uruguay: country strategy with the idb (2005-2009)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

URUGUAY

IDB COUNTRY STRATEGY WITH URUGUAY

(2005-2009)

This document was prepared by the project team consisting of Ximena Morey (RE1/OD1) (coordinator), Marcelo Cabrol (RE1/SO1), Gabriel Casaburi (RE1/FI1), Edgardo Demaestri (RE1/FI1), Jesús Duarte (RE1/SO1), Roberto Fernández (COF/CUR), Juan José García (PRI), Paolo Giordano (INT/ITD), Alfredo Giró (MIF), Héctor Malarin (RE1/EN1), Leandro Medina (RE1/OD1), Carolina Lozano Karanauskas (RE1/OD1), Francisco Mejía (RE1/SC1), Fernando Quevedo (INT/ITD), Héctor Salazar (RE1/SC1), and Michele Santo (RE1/OD1 consultant).

Inputs were received from Lynnette Asselin (RE1/SC1), Juan Blyde (RE1/RE1), Koldo Echebarría (SDS/SGC), Eduardo Fernández-Arias (RE1/RE1), Juan Ketterer (RE1/FI1), Flora Painter (RE1/RE1), Claudia Piras (SDS/WID), Raúl Tuazon (RE1/RE1), and Guillermo Zoccali (RE1/OD1). Diana Arteaga (RE1/OD1) and Cecilia Moreno (RE1/OD1) helped produce the document.

CONTENTS

EXECUTIVE SUMMARY I.

KEY DEVELOPMENT CHALLENGES ....................................................................................... 1 A. B.

C.

II.

PREVIOUS STRATEGIES AND PORTFOLIO PERFORMANCE: THE MOST IMPORTANT LESSONS FOR THE NEW STRATEGY .....................................................................................12 A. B. C.

III.

Background................................................................................................................. 1 Challenges for locking in economic growth and enhancing social equity................. 2 1. Fiscal and public debt sustainability................................................................... 2 2. Strengthening the State for more efficient and effective governance ................ 3 3. Economic productivity and investment .............................................................. 4 4. Further opening of the economy......................................................................... 6 5. Regaining societal welfare levels in a climate of fiscal restraint........................ 7 The government’s program and medium-range macroeconomic outlook................. 9 1. Government agenda ............................................................................................ 9 2. Macroeconomic outlook ...................................................................................11

Strategy programming cycles and outcomes............................................................12 Portfolio performance...............................................................................................14 Previous strategies’ achievements and implementation issues ................................15

THE BANK’S STRATEGY FOR 2005-2009 ............................................................................17 A. B.

C.

D. Appendix A

Objective ...................................................................................................................17 The strategy development exercise and the Bank’s prime focuses..........................18 1. Improving public management and sustaining fiscal soundness .....................19 2. Strengthening competitiveness and Uruguay’s international positioning to sustain growth..................................................................................................20 3. Poverty reduction and social inclusion as a pillar of sustainable growth.........23 4. Cross-cutting issues...........................................................................................25 Implementing the strategy ........................................................................................26 1. Portfolio execution............................................................................................27 2. Country financing parameters...........................................................................27 3. Fiduciary risk status ..........................................................................................27 4. Support to the private sector .............................................................................28 5. Lending scenarios for 2005-2009 .....................................................................29 6. The Bank’s exposure.........................................................................................30 7. Coordination with other multilateral organizations..........................................30 8. Monitoring the strategy.....................................................................................31 9. Strategy implementation risks...........................................................................31 Country dialogue agenda ..........................................................................................33 Country Strategy Monitoring Indicators

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ANNEXES

Annex I Annex II Annex III Annex IV Annex V Annex VI Annex VII Annex VIII Annex IX

Program of operations and tie-in to IDB sector strategies Implementation status of Millennium Development Goals Description of the consultation process for the Bank’s country strategy with Uruguay Technical documents consulted in developing the country strategy Current and future areas of action for international cooperation Nonfinancial products program Management’s actions in response to recommendations by OVE in its Uruguay Country Program Evaluation (1991-2004) IDB Uruguay country strategy matrix Net flow of resources

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ABBREVIATIONS

ANEP BCU BHU BPS BROU CAF CAS CFAA CFPs CPAR DGI DINAMA EU FSAP GDP IFAD IIRSA IMF INE MEF MERCOSUR MIDES NBC NLF ONSC OPP OVE PANES PDP PRODEV TPF VAT

Administración Nacional de Educación Pública [National Public Education Administration] Banco Central del Uruguay [Central Bank of Uruguay] Banco Hipotecario del Uruguay [Uruguayan Mortgage Bank] Banco de Previsión Social [Social Security Fund] Banco de la República Oriental del Uruguay [Bank of the Eastern Republic of Uruguay] Andean Development Corporation Country Assistance Strategy Country Financial Accountability Assessment country financing parameters Country Procurement Assessment Report Taxation Directorate National Environment Directorate European Union Financial Sector Assessment Program gross domestic product International Fund for Agricultural Development Initiative for South American Regional Infrastructure Integration International Monetary Fund Instituto Nacional de Estadísticas [National Statistics Bureau] Ministry of Economy and Finance Southern Common Market Ministry of Social Development Nuevo Banco Comercial New Lending Framework Oficina Nacional de Servicio Civil [National Civil Service Office] Office of Planning and Budget Office of Evaluation and Oversight National Social Emergency Program Policy dialogue paper Program to Implement the External Pillar of the Medium-term Action Plan for Development Effectiveness total factor productivity value added tax

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EXECUTIVE SUMMARY

Background

When the present Uruguayan administration took office in March 2005 it was faced with deteriorated social conditions and a heavy public debt that will have financial implications for its work. Nevertheless, Uruguay’s strengths—a stable democratic system, sound public institutions, and a relatively well educated populace—augur well for continued economic recovery. The country’s carefully managed exit from a financial and economic crisis, backing across the political spectrum for the broad thrusts of the new government’s macroeconomic policies, a successful voluntary debt swap, and relatively benign external conditions provide a solid starting point for an economic and social strategy that can usher in growth with equity.

Key development challenges

After a half century of slow average growth the Uruguayan economy would need to expand vigorously to be able to regain the societal welfare levels of the past and meet basic human development needs. In addition to fostering productivity and keeping the macroeconomy stable, policies are needed for human capital development and to adapt the country’s social protection system to shifting production patterns and an increasingly informal economy. The following are Uruguay’s foremost development challenges: 1.

2.

3.

4.

5.

The government’s agenda

Fiscal and public debt sustainability Strengthening the State for more efficient and effective governance Economic productivity and level of investment Further opening of the economy5 Recovery of social welfare levels in a climate of fiscal strictures

The government’s economic policy aims are relatively high and sustained output growth rates, more and better jobs, and substantive improvements in the quality of life of the bulk of the population, especially the weakest and most vulnerable segments. A State structural reform package to boost investment and growth will be tackling several fronts—public revenue and expenditure management, the financial system and capital market, the production system, a policy to position Uruguay internationally, creation of an investment friendly climate underpinned by clear, enduring ground rules and, in the area of innovation and technology advances, ways of building a more competitive and productive economy in the medium and long term.

Framing all these efforts will be fiscally rigorous short-run economic policy management to produce an acceptable primary surplus and hold to the current monetary and exchange rate policy regime.

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Strategy aim

The objective of the Bank’s strategy with Uruguay is to help the country sustain economic growth rates robust enough to reverse the decline in social indicators in the aftermath of the recession and crisis, while creating conditions for lasting improvements in Uruguayan living standards.

Strategy focuses

The strategy proposes to assist the government as it reengages the agenda of priority reforms that were interrupted by a deep recession beginning in 1999 and the crisis of 2002, and to support government development programs and policies for the period 2005-2009. The three suggested areas of strategic focus for the Bank’s technical and financial support, which address institutional dimensions of the five Uruguayan development challenges enumerated above, are as follows: 1. Improving public management and sustaining fiscal soundness. The Bank will support government moves to develop and implement a medium-term borrowing plan intended to smooth the debt repayment profile; strengthen and improve central government administration and public spending efficiency; bring in pro-investment tax reforms and modernize and strengthen the tax administration apparatus to equip it for the changes; improve the social security system to increase the administrative efficiency of the Social Security Fund (Banco de Previsión Social – BPS); and build financial and results-based management capacity in the government and enable it to fulfill requirements to access the Bank’s new flexible lending instruments.

