18.8

percent to 19.4 percent despite the strong economic growth. The Bank has supported

Government‘s efforts through a selective program of knowledge services as well as

investment projects with significant poverty reduction focus.

A Bank-financed Poverty Assessment (Report No. 58638-PY) detailed the evolution of

growth, poverty, inequality, and employment in Paraguay. It shows that characteristics such

as gender, ethnic background, geographical location, and level of income have a strong effect

on access to land, education, and health services. In 2010, poor, rural households did not share

in the increased incomes enjoyed by the rest of the population. Inequality increased as well;

the Gini coefficient of income distribution moved up from 0.487 in 2009 to 0.512 in 2010,

one of the highest in Latin America. These finding have raised awareness of equity issues

among decision-makers. The Government and the Bank will place a stronger focus on equity

and expanding social safety nets in the remaining CPS period.

Pillar III: Economic Growth and Inclusion. Addressing Paraguay‘s gap in infrastructure

and the provision of basic services has been central to the Bank‘s engagement under this

pillar, and it has been redesigned as part of this progress report to focus more on the need to

foster economic growth with inclusion. An example of how the Bank and Government are

rising to this challenge is an ―inclusive competitiveness‖ initiative being undertaken by the

Bank, Ministry of Finance, Ministry of Industry and Trade, Ministry of Agriculture and

Livestock (MAG), and the Technical Planning Secretariat.

The CPS identified the need to ensure that economic growth did not come at the expense of

the environment. While two key interventions have been undertaken toward this objective --

a WBI Development Marketplace grant and a GEF Biodiversity grant -- implementation has

been delayed due to significant institutional coordination challenges.

iii

The primary focus of the Bank program during the remainder of the CPS period will be

to consolidate the progress made to date against the CPS outcomes, support the achievement

of those outcomes, and target specific needs that have emerged during the first part of the CPS

period. Implementation of the remainder of the CPS will be dominated by a package of

products reflecting an intensified focus on inclusion. A multi-sectoral DPL (US$100 million)

is envisaged to support a policy framework focused on ensuring the benefits of growth reach

the most vulnerable. The proposed DPL would provide fast-disbursing resources to address

financing requirements for the 2012 budget while protecting critical social spending. In

addition, a US$20 million Rural Connectivity investment loan is proposed to support a key

element of the Government‘s strategy to reach the most vulnerable. The AAA components of

this package reflect a list of government priorities that emerged from a recent workshop on

the Poverty Assessment.

IFC’s strategy during the remainder of the CPS period will likely remain focused on

inclusive growth through a continued focus on financial services and agribusiness

investments. The Corporation will also continue seeking new infrastructure investment

opportunities. IFC‘s Advisory Services hopes to expand its portfolio across the four business

lines: investment climate, PPP, access to finance, and sustainable business. In addition, the

Government and Bank are discussing the next steps of a technical assistance that will

complement IFC‘s investments in river navigation, supporting government efforts to improve

the navigation conditions of the Paraguay River.

Most risks highlighted in the CPS remain relevant. Political and governance risks remain

high due to the relatively weak and fragmented government coalition combined with lack of

majority in Congress and powerful unions. Paraguay is exposed to fluctuations in

international demand and commodity prices through its strong dependence on agricultural

exports. Furthermore, the country is at risk of external shocks with possible causes including

weather cycles and deceleration of the world economy. Both of the latter risks materialized

during the CPS period, and the risk associated with external shocks and natural disasters is

assessed as high. The CPS also identified the pressures from social demands as a high risk to

deliver on its program. The political transition generated high expectations, particularly

among the rural poor, for the fulfillment urgent social needs and land tenure reform. These

have not been met due to political bottlenecks and a lack of political consensus. The CPS also

identified weaknesses in the Government‘s control system, together with inefficient aspects of

the budget process and the lack of fiscal transparency, as risks to the Bank program. The

Government has made strong efforts to address these issues; however, fiduciary risk remains

high. The Bank will continue close supervision of the program.

The CPS period will be extended six months until December 31, 2013, in order to ensure

sufficient time for consultation on a new CPS following presidential elections in April,

2013. Meanwhile, continued achievement of existing CPS targets will be supported by

US$100 million in DPL lending and US$20 million in additional investment lending, as well

as knowledge products expected to contribute to the foundations for government reforms.

1

I. INTRODUCTION

1. The Board of Executive Directors discussed the 2009-2013 Country Partnership

Strategy (CPS) for the Republic of Paraguay on May 5, 2009 (Report No. 48087-PY). The CPS provides strategic support to the Republic of Paraguay in the following areas:

governance, poverty reduction, and economic growth and environment. The strategy focuses

on implementation of the existing portfolio, new investment and development policy lending,

and a range of knowledge services to help achieve country development outcomes.

2. The development goals defined in the CPS remain aligned with the Government’s

agenda for the second period of the strategy. The CPS envisioned three main goals:

supporting the transition to a modern economy through improving governance and reducing

corruption; addressing the needs of vulnerable groups; and restoring growth in the aftermath

of the global financial crisis.

3. The 2009 CPS was not a joint Bank-IFC strategy as the IFC was not engaged in

Paraguay at the time the CPS was prepared. However, IFC has made significant progress

since re-engaging with Paraguay in 2009, nearly tripling the size of its Paraguay portfolio

between FY08 and FY12. IFC’s private sector-oriented strategy fits closely with the

Bank’s Economic Growth and Inclusion pillar. IFC has been able to launch highly

innovative financial structures in Paraguay, several of which were global ‗firsts‘ for the IFC.

4. Changing economic realities and experience with the current portfolio will

inform the strategy’s implementation in the remainder of the CPS period as the

Government seeks to contain the effects of global economic turbulence, drought and

outbreaks of foot and mouth disease that severely affect Paraguay’s second largest

export, beef. Resources for lending and AAA will be allocated to key areas with good track

records of engagement and government commitment. The IFC will continue to complement

the IBRD program, focusing on financial services, infrastructure, and agribusiness as channels

to reach small rural enterprises and the poor.

5. The CPS period will be extended six months until December 31, 2013, in order to

ensure sufficient time for consultation on a new CPS following presidential elections in

April, 2013. Meanwhile, continued achievement of existing CPS targets would be supported

by US$100 million in DPL lending and US$20 million in additional investment lending, as

well as knowledge products expected to contribute to the foundations for government reforms.

6. Consistent with the results-based approach, this Progress Report focuses on the

main achievements to date and proposes adjustments to realign the strategy with the

Government’s current needs and developmental priorities. Section II of the Report

provides a summary of recent country developments. Section III describes progress towards

CPS outcomes and proposes changes to the results framework in light of implementation

experience and evolving government priorities. Section IV sets out the program for the rest of

the CPS period, and Section V contains a brief summary of key risks

2

II. COUNTRY CONTEXT

A. Recent Developments

7. Three years into its mandate, the Government of President Lugo has made

progress in the execution of key themes of the Government’s Strategic Economic and

Social Plan 2008/2013. Paraguay successfully recovered from the 2009 global economic

crisis and was the fastest growing country in Latin America in 2010. There has been a

significant increase in private investment and a marked turn-around in agriculture, industry

and construction. The Government successfully implemented a counter-cyclical stimulus

package in response to the crisis while maintaining progress in medium-term reforms such as

tax administration and oversight of state-owned enterprises. The Government successfully re-

negotiated terms under the treaty with Brazil for the sale of excess electricity from the Itaipu

power plant1 and will receive incremental annual revenues of US$240 million starting in

2012. On the social front, there have been important advances in health and education, such as

free access to primary health care and primary education. There has also been progress in the

expansion of a conditional cash transfer program, Tekopora, to target the extreme poor, with a

temporary employment program pilot and the launching of a non-contributory pension

program for the elderly living in poverty.

8. The 2009 crisis temporarily interrupted Paraguay’s economic turn-around. A

severe drought exacerbated the impact of the international economic crisis, triggering a 3.8

percent real contraction of the economy in 2009. Agriculture was hit hardest – production fell

by an estimated 23.8 percent in real terms, primarily as a result of the drought. The

Government responded with a package of counter-cyclical policies that contained the impact.

The Anti-Crisis Plan aimed to provide fiscal stimulus through expanded public spending to

ensure sufficient liquidity in the financial system, access to financing for the productive

sectors and accelerated mobilization of external resources. Concurrently, the Government

adhered to the prudent macroeconomic policies in the Government‘s Strategic Economic and

Social Plan. Despite the increase in spending, the fiscal balance closed in surplus due to an

increase in tax revenues, underlining the positive impact of recent tax administration reforms.

9. In 2010, the economy rebounded strongly based on an agricultural export boom.

Paraguay‘s 15 percent real growth rate in 2010 marks the country‘s highest growth on record.

Real exports grew by 35.3 percent in 2010, led by an unprecedented boom in agriculture.

Fiscal policy remained expansionary, yet the fiscal balance posted a surplus supported by

strong revenue collection. Total public expenditures remained above pre-crisis levels relative

to GDP in 2010 (19.2 percent of GDP), based on sustained attention to social programs.

10. Agricultural growth decelerated in 2011, one of the main reasons behind the

economy’s below-trend growth of 4.0 percent (Table 1). The agricultural sector reached an

average 7.5 percent year-on-year (y-o-y) growth in the first three quarters of 2011, strongly

contrasting the average of 49 percent during the previous year. In addition, an outbreak of foot

and mouth disease during the last quarter of the year triggered a significant fall in meat

exports, the second most important source of export earnings. The construction sector

contracted based on the economy hitting capacity constraints in the previous year and slower

1 Royalties from the hydroelectric power plants on the Paraná River at the Brazil-Paraguay border, which

represent a significant proportion of public revenue.

3

credit growth to the private sector (Table 1). With signs of overheating subsiding, lower beef

prices, and a tighter monetary stance, inflation closed the year at 4.9 percent—within the

Central Bank‘s target range. The trade and current account deficits decreased due to lower

domestic demand, despite weaker export performance. Fiscal policy continued to be

expansionary, yet generated a surplus based on strong revenue collection.

11. High poverty and inequality rates continue to be major development challenges

in Paraguay despite noticeable improvements over the last decade. Paraguay is a

landlocked country with a relatively large rural sector. Poverty was 34.7 percent in 2010,

while the extreme poverty rate of 19.4 percent places Paraguay among the poorest countries in

Latin America. Inequality is also among the highest in the LAC region, with a Gini coefficient

of 0.512. Over half of the poor and more than two thirds of the extreme poor are located in

rural areas. With only 41.2 percent of the population in 2010, rural households have a

disproportionate amount of the poor (58.1 percent). The unprecedented growth rate of 15

percent in 2010 was driven mostly by sectors that are not labor intensive, thus not translating

into faster poverty reduction. In addition, high food prices also affected the poor in 2010.

Annex 10 presents a more detailed discussion about growth and poverty trends in Paraguay.

12. Socio-economic conditions have improved in Paraguay over the past decade;

however, over a longer horizon, poverty and inequality have shown less progress and an

inability to overcome existing structural issues. Since 2003, Paraguay considerably

improved its socio-economic indicators including poverty, inequality, and health and

education coverage. However, evaluated over a longer term and with respect to average

trends in the region, poverty declined more gradually in Paraguay, from 36.1 percent in 1998,

while inequality increased from 0.489 in 1998, indicating the structural nature of the problem.

Poverty decompositions highlight that growth is an important component in poverty

reduction. However, inequality in terms of endowments, particularly land and human capital,

limit the economic opportunities for the poor. Such inequality has hampered efforts to reduce

poverty: better distribution of income would have allowed economic growth to translate into

stronger poverty reduction. While there has been some progress in addressing these structural

issues, barriers remain that inhibit growth from translating into greater poverty reduction by

itself. Social expenditures have increased substantially but are still low compared to other

LAC countries. Poverty and inequality trends suggest the need to ensure that policies

supporting growth be combined with social and economic policies to invest in connectivity

and human capital, as well as to strengthen safety nets.

B. Outlook

13. In the period remaining before the April 2013 Presidential elections, the

Government is planning to consolidate reforms already achieved in areas such as public

financial management, tax administration, oversight of state-owned enterprises and sustaining

and expanding social policies. The Government also intends to create a special fund to

support development and counter-cyclical stabilization with incremental revenues from Itaipu.

Currently a draft law for this fund is pending approval by Congress. Progress on these issues

will be contingent on the dynamics of the relationship between the Executive and the

Legislative branches of the Government.

14. Early economic indicators suggest a GDP contraction of 0.7 percent in 2012,

reflecting the combined impact of drought, foot and mouth disease outbreaks, and

weaker global demand. The La Niña weather phenomenon is severely affecting the

4

agricultural sector. To date, the soy harvest is expected to show a 40 percent decline. In

addition, a second outbreak of foot and mouth disease in January 2012 has further limited

meat exports, and they will take time to recover. The rest of the economy has continued to

grow solidly during the first quarter of 2012. With an expected recovery in meat exports, an

abating La Niña phenomenon, and a base year effect, growth is expected to rebound to 7.5

percent in 2013. In 2014, growth is expected to revert to trend.

