paraguay: country strategy with the idb (2009-2013)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

PARAGUAY

THE BANK’S COUNTRY STRATEGY WITH PARAGUAY (2009-2013)

This document was prepared by the project team consisting of: Eduardo Feliciangeli (ICS/CPR); Goro Mutsuura (VPC/GCM); Masami Yamamori (CSC/CPR); and Pablo Molina (VPC/CSC), who coordinated preparation of the document under the direction of Vladimir Radovic (CSC/CPR). The following people collaborated in its preparation: Pablo Alonso (ICF/ICS); Gastón Astesiano (INE/ENE); Eduardo Borenzstein (VPC/CSC); Roberto Camblor (FMM/CPR); Tulio Correa (VPC/PDP); Gustavo Cuadra (EDU/CPR); Alberto De Egea (CSC/CPR); Francisco Demichelis (ICF/CMF); Joaquín Domínguez (CMF/CPR); Martín Duhart (SCF/CUR); Juan Manuel Leaño (TSP/CPR); Norma Fleytas (ITI/CPR); Mirtha de López (CSC/CPR); Kleber Machado (INE/WSA); Virginia de Medin (CSC/CPR); Gonzalo Muñoz (RND/CPR); Carlos Ortiz (MIF/CPR); Jorge Oyamada (CSC/CPR); Hector Malarin (INE/RND); Pedro Martel (RND/CGU); Ricardo Quiroga (INE/RND); Sandro Parodi (VPP/SCF); Laura Ripani (SCL/LMK); Marcos Robles (SCL/SCL); María Eugenia Roca (FID/CPR); María Elena Sánchez (CSC/CPR); Rebeca Sánchez (IIC); Emilio Sawada (ENE/CPR); Cristóbal Silva (VPC/PDP); Mariano Sturla (CSC/CSC); Gustavo Sierra (CSC/CPR); Luis Tejerina (SCL/SPH); Luis Uechi (INE/TSP); Carolina Vera (CSC/CPR); and Gustavo Zuleta (SPH/CUR). Carlos Hurtado (VPC/CSC) and Roberto Vellutini (VPC/VPC) provided leadership and guidance.

CONTENTS

I.

INTRODUCTION ................................................................................................................. 1

II.

THE IDB IN PARAGUAY.................................................................................................... 1

III.

SECTOR ASSESSMENT OF PRIORITY AREAS ..................................................................... 2 A.

B.

C.

IV.

Infrastructure........................................................................................................... 2 1. Transportation ................................................................................................ 2 2. Water and sanitation and solid waste ............................................................ 3 3. Agriculture and tourism ................................................................................. 4 4. Energy............................................................................................................. 5 5. Climate change............................................................................................... 5 Social sector............................................................................................................ 6 1. Healthcare....................................................................................................... 6 2. Education ........................................................................................................ 6 Institutional, financial, and municipal and urban development sector ................ 7 1. Institutional..................................................................................................... 7 2. Financial ......................................................................................................... 7 3. Municipal and urban development................................................................ 8

FINANCIAL PROGRAM....................................................................................................... 8 A. B. C.

External financing needs........................................................................................ 8 Financing from the IDB ....................................................................................... 10 Risks...................................................................................................................... 10

V.

USE OF COUNTRY SYSTEMS ........................................................................................... 11

VI.

COORDINATION WITH OTHER DONORS .......................................................................... 11

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PRINTED ANNEXES

Annex I Annex II Annex III Annex IV

Results matrix for the Bank’s country strategy with Paraguay for 20092013 Net flows of Bank resources with Paraguay Process of analysis, consultation, and validation of the country strategy OVE recommendations

APPENDICES

Proposed resolution

ELECTRONIC LINKS

SESP

Strategic Economic and Social Plan 2008-2013

ERP

Economic Recovery Plan

Diagnostic

Growth Diagnostic: Paraguay

Governance

Assessment of democratic governance in Paraguay

Social

Technical note on the social sector

Transportation

Technical note on the transportation sector

Water

Technical note on the water and sanitation sector

Energy

Technical note on the energy sector

PPP

Public-private partnerships

Agriculture

Documents assessing the agriculture sector

MDG

Paraguay: Millennium Development Goals

Strategy 20042008

Bank’s country strategy with Paraguay for 2004-2008

Progress

Progress report on the Bank’s country strategy with Paraguay for 20042008

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IFA

Integrated Fiduciary Assessment (IDB/World Bank/European Union)

IMA

Independent Macroeconomic Assessment

Risks

Risk analysis

DSA

Debt Sustainability Analysis

Agencies

Matrix of activities of the main multilateral and bilateral agencies

Master plan

Master plan for tourism

Decentralization Studies on fiscal decentralization in Paraguay Financial

Technical note on the financial system

Housing

Assessment of the housing sector

Sector risks

Matrix of sector risks

Country systems

Matrix of country systems

Action plan

Bank’s contribution to the IFA action plan

CEA

Country Environmental Assessment

Revitalization

Revitalization of historic downtown Asunción

Fiduciary

Technical note for the fiduciary strategy

CPAR

Country Procurement Assessment Review

Portfolio

Report on status of portfolio

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ABBREVIATIONS

AECI AFD ANDE ANNP CPAR DGIA DSA ESSAP GASC GDP IDB IFA IIC IMF JICA MEC MERCOSUR MIF MOPC NSG OFID OMJ OPEC OVE PPP SCF SENASA SESP SINAFOCAL SNPP TC

Agencia Española de Cooperación Internacional [Spanish Agency for International Cooperation] Agencia Financiera de Desarrollo [Development Finance Agency]/Paraguay Administración Nacional de Electricidad [National Electricity Administration]/Paraguay Administración Nacional de Navegación y Puertos [National Navigation and Ports Administration]/Paraguay Country Procurement Assessment Review Democratic Governance and Institutional Assessment Debt Sustainability Analysis Empresa de Servicios Sanitarios del Paraguay/Paraguay Grupo Articulador de la Sociedad Civil [Civil Society Coordination Group] Gross domestic product Inter-American Development Bank Integrated Financial Assessment (IDB, World Bank, European Union) Inter-American Investment Corporation International Monetary Fund Japan International Cooperation Agency Ministry of Education and Culture Southern Common Market Multilateral Investment Fund Ministry of Public Works and Communications/Paraguay Non-sovereign guaranteed (operation) OPEC Fund for International Development Opportunities for the Majority/IDB Organization of Petroleum Exporting Countries Office of Evaluation and Oversight/IDB Public-private partnership/Paraguay Structured and Corporate Financing Department/IDB Servicio Nacional de Saneamiento Ambiental [National Environmental Health Service]/Paraguay Strategic Economic and Social Plan Sistema Nacional de Formación y Capacitación Laboral [National Vocational Education and Training System]/Paraguay Servicio Nacional de Promoción Profesional [National Service for Professional Advancement] Technical cooperation project

EXECUTIVE SUMMARY

The IDB in Paraguay

The IDB is the main multilateral agency in Paraguay (45% of the external public debt and 81% of multilateral debt). As such, its support for the country has touched virtually all sectors of the economy.

The portfolio, concentrated in the public sector, comprises 106 operations for a total of US$751.2 million, with US$461.6 million to be disbursed as of 31 March 2009. Of these, 23 are sovereign-guaranteed loans with an undisbursed balance of US$405.9 million.

Half (54%) of the undisbursed portfolio is concentrated in infrastructure (transportation, 38.6%, and energy, 15.6%). Deficiencies in that sector are one of the main obstacles to the country’s growth, the other being institutional weakness.