2. Strengthening competitiveness and further integrating Uruguay into the global economy in order to sustain growth. As a continuing priority the Bank will help Uruguay become more competitive and boost private investment, looking to export-geared production that capitalizes on the country’s comparative advantages and adopts up-tothe-minute technology to move Uruguayan business and industry further into world markets.

3. Poverty reduction and social inclusion as a pillar of sustainable growth. The Bank will assist in the pursuit of the government’s social policy of alleviating hardships of people living below the poverty line, building human capital, and improving social sector institutions.

Strategy implementation

Some major strengths that need to be leveraged in order to effectively implement this strategy are a portfolio largely aligned to the new government’s priorities and concordant with the Bank’s diagnostic assessment; the chance to design a new operations program that targets key concerns in each strategy area, for which the authorities can take a large measure of ownership; and the potential to deploy the Bank’s new lending instruments, for which Uruguay is a good candidate.

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Seeking the best mix of Bank instruments is one of several important elements in putting together the lending program. In conformity with the government’s agenda and five-year budget, the program seeks a balance between investment projects that answer the country’s needs now and the sector programs required to further reforms to make government work better, help Uruguay become more competitive, and improve social conditions. The program being proposed also would help see conditions for adoption of the new investment lending policies and procedures quickly fulfilled, take account of constraints associated with the country’s financing program, and strive to tighten cooperation between lending institutions and donors.

Lending scenarios

The two lending scenarios developed for the strategy’s implementation—a target scenario and an alternative—both assume that the government will adhere to the economic program pacted in Uruguay’s International Monetary Fund (IMF) standby arrangement for 2005-2008. The target scenario of US$1.2 billion in approvals assumes that Uruguay will advance on reforms in key areas of the public sector, competitiveness, and social sectors to underpin the new lending. On the operational side a considerable effort is called for to normalize the pace of execution of the Bank’s active projects in Uruguay and develop the programmed new operations.

Risks

Various external and internal risks could affect the base-case macroeconomic scenario. Some major external contingencies to consider are the impact of rising international interest rates, the sharp jump in oil prices, falling agricultural commodity prices, and shocks that might emanate from elsewhere in the region, particularly spillovers from Brazil and Argentina.

Domestically, the chief risk has to do with sustained political support for the current economic policy strategy over time. This would become especially important in the event of a deterioration in the external environment severe enough to prompt even tighter fiscal restraint. The issue of electric energy and transportation infrastructure bottlenecks for export sales (forest products), which could obstruct output-boosting efforts, poses another risk.

Country dialogue agenda

The agenda for dialogue with the Uruguayan authorities should address the need for continued Bank support in areas requiring reforms, to be able to exert greater influence on growth and social cohesion in the country.

Another key dialogue focus would be the requisite investment climate improvements, including public sector reforms, by way of micro interventions that can help strengthen Uruguay’s competitiveness profile.

I.

KEY DEVELOPMENT CHALLENGES1

A.

Background

1.1

During the first half of the twentieth century Uruguay achieved impressive welfare levels, reflected in its advanced social development record and low inequality and poverty indices by Latin American standards. Its lackluster economic performance and investment productivity since that time—except in much of the 1990s— prompted strong societal pressures and cutbacks in public investment to be able to fund mounting social security benefits. Since 1995 Uruguayan social indicators have deteriorated and poverty is on the rise, exacerbated by a prolonged recession starting in 1999 and yet again by the 2002 financial sector crisis. After bottoming out in the fourth quarter of 2002 the economy experienced a growth spurt in 2003 which held in 2004-2005, for a cumulative growth rate of close to 22% during the period.

1.2

Certain vulnerabilities in Uruguay’s economy today could make it difficult to lock in the current economic recovery. Chief among the short-run vulnerabilities or constraints are the adverse impact of oil price surges, the possibility of a further increase in international interest rates which would push up public debt servicing costs, and falling agricultural commodity prices, largely as demand from China slowed in 2005. The country’s main structural vulnerabilities are its historically low saving and investment levels and productivity; vulnerability of the public finances given the public debt overhang—which will mean continued fiscal strictures in coming years; risks associated with Uruguay’s strong ties with its neighbors, given the past volatility of the larger MERCOSUR economies; weaknesses in the country’s financial system, primarily because it is so highly dollarized and there are constraints for broadbased, efficient provision of financial services; and a proportionally large elderly population.

1.3

The present administration took office in March 2005 at a very particular juncture in the nation’s history. Uruguay had successfully emerged from an economic and financial crisis, its economy was rebounding, and it had just gone through an exemplary democratic changeover of government, but deteriorated social conditions and the massive public debt facing the new administration will influence what it can accomplish. Nevertheless, Uruguay has a number of strengths that augur well for continued economic recovery in the coming years, as a foundation for reversing the worsening of poverty and other social indicators. On the structural side its main strengths are a stable democratic system and relatively high-caliber public institutions;2 the population’s high average education level, a solid base upon

1

This chapter draws on IDB, “Uruguay. Los grandes desafíos para el desarrollo de mediano y largo plazo.”

Policy Dialogue Paper, January 2005.

2

J. Blyde and E. Fernández-Arias (2004), in their paper “Economic Growth in the Southern Cone,” cite the caliber of Uruguay’s institutions as the chief explanation for total factor productivity increases and stronger growth performance than the rest of Latin America.

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which to build the human resources pool Uruguay needs to seize opportunities opening up as it positions itself internationally; some strong natural resource endowments, and international credibility. The country’s current strengths and opportunities include notably the voluntary debt swap program, backing across the political spectrum for continued pursuit of the government’s main macroeconomic policy thrusts, and the new administration’s accomplishment potential given its parliamentary majority and the relatively benign regional and international climate in 2005.

B.

Challenges for locking in economic growth and enhancing social equity

1.4

After a half century of slow average growth the Uruguayan economy would need to expand vigorously to be able to regain historical societal welfare levels and meet basic human development needs. But, because of the vulnerabilities enumerated above, the authorities are having to manage a number of challenges to lock in recent growth recovery and enhance social equity.

1. Fiscal and public debt sustainability: Uruguay’s fiscal challenge and the main driver of uncertainty in its economy is the sustainability of the public finances and the public debt.

1.5

Fiscal sustainability and a stable macroeconomy are a sine qua non for any growth strategy to succeed. Owing to Uruguay’s massive public debt3 (92% of GDP at end-2004), its fiscal dynamic is the main driver of uncertainty in its economy. Such uncertainty can only be dispelled through continued fiscal discipline in discretionary public spending management and through selective investments, especially given the prospect of international interest rate increases in the coming years. The principal fiscal restraint targets are: (i) public service average wage trends, with close monitoring also of private wage behavior;4 (ii) the social security deficit, affected by an increase in the average wage index, and which could be narrowed by curbing evasion and fraud; and (iii) revenue collection, which will require tax reforms to broaden the tax base and reduce tax rates and evasion.

1.6

For the public debt to be sustainable it will have to be efficiently managed. By some estimates,5 Uruguay would need to achieve—and sustain—a primary surplus on the order of 4% of GDP. This creates constraints both for social spending and public investment increases and for lightening the tax burden. Were such a fiscal

3

Includes nonfinancial public sector and Central Bank debt, excluding monetary regulation instruments and free reserves.

4

Private sector wages as adjusted in tripartite negotiations of wage councils made up of union and business representatives and an executive board appointee as arbiter.

5

IDB. Study by D. Artana, J. Bour, M. Catena, and F. Navajas (2004), “Sostenibilidad fiscal y de la deuda pública en Uruguay [Fiscal sustainability and public debt in Uruguay].” IMF. Uruguay. Request for StandBy Arrangement. July 2005.

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discipline effort to translate into budget institutions whose governing rules and procedures assured countercyclical fiscal policy, the savings generated as business activity rallied would enable the government to responsibly sustain spending levels during downturns while continuing to lower the country’s high debt-to-GDP ratio.