Table 1. Selected Macroeconomic Indicators

Prelim. Projected

2008 2009 2010 2011 2012 2013 2014

Real GDP growth (%) 5.8 -3.8 15.0 4.0 -0.7 7.5 4.5

Consumer prices (% y-o-y change, eop) 7.5 1.9 7.2 4.9 5.0 6.5 5.0

Credit to private sector (% y-o-y change) 49.3 24.1 42.9 26.3 15.0 19.5 22.0

Terms of Trade (% y-o-y change) 38.9 -19.1 6.7 4.0 -4.0 0.2 0.2

Trade balance (% of GDP) -2.9 -1.1 -4.6 -4.4 -6.5 -3.5 -4.0

Current account balance (% of GDP) -1.8 0.5 -3.2 -2.1 -4.0 -2.0 -2.0

Primary fiscal balance (% of GDP) 3.1 0.7 1.5 0.9 -1.7 -1.5 -1.0

Overall fiscal balance (% of GDP) 2.5 0.1 1.1 0.6 -2.1 -1.6 -1.3 Source: Central Bank of Paraguay and WB staff projections

15. An additional risk is related to the potential impact of the ongoing global crisis on

Paraguay’s financial sector. Paraguay is directly linked to the global financial system

through various channels, including foreign ownership of banks, financing to the agriculture

sector by large international grain traders, and bank borrowing from abroad. Stress abroad

could put pressure on any of these channels. Foreign ownership is particularly relevant, given

that nearly half of the banking system assets are held in local subsidiaries of foreign banks.

Disruptions in financing for large international grain traders from European banks could have

spillovers in Paraguay‘s economy (as occurred during the 2008 crisis). Bank borrowing from

abroad is less of a source of concern since foreign credit (less than US$700 million) is not a

significant source of funding for the system (less than 10 percent of loans). In terms of

potential policy responses, the authorities have room to lower interest rates and substantial

foreign reserves to intervene in the foreign exchange market if needed, as they did in 2008.

Yet developments in Europe should be followed closely for potential fallout in Paraguay.

16. The Government has room to buffer these negatives shocks. Overall, public debt

stocks in Paraguay are low, with central government debt reaching around 12 percent of GDP

in 2011. The primary balance is projected to deteriorate to a deficit of 1.7 percent of GDP in

2012, due to a substantial wage bill increase approved by Congress and lower than expected

non-tax revenues (Table 1). As a result, financing needs are projected to increase

significantly, though these are expected to be generally manageable given fiscal resources,

including the fiscal savings of the Government in the Central Bank accounts, and access to

domestic and foreign sources. (Annex 11). Downside risks arise from a potentially worse

impact of the drought and of another global crisis mainly through lower commodity prices

and lower demand from major trading partners. In such a scenario, a projected current account

deficit of 4 percent of GDP would expose Paraguay to sudden decreases in international

financial inflows. Yet, an economy-wide credit crunch appears unlikely given that the

banking system‘s share of foreign to total liabilities is moderate at around 6.5 percent (about

5

half the regional average). Even if another global crisis materializes, the Paraguayan

Government has fiscal and monetary space to mitigate the likely impact on the economy.

III. PROGRESS TOWARDS CPS OUTCOMES

C. Program Implementation and Portfolio Performance

17. A key element of CPS implementation has been increased integration in delivery

of IBRD’s range of products. The Government and Bank have focused on implementation

constraints in the existing portfolio, while knowledge services have focused on strategic

sector reforms linked to poverty reduction, inclusion and governance. As part of this decision

to increasingly focus on a cohesive package of services, greater rigor was applied to develop a

program of select knowledge services in priority areas, including non-lending technical

assistance (NLTA) in some sectors where new lending had been previously envisioned.

Among these are education, competitiveness, social protection, and land access. Selectivity

has been supported by strengthening the role of the Ministry of Finance on knowledge

products, bringing it in line with the Ministry‘s role on lending, to ensure the AAA program

reflects the Government‘s priorities and demands more broadly. New lending commitments

since the start of the CPS period include one investment operation for US$100 million

[Energy Sector Strengthening Project (P114971)] and two development policy loans (DPLs)

totaling US$200 million supporting public sector reforms. The indicative program of a series

of three programmatic DPLs was adjusted to two stand-alone DPLs, both with the objective of

supporting the effectiveness and efficiency of the public sector.

18. Trust funds have been used selectively in the Bank program to support key

institutional reforms and project implementation. During the first half of the CPS, the

Bank administered a US$1.37 million trust fund portfolio, supporting activities related to the

water and sanitation sector, public-private options to improve river navigation conditions,

public sector reform and governance, indigenous land regulation and strengthening of the

national statistics office. A trust fund portfolio of US$5.3 million is under client execution

(Annex 3), of which the most important is a GEF project supporting the conservation of the

biodiversity of the Atlantic Forest in Paraguay.

19. IFC has aggressively increased its investments in Paraguay since 2009, building a

strong portfolio, booking 32 new operations. IFC has focused heavily on inclusive growth

through its support to microfinance, MSMEs, small farms, and infrastructure. The

Corporation committed US$513.16 million to 13 clients between 2009-12 (a nearly 180

percent increase in its portfolio), after three years in which it had made no investments. The

program mostly focuses on financial services, but it has also supported Paraguay‘s burgeoning

agribusiness sector and made several river transportation investments. These investments have

enabled the Corporation to reach substantial numbers of the poor and underserved. For

instance, two transactions with financial institutions are expected to reach almost 7,000 SMEs

in 2011, and another investment with an agricultural services company will benefit 750 farms.

20. IFC has launched highly innovative financial structures in Paraguay, including

several global ‗firsts‘. In 2009 IFC‘s Bank Capitalization Fund made its first investment, a

US$20 million equity stake in Banco Continental. In 2011, IFC‘s new Global Warehouse

Finance Program made its inaugural commitment to Paraguay‘s Sudameris Bank (US$15

million) seeking to increase liquidity in the agribusiness sector by making commodities

6

available as collateral. A 2011 swap agreement with the Central Bank enables IFC to provide

local currency loans to non-exporting companies by eliminating exchange rate risk.

21. Bank Portfolio performance, in particular the pace of implementation, has

remained a challenge. Total investment commitments to date amount to US$275 million.

However, achieving timely disbursement remains a challenge. Of the four active projects in

the portfolio, three are in problem status. Complex project design, delays in effectiveness,

frequent staff turnover in project implementation units, and limited procurement and

safeguards capacity are the main reasons for a relatively low disbursement rate. The

Government‘s annual budget cycle has also contributed to disbursement delays as investment

expenditure is not authorized during the first quarter of the calendar year, interrupting

implementation for several weeks at the start of each year. Disbursements in FY11 reached

7.5 percent, still below the 30.9 percent average for the Latin America and Caribbean region

as a whole, but a significant improvement over the previous year‘s 2 percent. The pace of

FY12 disbursements to date is 50 percent above FY11. IFC‘s investments are relatively new;

only four have been active long enough to receive development evaluations. Nonetheless, all

four projects received successful or mostly successful development outcome ratings.

22. In coordination with the Government, the Bank has worked to improve

implementation through capacity-building activities and intensified implementation

support, particularly in the area of procurement. The 2010 Country Portfolio Performance

Review (CPPR) yielded an action plan to strengthen the portfolio which included, among

other measures: (i) increased country management presence through increased frequency of

visits, (ii) increased budget coefficient to facilitate more frequent missions by TTLs, and (iii)

strengthened channels of Bank-client communications. Proposed new lending is screened for

(i) project design appropriate to level of implementation capacity, (ii) political consensus, and

(iii) relevance to the Government‘s highest priority internal and external challenges.

23. The CPS portfolio complements the ongoing support to Paraguay provided by

the IMF. The next Article IV staff visit will take place in May 2012. In addition, technical

assistance is ongoing in the areas of energy subsidies, monetary policy framework, tax and

customs administration reform, agricultural taxation, macro projection models to improve

budgeting, and stress testing for cooperatives.

D. Results to Date

24. Overall progress toward expected CPS outcomes as defined in the results matrix

has been satisfactory, but structural and governance weaknesses need to be addressed to

sustain the achievements to date. While the CPS objectives related to strengthening

governance have been largely achieved under Pillar I with DPL support, significant

challenges remain. The remainder of the CPS period will be used to consolidate these gains

and focus the dialogue on the next phase of this effort.

Pillar I: Governance and Anti-Corruption

25. The current Government established improved governance as a priority at the

outset, requesting Bank support to improve the effectiveness of public investments, develop

a governance framework for all IBRD-financed projects, and strengthen public institutions

through DPL support focused on strengthened accounting in public enterprises, civil service

reform, and a stronger internal system of controls for the Government. Paraguay was also

chosen as a pilot country under the Bank‘s Governance and Anti-Corruption (GAC) Strategy.

7

26. Improving Governance, Fighting Corruption and Increasing Transparency.

During the first half of the CPS period, the Bank program contributed to the GAC objective

through four instruments: structural public sector reform supported by DPLs, GAC

frameworks in investment projects, public policy dialogue, and technical assistance financed

by trust funds. In addition, the GAC framework in project design for the roads maintenance

and water and sanitation projects has proven effective, and the Government has indicated their

interest in expanding the model to other sectors.

27. Strengthening Financial Public Control. The targets for increasing the effectiveness

of internal controls and internal audit functions have been met. At the request of the Ministry

of Finance, a Public Expenditure and Financial Accountability (PEFA) assessment led by the

European Union (EU) was conducted jointly with the IDB. It concluded that important

progress was made in the area of internal control and internal audit. In particular, a

standardized internal control framework was introduced by decree early in the CPS period,

and intensive capacity building was delivered for this purpose. Under the policy framework

for the DPLs and with multiple Spanish Trust Fund for Latin America (SFLAC) grants, five

ministries, representing approximately 70 percent of the central administration‘s overall

budget, have established internal control committees, internal control norms, and have trained

staff to implement the Paraguayan Standard Model of Internal Control (MECIP). The Office

of the Executive‘s Internal Auditor was upgraded to ministerial level with a significant

increase in budget and intensive staff training. The authorities will continue focusing on

control effectiveness in key expenditure areas--such as State Owned Enterprises or salary

expenditures, as well as control capacity in tax collection and compliance--and have requested

the continuation of Bank support in this area.

28. Effective Government Oversight of State-Owned Enterprises (SOEs). SOEs‘ size

and performance pose a significant challenge. They account for about 30 percent of public

sector expenditures and provide essential goods and services, including oil, water,

telecommunications and electricity. Their service delivery and management need significant

improvement largely due to institutional limitations that prevailed up to 2008: ineffective

oversight, institutional framework, non-disclosure of audited financial statements, asymmetric

information and a partial regulatory framework for utilities.

29. The CPS and DPL policy framework focused on making SOEs’ finances more

transparent and subject to greater scrutiny by Government and civil society. This

included the establishment of a Council for SOEs (CEP) ensuring public sector oversight and

the definition of a government policy for SOEs. CEP‘s capacity for fast institutional decision-

making and the professional and technical monitoring of UMEP created a responsive,

technically-sound supervisory body. In 2010, CEP established an inter-institutional

commission to calculate accrued debts and credits maintained between SOEs and the central

administration, and CEP has also been working with UMEP to ensure timely payment for

services provided by SOEs to Government. Payment for these services increased from 27

percent in 2008 to 51 percent in 2010. Furthermore, service delivery has been enhanced

through the adoption of performance contracts, now covering 80 percent of SOE-provided

services, and of a balanced scorecard to measure SOEs‘ economic, financial and technical

performance.

30. Gradually Professionalize Civil Service. The goals in this area have been largely

met through resolutions enforced voluntarily by individual line ministries. The instrument to

achieve the objective of professionalizing the civil service identified at the CPS was a civil

8

service law, which has been postponed. The path chosen for moving ahead in this area has

been one of selective steps with interventions to build consensus for future passage of a civil

service law. Since 2008, over 13,000 promotions and recruitments have been decided based

on merit and professional skills, following the Secretariat of Public Services (SFP) guidelines

in about 30 percent of public sector institutions. This has been accompanied by significant

capacity building of the SFP. The number of civil servants earning less than minimum wage

was reduced by more than two-thirds, from 28,000 in 2008 to 9,000 in 2010, and the number

of institutions that regularly report payroll data to the SFP more than doubled between 2008

and 2010, reaching 87 percent. The challenge going forward is to institutionalize and sustain

these gains through a stronger and more enforceable legal framework. A key development

was the approval of Law No. 4.394/2011, mandating the creation of two new institutions for

professionalizing the civil service at the Ministry of Finance.

31. The Bank has contributed to these efforts through a package of lending and non-

lending products. The First Public Sector Programmatic DPL (FY09) supported the

introduction of merit-based, competitive processes for recruitment and promotions in the

public sector. The SFLAC Enhancing Public Sector Effectiveness (FY10-13) has contributed

to this agenda through analysis on pay and classification reform, a comparative study on civil

service management, and support to the Paraguay-hosted XVI Latin American Conference on

Public Administration, focusing on civil service issues and with over 1500 participants.

32. Payment systems. The Central Bank of Paraguay (BCP) sought technical assistance

(TA) to support the modernization of the clearing and settlement of their payments systems. A

fee-based service (FBS) arrangement has allowed the Bank to assist the BCP from the initial

concept to implementation of an electronic, modern central payments system. The Bank team

helped formulate a new legal and regulatory framework for operating the system to properly

manage risks, and operational rules of the new Automated Transfer System were created and

communicated to private sector banks. Furthermore, oversight capacity is being developed

and strengthened within the BCP to monitor the payments systems.