Sector priorities

Sector coverage can include technical assistance and lending in the infrastructure sector (transportation, energy, water and sanitation, agriculture, biofuels, and climate change), the social, healthcare, and education sectors, as well as in institution-strengthening, the financial sector, and municipal and urban development.

Financing needs

Total financing needs for the period are on the order of US$1.5 billion, which is projected to be covered with external resources from multilateral agencies, in light of Paraguay’s absence from foreign and domestic financial markets. Disbursements equivalent to 2.2% of GDP (US$320 million) are required in 2009.

Debt sustainability

Paraguay has a solid macroeconomic framework and one of the lowest levels of debt in the region (17% of GDP). Simulations based on current growth forecasts place the debt at about 11% of GDP in 2013.

Financing from the IDB

IDB support is estimated at US$1 billion in approvals for the period. This would mean a positive net flow of loans to the country of US$272 million. The country’s debt with the IDB would rise from US$0.989 billion in 2008 to US$1.261 billion by period end, representing an increase in the debt-to-GDP ratio from 6.2% in 2008 to 7% in 2013, which does not affect debt sustainability in Paraguay.

Coordination with multilateral agencies

the IDB has taken the lead on cooperation agreements with the Spanish Agency for International Cooperation (AECI), for water and sanitation projects, and with the Japan International Cooperation Agency (JICA) and the OPEC Fund for International Development (OFID), for transportation operations.

Executive Summary

Use of country systems

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Through loans and technical cooperation projects, the IDB supports the development of country systems. The IDB is making partial use of the country systems and will decide whether to make greater use of them based on progress made in their development and under reasonable considerations of fiduciary risk.

I. INTRODUCTION 1.1

This country strategy paper replaces the country strategy paper (document GN-2312-1) approved in July 2004. It contains the agreement between the Bank and the Government of Paraguay on the amount of the Bank’s lending program in support of the country during the period 2009-2013, the priority areas of intervention (Annex I), and the main results (Annex II). The country strategy reflects the convergence of the institutional priorities of the IDB and the priorities established in the Paraguayan government’s Strategic Economic and Social Plan (SESP). It is supported by a large number of studies and diagnostic assessments (technical notes). It also incorporates the findings from consultations with the authorities (sector dialogues, encerrona, and validation) and consultations with civil society representatives (Annex IV). Lastly, it incorporates the relevant recommendations of the Bank’s Office of Evaluation and Oversight (OVE) (Annex V).

II. THE IDB IN PARAGUAY 2.1

The IDB is the principal multilateral or bilateral agency in Paraguay. In terms of financing, it is the largest lender, with 45% of external public debt and 81% of multilateral debt, which is the highest level of debt held in a borrowing member country. As of 31 March 2009, the stock of external public debt is US$2.148 billion, of which US$0.9588 billion (45%) corresponds to the IDB. Domestic debt is low (2% of GDP), and the government does not participate in domestic or foreign commercial capital markets, relying instead on multilateral and bilateral agencies to meet its short- and long-term fiscal needs.

2.2

The Bank’s action in the country is concentrated in the public sector and includes a broad spectrum of sectors and activities that reflect the Bank’s important role in providing technical assistance and institutional support to the government, in addition to loan resources. The outstanding portfolio as of 31 March 2009 consists of 106 operations totaling US$751.2 million, with US$461.6 million pending disbursement. Of those operations, 23 are sovereign-guaranteed loans with an undisbursed balance of US$405.9 million (see portfolio status).

2.3

For reasons of scale, the participation of the private sector windows is growing, particularly the Inter-American Investment Corporation (IIC). However, the support provided by the Structured and Corporate Financing Department (SCF) in the form of credit guarantees for trade finance (Trade Finance Facilitation Program) stands out. In all, there are 22 private sector operations (SCF and IIC) for US$73.6 million (see portfolio status).

2.4

The technical assistance program is extensive and goes beyond the areas covered by loan operations. There are 62 operations with an undisbursed balance of US$16.8 million, including 6 projects in the Social Entrepreneurship Program, in the technical cooperation portfolio.

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2.5

The loan portfolio is relatively young. Projects proposed in the Bank’s country strategy with Paraguay for 2004-2008 (document GN-2312-1) were approved in the second half of the previous administration (see progress report). The specific achievements are described in the matrix of performance indicators for the 2004-2008 country strategy, and the expected results for the current portfolio are presented in the matrix of performance indicators for the 2009-2013 country strategy.

2.6

With respect to the undisbursed portfolio, 54% is destined for the infrastructure sector, while 17.3% corresponds to poverty-reduction projects, and 12.6% corresponds to State modernization.

2.7

The infrastructure focus is explained by two factors: the country is focusing on improving its infrastructure, one of its main challenges; and at the time the Bank’s country strategy with Paraguay for 2004-2008 was conceived, the immediate objective was to revitalize the economy, which had not grown (on average) in the last seven years. During that period, among other activities, action was coordinated with the International Monetary Fund (IMF) and the World Bank to support the macroeconomic adjustment, the Development Finance Agency (AFD) was established, the road connecting Paraguay and Bolivia was completed, and construction was started on a power transmission line between Itaipú and Asunción.

2.8

In the area of poverty reduction, progress was made on three of the Millennium Development Goals: universal education, reduction in infant and maternal mortality, and access to safe drinking water. The country implemented a social safety net, for which technical support was provided and an operation was reformulated (Social Investment Program, PROPAIS), thus benefiting 6,100 families through conditional cash transfer programs.

2.9

In the area of institution-strengthening, support has been provided to the tax and customs administration, which led to an increase in tax revenue of nearly 2% of GDP during the macroeconomic adjustment program. Noteworthy progress has also been made in the connectivity and use of the Integrated Financial Management System and in the reform of the procurement system.

III. SECTOR ASSESSMENT OF PRIORITY AREAS A.

Infrastructure

3.1

The growth diagnostic for Paraguay indicates that one of the main development objectives is to build the infrastructure the country needs to overcome its landlocked status and the low coverage and quality of basic services (diagnostic).

1. Transportation

3.2

Fewer than 10% of the country’s roads are serviceable throughout the year (8,610 kilometers of paved and improved roads), and river transport is difficult during the summer (transportation). Accordingly, the priorities are to improve the road network (national and rural), as well as the waterway network, to make exports feasible (e.g. soybeans are primarily exported via the Paraguay River), in an effort

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to offset the effects of the country’s landlocked status. In addition, the public transportation system for metropolitan Asunción is in need of improvement, which will necessitate a change in the system’s economic and institutional model. These subsectors are identified as priorities in the SESP and are among the country’s development objectives.

3.3

In the case of road infrastructure, in order to increase the percentage of serviceable roads, the following activities are required: (a) strengthen the management, planning, and execution capacity of the Ministry of Public Works and Communications (MOPC), including development of a multiyear investment plan and a diagnostic assessment of investment needs in rural roads; (b) update the National Transportation Policy and its legal and regulatory framework; and (c) improve the regulatory framework (ownership of public works and the legal, regulatory, and contractual framework). In the case of public transportation, the following activities are needed: (a) develop a national urban transportation policy that paves the way for a first pilot project for mass transit in metropolitan Asunción, changing the traditional approach for a mechanism based on payment for services provided; (b) design, organize, and set up a specialized government agency for the centralized management, planning, and control of the mass transit system for metropolitan Asunción; and (c) make investments to improve the corridors and build terminals. In both cases, private participation in provision and operation would be possible through public-private partnerships (PPPs) arranged by the government. This, in turn, opens the possibility of supporting a program of concessions through non-sovereign guaranteed (NSG) operations. There are restrictions due to the sector’s limited capacity to absorb an increasing flow of resources.