Institutionalizing these processes would facilitate good policies and also make the fiscal prudence pledge credible, that being the foremost problem facing a government that starts off its term with public spending strictures.

2. Strengthening the State for more efficient and effective governance: The governance challenge is to revamp public sector administration and management to improve the quality of services delivered to the citizenry, strengthen competitiveness, keep the public finances sustainable, and effectively manage social policy.

1.7

Uruguay is a mature democracy with quality political institutions and one of the highest degrees of legitimacy in the region. It owes its stable political system and ability to unite interests to three factors in particular: political parties with deep roots in Uruguayan society; the essentially consensual nature of political competition, and a culture of negotiating interparty differences, characteristic of mature democracies. As for the justice system, whose independence and probity are not at issue, there are some challenges concerning administrative and operational capabilities but the rule of law is firmly embedded in Uruguay and legal safeguards are broadly observed. Overall, the nation’s democratic tradition, respect for property rights, and high-caliber public institutions are assets on which it should draw to anchor robust economic growth in the years ahead.6

1.8

The challenge is to create, within this sturdy democratic apparatus, a public sector that can efficiently and efficaciously supply Uruguayans’ needs. Since the mid1990s the government, particularly at the central level, has launched a series of initiatives to make the workings of the public sector more effective and efficient.

Though Uruguay’s public administration is more efficient now than in the prereform era, the public sector modernization exercise would need to be completed to adapt that sector’s strategic role to present-day demands and improve the quality, efficiency, and efficacy of government management and operations. This makes it imperative to tackle at least three issues that are key to strengthening governance from the standpoint of good-quality public service delivery: expenditure management, revenue management, and human resources management.

1.9

The expenditure management challenges are as follows: (i) an inflexible budget structure with a fragmented institutional infrastructure and a culture of incrementalism, all of which (given the heavy relative weight of the wage bill and social security costs) narrows the government’s public investment margin and makes it difficult to set new priorities; (ii) overlaps in control functions could make

6

IDB. Study by A. Schick (2004), “State Modernization in Uruguay.”

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for less transparency and clarity; (iii) the practice of appropriating funds outside the Single Treasury Account and contingent liabilities not portrayed in government financial reports mean that such accounts give an incomplete picture of the state of the public finances; and (iv) public spending inefficiencies and ineffective public service delivery systems owing to overlapping functions of different government agencies, and regulatory agency shortcomings in some key sectors (water and sanitation, environmental protection).

1.10

On the revenue management side the challenges are: (i) a high tax burden and relatively high average evasion levels for the value added tax (VAT) and social security and payroll taxes; (ii) a plethora of taxes, many of them low-yielding and non-neutral; this, coupled with nontax burdens, strongly impacts the economy’s competitiveness; (iii) high management costs, exceeding the regional average; and (iv) areas of weakness in tax administration institutions.

1.11

The following are challenges to address on the human resources management side: (i) public servants make up a relatively high share of the workforce (18%) despite major efforts in the 1990s to rationalize the civil service structure; (ii) compared to other countries, Uruguay’s civil service is less technically skilled and there are fewer incentives and merit provisions;7 and (iii) there has been a weakening of the civil service in terms of qualifications, motivation, and impartiality in a system of grade schedules and positions that exist on paper but do not match the actual organization of work or government units’ real needs. Overall, this bespeaks a weakness in the institutional apparatus governing the civil service (National Civil Service Office – ONSC).

3. Economic productivity and investment: The challenge of economic productivity through support for sound operation more resilient and efficient financial sector, business climate and production development policies to attract and sustain investment.

1.12

spurring high of markets, a improvements, high levels of

Uruguay’s investment ratios historically have ranked among Latin America’s lowest. To push growth rates in the coming years well beyond the historical average (1.7% average annual growth over the past 70 years) the country would need hefty increases in physical capital investment that translate into appreciable medium- and long-range gains in average economic productivity.8 It will be difficult to sustain total factor productivity (TFP) increases in the medium and long term without boosting the investment ratio enough to magnify the positive impact of technology

7

IDB. (2003). Regional Policy Dialogue. “Diagnósticos institucionales sobre servicio civil [Institutional dialogues on civil service].”

8

In their analysis J. Blyde and E. Fernández-Arias (2004), op. cit., demonstrate that Uruguay’s extremely low total factor productivity relative to the rest of the world in 1960-1999 is chiefly responsible for its slower growth compared to rest-of-world figures. The second factor is its lower physical capital accumulation.

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change on the capital stock, as an adjunct to labor productivity improvements. This will be particularly important if, owing to shifts in the regional environment driven by the late-1990s crisis, the future growth of Uruguay’s economy is led by expansion of its tradable goods and services sectors9 rather than labor-intensive nontradable sectors, which was the dominant pattern in the 1990s.

1.13

Given public investment’s significant contributions in the past and the financial strictures in store for Uruguay’s public sector, selectivity is essential when tackling the question of future public investments, to try to maximize complementarity with private investment. To remedy the problem of low investment levels a set of factors that have been acting as a brake on private investment would need to be tackled simultaneously in years ahead, along with the pursuit of policies specifically designed to support the real economy, in order to: (i) create a healthy business climate, revamping the regulatory-institutional framework of the Uruguayan economy of past decades10 and endeavoring to lighten the weight of the tax burden on business activity; (ii) improve the operation of markets, reviewing the multiple specific trading arrangements to prevent resource allocation distortions, particularly in agriculture; (iii) address financial system vulnerabilities and inefficiencies that are limiting the reach of financial services and output growth prospects;11 (iv) reduce transportation, energy, and telecommunications infrastructure vulnerability, concentrating on the public sector; and (v) pursue micro interventions notably in the tax and labor spheres to foster productivity and private investment and thereby help advance sectors in which Uruguay is competitive.12 One requirement for such investments is the development of suitable instruments and an institutional base for their implementation.

9

IDB. Study by R. Hausmann, D. Rodrik, and A. Rodríguez-Clare (2004), “Towards a Strategy for Economic Growth in Uruguay.” The authors affirm that the greatest returns to discovering high-productivity activities lie among tradable goods and services.

10

IDB. Study by G. Del Castillo (2004), “El clima de negocios en la República Oriental del Uruguay [The business climate in the Eastern Republic of Uruguay].”

11

IDB (2005), “Uruguay. Los grandes desafíos para el desarrollo de mediano y largo plazo.” Policy Dialogue Paper. Specifically: the bulk of financial savings are foreign-currency denominated and on short-term deposit; this, coupled with financial intermediaries’ risk aversion, limits the supply of medium- and longterm financing in local currency. A compounding factor is the country’s undeveloped capital market, which thus is not an alternative source of finance.

12

IDB. G. Casaburi et al. (2005), “Nota temática de competitividad de Uruguay [Thematic note on Uruguay’s competitiveness].”

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4. Further opening of the economy: The challenge of regional integration and international insertion to broaden external market access for Uruguayan goods.13 1.14

Deeper inroads into the global marketplace are essential for a small economy like Uruguay’s to achieve a minimum scale to be able to produce efficiently in industry sectors in which the country has—or could create—comparative advantages. What is more, its future growth picture hinges greatly on investment and productivity in its export industries. Consequently, deeper regional integration with MERCOSUR while pursuing further, and more functional, integration with the rest of the world will be important to brighten Uruguay’s growth prospects. The nation’s private sector—its domestic productivity driver—having been strengthened (see paragraph 1.13), two additional challenges await Uruguay to bolster its international position: negotiate better market access for its exports and smooth the way for Uruguayan businesses to enter newly opened markets.

1.15

The first challenge is to adopt a strategy that will effectively open up international markets, with a view to diversifying the geographic and sectoral makeup of Uruguay’s export base. Among the ensuing gains would be a swifter dismantling of nontariff barriers, new efficient dispute resolution avenues, and effective macroeconomic coordination and cooperation procedures. Uruguay also would come away from international trade negotiations with its regional trading partners with more favorable terms. All this will call for a strengthening of alternativeassessment capabilities and of available national and subregional institutions and instruments to tackle trade negotiations and ultimately implement accords that bring benefits to the Uruguayan people. The foreseeable outcome of a MERCOSUR deepening14 would be a coordination of trade policies and international negotiations.