33. A Financial Sector Assessment Program (FSAP) was undertaken in November

2010 that produced a comprehensive set of recommendations to strengthen the financial

sector. For example, the financial inclusion analysis found that much progress has been

achieved in the last few years to broaden financial inclusion in Paraguay, and the Government

has initiated some important reforms that enhance access to financial services. Nevertheless,

coverage of the rural areas continues to be limited, many people--in particular those without

formal employment--find themselves excluded from the financial system due to high

minimum balance requirements, lack of a credit history and collateral, and high costs.

Analysis of the pension system revealed that only 16 percent of the working population

contribute to a pension fund, suggesting substantial scope for increasing financial inclusion

related to pensions, and major structural shortcomings which, if addressed, should make

available a stable source of long-term financing for critical infrastructure. The Bank is

collaborating with the Ministry of Finance and Central Bank on follow-up TA.

34. The Bank also contributed to the debate on critical issues of governance and

accountability. A series of seminars organized jointly with the three powers--executive,

legislative and judiciary--had the objective of promoting and enhancing the debate for

consensus building on a development strategy and a policy road map to addresses Paraguay‘s

main developmental challenges. The seminars served as a platform to discuss reform

priorities and practical development solutions in which governance and accountability was the

9

common thread. The Bank has also provided technical assistance through the Stolen Asset

Recovery Initiative (STAR) for the creation of a specialized unit dedicated to asset recovery

within the Attorney General‘s Office. In addition, the Bank has worked with the Office of

Integrity in identifying areas for support through the Governance Partnership Facility.

35. Governance and Accountability in Media. The CPS focused on improving the

independent role of the media as a ―watchdog‖ and on assisting the Government in improving

the effectiveness and articulation of accountability in institutions to fight corruption. With

financing from the Governance Partnership Facility, 200 journalists participated in trainings

on investigative journalism. A feasibility study for a public media system was prepared and

utilized as the basis for discussions with local stakeholders, resulting in the establishment of a

public TV station. In addition, the Bank has organized several courses through a partnership

between the Central Bank of Paraguay and the Catholic University of Asunción.

Pillar II: Poverty Reduction

36. Moderate and extreme poverty levels fell significantly during recent years, yet

have remained relatively high. Reducing poverty remains a top priority and challenge. Total

poverty fell from 44 percent in 2003 to 34.7 percent in 2010. The reduction of extreme

poverty has been more volatile; it fell from 21.2 in 2003 to 19.4 in 2010, but reached as low

as 16.5 in 2005 and as high as 23.7 in 2006. In 2010, extreme poverty rose from 18.8 percent

to 19.4 percent despite the strong economic growth. Extreme poverty remains particularly

prevalent in rural areas with an incidence of 32.4 percent, compared to 10.3 percent in urban

areas. The Bank has supported Government‘s efforts through a selective program of

knowledge services as well as investment projects with a significant poverty reduction focus.

37. Employment Generation and Poverty Reduction. As indicated above, ambitious

poverty reduction objectives were surpassed over the first three years of CPS implementation.

Government achieved this by reaching more than 75,000 beneficiaries with the Tekopora

conditional cash transfer program and improving the targeting methods and supply of health,

education and nutrition services under the program. However, systematic budget cuts by

Congress since 2010 have made it difficult to secure the funds necessary to pay the benefits of

this expanded pool of beneficiaries. In addition to support under the DPL and other lending

operations, poverty reduction has been a key focus of the AAA and grants included in the

Bank program. For the remainder of the CPS period, the Bank will continue providing TA to

improving the targeting of the Tekopora program, as well as providing TA to strengthen the

Temporary Employment Program, Nambaapo Paraguay, in collaboration with the ILO.

38. A Bank-financed Poverty Assessment (Report No. 58638-PY) depicted the

evolution of growth, poverty, inequality, and employment in Paraguay. The study included a

gender dimension and progress on other socio-economic indicators, and it analyzed the

determinants of poverty and inequality—building on Technical Assistance and Capacity

Building previously provided by the Bank to support the updating of poverty measurement

methodology. The study shows that characteristics such as gender, ethnic background,

geographical location, and level of income have a strong effect on access to land, education,

and health services. For example, although female labor force participation increased by 6.2

percent between 2003 and 2008, female workers experience higher rates of unemployment

(7.6 versus 4.7 percent for men), more under-employment (32 percent versus 26 percent for

men), higher levels of informality (72 percent versus 61 percent for men), and a wage gap of

5.5 percent that cannot be explained by observable characteristics such as education, age, etc.

10

Ethnicity plays a more important role in wages however, as the earnings differences between

minorities and non-minorities are higher than those found between males and females.

39. Initial analyses suggest that Paraguayans at the low end of the income

distribution in urban areas were negatively affected by surging international food prices

in 2009 that outstripped the increase in wages. Also in 2010, poor households in rural areas

did not see increases in their income, as the positive effects of high growth seem not to have

reached them. In 2010, extraordinarily strong meat and soy production were main drivers for

growth, products that small-scale and subsistence farmers do not produce. Inequality

increased as well; the Gini coefficient of income distribution moved up from 0.487 in 2009 to

0.512 in 2010, one of the highest in Latin America. These finding have raised awareness of

equity issues in Paraguay. In particular, the awareness of the disadvantage of rural households

is reflected in the initiation of programs under the PRODERS project. In the same way, the

expansion of the CCT programs, in particular Tekopora, is an important step targeting the

lowest income percentiles.

40. Consensus on land reform and regularization has been difficult to achieve.

Diverse views on how to address land ownership issues in Congress have limited the capacity

of Government to comply with initial commitments. Deficiencies in the national cadastre

significantly limit targeting of policy actions; however, the Government has begun addressing

this with the assistance of IDB and recently negotiated a second phase (US$25m) to finance

its cadastre program, although the latter will only reach nine pilot rural municipalities.

41. The CPS aims to strengthen policies to reduce drop-outs, increase enrollment,

and improve quality of secondary education. During the first half of the CPS period, the

Bank focused on completing the Education Reform project. Previous plans for new lending

have been revisited by the Government in favor of a program of technical assistance to

provide technical inputs to improve the Government‘s evidence-based decision making.

42. Increase access to water and sewerage services, including indigenous populations: With support from other development partners, including JICA, the Bank-financed Water

Sector Modernization Project (P095235) supports the CPS objectives of expanding access to

sewerage and to clean drinking water to 20 percent and 71 percent of the population,

respectively, by 2013. The Project has suffered from implementation delays, exacerbated by

a complex design. However, commitment to the sector is strong, with public investment in

the sector increasing from 1.7 percent of GDP in 2008 to 2.8 percent in 2010.

43. The Bank remains productively engaged in the health sector with TA focused on

strengthening health policies to benefit populations without coverage and the poor. This

has successfully supported the design and implementation of a free drugs policy and a Family

Health Units program (500 FHUs are operational) and an analysis of the social determinants

of health. For the second half of the CPS period, the Ministry of Health has requested Bank

NLTA support to reduce fragmentation of the health system which is resulting in inequitable

access and quality of health services.

Pillar III: Economic Growth and Inclusion

44. Sound and prudent economic policies have contributed to strong macroeconomic

fundamentals and reduced vulnerabilities. Macroeconomic stability in turn has provided a

conducive environment for private sector growth and attracted investments. Paraguay has

sufficient fiscal space to borrow in case financial needs increase as a consequence of the

11

worsening global environment. Nevertheless access to international financing could be

limited, and domestic market issuances could come with a high price. Currently, international

reserves exceed US$5 billion or 19 percent of GDP. It will be crucial to protect gains in

macro and financial sector stability from the impact of a deteriorating external environment.

45. In spite of the important macroeconomic achievements, challenges remain for the

inclusiveness of growth. Reflecting the failure of 2010’s boom growth to benefit the

most vulnerable, the CPS will place a stronger focus on equity and expanding social

safety nets going forward. The Government and the Bank jointly organized and financed a

multi-sectoral round table workshop with the Social Ministries and other government agencies

linked to social policy, on the theme of ―Growth, Poverty Reduction, and Inequality‖. The

objective was to analyze the main sectoral problems and how to approach them in order to

improve the efficacy and efficiency of Paraguay‘s policies and programs in decreasing

poverty and inequality. The output served as a basis for policy discussions at the executive

level and input into the design of the food emergency package recently approved to protect

the most vulnerable and ensure food security in response to the drought.

46. IFC’s operations are also supporting the inclusive growth goal, mainly through

projects with financial institutions and agribusiness companies. IFC has made five

investments in Paraguayan banks and microfinance lenders for a total $96.2 million. In

addition, IFC has opened 19 trade finance lines with local banks, both to support exports and

to channel liquidity to MSMEs and small farms. IFC has made $47 million in loans since

2009 to four agribusiness firms to increase Paraguay‘s agricultural output and to support small

farms by expanding technical support, agricultural inputs, and pre-harvest financing.

47. Given the challenge of making growth more inclusive, the Bank is working with

the Ministry of Finance, Ministry of Industry and Trade, Ministry of Agriculture and

Livestock (MAG), and the Technical Planning Secretariat on an “inclusive

competitiveness” initiative that builds on a rural productivity mapping exercise that

identified regions of the country with high poverty and untapped agricultural growth potential.

It also attempts to address identified constraints to competitiveness such as: weak linkages

between small producers and export value chains; lack of mechanisms to promote regional-

sectoral competitiveness; weak public-private dialogue mechanisms; and lack of clear,

prioritized action plans to operationalize high-level competitiveness diagnostics. The Bank is

coordinating its competitiveness work with, and leveraging work done by, a range of

development partners, including the IDB, USAID, EU and JICA.

48. Public expenditure and its role in fostering inclusive growth. Paraguay has one of

the lowest tax-to-GDP ratios in Latin America and faces challenges in social sector outcomes,

foremost in health and education. A key question in the context of public service provision is

whether sufficient resources are available and whether the available resources are spent in an

efficient way to provide key public services to citizens. The Bank is currently exploring with

the Government topics that would assist them in this area.

49. Infrastructure for growth and inclusion. The Bank supports government efforts to

accelerate growth and facilitate inclusion through improvement in access to basic services and

infrastructure, with special focus on the needs of the most vulnerable. The Bank contributes,

first, through the infrastructure and logistic agenda that supports the competitiveness and

diversification of the economy while also creating new jobs; and second, by improving the

access and quality of infrastructure services while also addressing affordability issues. A key

12

intervention is the Energy Sector Strengthening Project (P114971), which finances a portion

of a Government Master Plan that is cofinanced by CAF, FOCEM and JICA. It will increase

the delivery and the quality of electricity services, allowing for an increase in productivity for

small farmers and small entrepreneurs. At the same time, this project will strengthen the

performance of the public utility responsible for the provision of electricity services.

50. Improving the efficiency of public spending in infrastructure. Efficiency gains

and increased sources of financing, including private sector participation, could help bridge

the large infrastructure gap in Paraguay in a context of limited public resources. The Bank is

defining a capacity building program to assist the Ministry of Finance in the identification,

design, implementation, and evaluation of infrastructure investments. The objectives are (i) to

increase the efficiency of public spending by improving the capacity to define, evaluate and

respond to infrastructure needs; and (ii) to maximize public and private financing to reduce

the infrastructure gap. With the support of a PPIAF, the Bank conducted three feasibility

studies for improving navigation conditions of the Paraguay river, including an assessment of

a public-private partnership option. The economy is highly vulnerable to the river navigation

conditions given the country‘s landlocked nature. IFC has made significant investments to

support the expansion of river transportation. It has committed $76.3 million in the leading

barge operator on the Paraná-Paraguay river system, UABL, which transports Paraguayan soy

to ports in Argentina for processing and export.

51. Safeguarding the Environment. The CPS identified the need to ensure that

economic growth did not come at the expense of the environment. Progress toward the CPS

goal of decreasing unsustainable forest management practices and slowing the expansion of

the agriculture frontier under a WBI Development Marketplace grant has encountered delays,

but the grant has been extended until November, 2012. Two workshops and five technical

studies were successfully conducted to assess the low carbon potential in relevant productive

sectors, in pursuit of the CPS outcome of strengthening national capacity to enable the growth

of Clean Development Mechanism projects and other mitigation activities. A GEF

Biodiversity grant supports the establishment of a biodiversity corridor, strengthening the

National Protected Areas system; however, implementation has been delayed due to

significant institutional coordination challenges.

E. Adjustments to the CPS Results Framework

52. Most elements of the 2009-2013 CPS results framework remain relevant, and the

achievement of most intended results is on track. The following adjustments are proposed

in light of changes in priority and implementation experience discussed above (Annex 2).

53. The Governance and Anti-Corruption pillar was modified to capture additional

efforts and ensure clarity on expected results. Outcomes were incorporated to reflect

progress made on timely payments by the state to SOEs, the inclusion of GAC frameworks in

all investment projects, and the modernization of the BCP‘s payments system. Also,

transparency indicators were reformulated to track the strengthening of the Office of Integrity

and the independent role of the media as a ―watchdog‖ of the political arena.

54. Changes to the Poverty Reduction pillar mainly reflect the Government’s

decision to direct additional Bank support towards NLTA activities until

implementation bottlenecks in the current portfolio are resolved. A lending operation to

the education sector did not materialize, and instead the Bank is supporting the Government to

13

strengthen educational policies and build capacity to enhance teacher quality and ensure basic

conditions are met in all public schools. A sub-pillar on health was incorporated to track joint

efforts to make health services accessible to the poor through the implementation of a free

drugs policy and the creation of more than 500 Family Health Units. After surpassing the set

target for the CCT programs, the Bank is now focusing its efforts on improving the targeting

instruments of the Tekopora and non-contributory pension program Adultos Mayores, and

helping the Government enlarge the scope of the country‘s social safety nets through the

design of the Nambapoo temporary employment program.