3.4

In order to improve the port infrastructure and the navigability of waterways, the following activities are required: (a) structure and strengthen the National Navigation and Ports Administration (ANNP) as a planning, regulatory, and oversight agency for port operations and waterway navigation; (b) define a rate structure for related services that covers the investment and variable operating costs; (c) review the regulation of ports and private terminals (which handle 60% of cargo) to establish effective mechanisms for paying royalties to the government; and (d) invest in the dredging of the rivers. The Bank’s loan operations in this subsector (e.g. investments in dredging) will be accompanied (or preceded, where necessary) by programs and activities related to the actions mentioned in items (a) to (c). There may be opportunities for NSG operations with private ports and transportation companies, as well as with producers and providers of key inputs for building infrastructure. The lack of political will to carry out these reforms is the main obstacle.

2. Water and sanitation and solid waste

3.5

The assessment of the water and sanitation subsector underscored the following: (a) the needs of the rural sector are critical (water and sanitation coverage is 49% and 37%, respectively); (b) the national policy for financing the rural subsector (through sanitation boards) is effective in terms of ensuring the financial

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sustainability of the systems, and the National Environmental Health Service (SENASA), responsible for the rural sector, has the required technical capacity to develop and execute investments and provide the sanitation boards with technical support for operating and maintaining their systems; and (c) the needs of the urban sector are also critical (water and sanitation coverage is 79% and 14%, respectively, and the wastewater treatment rate is 8%). The State-owned company responsible for this subsector (Empresa de Servicios Sanitarios del Paraguay, ESSAP) has institutional, technical, and management weaknesses, which added to a sizable lag in rates, restricts its ability to provide and expand services.

3.6

Against this backdrop, the Bank’s actions would focus on financing investments in rural areas (a development objective at the very top of the agenda); supporting technical, management, and financial improvements in the ESSAP in order to increase the company’s efficiency and facilitate the expansion and improve the quality of services; and helping to strengthen the sector’s institutional and regulatory framework (e.g., application of the existing regulatory framework, including the rate structure and strengthening of the regulatory agency). Given the government’s involvement in this subsector, no NSG operations are anticipated.

The management capacity of the sanitation boards’ uneven management capacity in the communities is an obstacle that must be overcome.

3.7

The assessment of the solid waste subsector identified the following requirements: (a) define more clearly the delegation of institutional, planning, and management responsibilities, including development of a national strategy and a metropolitan master plan for this subsector; and (b) review revenue and cost structures to ensure the financial sustainability of the service. The Bank’s actions in this subsector would address these requirements and could include pilot projects, prior to the financing of large-scale investment projects, with private sector participation. The Bank’s actions in the sector are consistent with the SESP strategic objectives to strengthen government institutions to make better policies and deliver better public services. Given the government’s involvement in this subsector, no NSG operations are anticipated. The lack of political consensus on its importance is the main obstacle in this subsector.

3. Agriculture and tourism

3.8

In the agriculture sector, the following action is needed: (a) restructure government spending so that expenditures are not tied to the production of specific crops (e.g. cotton), for example by providing subsidies that encourage the adoption of more efficient technologies, which could include the purchase of certain inputs; (b) improve land tenure by introducing a rural cadastre that standardizes the mapping and documentation of properties in the context of integrated management of all registration systems; and (c) make the necessary changes so that the producers participating in the agrarian reform can immediately obtain property titles. The Bank’s support in the agricultural sector—a crosscutting element in the SESP due to the poverty of the rural sector—would focus on the aforementioned activities, complemented by specific support for the agribusiness sector through NSG

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operations by the SCF, Multilateral Investment Fund (MIF), and the IIC. There is a risk of reversal of the previous policies.

3.9

Tourists and same-day visitors to Paraguay spend just US$35 on average; the goal is to increase this amount. Hotel infrastructure and related services must be improved to accommodate the large flow of visitors to Iguazú Falls. The master plan for the sector will make it possible to carry out activities consistent with the job creation pillar of the SESP and coordinate public and private sector initiatives to: (a) improve management and (b) build the necessary infrastructure. There will be opportunities for the MIF to participate in training programs for hotel staff and tourist guides, as well as programs to support microenterprises in the sector, and for the IIC to participate in the financing of the hotel infrastructure. Problems related to demand are the main obstacle.

4. Energy

3.10

The sector assessment of the electric energy sector (monopoly of the State-owned National Electricity Administration, ANDE) determined that the country has abundant hydroelectric power. However, investment is needed in the transmission and distribution subsectors, including rural electrification, as well as in power generated for export. This is addressed in the SESP in the chapters on improving the efficiency of public enterprises and on production development. In order to make the sector financially sustainable, the following actions are needed: (a) reduce technical and commercial losses (totaling 33%), including a reduction in the payment arrears of public-sector customers; (b) incorporate (or be preceded by, as appropriate) a rate adjustment; and (c) include measures to boost energy efficiency.

These measures will help ANDE become a modern and efficient public enterprise, although there are implementation risks. Given the structure and characteristics of the sector, NSG financing in the transmission sector would be viable if PPPs materialize. The sector assessment also notes the country’s heavy reliance on imported hydrocarbons, so consideration should be given to developing the country’s hydrocarbon potential and establishing a regulatory framework that deepens private sector participation and opens the door to future opportunities for NSG financing. In renewable energy, the production of biofuels would help diversify the energy matrix through private sector participation, which could be pursued with NSG operations.

5. Climate change

3.11

The assessment with respect to adaptation to climate change indicates that the changes that have been forecast—in terms of temperature increases and precipitation patterns—will make the agriculture sector more vulnerable and may damage soybean and cotton production, as well as the natural pastures used to graze cattle. Through the Sustainable Energy and Climate Change Initiative and with the support of the Climate Investment Funds, a pilot project is under way with Bolivia to identify the measures for the agriculture sector to adapt to climate change, including adoption of new varieties of seeds that are more resistant to drought or more tolerant of water. The results of this pilot project could be replicated/adapted

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in Paraguay. With respect to the mitigation of climate change, a policy framework is needed that paves the way for (public and private) investments in renewable energies, energy efficiency, and biofuels that can be financed by the Bank. These priorities are consistent with the SESP development objective of environmentally sustainable growth, which is not free from risks because the country continues to expand the land area devoted to agriculture (CEA).

B.

Social sector The poverty rate is 36% (social) and the extreme poverty rate is 19.7%. Poverty reduction is the priority objective of both the government (SESP) and the Bank and is being addressed by the authorities via a strategy based on expanding the social safety net, which had 19,000 direct beneficiaries in 2008. Expanding coverage to 120,000 beneficiaries, as indicated in the SESP, is critical to poverty reduction efforts. Creating a larger social safety net will place demands on the healthcare and education sectors, as described below.

1. Healthcare

3.12

A high percentage of Paraguay’s population (40% according to the World Health Organization) lacks access to healthcare services. Action on this front is a priority development objective. Implementation of the current law, which provides for free services, is limited owing to the shortage of resources, inadequate infrastructure, and excessive administrative centralization. Primary-preventive care, especially in rural areas, should be a priority area of intervention for the Bank, with a view to promoting an even level of care throughout the sector, through cost-efficient mechanisms. The SESP envisages improvements in basic healthcare within the framework of the Tekoporá conditional cash transfer program by ensuring a supply of public healthcare services, including prenatal care, preventive care for children under the age of five, and the mandatory immunization program (social).

Strengthening the primary healthcare units would be an effective mechanism to ensure supply. Given the government’s involvement in this subsector, no NSG operations are anticipated. Institutional coordination requirements are the main obstacle.