1.16

The second challenge is for Uruguay’s international insertion strategy to make domestic production more competitive, so good negotiating outcomes will translate into concrete business opportunities for Uruguayan companies and bolstered capacity to take on more efficient competitors. To meet this challenge it will be necessary to: (i) strengthen the institutional apparatus that is helping the private sector go into external markets, particularly on the product quality and product health sides, and (ii) pursue efforts to smooth the transition to a more open trade regime, by way of neutral actions that create the least possible drain on scarce fiscal resources.

13

IDB. P. Giordano and F. Quevedo (2004), “Nota temática sobre comercio e integración [Thematic note on trade and integration].”

14

IDB. “MERCOSUR. Regional programming paper, 2005-2008,” (document GN-2370-1). This document examines the question of which MERCOSUR path would be in Uruguay’s interests.

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5. Regaining societal welfare levels in a climate of fiscal restraint: The challenge of reversing recent increases in poverty and inequality levels and maintaining historically good social indicators.15 1.17

Uruguay’s poverty and inequality rates have traditionally been among Latin America’s lowest. A look back over the past two decades shows a steady decline in the poverty rate from 1985 until 1994 when 15% of the population were poor, but from 1995 onward poverty headcounts began to climb. The economic recession that started in 1999 accelerated this upward trend, and in 2002 the poverty rate soared to 23.6%. That was the year a financial system crisis spilled over into the rest of the economy: the unemployment rate skyrocketed and household income dropped. By 2003, 30.9% of Uruguayans were under the poverty line; in 2004 close to a third of the population (32%) fell into that category. But headcount increases tell only part of the story: poverty also is deepening and becoming more severe. The number of children and young people in the ranks of the poor is on the rise16 and growing residential segregation is manifest evidence of the geographic concentration of lower-income groups.

1.18

The inequality gap has widened considerably as well since the mid-1990s, as the rise in the Gini coefficient from 41.6 in 1994 to 44.5 in 2003 attests. A breakdown of changes in the income incidence of poverty shows that, while declining average income was the major driver of poverty increases before and during the crisis, the inequality increase represents almost 40% of those changes during the crisis compared to the pre-crisis 24%. The chief explanations for this worsening of poverty and inequality are the sharp falloff in formal employment, an increase in the number of casual jobs with no social security coverage, and the decline in real wages. Within that context of rising poverty and inequality there are signs of growing structural or long-term poverty. Using basic utility services as a yardstick: in 2003, 91% of the population had a safe water supply; only 55% had sanitary sewer service. Massive investment will be a must in this sector to reach the 2015 Millennium Goals of 98% and 75% coverage of safe water supply and sanitation services, respectively. Given the restrictions on private participation in this sphere, these outlays would fall to the public sector.

1.19

The fact that Uruguay’s poverty rates have remained high despite the strong business activity rally in 2003-2005 shows that the forecast growth rates will not be enough to improve household welfare and meaningfully reverse the deterioration in several social indicators. Unemployment came down in 2003 but the poverty rate was more than seven percentage points higher than the previous year. Preliminary figures for 2004 and early 2005 suggest that this trend is continuing: even with

15

IDB. Study by V. Amarante, R. Arim, M. Rubio, and A. Vigorito (2004), “Pobreza, red de protección social y situación de la infancia en Uruguay [Poverty, the social safety net, and the situation of children in Uruguay].”

16

In 2003, 49% of the under-18 population lived in poor households.

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GDP growth of approximately 12.3% and a near three-percentage-point further decline in unemployment in 2004, the poverty rate edged up from 30.9% in 2003 to 32.1% in 2004 and the extreme poverty rate rose from 2.8% to 4% in that interval.

1.20

The combination of these high transitory poverty levels and structural features could steadily erode Uruguay’s human capital base. The characteristics of this worsening of social conditions suggest that a focused strategy is needed to change conditions and improve opportunities for the hardest-hit population, along with active State policies to that end. In addition to targeting the issues of inflexible, procyclical social expenditure17 and sustainable social program funding, priority attention is needed to tackle factors that may be contributing to the recent rise in structural poverty. Two core concerns warrant attention: (i) households with poor children and pockets of poverty, and (ii) labor market operation, to expedite job creation and retrain the unemployed and underemployed workforce.18 Future social agendas should address both the country’s poverty and exclusion profiles and the populace’s preference for universalist policies, therefore targeting specific age groups or geographic areas and producing synergies with universal programs, as demonstrated by the broad societal acceptance of all-day schools that benefit the poorest children. To make such initiatives sustainable, the plan is to implement a complementary microfinance strategy that will help bring into the productive workforce some population segments that initially are social assistance clients.

1.21

To reach the Millennium Development Goals for safe water supply and sanitation, financing will be needed to manage a threefold challenge: (i) restrictions on private investment in delivery of these services; (ii) absence of a sound regulatory framework to govern users’ and providers’ specific obligations and utility rate calculation; and (iii) providers’ shortcomings, particularly State utilities’ management capacity.

1.22

Uruguay’s education indicators compare favorably with those elsewhere in the region, but its relative standing has slipped. This sector is contending with a number of challenges:19 (i) reduce primary school repetition rates through better student education; (ii) increase secondary-school student retention rates (traditional and technical streams) so as to increase average years of schooling and improve secondary education outcomes; (iii) offer adolescents and young people education options that are tailored to technology on the market and to industry needs and can equip them for the job market, upgrading skills acquired in formal education

17

The social security system takes up 60% of all government social spending. Public social expenditure is biased toward universal-type programs.

18

IDB (2004). C. Pagés, “Diagnóstico del mercado de trabajo en Uruguay [Diagnostic assessment of the labor market in Uruguay].”

19

IDB. Study by D. Caraballo, G. De Armas, and D. Glejberman (2004), “La ANEP tras un proceso de reforma y dos administraciones (1995-2004) [ANEP through a reform process and two administrations (1995-2004)].”

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settings or on the job; and (iv) improve efficiency in education system administration in the broadest sense, including planning, coordination, management, and resource assessment.

C.

The government’s program and medium-range macroeconomic outlook 1. Government agenda

1.23

The main thrusts of the government’s agenda are outlined in president Tabaré Vázquez’s electoral platform, embodied in the document El Gobierno del Cambio, Propuestas y Proyectos: La Transición Responsible [The Government of Change, Proposals, and Projects: A Responsible Transition]. During the administration changeover Uruguay’s political parties signed accords dealing with the economy, education, and foreign policy, which likewise sketch out the broad economic policy roadmap (Interparty Memorandum of Understanding).

1.24

Generally, the new government’s economic policy aims are fairly high, sustained output growth, more and better jobs, and substantive quality of life improvements for the bulk of the Uruguayan population, especially the neediest and most vulnerable segments. Keeping the economy on a strong growth path will require an increase in investment, this being the only possible avenue for the government to spend on social sector programs and initiatives and also service the public debt. To propel investment and growth the administration is proposing a series of State structural reforms of public revenue and expenditure management, the financial system and capital market, and the production system, a policy to strengthen Uruguay’s international positioning, and creation of a pro-investment climate underpinned by clear, enduring ground rules. In the area of innovation and technological progress the agenda calls for moves to build a more competitive and productive economy in the medium and long term. The government plans to frame all these efforts with fiscally rigorous short-run economic policy management that will yield acceptable primary surpluses and maintain the current monetary and exchange rate policy regime.

1.25

These broad thrusts have informed work to craft the government’s five-year budget approved by Parliament in late 2005. The Ministry of Economy and Finance (MEF) proposed the budget aggregate and budget tracking parameters. The authorities also have announced that annual budget reviews might be reinstated by way of budget accountability and performance reporting laws, whereupon the fiveyear budget would become more of an indicative roadmap for the period.20

20

IDB. Study by G. Oddone (2005), “Evaluación de la factibilidad de las principales líneas de acción de las políticas públicas en Uruguay (2005-2010) [Feasibility analysis of the main public policy lines of action in Uruguay (2005-2010)].”