55. The section on Land Reform was reformulated to capture the difficulty of

reaching consensus on the matter, especially in light of the weakened coalition supporting

the Lugo administration in Congress. Together with implementation challenges faced by the

Indigenous Community Development Trust Fund, this implies that the current CPS support to

indigenous populations would be less comprehensive than previously envisaged.

56. The third pillar was renamed “Growth with Inclusion” in line with the

Government’s policy agenda. The objective is to highlight the efforts made to increase the

reach of social services and safety nets while maintaining a stable macroeconomic framework

and boosting the public investment/GDP ratio. New outcomes and milestones were added to

reflect additional improvements in several areas and further support planned for the remainder

of the CPS period, such as increased supervision and auditing of large taxpayers and the

development of competitiveness action plans in pilot sectors and regions. Indicators for the

electricity and environment sectors were revised to reflect delays in the implementation of

projects. Lastly, work on airports did not materialize due to an Executive veto, and

telecommunications indicators were removed as the sector was not supported by the CPS.

IV. FUTURE ENGAGEMENT

57. The primary focus of the Bank program during the remainder of the CPS period

will be to consolidate the progress made to date against the CPS outcomes, support the

achievement of those outcomes, and target specific needs that have emerged during the first

part of the CPS period. Consultations with the Government centered on how the Bank could

best respond to pressing needs and focus the program during the remainder of the CPS period.

Particular attention will be on better targeting of social safety net programs and ensuring that

economic growth benefits the most vulnerable. In addition, the Government requested the

Bank to identify policy interventions for inclusion in the its program to contain the effects of

the global economic slowdown, drought, and foot and mouth disease. These areas are

reflected in the remaining CPS agenda. Consultations with civil society groups verified that

the Bank is seen as a valuable and reliable partner for the Government, and there was

consensus on the strategy‘s focus. Coordination with development partners will continue,

especially in areas such as efficiency of public spending, governance, infrastructure, poverty

and inclusiveness.

58. Implementation of the remainder of the CPS will be dominated by a package of

products intended to reflect an intensified focus on inclusion. A multi-sectoral DPL

(US$100 million) is envisaged which would incorporate a policy framework focused on

ensuring the benefits of growth reach the most vulnerable. It would provide fast disbursing

resources to address financing requirements for the 2012 budget while protecting critical

14

social spending. In addition, a US$20 million Rural Connectivity investment loan would

support a key element of the Government‘s strategy to reach the most vulnerable. The AAA

components of this package reflect a list of government priorities that emerged from a recent

workshop on the Poverty Assessment. In addition to those mentioned elsewhere in this

report, these include: (i) an analysis of the links among economic growth, poverty and

inequality during 2005-2010, including an ex-ante evaluation of the impact of another global

crisis; and (ii) an analysis of the efficiency of public expenditures. The Bank is also providing

TA to complement IDB‘s financial support to Paraguay‘s upcoming Economic Census polls.

59. In addition to the gender dimensions of the Poverty Assessment and the

mainstreaming of gender as an issue in the Bank’s lending and AAA portfolios, the Bank

is preparing a review of the data and the key existing literature on gender issues in Paraguay.

This will inform a more in-depth analysis which will, building on the Poverty Assessment,

inform the next CPS.

60. The Government and the Bank will continue to apply lessons of CPPRs and

project implementation to strengthen portfolio performance. Proposed lending will

continue to be screened as described in paragraph 23. A joint CPPR held in November 2011

identified weaknesses in the areas of contract administration and safeguards, and capacity

building programs have been planned in response. The Government has also committed to

scale up efforts for project implementation. The Ministry of Finance recently created a unit to

monitor externally-financed investments and follow up on agreed actions. The Bank and

other development partners (IDB, GTZ, EU, and UN) are working together to identify

common issues in project implementation and offering joint proposals for addressing these.

61. IFC’s strategy during the remainder of the CPS period will likely remain focused

on inclusive growth through a continued focus on financial services and agribusiness

investments. The Corporation will also continue seeking new infrastructure investment

opportunities. IFC‘s Advisory Services hopes to expand its portfolio across the four business

lines: investment climate, PPP, access to finance, and sustainable business. In addition, the

Bank and Government are discussing the next steps of a technical assistance that will

complement IFC‘s investments in river navigation, supporting government efforts to improve

the navigation conditions of the Paraguay River.

V. PROGRAM RISKS AND MITIGATION

62. Most risks highlighted in the CPS remain relevant. The CPS identified the

relatively weak and fragmented government coalition combined with lack of majority in

Congress and powerful unions as important risks to the program. The Bank will continue

supporting the Ministry of Finance to improve its communication strategy for building

consensus and obtaining Congressional approval. Through AAA the Bank will support the

line ministries in better informing stakeholders of their investment programs and the results

and impact of the reforms. Second, there is a risk that a failure to secure Congressional

backing on budget decisions would put at risk sound fiscal management and critical social

expenditures. The Bank will support the executive‘s ability to build consensus among

stakeholders for maintaining a sound fiscal policy while protecting the social programs for the

most vulnerable. Despite these efforts, political and governance risk is assessed as high.

15

63. Paraguay is exposed to fluctuations in international demand and commodity

prices through its strong dependence on agricultural exports. The debt sustainability

analysis shows a scenario that is consistent with a significant slowdown in the global

economy. In the medium term, growth is expected to revert to its trend of around 4 percent.

64. Progress in the Bank program could be affected by weak human resource

capacity in the public sector, as well as limited inter-institutional cooperation. Limited

institutional capacity and high turnovers within the counterpart agencies have caused delays

in the Bank portfolio. The Bank and the Government are monitoring the program through

CPPRs and action plans to address the problems identified.

65. The CPS identified the pressures from social demands as a risk to deliver quickly

on its program. Poverty reduction and inequality remain key challenges, stressing the risks

for social tensions. Social tensions regarding land tenure have escalated. The political

transition generated high expectations, particularly among the rural poor, for urgent social

needs and land tenure reform, which have not been met due to political bottlenecks and a lack

of consensus on an agenda. The Bank is assisting the Government to improve targeting of

social safety nets and identify land use, tenure and land market dynamics that could inform

solutions to the land access and tenure challenges. Nonetheless, social risk is assessed as high.

66. The Government has made strong efforts to address weaknesses in the

Government’s control system identified in the CPS as risks to the Bank program.

Despite these efforts in Public Financial Management (PFM) and particularly control

effectiveness issues, the lack of accountability, inadequate human resources policies, and

cumbersome procedures and work practices continue to pose concerns. Thus, the fiduciary

risk remains high for the remaining CPS period. The Bank will continue close supervision of

the program and related technical assistance over the remaining CPS period.

67. The risk of external shocks was identified in the CPS, with possible causes

including weather cycles and deceleration of the world economy. Both risks materialized

during the CPS period. The severe drought of 2009 and the global crisis caused a contraction

of the economy. While the severity of the current global downturn is still uncertain, Paraguay

could be impacted through lower fiscal revenues, and trade and capital flows. Government is

prepared to weather the effects of the global slowdown and introduce a fiscal stimulus plan if

needed. The effects of La Niña are already being felt, and the Government is putting

together an emergency package to protect small farmers and the most vulnerable. In

addition, increased revenues from the Itaipu hydroelectric power plant will provide fiscal

flexibility. The risk associated with external shocks and natural disasters is assessed as high.

16

Annex 1: Updated Results Framework

CPS Outcomes Milestones Status Bank Group Program

I. Governance and Anticorruption: Strengthening state institutions to improve policy making, public service provision, and rule of law for investments and households

Fighting corruption and increasing transparency

Improving the independent role of the media as a ―watchdog‖

of the powerful generating a more plural communications environment.

4 trainings on investigative journalism delivered.

Feasibility study for a system of public media guides

discussion in Paraguay.

196 journalists trained on investigative journalism.

Government used study to engage with key stakeholders.

GPF Building an Accountability to

Address Systemic Corruption

Assisting the Government in improving the effectiveness and

articulation of accountability institutions to fight corruption.

Institutional Strengthening of the Office of Integrity.

Include Governance component on every project

Preparing work program.

Road Maintenance Project includes an Improvement of

Governance Action Plan (IGAP). It is partially functioning within an electronic platform called Control Board, since

2010. Remaining areas for full operation of the IGAP are

to be completed by March 2012. The uses of the Control Board and the IGAP have been expanded to all activities

and projects of the MOPW.

The PRODERS Project has helped strengthen

neighborhood committees in 30 micro watersheds in the

State of San Pedro and Caaguazu, allowing for social control mechanisms for public sector investments.

Water and Sanitation Modernization Project: 1) Each W&S sector institution has developed a website; 2)

DAPSAN has prepared an action plan for the governance strategy and a framework to monitor its governance

indicators.

SFLAC Strengthening Paraguay

National Audit Office

Paraguay Strengthening Congressional Legislative Process

and Budget Oversight Capacity

Road Maintenance Project

Water and Sanitation Modernization Project

Sustainable Rural Development Project

Energy Sector Strengthening Project

Modernization of the Public Administration to improve service delivery

Increase effectiveness of internal control and internal audit

function:

- PEFA Indicators for Internal Control and Internal Audit (PI-

20 and PI-21) have been upgraded

Baseline: D+ (IFA 2008) Target: C (2013)

The Government has issued two decrees to upgrade the

Office of the Executive‘s Internal Auditor (AGPE) to

ministerial level; and to strengthen the authority and independence of AGPE in order to establish a standard

internal control model (MECIP) and determine criteria for

selection of internal auditors throughout the central administration.

50 percent of ministries and secretariats have established internal control committees, internal control norms, and

trained staff to implement the MECIP; and their respective

internal audit units (AIIs) have the number of employees and competitive hiring processes required by AGPE.

The standardized internal control framework was

introduced by decree soon after the presidential elections.

Also, the Office of the Executive‘s Internal Auditor (AGPE) was upgraded to ministerial level accompanied by

a significant increase in its budget and intensive staff

training.

Five ministries, representing approximately 70% of GoP‘s overall budget, have met this milestone.

PEFA Indicators for internal control and internal audit (PI-20 and PI-21) for 50% of the ministries are rated C.

Programmatic DPL

Public Sector AAA

SFLAC Strengthening Paraguay

National Audit Office

Paraguay Strengthening

Congressional Legislative Process and Budget Oversight Capacity

PEFA

17

CPS Outcomes Milestones Status Bank Group Program

I. Governance and Anticorruption: Strengthening state institutions to improve policy making, public service provision, and rule of law for investments and households

Modernization of the Public Administration to improve service delivery

The clearing and settlement of the Central Bank‘s payment

system has been modernized and Government payments are made through an automated transfer system.

An electronic, modern central payment system has been

implemented.

The legal and regulatory framework for operating the new

system has been created and operational rules are communicated to private sector banks.

A new Automated Transfer System has been implemented

with Bank assistance. The legal and regulatory framework for operating the system has been created and operational

rules have been communicated to private sector banks.

Paraguay (FBS) Payment System

Personnel recruitment and promotions are based on merit and professional skills:

- Public sector institutions following competitive recruiting and promoting practices and reporting to the Civil Service

Secretariat (SFP) Baseline: 0, only some consultants (2007)

Target: 40% of public sector institutions (2013)

- Public sector institutions supervised by the Civil Service

Secretariat (SFP)

Baseline: 40% of institutions (2008) Target: 80% (2013)

- Number of civil servants earning below minimum wage. Baseline: 28,000 (2008)

Target: 0 (2013)

Government introduces competitive and transparent processes for recruitment and promotion of civil servants,

and the Civil Service Secretariat is overseeing those

processes.

Reclassification and pay reform road map proposal delivered to client.

Since August 2008, over thirteen thousand promotions and

recruitments have been decided through competitive

processes following the Secretariat of Public Services (SFP) guidelines and methodology and supervised by SFP

officials in about 30 percent of public sector institutions.

These, however, remain voluntary as there is no enforcement mechanism in place.

Number of civil servants earning below minimum wage was reduced to less than a third, from 28,000 in 2008 to

9,000 in 2010.

Programmatic DPL

Public Sector AAA

SOEs finances and operations are transparent and subject to

greater scrutiny by Government and civil society.

Government has issued a decree to establish a Council for

SOEs (CEP) ensuring (i) public sector oversight on SOEs,

and (ii) the definition of a Government policy for SOEs‘ reform.

The Government has strengthened the institutional framework associated with SOE management through: (i)

the submission to Congress of a law draft proposing the

legal establishment of the CEP and the UMEP; and (ii) the approval by CEP of the UMEP‘s Organizational-

Operational Manual.

CEP ensures greater transparency in SOE management via

implementation of annual external audits, elaborated

according to CEP standards, and published.

The Inter-ministerial Council of SOEs (CEP) and the SOEs

Monitoring Unit (UMEP) were established soon after the

presidential elections. The ability to combine CEP‘s fast inter-institutional decision-making capacity with the

professional and technical monitoring of UMEP created a

responsive, technically-sound SOE supervisory body. The Board of CEP meets regularly, and its agenda is jointly

prepared by CEP‘s executive secretary and UMEP.