2. Education

3.13

The assessment (social, education) highlights the quality and equity of primary education as priority areas, along with coverage and quality at other levels: early childhood education, preschool, secondary school, and university education. Due to considerations of institutional capacity and in light of the participation of other agencies, the Bank will focus its actions on early childhood and primary education, which are singled out as priority development objectives in the SESP, through costefficient programs and mechanisms for infrastructure and quality. This is consistent with the education component of the Tekoporá program, as well as the “Escuela Viva” program, focused on disadvantaged rural and urban areas. Human resource capacities are a risk factor. Another area of intervention is technical/vocational education, associated with the school-to-labor market transition, which requires institutional reforms, particularly in the regulatory function of the National

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Vocational Education and Training System] (SINAFOCAL), as well as the elimination of the monopoly over the training system by the National Service for Professional Advancement (SNPP). Any intervention at the university level would require stronger regulations and oversight of higher education. The difficulty of reconciling the interests of a large number of stakeholders is the main obstacle.

Given the government’s involvement in this subsector, no NSG operations are anticipated.

3.14

Lastly, given that the country’s spending on science and technology is very low (0.08% of GDP), the following actions are needed: (a) develop a strategic plan in science, technology, and innovation that is consistent with the objectives of the SESP; (b) expand and strengthen the system of incentives for research and innovation that the country has established with the Bank’s support; and (c) strengthen the infrastructure of science and technology services and the human resource base in the science and technology research sector.

C.

Institutional, financial, and municipal and urban development sector 1. Institutional

3.15

Public administration in Paraguay does not address the country’s needs, limiting economic development (diagnostic, governance). This is exacerbated by the lack of a professional civil service and a judicial system with credibility problems.

Enhancing institutional capacity is a priority development objective and the specific activities are identified in the SESP under its modernization of the public administration pillar. The main public administration problems that should be addressed under any Bank support program include: a low tax burden, unsystematic public expenditure, human resource deficiencies, inefficiencies in the budget process, flaws in statistical and registration systems, and a high degree of impunity leading to legal certainty problems. In addition, the institutional framework that supports foreign trade and regional integration must be strengthened. The primary constraint to overcoming institutional weaknesses lies in the difficulty of increasing the capacity of human resources.

2. Financial

3.16

Although private banks have sufficient levels of liquidity, financing terms are short (1.55 years in the banking system) and costs are high (financial). Longer-term loans (up to nine years) are made with resources provided by second-tier public banks (AFD), but on market terms, with specific risk assumed by commercial banks.

First-tier public banks do not have a suitable institutional structure for meeting the credit needs of microenterprises and small and medium-sized enterprises not served by the private sector. The securities market is shallow, has few instruments, with corporate bonds predominating, and has a limited investor base. Deepening the financial sector is a development objective identified in the SESP as one of its pillars.

3.17

The Bank’s actions will be geared toward: (a) supporting the reform of first-tier public banks in order to increase credit to small businesses and family farms;

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(b) contributing resources to AFD to enable private banks to make longer-term loans; (c) supporting implementation of a mechanism to coordinate the actions of public entities; and (d) supporting development of the national securities market. A prolonged reduction in the level of economic activity would place restrictions on the development of the sector strategy.

3.18

The private sector windows are available to finance foreign trade operations through the Trade Finance Facilitation Program as well as loans to banking institutions. The IIC and the MIF consider their participation in microfinance sectors to be a priority in order to reach markets not served by regular banks, such as rural areas and microenterprises.

3. Municipal and urban development

3.19

Three areas require attention: (a) the high degree of centralization in the Paraguayan government, which creates problems in the provision of local goods and services due to inadequate regulations and low municipal management capacity, including in the area of tax administration and collection (decentralization); (b) the need for urban renewal in Asunción, given the decline of the downtown area and neighborhoods near the port, which are the oldest parts of the city (revitalization); and (c) strengthening and reform of the housing sector, in line with the objectives established in the SESP, given the large housing deficit (housing). Actions in these areas fall under the objective of support for regional development.

3.20

The Bank’s actions would focus on: (a) supporting the process of decentralization and strengthening of the fiscal and administrative management of the municipios; (b) supporting comprehensive urban renewal of the port area and downtown Asunción, making investments to revitalize these areas and incentivize new private sector investment, accompanied by an urban transportation plan; and (c) supporting the housing sector, provided funds are channeled through the financial sector, and subsidies (if necessary) are provided on the demand side. Although conditions are not suitable for NSG operations at the municipal level, these operations would be possible in the housing chain through the Opportunities for the Majority (OMJ) window.

IV. FINANCIAL PROGRAM A.

External financing needs

4.1

The government is considering a fiscal stimulus in response to the global crisis. The financing scenario under consideration would support implementation of the SESP for the period 2008-2013, which incorporates the measures included in the Economic Recovery Plan (ERP). The plan has a medium-term outlook and calls for: (i) a fiscal stimulus in 2009-2010 directed at financing capital expenditures and conditional cash transfers; (ii) the provision of liquidity to the financial system to ease credit; and (iii) medium-term structural reforms in the public administration.

These activities are consistent with the areas of intervention proposed by the Bank.

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4.2

The public sector deficit is projected at 0.7% of GDP in 2009, rising to 0.8% of GDP in 2010. Starting in 2011, it is forecast to gradually shrink to 0.2% of GDP in 2013. The proposal is to finance the deficit with resources from multilateral entities in light of Paraguay’s lack of participation in foreign financial markets and its limited participation in the domestic market. In order to meet its financing needs (deficit plus amortization payments), the country requires total disbursements in 2009 in the amount of Gs. 1.791 trillion (US$320 million), which will gradually fall to Gs. 1.686 trillion (US$250 million) in 2012, totaling around Gs. 8.125 trillion (around US$1.5 billion) for the period.

Table IV.1 Financial program for the consolidated public sector 2009-2013 (In billions of guaranies (Gs.) and % of GDP)

2009p 2010p % of % of Gs. Gs. GDP GDP 16,535 22.1 17,849 22.4 Total revenue Tax 8,828 11.8 9,642 12.1 17,058 22.8 2,629 3.3 Total expenditure Current 13,392 17.9 14,422 18.1 Investment 3,666 4.9 4,144 5.2 Primary balance 224 0.3 159 0.2 General balance -523 -0.7 -651 -0.8 Financing 523 0.7 651 0.8 Net external financing 668 0.9 310 0.4 Disbursements 1,791 2.4 1,516 1.9 Amortization -1,123 -1.5 -1,206 -1.5 Net internal financing -145 -0.2 341 0.4 Financing needs 1,646 2.2 1,857 2.3 Source: Ministry of Finance, IMF, and own calculations

2011p % of Gs. GDP 19,410 22.7 10,603 12.4 19,923 23.3 15,391 18.0 4,532 5.3 427 0.5 -479 -0.6 479 0.6 291 0.3 1,555 1.8 -1,264 -1.5 188 0.2 1,743 2.1

2012p % of Gs. GDP 21,196 23.1 11,745 12.8 21,380 23.3 16,516 18.0 4,863 5.3 826 0.9 -206 -0.2 206 0.2 266 0.3 1,577 1.7 -1,311 -1.4 -60 -0.1 1,517 1.6

2013p % of Gs. GDP 22,561 22.8 12,369 12.5 22,660 22.9 17,613 17.8 5,047 5.1 891 0.9 -201 -0.2 201 0.2 356 0.4 1,686 1.7 -1,330 -1.3 -155 -0.2 1,531 1.5

4.3

This financing scenario would result in total net additional debt of approximately US$300 million, which would be allocated during the period as a decreasing percentage of GDP, from 0.9% of GDP in 2009 to 0.4% of GDP in 2013. The net additional debt would bring the stock of external public debt, which was US$2.234 billion in late 2008, to US$2.534 billion by period end.