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1.26

The government has stated its intention to enhance the investment environment.

The State would concentrate on bolstering its regulatory role, improving the workings of markets, and supporting innovation systems (technology transfer and application; information and communication systems)—all of which is vital to develop competitiveness-enhancing infrastructure, improve the business climate and, ultimately, build a private-sector-led economy. In this vision the State is one single entity that should make better use of the resources at its disposal, working to mesh and prevent fragmentation and duplication of efforts. This would entail government moves to see State agencies, including public enterprises, work more in concert to make sure that public resources are put to the best use.

1.27

The starting premise of the government’s social policy is that a combination of structural factors (programmatic makeup and institutional base for Uruguayan social policy) and transitory factors (response to the 2002 crisis) helps explain why a broadbased social policy is nevertheless missing many poor households.

Consequently, through its term the administration’s social policy targets will be poverty reduction and social inclusion, human capital building, and more effective social policies, to which end it proposes to bolster social sector institutions. Another key social policy aim is immediate interventions—delivered through the National Social Emergency Program (PANES)—to meet the needs of population segments that have borne the brunt of the protracted crisis, while at the same time working to improve delivery of core social services (child care, education, and health) for the poor.

1.28

The authorities also are implementing an IMF-backed economic program that extends the policy horizon for three years to give the necessary uncertaintydispelling signals. The program’s content is designed to bolster macroeconomic stability, preserve clear ground rules, and redefine State structural reform priorities so as to strengthen the budgetary tool, among other aims, and make the revenue collection apparatus, civil service, and social insurance system operate more efficiently. Specifically, the government proposes to: (i) send a tax reform bill to Parliament; (ii) restructure the Tax Directorate (DGI) and improve the coordination of revenue collection agencies; (iii) in the medium term, revamp the specialized pension plans (military, police, and bank employees); and (iv) create a public debt management unit in the MEF. The government also is blueprinting finance sector reforms, including institutional changes to increase the Central Bank’s operational independence, effectively integrate financial supervision, and create a sturdy financial safety net; improve the operational side of Banco de la República Oriental del Uruguay (BROU) and the national mortgage bank, Banco Hipotecario del Uruguay (BHU), and lower their costs; privatize Nuevo Banco Comercial (NBC), and bring in a microfinance strategy that will make financial services more widely accessible.

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2. Macroeconomic outlook 1.29

During its term the administration will be managing the twofold challenge of keeping the macroeconomy stable and locking in the country’s 2003-2004 growth performance while striving to satisfy demands for gradual real wage recovery and reducing poverty and social privation in the short and medium term. Despite constraints stemming from the magnitude of the public debt and its maturity concentration, the authorities see the current economic climate as an auspicious starting point. The Uruguayan economy continued to benefit in 2005 from favorable conditions in the rest of the world, although less so than in 2004, and real GDP grew by an estimated 6% to 6.5%. Looking ahead to 2006, international interest rates will continue to edge up; world growth will continue to be led by the U.S. economy, at a rate similar to 2005, and by the Asian economies, at a rate somewhat slower than last year, as these economies achieve more sustainable growth rates. Commodity prices will hold firm yet less favorable than in 2005, although oil prices will stay high. Uruguay also will continue to reap the benefits of the region’s strong macroeconomic performance with moderate, stable growth rates that would help the Uruguayan economy.

1.30

The government has framed its economic policy around the economic program mapped out in the IMF standby arrangement.21 Key undertakings in that program are a primary surplus of 3.6% to 4% of GDP, with which Uruguay can pay part of the interest bill on its debt; maintaining the inflation target and floating exchange rate system; and putting through the above-discussed reform agenda. One item high on the government’s agenda is wage negotiations, which have had major implications for fiscal soundness and public debt sustainability efforts, especially in 2005. The hope is that these talks, which took place prior to debates on the government’s five-year spending plan, will end up improving workers’ incomes in the framework of public-private wage council negotiations. The object of a possible wage and income pact would be to help recover real wage levels in a climate of fiscal strictures, with due regard to potential competitiveness erosion problems.22

1.31

Uruguay’s export sectors and its goods producers generally will undoubtedly play a greater part in the medium-term economic growth pattern, since the region foreseeably will exert less of a favorable influence than in the 1990s—a repeat of the 1990-1994 huge capital influx being especially unlikely. This outlook could change if the terms of trade increased significantly or the government’s charted structural reforms ultimately boosted investment and productivity growth enough to sustain a quicker recovery of average household income, even in the short run. The forthcoming massive foreign direct investment for pulp mill development in 2005-

21

The 36-month, SDR 766.3 million standby arrangement was approved on 8 June 2005. Upon approval of the accord the IMF released SDR 30.7 million under the arrangement.

22

The pact’s targets for this year appear to have been met. Increases worked out in wage councils generally stuck to the official guidelines.

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2007, concentrated mainly in 2006, will show up in a sharp increase in the investment ratio.

Base-case medium-range macroeconomic scenario Actual 2004 Real GDP growth Inflation (period end) GDP (US$ billion)

12.3 7.6 13.3

Gross domestic investment Gross national savings External savings

13.3 12.5 0.8

Primary surplus Interest Overall balance Public sector debt 1

3.8 6.0 -2.2 92.0

Merchandise exports, FOB (US$ million) Merchandise imports, FOB (US$ million) Current account External debt 2

3,021 2,990 -0.8 87.4

Forecast 2005 2006 2007 I. Output and inflation (%) 6.0 4.0 3.5 6.5 5.5 4.5 16.8 18.4 19.6 II. Savings and investment (% of GDP) 15.5 20.0 18.4 12.8 13.7 15.6 2.8 6.4 2.8 III. Public sector and debt (% of GDP) 3.6 3.7 4.0 4.9 4.8 4.7 -1.3 -1.1 -0.7 73.0 67.0 64.0 IV. External sector (% of GDP) 3,496 3,724 4,078 3,852 4,878 4,724 -2.8 -6.4 -2.8 69.7 62.2 57.2

2008 3.0 3.5 20.8 17.8 16.3 1.5 4.0 4.6 -0.6 60.0 4,511 4,961 -1.5 52.9

1

Debt of the nonfinancial public sector and Central Bank (excluding monetary policy instruments).

Excludes nonresident deposits.

Source: IMF (EBS/05/136) 2

II. PREVIOUS STRATEGIES AND PORTFOLIO PERFORMANCE: THE MOST

IMPORTANT LESSONS FOR THE NEW STRATEGY23 A.

Strategy programming cycles and outcomes

2.1

In the decade 1993-2003 the Bank adopted three country strategies. The first blueprint, covering 1991-1994, had three priority focuses aligned to the government’s strategy: (i) support for structural and policy reforms, especially financial sector restructuring and creation of enabling conditions for investment; (ii) private sector modernization to help Uruguay become more competitive within MERCOSUR, and (iii) improvements in social spending efficiency and equity. The

23

This section draws on: (i) the successive Bank country strategies with Uruguay; (ii) a paper prepared for the IDB by W. Van Ryckeghem (2004), “Uruguay. Lessons Learned from IDB Lending (1993-2003)”; (iii) a paper produced for the IDB by G. Oddone, “Documento de apoyo para la preparación de la Estrategia de País del Banco con Uruguay [Supporting document for preparation of the Bank’s country strategy with Uruguay]”; (iv) the respective portfolio review mission reports; and (v) various project completion reports.

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foremost achievements of Bank-backed activities over that period were those that helped bring in structural reforms—an area in which the Bank first engaged in 1991, notably to help revamp the financial system. Later on, the investment sector program laid foundations for private investment climate enhancements and paved the way for subsequent social security and central government reforms. Equally fruitful was the Bank’s work to support microenterprise and sanitation and municipal infrastructure development.

2.2

During the 1995-1999 subperiod the Bank continued to anchor its support in structural reforms. Infrastructure and social sector support came back into play, now with a fresh perspective of decentralization and private sector participation.