By June 2010, all SOEs had already signed their respective

external audit contracts with independent audit firms

according to procedures established by UMEP and the National Public Procurement Law. 7 SOEs have concluded

and published their reports and the remaining one is

expected to do so by mid-2012

Programmatic DPL

Public Sector AAA

Water and Sanitation Modernization

Project

IE on Water Access to Rural

Communities (SIEF)

Electricity Strengthening Project

18

CPS Outcomes Milestones Status Bank Group Program

I. Governance and Anticorruption: Strengthening state institutions to improve policy making, public service provision, and rule of law for investments and households

Modernization of the Public Administration to improve service delivery

Rate of timely payments reaches 60% for basic services provided to the state by SOEs (Electricity,

Telecommunication, and Water). (Baseline 2008: 27%)

The Ministry of Finance establishes clear rules with respect

to transfers and payments between SOEs and the Central Administration.

In 2010, CEP designated members from of an inter-

institutional technical commission (CTI) to calculate accrued debits and credits maintained between the SOEs

and Central Administration. Rate of timely payments of

SOE-provided services jumped from 27% in 2008 to 51% in mid-2010.

Programmatic DPL

Public Sector AAA

Water and Sanitation Modernization Project

Electricity Strengthening Project

Coverage of ESSAP water access as measured by the

percentage of households in urban areas with access to water

has increased to 89.2% (baseline 2010: 79.4%)

Number of hours of power outage as measured by hs/year per user has declined to 11 hours (Baseline 2010: 11.2 hs/year)

Projects in support of investments by ESSAP become

effective (i.e., are approved by congress)

ANDE satisfactorily implements ongoing investment

program and develops (jointly with financiers) a transmission investment program

Appropriate fiduciary management of public investments by ESSAP and ANDE

Water and sanitation project effective.

Energy Sector Strengthening Project effective.

ESSAP is receiving enhanced support from WB

Procurement specialist and consultant on technical issues

and utility transformation to prepare bidding documents. Same kind of intensive support is required for Financial

Management.

II. Poverty: Improving investments in the social sectors (health and education) and focusing public spending on fighting extreme poverty

Employment Generation and Fighting Poverty (especially in light of the effects of the global financial crisis on Paraguay)

Focus the limited country capacity and financial resources on

a few programs to:

Increase the number of beneficiaries (households) for the conditional cash transfer program—Tekopora, PRO-PAIS II,

and Ñopotivo

Baseline: 18,700 (2008) Target: 75,000 (2013)

Gradually increase beneficiaries of the conditional cash

transfer programs as follows:

beneficiaries by 2009 (2) 25,000 beneficiaries by 2011 (3) 50,000

beneficiaries by 2013 (4) 75,000

Target surpassed as programs benefitted 98,000

households living in extreme poverty (Tekopora: 83,000

and PRO-PAIS II: 15,000). Between 2007 and 2010, poverty rates declined to 19.4% (extreme) and 34.7%

(overall), but high growth in 2010 left extreme poverty

rates practically unchanged for that year.

Programmatic Dialogue on Social

Policy

Programmatic poverty NLTA

Multi-sectoral DPL

HD Programmatic NLTA

JSDF Indigenous Community

Development.

Improve targeting of social expenditures on cash transfer programs

Update the targeting instrument of the CCT program ―Tekopora‖

Introduce a new targeting instrument to select and enroll beneficiaries of the non contributory pensions program

―Adultos Mayores‖

Targeting CCTs significantly improved as beneficiaries for

the Tekopora program were identified by a two-fold approach of geographic targeting and a door-to-door

census.

The Bank is supporting the Government in updating the targeting instrument, which is expected to be ready before

mid-2012.

The Bank helped design and implement a targeting instrument for the Adultos Mayores program. Next steps

include the legal formalization of the instrument, expected to ready by end-2013

19

CPS Outcomes Milestones Status Bank Group Program

II. Poverty: Improving investments in the social sectors (health and education) and focusing public spending on fighting extreme poverty

Employment Generation and Fighting Poverty (especially in light of the effects of the global financial crisis on Paraguay)

Retool institutional capacity to address other important

poverty concerns, particularly those arising from the crisis, via decentralized mechanisms, such as community driven

projects

Launch a dialogue on the options that Paraguay has to

counteract the effects that the Global financial crisis might have on poorest households (including, if appropriate,

partnership with private sector in support of active labor

market policies, vocational education, etc.).

A poverty assessment NLTA was conducted to analyze the

impact of rising inequality and food prices in national poverty rates. It also presented the new poverty

methodology, analyzed the determinants of poverty,

analyzed trends in the urban labor market and analyzed the possible poverty impacts of a (simulated) expansion in

monetary transfer programs (both CCTs and the new non-

contributory pension law).

Programmatic Poverty NLTA

Develop active labor market policies to prepare the country, and especially the vulnerable groups, to respond to the effects

of an economic crisis that may harm employment.

The Temporary Employment Program ―Nambapoo‖ has been designed and is ready to be implemented.

The Bank is helping the Ministry of Justice and Labor design the temporary employment programs, to be ready to

implement by end of CPS

HD Programmatic NLTA

Integrated Agrarian Reform, and reactivation of small-scale (household) agriculture

Land use change detection completed for major hot spots.

Land market analysis completed for major hot spots.

First round of national dialogue on evidence-based land

policy complete.

Broad -based stakeholder support achieved for evidence-based land policy options, to facilitate more

environmentally and socially sustainable agricultural

growth and urbanization by mid 2013.

Paraguay Land Assessment focusing on land use and land tenure dynamics from a market perspective launched mid-

2011.

Poverty Assessment was completed in 2010 and confirmed

association between limited land access and rural poverty.

Paraguay Land Assessment with support from FAO.

Sustainable Rural Development Project

Programmatic municipal development dialogue.

Paraguay Poverty Assessment.

JSDF financed pilot land titling in

indigenous communities.

JSDF Indigenous Community

Development.

Launch program to provide integrated support to the rural

poor in San Pedro and Caaguazu

Baseline: 0 (2008) Target: 300 communities and 60 indigenous communities

(2013)

Sustainable Agriculture project effective and

implementation arrangements deployed

As of mid-2011, 150 neighborhood development

committees were established, together with 4 aboriginal

community organizations.

First two micro-watershed participatory management plans

are being implemented. 140 small farms have seen their production increase by

20%.

It is expected that PRODERS will benefit more than 6,000

poor families by the end of FY13.

Increased number of indigenous communities with formal

property titles Baseline: 0 (2008)

Target: 30 (2013)

6 indigenous communities have obtained formal land titles.

20

CPS Outcomes Milestones Status Bank Group Program

II. Poverty: Improving investments in the social sectors (health and education) and focusing public spending on fighting extreme poverty

Increase enrollment rates and quality of secondary education

Improve Evidence-Based Decision Making within the

Ministry of Education on:

(1) ensuring basic conditions in all public schools (primary

and secondary) and

(2) designing an effective strategy to enhance teachers‘

quality

Development of a methodology to identify the most

important needs of the school system. The goal is to help prioritize expenditure (infrastructure, teachers training,

equipment, etc,) based on a set of benchmarks.

Diagnostic of Paraguay‘s current teachers‘ policies (hiring,

training, academic requirements, and professional development) together with a plan for improving teachers‘

qualifications (pre and in service training).

The Government of Paraguay recently requested the

Bank‘s assistance to develop the studies described in the milestones

Activities are currently under development and a workshop in Asuncion to show the interim results will be organized

in June 2012.

Education NLTA (FY12)

Multi-sectoral DPL

HD Programmatic NLTA (FY13-Fy14)

Increase access to water and sewerage services for the entire population, including indigenous populations

Increase coverage of water and sanitation system in rural and urban areas and in particular increasing the number of

additional families (over 2007):

- Using sanitation systems in the Asunción metropolitan area:

Target of 15,000 new families by 2013

- Using water supply systems in rural and indigenous areas:

Target of 5,000 new families by 2013; and

- Using basic sanitation in rural areas: Target of 4000 new

families by 2013).

Framework for managing the sector agreed (rural and urban)

Investment program for water and sewerage approved

Increased level of public investment in the sector materialized.

Water and Sanitation project approved and effective, but suffering implementation delays.

Rehabilitation works planned to start during the second semester of 2012.

DAPSAN initiative (―mesa de coordinación‖) to improve sector stakeholders‘ coordination is promising. Meanwhile,

Water and Sanitation project requires better coordination

from DAPSAN.

Talks on ESSAP concession contract are progressing well.

Public investment increased from 1.7% of GDP in 2008 to 2.8% of GDP in 2010.

Water and Sanitation Modernization Project

Increase access to basic health services of good quality

Reduce out-of-pocket payments on drugs and increase access

to basic health services, especially for the poor and in remote

areas.

Policy of free drugs designed and implemented

Family Health Units Program designed and under implementation

Social health determinants are analyzed to design health

policies.

Done.

500 FHU are operational Early experience with Family Health Units program has

been evaluated.

Analysis of social determinants of health has been

completed.

Programmatic Health AAA

Multi-sectoral DPL

HD Programmatic NLTA (FY13-

Fy14)

21

CPS Outcomes Milestones Status Bank Group Program

III. Growth with Inclusion: Fostering growth with a focus on employment generation and on improving income distribution, without destabilizing the country’s macroeconomic framework, and in an

environmentally friendly manner.

Appropriately responding to the global financial crisis, while safeguarding macroeconomic and financial stability

Adoption of a countercyclical fiscal policy to mitigate the

impact of the crisis on the most vulnerable population, but maintaining a sustainable fiscal stance in terms of public debt

to GDP:

- The overall fiscal balance to move from surplus to deficit,

but to avoid sharp increases in the debt to GDP ratio the

average deficit should be around 1% of GDP (2009-2011) - Increased tax-to-GDP ratio

Baseline: 11.9% (avg 2004-08)

Target: 13.0% (2013)

- Ratio of audits of large tax payers that result in additional

assessment exceeds 70%.

Adoption by congress of the emergency, anti-crisis,

package of $300M which is co-financed by IDB, CAF, Japan and the World Bank.

Gradually (as political economy permits) expand the base

of tax payers by, for instance eliminating VAT deductions

from the profit tax paid by agricultural enterprises (the IMAGRO), improving administration for the 114 largest

firms and increasing consumption taxes as well as VAT

withholding agents

Under-Secretariat of Taxes (SET) has strengthened its

audit capacities for large taxpayers through: (i) the issuance of a resolution by SET and the Superintendencia

de Bancos to allow for the audit of financial institutions

classified as large taxpayers.; and (ii) the implementation of a training program for auditors from the large taxpayers

unit (DGGC).

An anti-crisis plan was launched, helping the country‘s

impressive economic recovery in 2010 and neutralizing the effects of the crisis in poverty rates.

Tax/GDP ratio reached 13.5% in 2010, surpassing the set

target and allowing the Government to maintain a positive

overall fiscal balance even during the crisis.

(SET) has strengthened its audit capacities for large

taxpayers through: (i) the issuance of a resolution by SET and the Superintendencia de Bancos to allow for the audit

of financial institutions classified as large taxpayers; and

(ii) the implementation of a training program for auditors from the large taxpayers unit (DGGC).

The Ratio of audits of large tax payers that result in

additional assessment was 55% in 2010.

Programmatic DPL

Programmatic public sector reports

Programmatic growth notes

Macroeconomic and financial sector

monitoring

Public Expenditure Review

NLTA on debt management

including the assessment of

contingent liabilities

Utilizing the fiscal headroom to increase targeting of public

spending, away from wages and other recurrent spending and towards capital and social protection items:

- Increase public investment/GDP ratio Baseline: 1.7% in 2008

Target: 3.5% in 2013

Adoption by the Executive of financial programs (which

control non-protected such as social programs and public investments) that are consistent with social and

infrastructure priorities (for 2009 and beyond).

The share of social programs in the overall budget

expenditures increased from 47.8 in 2006-2007 to 50.8 during the crisis while coverage of social protection

programs increased more than 6 fold.

Public investment/GDP reached 2.8% in 2010.

- Increase coverage for the conditional cash transfer program Baseline: 2008: 18,700

Target: 75,000 in 2013

Efficient institutional and operational mechanisms for public entities responsible for social policy implementation

are introduced.

A Social Economic Unit was created within the Ministry of Finance to support the design and evaluation of social

programs.

CCT programs beneficiaries reach 98,000.

Moving towards a more sustainable pattern of growth, based in greater diversification of products and external markets; supporting investments in infrastructure and human capital, and improvements in the investment

and business climate, that will unambiguously move the country in that direction in the short to medium term

Launch investment program to improve the transmission and

transformation capacity, as well as improvement of the

system losses.

Begin manufacturing of equipment for the installation of

new transmission and transformation capacity, and for the

modernization of distribution system to support loss reduction.

Energy Sector Strengthening Project effective. Preparation

of key documentation is well advanced to begin

implementation of works.

Energy Sector Strengthening Project

Paraguay Conservation of

Biodiversity and Sustainable Land Management in the Atlantic Forest

of Eastern Paraguay (GEF).

22

CPS Outcomes Milestones Status Bank Group Program

III. Growth with Inclusion: Fostering growth with a focus on employment generation and on improving income distribution, without destabilizing the country’s macroeconomic framework, and in an

environmentally friendly manner.

Moving towards a more sustainable pattern of growth, based in greater diversification of products and external markets; supporting investments in infrastructure and human capital, and improvements in the investment

and business climate, that will unambiguously move the country in that direction in the short to medium term

Improve the quality of road infrastructure though the increase of km of road under systematic road maintenance

Baseline: 25% of paved road network under routine

maintenance in 2007 Target: 50% by 2013

First maintenance contracts awarded to the private sector. 2009

All maintenance contracts for the paved road network awarded. 2011

Toll network optimized. 2012

1,218 kilometers of roads are maintained through performance-based contracts. Also, an estimated 50

percent of the paved road network was under routine

maintenance in 2010.