4.4

According to the Independent Macroeconomic Assessment (IMA), Paraguay’s macroeconomic framework is stable and capable of absorbing moderate shocks. The debt sustainability analysis (DSA) shows that, in the case of moderate shocks, Paraguay’s debt would follow the patterns recently observed and would be equivalent to around 11% of GDP at period end. An extreme case was

50%

Figure IV.1 Projected public debt of Paraguay 2009-2013 (% of GDP) Base scenario

50%

40%

40%

30%

30%

20%

20%

10%

10%

0%

0%

-10% -10% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

- 10 -

also considered assuming an average nominal devaluation of 20%, under which public debt for 2013 would be approximately 17% of GDP, i.e. at current levels.

This means that the debt is sustainable even under adverse conditions.

B.

Financing from the IDB

4.5

The country’s financing needs are approximately US$1.5 billion for 2009-2013, which means a net increase of US$300 million in the stock of debt (Table IV.1).

The IDB’s objective is to provide resources to the country of up to the equivalent of 50% of external debt under the current projections, which translates into a lending program of up to US$1 billion for the period.

Table IV.2 Net flows of Bank resources with Paraguay 2009-2013 (In US$ millions) Baseline scenario New approvals a. Loan disbursements b. Repayment of principal c. Net flow of loans (a-b) d. Interest and fees f. Net cash flow (c-d)

2009 227.6 199.1 91.2 108.0 38.1 69.9

2010p 233.0 157.6 91.8 65.9 43.3 22.6

2011p 280.0 116.4 92.3 24.1 42.1 -18.0

2012p 132.0 154.3 91.1 63.2 41.6 21.6

2013p 127.4 97.6 86.5 11.1 40.6 -29.6

Source: Annex II

4.6

The net flow of loans from the IDB would be approximately US$272 million during the period, taking into account the existing portfolio and projected disbursements derived from a lending program totaling US$1 billion. This contrasts with the net negative cash flow of US$40 million in the prior period and is equivalent to 90% of the government’s net debt during the period. This increase would bring the country’s debt with the IDB from US$0.989 billion in 2008 to US$1.261 billion at period end. The debt-to-GDP ratio would increase from 6.2% in 2008 to 7% in 2013, a marginal increase that does not affect debt sustainability (see Table IV.2).

C.

Risks

4.7

The Paraguayan economy is subject to various types of risks that could affect the Bank’s strategy. The most volatile sector is agriculture, due to climate changes as well as fluctuations in international prices. Instability in the agriculture sector could also cause weaknesses in some less capitalized financial entities with high exposure to the sector. An exercise to evaluate those risks (risks) estimated additional financing needs at US$200 million to be provided by the Bank over four years, but concentrated in the year of the shock. The debt sustainability exercise indicates that, under these conditions, the debt-to-GDP ratio would rise from 11% to 34% towards the end of the four-year horizon. However, owing to the moderate interest rates on

- 11 -

Paraguay’s debt, and assuming a return to long-term growth after the negative shock, the sustainability of the public debt would not run great risk.

4.8

The main risks to implementation of this strategy are related to low institutional capacity among a number of government agencies, which is primarily due to institutional weakness and scarcity of qualified human resources. There are also difficulties in achieving the political consensus needed to make public policy decisions and problems of popular resistance to relevant measures, as well as problems mediating between divergent interests (See sector risks).

V. USE OF COUNTRY SYSTEMS 5.1

The government is carrying out a plan to strengthen the country’s fiduciary systems that was agreed upon in the framework of joint diagnostic work with international organizations (IDB, World Bank, European Union). The plan, contained in the Integrated Fiduciary Assessment (IFA/PEFA, 2008), is mainly being supported by the IDB through various loans, technical cooperation operations, and nonlending products. The IDB is making partial use of the country systems (country systems) and will determine the degree of use based on progress made in implementing this plan and under reasonable considerations of fiduciary risk (fiduciary report).

VI. COORDINATION WITH OTHER DONORS 6.1

The presence of other agencies and the quantity of available resources has increased in recent years. As the main source of financing for Paraguay, the IDB plays an important role in supporting the government in its efforts to strengthen its country systems so it is able it to conduct better project monitoring and coordination of donors. For its part, the IDB provides information on its projects to create synergies with other agencies. Specifically, the IDB has taken the lead on cooperation agreements with the Spanish Agency for International Cooperation (AECI), for water and sanitation projects, and with the Japan International Cooperation Agency (JICA) and the OPEC Fund for International Development (OFID), for transportation operations.

6.2

Other than the IDB, the main multilateral and/or bilateral agencies active in Paraguay are the World Bank, the Japan International Cooperation Agency, and the European Union, which are engaged in ongoing coordination of their activities in order to avoid overlaps, both in lending and technical cooperation activities. There is rising interest in the country among other agencies, which is taking the form of access to greater resources and greater technical assistance. Paraguay recently became a full member of the Andean Development Corporation, and there has been an increase in technical cooperation resources from the United States Agency for International Development (Threshold Program), the European Union, Spain (AECI), Taiwan, and the MERCOSUR Structural Convergence Fund.

PARAGUAY ECONOMIC AND SOCIAL INDICATORS Paraguay: Selected Macroeconomic and Social Indicators--2002-2009f 2002 0.0 5.1 921

2003 3.8 5.6 989

2004 4.1 6.9 1,216

2005 2.9 7.5 1,292

2006 4.3 9.3 1,568

2007 6.8 12.2 2,026

2008 5.8 16.0 2,601

2009f -3.5 14.4 2,266

14.6 -1.0 5,721 111

9.3 57.7 6,408 103

2.8 17.6 5,989 107

9.8 4.3 6,161 100

12.5 13.0 5,635 113

5.9 35.3 5,033 125

7.5 18.1 4,355 146

4.3 25.4 5,101 137

Current Account Balance (% of GDP) Financial Account Balance (% of GDP) Foreign Direct Investment (% of GDP) Gross International Reserves (in millions US$) /2 Gross International Reserves (% of GDP)

1.8 2.5 0.1 631 12.4

2.3 -3.2 0.4 971 17.4

2.1 -2.3 0.5 1,168 16.8

0.3 3.3 0.6 1,297 17.3

0.5 -0.8 1.7 1,702 18.4

0.7 -3.5 1.6 2,461 20.1

-2.1 0.5 1.1 2,846 17.8

-0.6 -0.7 0.9 3,551 24.7

CG Overall Balance (% of GDP) CG Primary Balance (% of GDP) Public Sector Debt (% of GDP) External Public Debt (% of GDP)

-2.5 -1.9 71.7 63.6

-0.3 1.0 52.6 48.1

2.0 2.7 45.5 41.3

0.6 1.9 38.0 34.6

0.1 1.5 27.8 25.4

0.9 1.8 21.8 19.9

2.6 3.3 20.4 18.6

-0.9 0.2 20.6 18.9

Social Indicators Population (in millions) Unemployment Rate (%) Underemployment Rate (%) /3 Extreme Poverty Total Poverty

2002 5.5 16.4 22.4 21.7 46.4

2003 5.6 13.0 24.1 20.1 41.4

2004 5.7 10.9 24.2 17.1 39.2

2005 5.8 9.4 25.1 15.5 38.2

2006 5.9 11.7 24.0 … …

2007 6.0 8.8 26.5 19.4 35.6

2008 6.2 8.2 26.5 … …

2009f … … … … …

Real GDP Growth (%) GDP in Current Prices (in billions US$) Per capita GDP (US$) Consumer Prices (%) end of period Monetary Base (annual percent change) Exchange Rate (Guaraní/US$) period average Real Effective Exchange Rate (index) average /1

Notes: 1. An increase implies an appreciation. Also, 2009f figure is based on January-August 2009 average.