Accordingly, Bank-financed operations focused on helping the government spur investment as a development driver to make Uruguay more competitive. The three central strategy priorities in those years were to: (i) deepen structural reforms in order to rationalize public spending and balance the public accounts; (ii) enhance the private investment climate; and (iii) improve social spending quality and targeting to preserve the country’s good social indicators and build the human capital base required in this era of regional integration and globalizing markets. To continue its social sector support the Bank funded some 30 education, municipal development, housing, and water and sanitation programs.

2.3

The third and last of the Bank’s strategies over the course of the decade reviewed here (covering the 2000-2004 span) kept to the preceding strategy’s priorities but accented initiatives to make Uruguayan production more regionally and globally competitive, further modernize the State and strengthen governance, and improve societal welfare and equity. The protracted economic recession beginning in 1999 hampered implementation of this strategy, and matters worsened in 2002 when the nation was plunged into an economic and financial crisis: GDP dropped roughly 11% that year and three of Uruguay’s leading private banks collapsed following a massive run on the banking system. The main driver of these events was a string of adverse external shocks that had shaken the economy since early 1999, the devaluation of the Brazilian real and a sharp terms-of-trade loss being two of the most potent. As the Bank was charting its country strategy the Uruguayan economy was slipping into recession, but the 1999 downturn was thought to be a temporary interruption after the country’s stability and growth successes of the 1990s and advances made on its public sector and finance sector structural reforms.24 In the end the Bank operated its work program in a setting in which the country strategy’s base-case macroeconomic scenario did not play out.25

24

The first review of the IMF standby arrangement (IMF Country Report 01/46, March 2001) pictured the economy as gradually emerging from the 1999-2000 recession. For purposes of the economic program the forecast was for 2% GDP growth in 2001.

25

Growth estimates were 2% for 2000 and 4% for 2001-2002. The economic program agreed with the IMF projected successive cuts in the public sector deficit to 1.8% of GDP in 2000, 1.2% in 2001, and 0.8% in 2002.

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2.4

In those circumstances, the agreed country strategy and lending program had to be adjusted to address the unfolding economic and financial crisis. Most notably the Bank approved a US$500 million social protection and sustainability program as one piece of an IMF-headed financial support package in which the World Bank participated as well. That program’s twofold purpose was to supply funds to the government to help it manage the financial crisis and shield priority social program budgets from government spending cuts so the crisis would take less of a toll on the country’s poor. This also would keep Uruguay’s social indicators from deteriorating and prevent it from having to backtrack on its ongoing modernization moves. The financial sector upheaval also triggered a sharp contraction in liquidity and impairment of banking system assets. To help turn that situation around the Bank approved a US$200 million sector loan to strengthen the banking system— specifically, to carry through reforms devised to stabilize bank liquidity and capital strength and restore depositor confidence in the banking system. The successful government debt swap in April 2003 did much to move the process forward.

B.

Portfolio performance

2.5

Over the span of the 2000-2004 country strategy, macroeconomic constraints generally and fiscal strictures in particular influenced the implementation of projects that targeted priority strategy areas. Portfolio performance and portfolio adjustments reflected the authorities’ commitment to stay the course charted in successive IMF-backed economic agendas, pursuing tight fiscal policy to sustain fiscal soundness by boosting revenues and containing primary expenditure. Evertighter fiscal strictures over the course of those years meant cuts in budget lines needed to execute programmed investment loans and thus hampered these operations’ implementation progress. To attenuate the impact of fiscal restraints the Bank and the authorities actively managed the portfolio, agreeing for instance on project-specific measures and actions to minimize the negative repercussions of tight budgets. This period also saw the cancellation—a first for Uruguay—of portions of some active loans (US$65 million in 2003 and US$2.9 million in 2004).

2.6

Between 2000 and 2004 the Bank approved a total of US$1.429 billion in financing to pursue its country strategy, including US$33 million for two private sector operations. The approvals distribution over that interval by strategy focus was 48% for welfare and equity enhancement, 36% for competitiveness and investment, and 16% for State modernization and reforms. Because of the magnitude of the social protection and sustainability program loan and the sector loan to strengthen the banking system, these operations weighed heavily in the distribution of lending.

The rest of the loans corresponding to the lending program for the period, which the Bank and the government had agreed on in 2000, are spread more equally across the strategy areas. They contain greater emphasis on fostering competitiveness and growth: 43% for competitiveness, 31% for reforms and modernization, and 26% for welfare and equity.

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C.

Previous strategies’ achievements and implementation issues

2.7

On balance, the Bank’s country strategies have duly addressed the country’s problems and have been aligned to country priorities. Specifically: (i) for the most part the strategy’s implementation was aligned to government agenda priorities and to priorities in the strategy itself, and yielded concrete outcomes along those lines; (ii) the Bank has become firmly engaged in sectors of activity that are key for Uruguay’s advancement, through support for structural reforms and investment programs notably for road and energy infrastructure, the financial sector, and modernization of the State, including social security reform; and (iii) the Bank showed that it could respond flexibly to Uruguay’s needs, particularly in the wake of the 2002 crisis. These features of Bank activity in the country—alignment to country priorities, engagement in key sectors, and responsiveness—are strengths on which the Bank should build in operating the new strategy. Other elements such as the country- and results-focused approach advocated in the New Lending Framework (NLF) need to be strengthened as well.

2.8

The Bank’s support translated also into major specific contributions to Uruguay’s advancement. The following are some achievement highlights of Bank-financed programs: (i) the Bank’s countercyclical support, which helped the country weather the severe fiscal and financial crisis of 2002; (ii) the impetus given to regional integration by road infrastructure improvements along integration corridors with Argentina and Brazil in conformity with MERCOSUR standards, and installation of the first power conversion station to integrate the Uruguayan and Brazilian electric grids; (iii) increased government efficiency and cost savings for the Uruguayan people and business community thanks to broadbased services reengineering; (iv) increased efficiency of the departmental governments as decentralized local governance and development authorities; (v) more transparent government procurement processes which now employ information and communications technologies for wider publicity and tighter control; (vi) a decline in secondary school dropout rates; (vii) support to vulnerable groups by regularizing unplanned settlements and assisting at-risk children and youth; (viii) living condition improvements in Montevideo, thanks for instance to sustainable increases in the share of the population with sanitary sewer and storm drainage service, and environmental amelioration of beaches for tourism and recreation; and (ix) quality of life improvements for Uruguayans living outside the capital by virtue of infrastructure upgrades in 30 cities, investments in municipal works and services (urban sanitation, sewer systems, paving, street lighting), and barrio and urban area consolidation programs.

2.9

An analysis of the country strategies pursued over the past ten years and of recent portfolio performance yields lessons to guide the Bank’s future work with Uruguay.

The following paragraphs sum up the most important lessons learned to enrich future strategy development, new operation design, and portfolio administration.

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2.10

Identification of strategy implementation risk drivers. It was assumed in implementing the 2000-2004 strategy that Uruguay’s neighbors would be proceeding with their stabilization programs, which exposed the strategy’s operation to a risk of major changes in the regional arena. Though that contingency had been acknowledged, the magnitude of the crisis exceeded all prognostications.

The authorities were forced to adopt extreme measures and the Bank had to respond swiftly—as part of the IMF-led support package—to lend assistance. The use of an emergency loan to manage the crisis was effective in the short run but the downside was a concentration of repayments in 2005-2007. The new strategy proposes to assist government efforts to allay risks of any new crisis from without, through backing for measures to assure continuing fiscal soundness and sustained long-term growth. The proposed lending scenarios take into account the country’s financial programming constraints and, by sequencing and selecting implementation instruments, they would help make Uruguay’s debt sustainable by preventing the concentration of future payments within a very short span.

2.11

Selectivity and targeting of the strategy. The Uruguayan State is still strained by crisis at a time when it must rise to the challenges of globalization, regional uncertainty, financial sector weaknesses, fraying social cohesion, slow creation of quality employment, and mounting poverty. In directing its support at such a juncture the Bank will have to balance its own resource constraints with Uruguay’s limited net new external borrowing capacity and the need to be more selective in choosing projects for funding. In light of the constraints that come with the Bank’s status as Uruguay’s leading provider of external finance and the multiple demands for its support, the Bank should concentrate its assistance on key concerns within each strategy area and, under the government’s leadership, foster effective coordination with other institutions (see Annex V).