Road maintenance project.

Programmatic AAA on small

cities/rural development.

Achieve a 10 feet operational depth and 24 hour navigation

on 90 percent of the year in waters of Paraguayan rivers and shared jurisdiction in the Paraguay and Parana rivers.

Reduce transport cost by 30 percent through the dredging of the Paraguay river

Develop a strategy for the institutional framework of river

navigation (and the role of the ANNR, the state‘s port authority, in this framework). 2012

Complete study necessary to assess the convenience of implementing the dredging and maintenance of the river

through a public works, PPPs or other contractual

arrangement – 2012

Complete technical studies to implement the dredging of

the river.

A feasibility study on concessions for river navigation was

prepared in 2011

IFC Investment in logistic company

for river transportation.

Sources of Growth and Overall Competitiveness

Competitiveness strategies and action plans agreed upon by

stakeholders (through a public-private dialogue mechanism)

for pilot sectors/regions.

Methodology developed and pilot sectors selected for

development of competitiveness strategies and action

plans.

Preliminary methodology agreed upon with the

Government and pilot selection process initiated for

technical assistance to develop pilot competitiveness strategies and action plans.

WB‘s Programmatic Growth Notes

WB‘s Competitiveness NLTA

IFC‘s ongoing financial sector

operations

IFC‘s ongoing operations in

logistics

IFC‘s investment in selected

agribusiness companies

Potential IFC Investment Climate,

Access to Finance advisory programs.

Launch dialogue on sources of growth (including the potential role of the modernization of agricultural enterprises)

launched.

Participatory diagnostic prepared on major constraints to sustainable growth

A multi-sectoral workshop was carried out on November 7-8, where Bank and Social Ministries discussed the issues

of growth, poverty reduction and inclusion

Business climate is improved by reductions in red tape.

Baseline: 291 days to deal with construction permits (2009) Target: 137 days to deal with construction permits (2013)

Start a program to simplify the opening of a business and

the issuance of construction licenses in Asunción.

Continue programs to promote public/private dialogue

towards resolving business obstacles

Continue programs to support private sector development

Business climate improved by making it easier to obtain a

construction permit. In 2010, the creation of a ―single window‖ for building permit approvals and associated

regulatory changes reduced the time to obtain a building

permit from 63 to 21 days in Asuncion.

23

CPS Outcomes Milestones Status Bank Group Program

III. Growth with Inclusion: Fostering growth with a focus on employment generation and on improving income distribution, without destabilizing the country’s macroeconomic framework, and in an

environmentally friendly manner.

Safeguarding the environment

Decrease in unsustainable forest management practices and

slow down of the expansion of the agricultural frontier as a result of the implementation of PES in pilot areas.

Agreement with OAS and IDEA to promote payment for

ecosystem services and sustainable agriculture.

Initial delay due to the finalization of the legal

documentation. The project closing date was extended to November 2012.

Development Market Place.

WB Carbon Finance Assist

Paraguay Conservation of Biodiversity and Sustainable Land

Management in the Atlantic Forest

of Eastern Paraguay (GEF).

Sustainable Agriculture & Rural

Development Project.

Water & Sanitation Sector

Modernization.

Energy Sector Strengthening Project

Strengthening of the national capacity to enable the

development of Clean Development Mechanism (CDM)

projects and other mitigation activities.

Completion of the Carbon Finance Assist Country Work

Program.

Two workshops and five technical studies were

successfully carried out to assess the low carbon potential

in relevant productive sectors.

Establishing a biological corridor and encouraging

sustainable agricultural practices;

Strengthening the institutional capacity of MAG and SEAM

to improve management capacity; and

Strengthening the National Protected Areas System.

Grant effectiveness achieved during 2011.

The project implementation is dealing with significant

institutional coordination challenges between Itaipú Binacional, MAG/PRODERS and SEAM to agree on some

basic operational principles.

The Project‘s Indigenous People Strategy needs to be updated.

24

Annex 2. Summary of Changes to CPS Results Framework

Pillar I: Governance and Anticorruption

Deleted

Added

Reformulated

CPS Outcomes

5 successful high profile

corruption trials.

Ministers formally adopt

good governance

practices.

Improving the

independent role of the

media as a watchdog of

the political arena.

Assisting the Government

in improving

accountability institutions.

Modernization of clearing

and settlement of the

Central Bank‘s payment

system.

Reduce number of civil

servants earning below the

minimum wage

Rate of timely payments

for SOE-provided services

to the state reaches 60%.

Indicators tracking

competitive recruiting

practices changed from

percentage of officials to

percentage of public

sector institutions

Indicators tracking

improvements in public

service deliver changed

from share of capital

expenditures to concrete

water and electricity

indicators

Milestones

Subscription to the Stolen

Assets Recovery Program.

Preparing and

anticorruption plan.

Reference to Civil Service

Law amendments

Journalism trainings and

media studies

References to Central

Bank payments system

modernization

Reference to timely

payments by the state to

SOEs

Road and water sectors

governance agreement

specified as a component

of all Bank projects in the

country.

References to the

establishment of SOE

holding agency

summarized.

Bank Program

Instruments

StAR Initiative

Strengthening the

National Audit Office

SFLAC.

Congressional

Strengthening IDF.

IE on Water Access to

Rural Communities

(SIEF).

Previous reference to a

possible Trust Fund

substituted by actual

project ―Building an

accountability to Address

Systematic Corruption‖.

25

Pillar II: Poverty

Deleted

Added

Reformulated

Country Strategic Goals

Increase access to basic

health services of good

quality.

CPS Outcomes

Reference to road

maintenance by

community groups.

Improve targeting of

social expenditures on

cash transfer programs.

Develop active labor

market policies to prepare

the country to the effects

of a crisis that may harm

employment.

Reduce out-of-pocket

payments on drugs and

increase access to basic

health services for the

poor.

CCT beneficiaries targets

now cover whole CPS

period.

Reference to land reform

to reflecting current

emphasis on reaching

consensus on the issue.

Education outcomes were

reformulated to reflect

changes in the nature of

Bank support to the sector,

now focusing on policy

strengthening.

Milestones

Capacity building

activities for school

teachers.

Continued support to the

cash transfers conditioned

on secondary school

attendance.

Reference to design of

Nambapoo.

Policy of free drugs

designed and

implemented.

Family health units

program designed and

implemented.

Social health determinants

analysis to inform policy

design.

Specific reference of

social programs to receive

support on updating or

designing targeting

instruments (Tekopora

and Adultos Mayores).

Milestones on land-reform

reformulated and

emphasis given to

reaching broad stake-

holder consensus.

Milestones on education

reformulated to reflect

current emphasis on

policy dialogue.

Bank Program

Instruments

Secondary education

project.

Possible social safety nets

operation.

HD Programmatic NLTA.

Education NLTA.

HD Programmatic Health

AAA.

Multi-sectoral DPL.

26

Pillar III: Growth with Inclusion

Deleted

Added

Reformulated

Pillar

Pillar renamed Growth

with Inclusion (formerly

―Growth with Equity‖)

CPS Outcomes

Reference to airports and

the potential and costs of

air traffic.

Issues related to

improving

telecommunications and

the internet.

Strengthening financial

sector supervision

Reference to land

ecological services in pilot

areas.

Increase the ratio of audits

of large tax payers that

results in additional

assessment.

Reduce transport costs

through the dredging of

the Paraguay river

Competitiveness strategies

and action plans for pilot

regions/sectors.

Strengthening the

institutional capacity of

MAG and SEAM and the

National Protected Areas

System.

Electricity sector

objectives reformulated to

reflect specific objectives

of Energy Project.

Business climate

indicators now focused on

reduction of red tape

(formerly investment to

GDP ratio).

Establishing a biological

corridor and encouraging

sustainable agricultural

practices replaced

objective of exposing 15

groups to conservation

practices n Caaguazú and

San Pedro.

Milestones

Reference to Ministry of

Industry and Commerce

working group to resolve

obstacles faced by key

industries.

Reference to introducing

international standards for

cooperatives supervision.

Reference to the auditing

of large taxpayers.

Reference to

Manufacturing of

equipments to modernize

electricity sector.

Complete technical study

to implement dredging of

Paraguay river

Develop methodology and

pilot sectors selected for

competitiveness strategy.

Biodiversity GEF grant

effectiveness in 2011.

References to carbon

finance changed from

analysis of the potential to

participate in the program

to completion of Carbon

Finance Country Work

Program.

Bank Program

Instruments

Environment evaluation

state.

FMAM Biodiversity

Programmatic AAA on

small cities/rural

development.

Potential IFC Investment

Climate and Access to

Finance Advisory

programs.

Carbon Finance program.

Development Market

Place

GEF Biodiversity Project.

Water and Sanitation

Project.

Energy Sector

Strengthening Project.

27

Annex 3. Paraguay IBRD Lending and Government-Executed Trust Fund Program

Fiscal Year Quarter Project Amount

(US$ million)

Loan

2009 Q4 Water and Sanitation Sector Modernization (approved under previous CPS) 64

2009 Q4 Public Sector Reform DPL 100

2011 Q2 Energy Sector Strengthening Project 100

2012 Q2 Public Sector DPL 100

Government-Executed Trust Fund

2009 Q4 Strengthening Congressional Legislative Process and Budget Oversight Capacity (IDF) 0.44

2010 Q4 Conservation of Biodiversity and Sustainable Land Management in the Atlantic Forest of Eastern Paraguay (GEF)

4.50

2011 Q3 Strengthening National Audit Office (SFLAC) 0.33

28

Annex 4. AAA Program in Paraguay, FY10-FY13

Delivery FY

Project Name

Theme

Output Type

Delivered to Client 2010 Public Sector NLTA Governance Institutional Development Plan

2011

MTDS Report Economic Policy Macroeconomics and Growth Report

FSAP Update Financial Development Financial Sector Assessment Report

Social Protection NLTA Social Protection Advisory Services/Technical Assistance

(FBS) Payment System Governance Advisory Services/Technical Assistance

Implications of Trade Liberalization within MERCOSUR Economic Policy Knowledge-Sharing Forum

2012

Programmatic Poverty Non-Lending Technical Assistance (NLTA) Poverty Reduction Advisory Services/Poverty Assessment

CDM Technical Assistance for Paraguay Environment Advisory Services/Technical Assistance

Support for the Design of River Navigation Concessions-Phase II Transport Advisory Services/Technical Assistance

Currently Underway

2012

Building an Accountability Coalition to Address systemic corruption Governance Advisory Services/Technical Assistance

Paraguay Land Dialogue Rural Development Advisory Services/Technical Assistance

Programmatic Poverty Poverty Reduction Advisory Services/Poverty Assessment

Medium and Long-Term vision for the Paraguay Health Sector Development Health Sector Study Report

2013 Paraguay Competitiveness and Innovation Economic Growth Advisory Services/Technical Assistance

2013 Paraguay Public Expenditure Report Governance Public Expenditure Review

2013 Education Education Advisory Services/Technical Assistance

2013 Public Sector Effectiveness (SFLAC) Governance Advisory Services/Technical Assistance

2013 (FBS) Payment System 2 Governance Advisory Services/Technical Assistance

2013 Infrastructure and Logistics Transport Advisory Services/Technical Assistance

2013 Strengthening the Pension System Social Protection Sector Study Report

29

Annex 5. Operations Portfolio (IBRD/IDA and GEF Grants) As of 04/09/2012

Active

Projects

Difference Between

Last PSR

Expected and Actual

Supervision Rating

Original Amount in US$ Millions

Disbursements a/

Project ID Project Name Development

Objectives

Implementation

Progress Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig.

Frm

Rev'd

P114971 PY Energy Sector Strengthening Project MU MU 2011 100

99.75 -0.249995

P094335 PY GEF Biodiversity Conservation MS MS 2010

4.5

4.05

P088799 PY PRODERS - Sust. Agric. & Rur Dev. Prj MS MS 2008 37.5

32.14675 23.401441

P117043 PY Public Sector DPL # # 2012 100

100

P082026 PY Road Maintenance MU MS 2007 74

45.85723 45.072229 19.69056

P095235 PY Water & Sanit. Sector Modernization MU U 2009 64

60.50835 22.508349

Overall Result

375.5

4.5

342.3123 90.282032 19.69056

30

Annex 6. Paraguay: IFC Investment Operations Program

2009 2010 2011 2012*

Original Commitments (US$m)

IFC and Participants

85.76 101.63 217.72 112.82

IFC's Own Accounts only

85.76 101.63 217.72 112.82

Original Commitments by Sector (%)- IFC Accounts only

AGRICULTURE AND FORESTRY

11.66 9.84 4.59 15.07

FINANCE & INSURANCE

18.38 88.88 95.41 71.63

TRANSPORTATION AND WAREHOUSING

69.96 1.28

13.3

Total

100 100 100 100

Original Commitments by Investment Instrument (%) - IFC Accounts only

Equity

6.1

Guarantee

18.38 58.18 65.55 71.64

Loan

81.62 34.44 34.45 28.36

Risk product

1.28

Total

100 100 100 100

* Data as of April 01,2012

31

Annex 7. IFC Committed and Disbursed Outstanding Investment Portfolio

As of 3/31/2012

(In USD Millions)

Committed

Disbursed Outstanding

FY Approval Company Loan Equity **Quasi Equity *GT/RM

Partici pant Loan Equity

**Quasi Equity *GT/RM

Partici pant

2010 Agrihold group 11.5 0 0 0 0

6.5 0 0 0 0

2012 Agrofertil sa 8.26 0 0 0 0

8.26 0 0 0 0

2011 Banco regional 29.44 0 0 0 0

29.44 0 0 0 0

2010 Bbva paraguay 18.75 0 0 0 0

18.75 0 0 0 0

2011 Itau paraguay 20 0 0 0 0

20 0 0 0 0

2012 Nfd agro 17 5 0 0 0

5 5 0 0 0

2012 Sudameris bank 15 0 0 6.5 0

15 0 0 6.5 0

2010 Uabl 75 0 0 3.32 0

75 0 0 2.38 0

Total Portfolio: 194.95 5 0 9.82 0 177.95 5 0 8.88 0

* Denotes Guarantee and Risk Management Products. ** Quasi Equity includes both loan and equity types.