2. 2009f figure is based on international reserves at end of September 2009.

3. Underemployment consists of those who work less than 30 hours per week and would like to work more hours and those who work 30 hours or more per week but earn less than the minimum wage.

Souce: Consensus Forecast, CBP, DGEEC, IMF and Ministry of Finance

Annex I Page 1 of 4

RESULTS MATRIX FOR THE BANK’S COUNTRY STRATEGY WITH PARAGUAY 2009-2013 IDB

Sector

Subsector

Infrastructure

Road infrastructure

SESP

Pillar

Infrastructure

Performance monitoring indicators IDB strategic objectives

(1) Expand productive infrastructure

Expected results of the strategy

1. Increase the number of kilometers of paved roads 2. Increase the number of kilometers of improved roads in the primary network

Port infrastructure

Infrastructure

3. Modernize the ANNP and establish a rate structure for transported cargo independent of customs valuation

Rural water and sanitation

Efficient public enterprises / Infrastructure

4. Increase rural coverage

Indicator

Km of paved roads

Km of improved rural roads (serviceable year-round) Establishment of a new rate structure for the ANNP independent of customs valuation

Efficient public enterprises / Infrastructure

Period of country strategy

Frequency of measurement

Source

4,512

4,652

Annual

MOPC

3,600

4,150

Annual

MOPC

N/A

Regulations in force

Sporadic

MOPC/ANNP /Ministry of Finance

49%

52%

Annual

Permanent Household Survey

37%

40%

Annual

Permanent Household Survey

79%

81%

Annual

Permanent Household Survey

14%

15%

Annual

Permanent Household Survey

N/A

Master plan for Greater Asunción

Sporadic

Environmental Secretariat

33%***

31%

Annual

ANDE

Based on current legislation

Implemented

Sporadic

Ministry of Finance

Water coverage in rural areas Sanitation coverage in rural areas

Urban water and sanitation

Baseline (2008)*

Indicative targets**

5. Increase urban coverage

Water coverage in urban areas Sanitation coverage in urban areas

Solid waste

Efficient public enterprises

6. Have a national solid waste management strategy in effect

Electric power

Infrastructure

7. Improve the transmission infrastructure and its efficiency

Level of electricity losses

Hydrocarbons and biofuels

Competitiveness

8. Introduce biodiesel blends in conventional diesel

Review of the rate and incentives structure

Establishment of solid waste management plans

Annex I Page 2 of 4

IDB

Sector

Subsector

Agriculture

Tourism

Climate change

Climate change

SESP

Pillar

Comprehensive agrarian reform

Employment/ Competitiveness

Macroeconomic policy / Competitiveness

Performance monitoring indicators IDB strategic objectives

Expected results of the strategy

(2) Increase the efficiency of government support and legal certainty

9. Establish a system of economic and social information on family farms 10. Establish the technical platform for formalizing land tenure 11. Increase the amount spent by tourists and same-day visitors to Paraguay

(3) Increase the flow of resources obtained through tourism (4) Develop an environmental institutional framework

12. Establish a policy framework that makes investments in renewable energies, energy efficiency, and biofuels feasible

Indicator

Baseline (2008)*

Indicative targets** Period of country strategy

Frequency of measurement

N/A

Completed

Sporadic

Ministry of Agriculture

0

50,000

Annual

437,000

485,000

Annual

SICAR, Ministry of Finance National Tourism Secretariat

N/A

In effect

Sporadic

Registry of family farms Number of properties linked to the registry and cadastre

Number of tourists who visit Paraguay

Creation of a policy for mitigating and adapting to climate change

Source

Ministry of Finance/ Environmental Secretariat

Annex I Page 3 of 4

IDB

Sector

Subsector

Social sector

Social safety net

SESP

Pillar

Employment

Healthcare

Employment

Early childhood education

Employment

Primary education

Employment

Technical education

Employment / Competitiveness

University / higher education

Employment / Competitiveness

Performance monitoring indicators Indicative targets**

IDB strategic objectives

Expected results of the strategy

(5) Expand the social safety net

13. Increase the number of Tekoporรก beneficiaries

Number of beneficiaries receiving resources

13,706

Period of country strategy 84,706

14. Conduct impact evaluations on social programs

Number of evaluations completed

0

15. Increase primarypreventive care in rural areas

% of immunization coverage for children aged 12-23 months

16. Expans coverage of early childhood education

Net coverage rate for preschool

17. Improve the quality of primary education

Rate of over-age enrollment in primary education

18. Improve the transition from school to the labor market 19. Strengthen higher / university education

(6) Consolidate reform of the education system, with a priority on preschool and primary education

Indicator

Baseline (2008)*

Frequency of measurement

Source

Annual

Social Action Secretariat/ Ministry of Finance/Social Economics Unit

5

Annual

Ministry of Finance

75.6%

80%

Annual

National Demographic and Sexual and Reproductive Health Survey

67% (2007)

70%

Annual

Ministry of Education and Culture (MEC)

19.2% (2007)

17%

Annual

MEC

Number of graduates from post-secondary technical schools

2,862 (2007)

4,000

Annual

MEC

% of economically active population who have completed university education

5.1%

5.5%

Annual

Bureau of Statistics, Surveys, and Censuses

Annex I Page 4 of 4

IDB

Sector

Subsector

Institutional capacity

Institutional

SESP

Pillar

Modernization of the public administration

Financial

Financial system

Decentralization

Modernization of the public administration

Urban development

Modernization of the public administration Employment

Housing

Performance monitoring indicators IDB strategic objectives

(7) Strengthen public administration

(8) Reform public banking (9) Facilitate municipal development

Expected results of the strategy

20. Increase tax revenue as a percentage of GDP though administrative management mechanisms 21. Improve the reliability of country systems

22. Faciliate medium- and long-term financing for the productive sector 23. Increase the level of decentralization

Indicator

Baseline (2008)*

Five-year moving average of tax revenue

11.1%

Financial administration: level of 28 indicators in the Integrated Financial Assessment (IFA) Procurement: 4 indicators in the Country Procurement Assessment Review (CPAR) and the IFA Average term of loans in the banking system portfolio

IFA indicators

CPAR indicators

1.55 years

Indicative targets** Period of country strategy 11.5%

Source

Annual

Ministry of Finance

10% improvement in indicators

4 years

IFA

10% improvement in each indicator 2 years

4 years

CPAR

Annual

AFD

Sporadic

Ministry of Finance

Sporadic

MOPC

Annual

Permanent Household Survey

Institutional strengthening of subnational governments

No baseline

24. Revitalize downtown Asunci贸n

Urban quality of life indicators

N/A (to be developed)

Execution and reporting capacity (17 governments) Established indicators

25. Increase housing solutions

Percentage of homes owned

75.2%

78%

Notes: * The indicators are for 2008 unless otherwise indicated. ** The targets will be revised or replaced as necessary through the programming documents prepared during the period of the country strategy. *** Estimate. In the event that the baseline is modified, the target should also be modified in the proportion established in the matrix.