2.12

Structural reforms, sound leadership, and long-run sustainability. Structural reforms have taken longer to put through in Uruguay than elsewhere in the region.

Though the purpose of proposed reforms has been clear, the implementation side has come in for less attention. The resistance to change that any reform will run up against was underestimated at times, as was the need for incentive mechanisms to soften such opposition. Consequently, some reforms were held up by a lack of solid, sustained leadership over time, capable of forging the requisite consensus to see the reforms through and remain committed to the changes. The country’s unfinished civil service reforms are a case in point. Thus, a definition of the object of the planned changes, careful implementation sequencing, and a risk analysis are essential pieces in the design of Bank operations to back government reform programs.

2.13

Executing agencies’ institutional shortcomings. Various Bank operations tackled problems of institutional weak points in executing agencies or the institutional frameworks in which they were operating. In Bank-financed social programs the absence of efficient coordination mechanisms and role overlaps among social sector

- 17 -

institutions have hindered project execution. The limited pool of skilled human resources with experience in poverty alleviation and reduction program implementation is a further constraint. The new-minted Ministry of Social Development (MIDES) will help tackle these areas of weakness. Institutional strengthening of MIDES is of utmost importance, along with closer interfacing of public and private institutions working in this sphere. Another newly created body, the Innovation Cabinet,26 will accomplish something similar on the innovation policy side, helping to fix institutional weaknesses and develop and implement effective, coordinated actions.

2.14

New program conceptualization and design. Some programs’ objectives were overly ambitious or imprecise, resulting in operations that were oversized, did not come in on schedule, or failed to meet other implementation requirements when certain factors changed, especially fiscal capacity and institutional conditions. With its New Lending Framework the Bank is better equipped to design more flexible operations with which to respond quickly to sudden and unforeseen changes in the environment.

2.15

Good practices. The following are good practices of particular note: (i) close coordination with the channel of communication made it possible, in a tight budget climate, to prioritize projects within the portfolio and activities within programs, and thereby optimize results with the scarce resources available; (ii) thanks to close coordination between the Bank, Uruguay’s Tribunal of Accounts, and executing agencies, audited financial statements were produced in due time and form; and (iii) a website created to post all government procurement information (tender calls and sole-source purchasing) has made for more transparent procurement processes, afforded stronger guarantees to private sector agents, and yielded savings for the State.

III. THE BANK’S STRATEGY FOR 2005-2009

A.

Objective

3.1

The object of the new IDB country strategy with Uruguay is to help the country sustain robust enough growth rates to reverse the deterioration in social indicators triggered by the recession that began in 1999 and the 2002 crisis, and simultaneously instill conditions for lasting improvements in Uruguayan living standards.

26

Innovation Cabinet members are the ministers of education and culture, industry, energy, and mines, agriculture and fisheries, and economy and finance, and the director of the Office of Planning and Budget.

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B.

The strategy development exercise and the Bank’s prime focuses

3.2

The new 2005-2009 country strategy is the product of efforts and dialogue that go back to 2004, including considerable analytical work to identify challenges awaiting Uruguay in the medium term to sustain growth (see Annex IV). The main findings of studies and issues notes that came out of that exercise were incorporated into the policy dialogue paper (PDP). Following the January 2005 policy dialogue meeting the Bank stepped up talks with the elected government and organized workshops to examine strategy areas identified as Bank action priorities (see Annex III).

3.3

One shared consideration that emerged from this dialogue, which has important implications for the new strategy, is that Uruguay’s fiscal and debt dynamic is limiting the government’s room for maneuver in economic and social policy management. Furthermore, many of the production-sector concerns identified in the PDP are latent problems that could manifest themselves fully once the nation’s current idle capacity is used up, whereupon fresh investment would be needed to drive growth. Until that happens the economy is likely to continue expanding, which in turn will help alleviate some of the country’s social problems. All this makes the current juncture a critical period of transition toward a new growth-withequity vision for Uruguay. There are early signs of progress in that direction on three major fronts: management of the social emergency, bolstering of the new administration’s credibility, and the use being made of the five-year-budgeting mechanism.

3.4

By way of its new country strategy the Bank proposes to help the government put the reform agenda back on track in priority areas—earlier reform plans having been derailed by the severe recession starting in 1999 and the crisis of 2002—and support government development programs and policies for 2005-2009. In consideration of the Bank’s current active portfolio in Uruguay, previous country strategy lessons learned, complementarity of the Bank’s assistance with the work of other multilateral and official financial institutions, and the Bank’s comparative advantages, it is suggested that its technical and financial support target three strategic areas which address institutional dimensions of the five development challenges enumerated in chapter I.27

27

The country strategy matrix in Annex VIII summarizes the Bank’s chief action focuses and incorporates indicators of interim outcomes being sought in projects currently under way.

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1. Improving public management and sustaining fiscal soundness28 3.5

Fiscal sustainability and a sustainable public debt are a sine qua non for instituting public sector reforms that can: (i) improve the sector’s efficiency and efficacy; (ii) create an incentives framework that can boost investment and economic productivity; (iii) deepen Uruguay’s integration with the world economy and move intelligently to seize the opportunities that come with globalization and international trade; and (iv) fund social emergency assistance programs.

3.6

The caliber of Uruguay’s democratic system and its independent judicial system are valuable assets on which it would do well to capitalize to bolster future growth performance. State structural reforms are one initiative that calls for continued efforts to tailor the State’s strategic role to present-day demands and improve the quality, efficiency, and efficacy of the workings of government.

3.7

To support government efforts to those ends, the country strategy proposes Bank assistance on several fronts. The first is technical assistance to create, in coordination with the IMF, a public debt management unit, one of whose mandates would be to develop and implement a medium-term borrowing plan to smooth the debt repayment profile. The second is an operation to strengthen and improve central government management and make for more efficient public expenditure.

This would take in budgetary as well as civil service institutions to upgrade human resources skills, motivate public servants, and provide competitive salaries, to be able to efficiently manage new State roles and reduce red tape and regulatory burden costs on private enterprise. On a third front—public revenues—the Bank would support pro-investment tax reform for a gradual move toward a system with fewer taxes, a broader tax base, and lower rates, which would be easier to manage and should curb tax evasion, as well as modernization and strengthening of the tax administration apparatus to make the reforms workable.

3.8

IDB-backed activities on a fourth front would address the continued weight of social security spending in the public accounts and what this means for achieving fiscal balance in Uruguay.29 Though the country’s social security reform was successful,30 a number of serious institutional challenges remain. The Bank could support improvements in the system’s administrative efficiency and broader

28

IDB. E. Echebarría, F. Mejía, and F. Straface (2005), “Nota temática sobre capacidades estatales para la gobernabilidad en Uruguay: institucionalidad presupuestaria y del servicio civil [Thematic note on state governance capacity in Uruguay: Budget institutions and civil service].”

29

IDB. Study by Osvaldo Giordano and Jorge Colina (2005), “La reforma de la seguridad social en Uruguay.

Evaluación y propuestas de política [Social security reform in Uruguay: Evaluation and policy proposals].”

The prime objective of the 1995 reform was financial sustainability of the social insurance system, to effectively protect retirees in an adverse financial environment and population dynamic.

30

With broad popular backing, these reforms helped solidify the public finances, protect pension savings, further State modernization and, in the process, advance the country’s still-embryonic capital market.

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effective coverage. For the former it could help bring about second-generation reforms of the nation’s social security fund administrator Banco de Previsión Social (BPS) to equip it to manage client payments and benefits quickly and efficaciously.

As for the system’s reach, the Bank would target support to the revenue collection area to help check the rise in unregistered employment which today is one of the undercoverage issues that most affect the social security system’s operation.