32

Annex 8. Selected Indicators* of Bank Performance As of 04/09/2012

Indicator 2009 2010 2011 2012 Portfolio Assessment

Number of Projects Under Implementation a 6 3 4 5

Average Implementation Period (years) b 3.0 2.5 3.0 3.3

Percent of Problem Projects by Number a, c

50.0 0.0 75.0 60.0 Percent of Problem Projects by Amount

a, c 25.0 0.0 62.7 62.6

Percent of Projects at Risk by Number a, d

66.7 66.7 75.0 80.0 Percent of Projects at Risk by Amount

a, d 48.3 56.4 62.7 73.7

Disbursement Ratio (%) e 4.7 1.2 7.2 7.7

Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project)

Memorandum Item Since FY 80 Last Five FYs

Proj Eval by OED by Number 36 2 Proj Eval by OED by Amt (US$ millions) 796.7 28.7 % of OED Projects Rated U or HU by Number 40.0 50.0 % of OED Projects Rated U or HU by Amt 42.5 69.7

a. As shown in the Annual Report on Portfolio Performance (except for current FY).

b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).

d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only.

* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

33

Annex 9. Paraguay at a Glance

Paraguay at a glance 02/29/12

Latin Lower

Key Development Indicators America middle Paraguay & Carib. income (2010) Population, mid-year (millions) 6.5 572 3,811 Surface area (thousand sq. km) 407 20,394 31,898 Population growth (%) 1.8 1.1 1.2 Urban population (% of total population) 61 79 41 GNI (Atlas method, US$ billions) 19.1 4,011 8,846 GNI per capita (Atlas method, US$) 2,960 7,007 2,321 GNI per capita (PPP, international $) 4,430 10,286 4,784 GDP growth (%) 15.0 -1.9 7.1 GDP per capita growth (%) 13.0 -3.0 5.9 (most recent estimate, 2004–2010)

Poverty headcount ratio at $1.25 a day (PPP, %) 5 8 .. Poverty headcount ratio at $2.00 a day (PPP, %) 13 17 .. Life expectancy at birth (years) 72 74 68 Infant mortality (per 1,000 live births) 19 19 43 Child malnutrition (% of children under 5) .. 4 24 Adult literacy, male (% of ages 15 and older) 96 92 87 Adult literacy, female (% of ages 15 and older)

93 90 74 Gross primary enrollment, male (% of age group)

104 118 109 Gross primary enrollment, female (% of age group)

101 114 105 Access to an improved water source (% of population)

86 93 86 Access to improved sanitation facilities (% of population)

70 79 50 Net Aid Flows 1980 1990 2000 2010

a

(US$ millions) Net ODA and official aid 30 57 82 148 Top 3 donors (in 2008): Spain 0 1 5 39

Japan 16 26 52 37 European Union Institutions 0 1 5 32

Aid (% of GNI) 0.7 1.1 1.1 1.0

Aid per capita (US$) 10 13 15 23 Long-Term Economic Trends Consumer prices (annual % change) 22.4 37.3 9.0 9.2 GDP implicit deflator (annual % change) 16.7 36.3 12.4 6.7

Exchange rate (annual average, local per US$)

126.0 1,229.8 3,486.4 4,592.0

Terms of trade index (2000 = 100) .. .. .. ..

1980–

90 1990–2000

2000–10

(average annual growth)

%)

Population, mid-year (millions) 3.2 4.2 5.3 6.5 2.8 2.3 1.9 GDP (US$ millions) 4,579 5,265 7,095 18,904 2.5 2.2 3.8 (% of GDP) Agriculture 28.6 27.8 17.0 22.3 3.6 3.3 5.2 Industry 27.4 25.2 22.7 20.4 0.3 0.6 2.1 Manufacturing 16.0 16.8 15.7 12.2 4.0 1.4 1.3 Services 43.9 47.0 52.0 46.8 3.1 1.6 3.8 Household final consumption expenditure 75.7 77.2 79.2 69.0 2.4 2.6 3.3 General gov't final consumption expenditure 6.0 6.2 12.7 9.3 1.5 2.5 4.3 Gross capital formation 31.7 22.9 18.8 19.5 -0.8 0.7 4.0 Exports of goods and services 15.3 33.2 38.1 57.1 11.5 3.1 7.5 Imports of goods and services 28.7 39.5 48.8 55.0 4.4 2.9 6.8 Gross savings 19.2 18.8 16.5 13.4 Note: Figures in italics are for years other than those specified. 2010 data are preliminary. Group data are for 2009. .. indicates data are not available.

a. Aid data are for 2009. Development Economics, Development Data Group (DECDG).

10 5 0 5 10

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2009

Male Female

0

10

20

30

40

50

60

1990 1995 2000 2009

Paraguay Latin America & the Caribbean

Under-5 mortality rate (per 1,000)

-10

-5

0

5

10

15

20

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

34

Paraguay Balance of Payments and Trade 2000 2010

(US$ millions) Total merchandise exports (fob) 2,329 8,335 Total merchandise imports (cif) 2,050 9,400 Net trade in goods and services -362 -867 Current account balance -163 -805 as a % of GDP -2.3 -4.3 Workers' remittances and compensation of employees (receipts) 278 609

Reserves, including gold 772 4,168 Central Government Finance (% of GDP) Current revenue (including grants) 17.2 18.3 Tax revenue 10.8 13.1 Current expenditure 16.7 13.7 Technology and

Infrastructure

2000 2009 Overall surplus/deficit -4.6 1.4

Paved roads (% of total) 50.8 .. Highest marginal tax rate (%) Fixed line and mobile phone Individual 0 10 subscribers (per 100

people) 21 95

Corporate 30 10 High technology exports (% of manufactured

exports) 2.9 11.3

External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 3,088 4,938 Agricultural land (% of land

area) 51 51

Total debt service 352 464 Forest area (% of land area) 48.7 44.3 Debt relief (HIPC, MDRI) – – Terrestrial protected areas (% of

land area) .. ..

Total debt (% of GDP) 43.5 26.1 Freshwater resources per capita

(cu. meters) 16,873 15,343

Total debt service (% of exports) 10.6 4.4 Freshwater withdrawal (billion cubic meters)

0.5 .. Foreign direct investment (net inflows) 104 274 CO2 emissions per capita

(mt) 0.69 0.67

Portfolio equity (net inflows) 0 0

GDP per unit of energy use

(2005 PPP $ per kg of oil equivalent)

5.3 6.2

Energy use per capita (kg of oil equivalent)

720 699

World Bank Group

portfolio

2000 2009

(US$ millions)

IBRD

Total debt outstanding and disbursed

201 281

Disbursements 47 101

Principal repayments 19 33

Interest payments 11 7 IDA Total debt outstanding and

disbursed 28 15

Disbursements 0 0 Private Sector Development 2000 2010 Total debt service 2 2 Time required to start a business (days) – 35 IFC (fiscal year) Cost to start a business (% of GNI per capita) – 55.1 Total disbursed and outstanding

portfolio 0 71

Time required to register property (days) – 46 of which IFC own account

0 71 Disbursements for IFC own

account 0 60

Ranked as a major constraint to business 2000 2010 Portfolio sales, prepayments and

(% of managers surveyed who agreed) repayments for IFC own

account 0 0

Anticompetitive or informal practices .. 25.8 Access to/cost of financing .. 21.0 MIGA Gross exposure 5 0 Stock market capitalization (% of GDP) 3.5 0.2 New guarantees 0 0 Bank capital to asset ratio (%) 12.4 9.7 Note: Figures in italics are for years other than those specified. 2010 data are preliminary.

1/11/12 .. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100) higher values imply better ratings

2009

2000

Governance indicators, 2000 and 2009

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 281 IDA, 15 IMF, 0

Other multi- lateral, 1,057

Bilateral, 625

Private, 1,254

Short-term, 752

Composition of total external debt, 2009

US$ millions

35

Annex 10. Growth and Poverty Trends in Paraguay 2003-2010

i. High poverty and inequality continue to be major development challenges in Paraguay

despite noticeable improvements over the last decade. Poverty was 34.7 percent in 2010, while the

extreme poverty rate of 19.4 percent places Paraguay among the poorest countries in Latin America.

Inequality is also among the highest in the LAC region with a Gini coefficient of 0.512. Over half of

the poor and more than two thirds of the extreme poor are located in rural areas of Paraguay.2 With

only 41.2 percent of the population in 2010, rural households have a disproportionate amount of the

poor (58.1 percent). Overall, poor household heads have similar age and gender characteristics as

non-poor household heads, but much higher rates of incomplete primary education (45 percent versus

25 percent for the non-poor) and of informality (60 percent versus 42 percent), with a third working in

agriculture (as compared to 16.5 percent for the non-poor). Poor households have a higher dependency

ratio, with an average of 5.3 members (versus 3.7 members for the non-poor), and tend to speak

Guarani at home. Poor households also live in lower quality dwellings.

ii. Socio-economic conditions have improved in Paraguay over the past decade; however,

over a longer horizon, poverty and inequality show less improvement and an insufficiency to

overcome existing structural issues. Since 2003, Paraguay has improved considerably its socio-

economic indicators including poverty, inequality, health, and education. Nonetheless, evaluated in a

longer term perspective and with respect to average trends in other LAC countries, poverty declined

more gradually in Paraguay, from 36.1 percent in 1998 to 34.7 percent, while inequality increased

from 0.489 in 1998 to 0.512, indicating the structural nature of the problem.

iii. Growth continues to be necessary for poverty reduction, but is not sufficient. Poverty

decompositions throughout the period highlight that growth continues to be an important component

in poverty reduction. However, increases in food prices and, in recent years, high levels of inequality

have not helped reduce poverty. A better distribution of income would have helped reduce poverty

more strongly along with the economic growth. Poor people living in rural areas do not benefit much

from an expansion in agriculture due to land access issues and mass production by big firms. Social

transfer programs exist but are insufficient to have a significant impact on poverty and inequality. The

government does not have a sufficient revenue basis to afford stronger transfer programs: the tax to

GDP ratio in Paraguay is still around 12 percent, one of the lowest in LAC.

iv. Poverty rates have also shown strong differences between rural and urban areas. Paraguay‘s economy is strongly based in the agricultural sector (especially soy and meat) which represents

more than 20 percent of total value added. Paraguay‘s exports and export partners are also heavily

concentrated. About 80 percent of exports are agriculture-based products, half of which are soy and meat.

This makes the economy extremely sensitive to weather and commodity price changes. Paraguay is also

very vulnerable to a slowdown in trade activity of the MERCOSUR region, as 50 percent of exports are

destined to Argentina, Uruguay and Brazil. However, the poor in rural areas do not participate strongly in

soy and meat production. Soy and meat production are not labor intensive and, thus, growth in these

exports does not translate into faster poverty reduction. Changes in the distribution of income and in food

prices also matter in terms of changes in poverty rates. In 2010, a 5 percent increase in the extreme poverty

line (which reflects only food prices), would have increased extreme poverty by about 8 percent and

affected the rural extreme poor by relatively more than the urban.

v. A closer look at poverty since 2003 shows that most of the above-explained factors were

at work. Between 2003 and 2008, Paraguay experienced six consecutive years of positive output

2 Paraguay measures poverty in monetary terms using the poverty line method: persons with income below the

poverty line (measured by the value of a basic basket of food and non-food goods and services) are considered

poor. Those below the extreme poverty line (measured by the value of a basic basket of food) are considered

extreme poor, or indigent.

36

growth with an annual average growth rate of 4.6 percent and an overall decline in poverty and

inequality. Poverty fell from 44 percent in 2003 to 37.9 percent in 2008 (Figure 1), and the Gini

declined by 0.04 points to reach 0.506 in 2008. Unlike in 2010, improvements in both mean incomes

and its distribution worked towards the reduction of poverty.

Figure 1: Poverty and Extreme Poverty Trends, Paraguay

vi. The severe drought and global financial crisis in 2009 had little effect on national

poverty levels, but had a differentiated effect on the rural and urban sectors. National poverty

and inequality continued to decline in 2009, reaching 35.1 percent and 0.487, respectively, in that

year. In urban areas, the negative impact on GDP was not as strong, and urban poverty declined from

30.2 in 2008 to 24.7 percent as a result. This reflected rising wages for urban low skilled workers, in

part possibly due to countercyclical government spending on public works that benefitted low-skilled

sectors such as construction. Real wages in construction increased by about 20 percent between 2008

and 2009. Increasing remittances, which represented 10 percent of urban household income of the

poorest decile, and increased public transfers (Tekopora) to extreme poor urban households may also

have buffered these households. However, contrary to the developments in the urban sector, rural GDP

fell strongly as the agriculture sector was hit hard by the drought. Rural poverty went up 1 percentage

point to 49.8 percent. The labor force participation of family members increased in search of

additional income, but this may have led to a further dampening of wages. Neither extra family labor

income nor remittances nor public transfers (Tekopora) were enough to buffer household incomes.