Frequency of measurement

Annex II Page 1 of 1

Aug/05/2009 16:54

Net flows of Bank resources with Paraguay (US$ millions) Baseline scenario 2003 88.4 68.4 68.4 0.0 20.0 59.0 53.8 37.5 16.2 5.2 29.4 38.5 -3.8 1.0 -6.3 0.0

a. Loan disbursements a.1. Investment 1.I. From Ordinary Capital 1.II. From Fund for Special Operations a.2. Sector a.3. Emergency b. Repayment (principal) b.1. Investment 1.I. From Ordinary Capital 1.II. From Fund for Special Operations b.2. Sector b.3. Emergency c. Net flow of loans (a-b) d. Interest e. IFF f. Fees f. Net cash flow (c-d-e) Capital contributions

2004 60.6 60.6 60.6 0.0 67.4 59.6 44.5 15.1 7.8 -6.8 40.4 -2.9 0.8 -45.1 6.0

2005 52.3 52.3 52.3 0.0 64.1 58.8 43.6 15.3 5.3 -11.8 35.8 -2.6 0.9 -45.9 6.4

2006 72.6 72.6 72.6 0.0 66.7 61.5 46.3 15.1 5.2 5.9 35.1 -3.0 0.2 -26.3 2.7

2007 67.8 37.8 37.8 0.0 30.0 88.1 73.0 57.8 15.2 5.1 10.0 -20.4 42.3 -3.1 0.5 -60.1 6.1

2008 86.6 40.9 39.9 1.0 45.7 94.3 78.8 62.8 16.1 0.0 10.0 -7.7 39.3 -2.8 0.5 -44.6 6.6

Net flow of loans period 2007-2010:

Stock of debt US$ millions % of GDP Exposure (on OC/stable IDB portfolio) Approvals Investment Traditional SWAp Sector Emergency p= projected

2009p 199.1 99.1 97.8 1.3 100.0 91.2 85.4 69.3 16.1 5.8 108.0 39.6 -2.5 1.1 69.9 6.5

2010p 157.6 105.0 100.6 4.4 52.6 91.8 86.1 69.9 16.1 5.7 65.9 46.0 -3.3 0.6 22.6 6.5

2011p 116.4 66.4 63.0 3.4 50.0 92.3 84.7 68.5 16.1 7.7 24.1 44.6 -3.2 0.6 -18.0 6.5

2012p 154.3 104.3 98.1 6.2 50.0 91.1 83.4 67.2 16.1 7.7 63.2 44.1 -3.1 0.6 21.6 6.4

2013p 97.6 97.6 88.0 9.5 0.0 86.5 84.5 68.4 16.1 2.0 11.1 42.9 -2.9 0.6 -29.6 3.2

145.8

978 17.6 1.2

992 14.3 1.3

939 12.5 1.3

939 10.1 1.4

975 8.0 1.4

989 6.2 1.4

1,097 7.4 1.6

1,163 7.7 1.7

1,187 7.5 1.7

1,250 7.5 1.8

1,261 7.0 1.8

66.0 36.0 36.0 30.0

-

39.2 9.2 9.2 30.0 -

249.1 249.1 249.1 -

61.3 61.3 61.3 -

76.5 26.5 26.5 50.0 -

227.6 77.6 77.6 150.0 -

233.0 183.0 183.0 50.0 -

280.0 280.0 280.0 -

132.0 82.0 82.0 50.0 -

130.0 130.0 130.0 -

N.B. PROJECTIONS DO NOT INCLUDE THE EFFECTS OF REVALUATIONS OF STOCK OF DEBT

Net cash flow

Approvals by type of loan

Interest

2013p

2011p

2012p

2010p

2009p

2008

2007

Net flow of loans

Net flow of loans

Net cash flow

IDB debt stock

300

Investment

Emergency

Stock

Stock as % of GDP

2013p

2013p

2012p

2011p

2010p

2009p

2008

2006

2005

2004

2007 Sector

2012p

4.0 2011p

6.0

600

-

2010p

8.0

700

2009p

10.0

800

50

2008

12.0

900

100

2007

14.0

1,000

150

2006

1,100

2005

16.0

200

2004

1,200

2003

18.0

250

US$ millions

1,300

2003

US$ millions

2006

2005

2004

2003

2013p

2012p

220 170 120 70 20 -30 -80 -130 -180

% of GDP

Repayment (principal)

Loan disbursements

2011p

2010p

2009p

2008

2007

2006

2005

2004

US$ millions

350 300 250 200 150 100 50 0 -50 -100 -150 2003

US$ millions

Net flow of loans

Annex III Page 1 of 4

CONSULTATION PROCESS FOR THE STRATEGY 2009-2013 The consultation process for the Bank’s country strategy with Paraguay is divided into several stages, beginning with entry into force of the country strategy for 2004-2008 with the specific objective of verifying that the Bank’s action is aligned with the government’s objectives and effectively addresses the development challenges faced by the country: (1) consultations related to the relevance of the Bank’s country strategy with Paraguay for 2004-2008; (2) consultations related to studies and technical notes; (3) consultations with the different representatives of civil society in the pre-electoral period; and (4) consultations with the government and validation of the Bank’s country strategy with Paraguay.

1. Consultations related to the relevance of the Bank’s country strategy with Paraguay for 2004-2008 In October 2005, the Bank held a seminar with the main stakeholders in Paraguay to determine the relevance of the challenges identified in the Bank’s country strategy with Paraguay for 2004-2008, bearing in mind that a macroeconomic adjustment program had been carried out successfully owing to its magnitude and speed, and conditions were changing at the international level. The country’s main think tanks were commissioned to produce papers. The papers were presented at the seminar and their conclusions were discussed at great length by the participants. The papers were structured around the strategic areas of the Bank’s country strategy with Paraguay.

The authors were: Ricardo Rodríguez Silvero (Strengthening Governance), César Cabello and José Molinas (Poverty), Fernando Masi (Integration), and César Barreto (Competitiveness). The discussion concluded that the development challenges in Paraguay identified in the Bank’s country strategy with Paraguay for 2004-2008 were still relevant.

2. Consultations related to studies and technical notes Based on the Bank’s country strategy with Paraguay for 2004-2008 and the progress report, in 2007 the Bank initiated a process whereby studies and technical notes were prepared, for processing in consultation with the different stakeholders in Paraguay.

To that end, studies were initially organized around three topics related to the objectives of the Bank’s country strategy with Paraguay for 2004-2008 that were determined to be effective for identifying the development challenges faced by Paraguay, and its analysis was updated and presented to the different stakeholders in Paraguay. The objective was to feed the discussion between those stakeholders. The three activities were: the growth diagnostic, the assessment of democratic governance, and support for a consensus-building mechanism in social policy. a. Growth diagnostic The study conducted by Ricardo Hausmann and his team at Harvard University was widely disseminated in Paraguay. Eight activities were carried out, open to participation by all social sectors, including the executive branch (meeting with the President and his ministers), the legislative branch (presentation in Congress), trade unions (meeting with approximately 250 people), nongovernmental organizations (meeting with approximately 50 representatives), business owners

Annex III Page 2 of 4

(meeting with business owners organized around Desarrollo en Democracia [Development in Democracy], REDIEX [Paraguayan Investments and Exports Network] committees, and students from various universities (1,200). It should be noted that for the student event, a mechanism had to be established whereby university representatives decided on the format, venue, and means of publicizing the event. These events were widely covered by the media, were well received and discussed, and the participants internalized the arguments of the paper to such an extent that it has become a compulsory point of reference in the national debate on Paraguay’s economic growth potential. b. Assessment of democratic governance The IDB conducted a Democratic Governance and Institutional Assessment (DGIA) 1 in Paraguay. This included both static and dynamic analysis. The static analysis described and analyzed the country’s characteristics in the four areas encompassed by the IDB’s Modernization of the State Strategy. These are: political, administrative, and legal systems, as well as the relationship between the State and society (market institutions). The study identified the causes and policy options to solve the problems. The dynamic analysis looked at the economic policy, as well as the historical, social, and cultural factors that affect each of the aforementioned areas in order to put the feasibility of the policy options into perspective.