Nevertheless, all these sources of income likely kept poverty from increasing even further. In all, the

net effect of the changes in rural and urban areas resulted in a relatively stable poverty rate –a small

reduction at the national level.

vii. In 2010, Paraguay enjoyed an unprecedented 15 percent GDP growth, yet poverty

decreased by only 0.4 percent (to 34.7 percent) and extreme poverty even increased by 0.6

percent (from 18.8 percent in 2009 to 19.4 percent). The rebound in the agricultural sector

accounted for more than half of the strong rebound in 2010, while the commerce sector accounted for

another third. One possible explanation for the difference in these trends as compared to 2003-2008

could be the growing importance of soybeans, as the acreage devoted to this commercial export crop

has increased significantly since 2008 responding to higher world market prices. The production of

soybeans and meat requires large extensions of land and are not labor-intensive. This not only

weakens the links to employment creation and poverty reduction, but it is also characteristic of an

economy with high inequality. The extreme poor in rural areas do not work in commercial export

agriculture (soybean and cattle); therefore, growth driven by these sectors has not trickled down

sufficiently to offset higher food prices for the rural poor.

44.0 41.3 38.6

43.7 41.2

37.9 35.1 34.7

21.2 18.3 16.5

23.7 23.2 19.0 18.8 19.4

0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010

Per

cen

tage

Poverty

Extreme Poverty

Rural

Urban

37

viii. The failure of growth to translate into a reduction in extreme poverty since 2009 seems

to be linked mainly, but not exclusively, to three main phenomena. First, high levels of initial

inequality in income and assets holdings (such as land), which makes growth less effective in reducing

poverty. Second, a growth pattern in the rural area based on relatively capital-intensive sectors, which

extends to service sectors in urban areas (such as commerce), with the exception of construction that

has a clear link to public investment. Third, a non-structural factor but one determined by external

conditions: price and weather shocks that affect primary goods and have an impact on real wages.

Public transfers and remittances have played a role, but compensating only partially the other

components.

38

Annex 11. Financing Gap

Based on a significant increase in the primary deficit, financing needs are projected to

be challenging but generally manageable. Gross financing needs are projected to increase

from US$206 million in 2011 to US$827 million in 2012. This translates into an increase

from 1 percent of GDP to 3.2 percent of GDP. Total amortizations substantially add to the

financing needs on top of those arising from the increase in the primary deficit. Amortizations

are expected to peak at US$ 367 in 2014. Beginning in 2012, projected fiscal deficits add to

the financing needs. Disbursements of external loans are expected to reach US$456 million in

2012 and US$419 million in 2013, including new budget support. After abstaining from bond

issuance in 2011, the Government is planning to step up domestic bond issuance from

US$172 million in 2012 to US$187 million in 2014. If all or part of the budget support

operations is not approved by Congress in the course of 2012 or 2013, the Government still

has some room to increase the issuance of domestic bonds and/or use part of the net public

sector deposits with the Central Bank.3 In 2010 alone, the Government deposited US$260

million, including US$100 million from the Inter-American Development Bank (IADB).

Central government's medium-term financing plan*

(USD million)

*90% of public sector figures

1/ 2010: BID ($100m), CAF ($45.2); 2012: PSDPL ($100m); 2013: BID ($75m)

3 The annual budget law usually authorizes the issuance of domestic bonds up to US$300 million.

2010 2011 2012 2013 2014

Financing needs 104 206 826 697 817

Primary surplus/deficit 273 220 -435 -444 -337

Amortizations 305 324 283 220 367

Domestic 89 122 82 44 203

External 217 202 202 176 164

Multilateral 135 128 122 111 99

Bilateral 81 74 79 65 65

Interest payments 72 102 107 32 113

Financing Sources 364 159 456 419 387

Disbursements 364 159 456 419 387

External 278 159 283 233 193

Multilaterals 267 132 235 172 127

o/w new budget support 1/ 145 0 100 75 0

Bilaterals 11 28 48 61 67

Domestic bonds 86 0 172 187 194

Use of public sector deposits at CB -260 47 370 277 430

Financing gap 0 0 0 0 0

39

Annex 12. Debt Sustainability Analysis

1. The debt sustainability analysis is performed on the basis of two methodological

approaches. The deterministic approach presents the evolution of main determinants of

public debt over time. The stochastic approach shows how the main determinants of public

debt are affected by stochastic shocks.

2. A favorable medium-term macroeconomic framework would help preserve a

stable path for Paraguay’s public debt in 2011-2014. The baseline for the debt

sustainability analysis is conservative. Fiscal accounts are expected to deteriorate in 2011-

2014 although at sustainable levels. Under these assumptions, central government gross debt

is projected to decline from 20.0 percent of GDP in 2009 to 11.3 percent of GDP in 2014. The

baseline scenario is based on the assumption of an average primary deficit of 1.4 percent of

GDP during 2012-2014.

3. Fiscal prudence, economic growth and exchange rate stability are critical for

continued improvement in public debt indicators. For the baseline scenario, it was found

that during 2008 and 2010 exchange rate appreciation, fiscal adjustment (primary surplus) and

continued healthy growth played a significant role in reducing the debt-to-GDP ratio. In

addition a shock of a 2 percentage point decline in the real growth rate due to a potential

global crisis is applied. In this scenario the debt-to-GDP ratio would peak at about 14 percent

in 2013 to then fall back in the following year.

Central Government Debt Sustainability (baseline scenario) 2008-2014

4. Following a deterministic approach to the debt sustainability analysis, it can be

found that adverse shocks could temporarily reverse the favorable debt trends observed

under the baseline scenario. Various stress tests to evaluate the behavior of the central

government debt ratio under different scenarios have been considered. For example, a one-

time 30 percent exchange rate depreciation in 2012. This shock would cause the debt-to-GDP

ratio to deteriorate rapidly to 17.8 percent in 2012, reverting to below 15.5 percent by 2014.

Est.

2008 2009 2010 2011 2012 2013 2014

Central government (% of GDP) 18.4 19.9 16.5 11.9 12.6 12.7 11.3

o/w foreign currency-denominated 13.6 13.1 11.1 9.3 8.6 7.3 6.5

Key assumptions

Real GDP growth (%) 5.8 -3.8 15.0 4.0 -0.7 7.5 4.5

Primary balance (% of GDP) 3.1 0.7 1.5 0.9 -1.7 -1.5 -1.0

Overall balance (% of GDP) 2.5 0.1 1.1 0.6 -2.1 -1.6 -1.3

Growth of real primary spending (%) -4.9 28.2 4.7 4.7 3.9 4.5 4.7

Average nominal interest rate (%) 3.3 2.8 3.8 3.6 4.0 4.2 4.6

Exchange rate (Gs/US$), eop 4945.0 4610.0 4574.0 4439.9 4300.0 4250.0 4100.0

Proj.Act.

40

Gross Public Debt: Alternative Scenarios and Bound Tests, 2009-14 (in percent of GDP)

1/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

2/ Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus

domestic inflation (based on GDP deflator).

Table Central Government Debt Sustainability Framework 2000-2014

1/ Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is

used.

2/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate

of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate

depreciation (measured by increase in local currency value of U.S. dollar).

3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth

contribution as -g.

4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

5/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end

of previous period.

6/ Derived as nominal interest expenditure divided by previous period debt stock.

2010 2011 2012 2013 2014

A. Alternative Scenarios

A1. Key variables are at their historical averages in 2012-14 1/ 16.5 11.9 8.5 6.4 3.0

A2. No policy change (constant primary balance) in 2012-14 16.5 11.9 9.0 7.1 4.3

B. Bound Tests

B1. Real interest rate is at baseline plus one standard deviations 16.5 11.9 12.8 13.2 12.0

B2. Real GDP growth is at baseline minus one-half standard deviation 16.5 11.9 13.4 14.6 14.7

B3. Primary balance is at baseline minus one-half standard deviation 16.5 11.9 13.3 13.9 13.1

B4. Combination of B1-B3 using one-quarter standard deviation shocks 16.5 11.9 13.2 13.8 12.9

B5. One time 30 percent real depreciation in 2012 2/ 16.5 11.9 17.8 17.3 15.5

B6. 10 percent of GDP increase in other debt-creating flows in 2012 16.5 11.9 22.6 21.4 19.3

B7. Real GDP growth is at baseline minus 2% in 2012 16.5 11.9 13.3 13.7 12.6

II. Stress Tests for Public Debt Ratio

ProjectionsActual

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Central government debt 1/ 31.5 39.6 54.4 43.0 36.7 30.0 22.3 22.6 18.4 19.9 16.5 11.9 12.6 12.7 11.3

o/w foreign-currency denominated 28.2 34.3 47.3 38.0 32.8 26.9 20.0 15.7 13.6 13.1 11.1 9.3 8.6 7.3 6.5

Change in public sector debt 1.1 8.1 14.8 -11.3 -6.3 -6.7 -7.7 0.2 -4.1 1.5 -3.4 -4.6 0.7 0.1 -1.4

Identified debt-creating flows (4+7+12) 3.7 8.0 16.7 -15.2 -6.9 -5.1 -7.7 -5.4 -6.0 -0.3 -4.8 -3.1 1.3 -0.1 -0.1

Primary deficit 3.3 -0.5 1.8 -1.0 -2.7 -2.0 -1.5 -1.8 -3.1 -0.7 -1.5 -0.9 1.7 1.5 1.0

Revenue and grants 17.2 18.8 17.4 17.0 18.4 18.3 18.3 17.6 17.3 19.6 18.5 18.9 20.0 18.3 17.5

Primary (noninterest) expenditure 20.5 18.3 19.2 16.0 15.7 16.3 16.8 15.8 14.2 18.9 17.0 18.0 21.6 19.8 18.5

Automatic debt dynamics 2/ 0.4 8.5 14.9 -14.2 -4.2 -3.2 -6.2 -3.6 -2.9 0.3 -3.3 -2.1 -0.4 -1.6 -1.0

Contribution from interest rate/growth differential 3/ -1.2 -0.7 -2.1 -8.7 -4.9 -2.5 -2.5 -2.5 -3.1 1.3 -3.2 -1.9 -0.1 -1.5 -0.8

Of which contribution from real interest rate -2.2 -0.1 -2.1 -7.0 -3.4 -1.6 -1.4 -1.2 -2.0 0.6 -0.8 -1.3 -0.1 -0.7 -0.3

Of which contribution from real GDP growth 0.9 -0.6 0.0 -1.7 -1.5 -0.9 -1.2 -1.3 -1.1 0.7 -2.4 -0.6 0.1 -0.8 -0.5

Contribution from exchange rate depreciation 4/ 1.6 9.2 17.0 -5.5 0.8 -0.6 -3.7 -1.1 0.2 -1.0 -0.1 -0.3 -0.3 -0.1 -0.2

Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Residual, including asset changes (2-3) -2.6 0.1 -1.9 3.8 0.6 -1.6 0.1 5.6 1.9 1.8 1.5 -1.6 -0.6 0.2 -1.3

Central government debt-to-revenue ratio 1/ 183.9 210.9 311.8 253.1 199.5 163.9 121.7 128.0 106.4 101.7 89.3 62.8 63.1 69.3 64.5

Gross financing need 5/ 8.9 5.8 9.4 6.7 5.1 4.9 4.0 2.5 0.8 3.4 1.7 1.7 4.1 3.3 3.0

in billions of U.S. dollars 0.6 0.4 0.5 0.4 0.4 0.4 0.4 0.3 0.1 0.5 0.3 0.4 1.0 1.0 1.0

Key Macroeconomic and Fiscal Assumptions

Real GDP growth (in percent) -3.3 2.1 0.0 3.8 4.1 2.9 4.3 6.8 5.8 -3.8 15.0 4.0 -0.7 7.5 4.5

Average nominal interest rate on public debt (in percent) 6/ 4.3 4.7 4.2 3.0 3.1 3.5 3.7 4.4 3.2 3.2 2.4 2.0 3.7 1.0 2.9

Average real interest rate (nominal rate minus change in GDP deflator, in percent) -8.1 -0.2 -5.9 -15.0 -8.7 -4.6 -4.8 -5.8 -10.0 3.0 -3.9 -8.4 -1.3 -5.5 -2.1

Nominal appreciation (increase in US dollar value of local currency, in percent) -5.6 -24.7 -34.1 16.2 -2.2 2.1 17.9 6.5 -1.4 7.3 0.8 3.0 3.3 1.2 3.7

Inflation rate (GDP deflator, in percent) 12.4 4.8 10.0 18.0 11.8 8.1 8.5 10.2 13.2 0.2 6.3 10.4 5.0 6.5 5.0

Growth of real primary spending (deflated by GDP deflator, in percent) -3.9 -9.0 5.0 -13.3 1.7 7.3 7.7 0.2 -4.9 27.7 3.7 10.0 19.4 -1.7 -2.4

Primary deficit 3.3 -0.5 1.8 -1.0 -2.7 -2.0 -1.5 -1.8 -3.1 -0.7 -1.5 -0.9 1.7 1.5 1.0

Actual

I. Baseline Projections

Projections