The study was conducted with the participation of local consultants (think tanks), notably in partnership with the country’s two main think tanks (Centro de Análisis y Difusión de Economía Paraguaya [Center for Analysis and Dissemination of Information about the Paraguayan Economy] and Instituto Desarrollo [Development Institute]), taking full advantage of the country’s human resources.

Independent experts commented on the study, and the study findings and comments were presented at seminars with government authorities, experts in the areas discussed in the study, and representatives from civil society organized through the Civil Society Coordination Group (GASC). c. Seminar to identify social policies Together with the World Bank, the IDB held a seminar with the participation of representatives from organizations that work on social issues in Paraguay. The purpose was to encourage dialogue between these stakeholders for the purpose of identifying the practicable public policies required by the country. The experience was rich in terms of participation by stakeholder organizations but revealed the deep differences that existed with respect to public policy decisions in the social sector, which later were evident in the political process.

Technical notes: Building on this foundation, the IDB proceeded to conduct studies and prepare technical notes in specific sectors where greater depth was required or 1

DGIAs are studies based on a methodology developed by the IDB to systematically evaluate, in a participatory manner, a country’s institutional and governance limitations, as well as the causes of those limitations and future governance scenarios.

Annex III Page 3 of 4

where there were risks that needed to be evaluated. For example, the Country Environmental Assessment includes a section on the potential environmental impacts on the development of the Chaco, and the technical note includes a study on the development of that region. As a second example, a technical cooperation project was carried out to gather and analyze information on the situation of the indigenous population in Paraguay. The initiative was well received in the country, and Paraguay’s Bureau of Statistics, Surveys, and Censuses took charge recruiting the participation of the United Nations Children’s Fund and the German Agency for Technical Cooperation (GTZ) and thereby expanding the coverage of the survey. The analysis of the information can be found in the social sector report. Each technical note underwent a similar process of consultation and validation with the participation of the country authorities from the executive and legislative branches, trade unions, analysts, and representatives of various political factions, in addition to experts on the issues addressed.

GASC: The Civil Society Coordination Group (GASC) was formed within the Bank with the vision of creating a forum where civil society representatives from Paraguay can express their opinions with respect to the relevance, analysis, and design of the Bank’s project cycle. GASC members also participated in activities related to the growth diagnostic, the governance assessment, and the seminar on public social policies.

3. Consultations in the pre-electoral period The IDB started its consultation process prior to the presidential elections and met with the presidential candidates and/or their economic teams in order to present the activities it carries out in the country and to learn about the respective government programs. The IDB met with candidates from the Colorado Party, Blanca Ovelar; from UNACE, Lino Oviedo; and with the economic team of Pedro Fadul, candidate for the Patria Querida party. Meetings were also held with various labor unions and civil society organizations (GASC).

4. Encerrona and validation of the Bank’s country strategy with Paraguay for 20092013 Once the new administration took office, the Bank held a high-level policy meeting (encerrona) with the government, presided by the President of the Republic, Mr. Fernando Lugo, and attended by the Governor for the Bank, Dr. Dionisio Borda, and the members of the Cabinet of Ministers. Participating on behalf of the Bank were President Luis Alberto Moreno, Vice Presidents Santiago Levy and Steven Puig, Managers Mario Marcel and Carlos Hurtado, and the Paraguay team led by Valdimir Radovic. The main objective was to give the new administration a view of the Bank’s many experiences and knowledge in other countries based on the priority areas identified in the SESP and of how the Bank’s portfolio supported the new administration’s plans.

The Bank’s country strategy with Paraguay for 2009-2013 was agreed upon with the Paraguayan authorities, and its validation included a meeting with the President of the Republic, Mr. Fernando Lugo; the Minister of Finance, Dr. Dionisio Borda; and other

Annex III Page 4 of 4

ministers, authorities, and officials of the Government of Paraguay. The strategy was additionally validated with the Vice President of the Republic, Mr. Federico Franco, and the party leaders in the Congress of the Republic. A meeting was also held with the main representatives from the private sector and civil society organizations.

Participating on the Bank’s behalf were the Vice President for Countries, Roberto Vellutini; the Manager of the Country Department Southern Cone, Carlos Hurtado; the Country Coordinator, Pablo Molina; Carlos Pimenta, Project Team Leader, who prepared the programmatic Public Management Modernization Program; Vladimir Radovic, Country Representative; and Masami Yamamori, Chief of Operations.

Annex IV Page 1 of 1

OVE RECOMMENDATIONS The Bank’s country strategy with Paraguay incorporates the OVE recommendations that Management has determined to be relevant to the Bank’s action in the country.

(1) Recommendation to target the Bank’s action The OVE recommendation is considered relevant although there is disagreement as to its application. The Bank’s new country strategy with Paraguay (2009-2013) addresses the priorities established in the SESP prepared by the government. The focus on these priorities does not necessarily mean the Bank should reduce its presence in the country (which OVE calls dispersion) in the short and medium term. In fact, it could increase the Bank’s presence given its role in the country, the speed with which other multilateral and bilateral agencies are increasing their participation in the country, and the fact that the country is facing the downward phase of the business cycle.

(2) Recommendation to be proactive in attracting investment and cooperation The country strategy takes this recommendation into consideration. In fact, the Bank is promoting cooperation structures with bilateral entities and to date has obtained a total of US$119 million in cooperation for the Government of Paraguay (US$79 million in cooperation with JICA and OFID (OPEC) for the Rural Roads Project II and US$40 million from the Spanish government for Water and Sanitation). It should be noted that both the Government of Paraguay and the bilateral agencies value technical inputs from the IDB as key to the success of their programs. Through the MIF, support is being provided to establish PPPs. (3) Recommendation to strengthen institutional capacity and execution systems The country strategy considers possible actions by the Bank in all sectors in which it can participate, either through technical cooperation or investment projects. The objective is to strengthen the fundamental pillars of the institutional framework of democracy. The operations include crosscutting support for the training of technical and professional staff and modernization of the public administration. With respect to country systems, the IDB has two technical cooperation operations in execution (Support for Consolidation of the Government Procurement System and Program for Specialization of Public Officials).

These operations support development of the action plan defined in the IFA (jointly prepared with the World Bank and the European Union).

(4) Recommendation to support management of the transition and generation of social capital The country strategy follows the recommendation to effectively finance the growth of social capital. Active participation is proposed in the education and healthcare sectors, as well as in strengthening of the social safety net. It should be noted that other areas of intervention indirectly affect the generation of social capital, such as water and sanitation, transportation, and energy operations that make it easier to access services that directly promote the generation of social capital.

COUNTRY STRATEGY: DEVELOPMENT EFFECTIVENESS MATRIX In August 2008, the Board of Directors approved the Development Effectiveness Framework (GN-2489) to increase the evaluabiliy of all Bank development products.

The Development Effectiveness Matrix for Country Strategies (DEM-CS) is a checklist of the elements that are necessary to evaluate a country strategy. It is based on the evaluation criteria developed by the Evaluation Cooperation Group of the Multilateral Development Banks in the "Good Practice Standards for Country Strategy and Program Evaluation."

The DEM-CS is a yes/no system with a partial score for each of the four evaluation criteria.

SCORE I. RELEVANCE

7.50

A. Ownership and Alignment: establishing consistency of CS objectives with government's plans & priorities

5.00

B. Coherence: establishing (i) the definition of CS focus in terms of anticipated results and (ii) the integration across Bank instruments/products

10.00

II. EFFECTIVENESS

6.84

A. Strategy Results Framework

4.44

B. Financial Transfers

10.00

C. Build up and use of Country systems

6.08

III. EFFICIENCY

IV. RISKS

to be determined in Programming document 6.67