3.9

A final focus would be the Program to Implement the External Pillar of the Medium-term Action Plan for Development Effectiveness (PRODEV).31 That program is intended to help the Bank’s borrowing member countries build financial management capacity, manage for results, and fulfill requirements to access the Bank’s new flexible lending instruments. As a first step, in 2003 the IDB, with the World Bank, prepared a Country Financial Accountability Assessment (CFAA) which identified outstanding public sector financial management issues in Uruguay. The IDB now would help the country implement the CFAA recommendations by way of PRODEV. 2. Strengthening competitiveness and Uruguay’s international positioning to sustain growth32

3.10

In light of the cardinal role that will fall to investment to boost the Uruguayan economy’s output capacity in the medium term the Bank has supported efforts to remove bottlenecks in key sectors, particularly infrastructure and the financial system, along with policies and reforms to nurture private enterprise generally.

However, some major challenges remain to be addressed to increase private investment and sustain growth. As an ongoing priority in this respect the Bank will assist Uruguay’s efforts to become more competitive and push up private investment, looking to export-oriented production that embraces up-to-the-minute technology and makes the most of the country’s comparative advantages to secure it a firmer foothold in world markets. With a view to tightening coordination of the work of Bank group arms (PRI-MIF-IIC) with Uruguay’s private sector in the strategic area of competitiveness, work began on a private sector development strategy following the May 2005 seminar on the main opportunities and challenges for private enterprise in Uruguay. Development and pursuit of that strategy will be a key component in the IDB Uruguay country strategy implementation. The following paragraphs summarize the eventual private sector development strategy’s central focuses of support, which could do a great deal to boost Uruguayan competitiveness, spur private enterprise, and move the country further into the global marketplace.

31

Uruguay signed the agreement for this initiative during the Bank’s 2005 annual meeting in Okinawa.

32

This section draws on G. Casaburi et al. (2004), “Nota temática de competitividad de Uruguay” and background studies referenced in its drafting (included in Annex IV), and on P. Giordano and F. Quevedo (2004), “Uruguay. Nota temática sobre comercio e integración [Thematic note on trade and integration].”

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3.11

Creating a pro-investment business climate. The Bank would support measures to enhance the climate for domestic and foreign private investment, to propel total factor productivity growth. Actions are being proposed in this regard to: (i) reduce bureaucratic hurdles to business startups and operation, and (ii) streamline regulations to instill a more investment friendly, competitive environment. The Bank is engaged in such efforts through its Business Climate Initiative33 which is endeavoring to ascertain and remove obstacles to private sector development.

3.12

Pro-productivity microeconomic interventions a. Production development policies: Explicit policies are needed to remove impediments and reduce market failures that are dampening Uruguay’s chances for increased investment and productivity gains. The strategy envisages support for a variety of activities to that end. In the agriculture sector an agricultural trade policy review is proposed to do away with specific trading arrangements that can impede efficient resource allocation. In tourism the Bank would support government strategic planning and development functions to make Uruguay’s tourism industry more competitive. Current industrial development and pro-investment policies should be reviewed and revamped and outcomes assessment mechanisms put into place. Business development could be fostered as an adjunct, with an accent on clustering of firms in dynamic export-oriented industry sectors. b. Quality and science, technology, and innovation (STI). Encouraging STI and adopting international technical and quality standards is one way to propel business productivity and competitiveness. Uruguay has made strides in these areas in recent years but budget and institutional organization constraints have made it difficult to gain further ground. IDB support for priority attention to these concerns and institutional improvements will help Uruguayan businesses innovate more and bring their operations and products up to international quality standards. For agriculture sector innovation it is proposed that government support not be atomized throughout multiple public agencies and that public monies be allotted competitively and transparently. Interfaces among State agricultural health activities would need to be improved in order to modernize these services, which are crucial to increase the supply of highquality goods for export. c. Productive-sector development institutions. A concerted effort is needed to come up with instruments that work and, fundamentally, to rethink Uruguay’s current institutional infrastructure for helping businesses grow and go international. This institutional apparatus for competitiveness will be enriched by engaging the private sector in the design and implementation of initiatives.

33

Uruguay signed on to the Business Climate Initiative in February 2004.

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Decentralized implementation arrangements that avoid red tape and leave room for operational flexibility can heighten these institutions’ impact.

3.13

Support for export development and internationalization of business and industry. Because Uruguay’s agrifood exports account for such a heavy share of its export base it is running into stiff barriers in world markets. Uruguayan companies’ moves to diversify markets and product offerings would need to be backed by government policies that can help negotiate new market access, promote domestic goods—reducing both tariff and technical or market barriers to their entry, and equip Uruguayan businesses to survive mounting foreign competition. The Bank will continue supporting government efforts to develop technical expertise in trade negotiation and make the best use of funds allotted for international trade bargaining in various fora, to strengthen negotiating teams and the interagency structure of their government and private-sector participants and give negotiators the tools they need to navigate these trade talks.

3.14

Competitiveness infrastructure a. Road transportation. The Bank proposes to continue helping Uruguay increase road system efficiency, with support for freight and passenger transport improvements in priority corridors to enhance Uruguay’s competitiveness and deepen regional integration. The road infrastructure operation approved in 2004 (1582/OC-UR) will pursue that purpose, as would prospective new projects to assist with road maintenance and development of the Montevideo ring road. The Bank also could support further regional physical integration ventures under the Initiative for South American Regional Infrastructure Integration (IIRSA). b. Ports. Access channel accommodation capacity and the capacity of public and privately owned port terminals needs to be augmented. The Bank has already approved technical-cooperation funding to help prepare the new Montevideo port modernization project (UR-L1004), which aims to lower transportation costs, improve the port’s efficiency and make it more competitive. c. Energy. If Uruguay is to reduce its energy vulnerability it will need massive investments to diversify its energy sources. The Bank could assist the government to chart a long-range energy strategy which would bring the private sector into power generation projects and help deepen intraregional energy trade. It then could consider funding for investments to pursue such a long-run strategy to strengthen Uruguay’s energy security and efficiency, especially in the electric power industry.

3.15

The financial system and capital market development. Further policies and measures would be required to make Uruguay’s financial system more resilient; boost currently low financial intermediation and credit levels; bolster financial

- 23 -

system regulation and supervision and make the financial safety net fully operational; extend the reach of financial services; and bring in financial sector efficiency reforms, invigorate capital markets and make long-term finance more readily available to business and industry.

3.16

The Bank would continue to support financial system strengthening and efficiency improvements through its ongoing sector program to strengthen the banking system (1496/OC-UR). Its multisector credit program (1407/OC-UR) will help Uruguay fill the gap in the lending market; that program’s operational modality will be reviewed as it helps revitalize the productive sectors. Given the country’s stillembryonic explicit deposit insurance system and incomplete financial safety net, the Bank proposes to support the design and implementation of that safety net through a policy loan which also would assist the authorities’ moves to integrate and consolidate bank supervision and give the Central Bank greater operational independence.

3.17

Uruguay’s efforts to enlarge its capital market and improve public debt management are slated for Bank support as well. A proposed sector facility operation would help create a new Public Debt Management Office at the Ministry of Economy and Finance, in coordination with the Central Bank. On the microfinance side the Bank will work with the authorities to develop and implement a global microfinance strategy encompassing a wide spectrum of financial services. This would help some current and potential microentrepreneur segments to establish themselves formally in the mainstream economy, move more of their financial transactions through the regulated banking system, and equip the more sophisticated microentrepreneurs to compete and integrate efficiently into local and world markets.

3. Poverty reduction and social inclusion as a pillar of sustainable growth

3.18

Prior to Uruguay’s 2002 financial and economic crisis the Bank’s prime investment strategy aims in the social sectors were to improve social conditions and increase workforce employability, labor productivity, and levels of social protection for the country’s poorest. When the crisis deepened in 2002 the Bank stepped in with funding for a social protection and sustainability program (1417/OC-UR) to shield budgets for priority social programs—education, health, and social protection. The starting premise for the new administration’s social policy is that a combination of structural and current factors helps explain why some of the poorest households are slipping through the country’s extensive social safety net.

3.19

The Bank will support the government’s social policy through its current program to assist at-risk children, adolescents and families (1434/OC-UR) and a new social sector program (UR-L1003) to ease the hardships of people living in poverty, continue building human capital, and strengthen social sector institutions.

- 24 -

3.20

Help for the poorest of the poor. The government’s National Social Emergency Program (PANES) now in operation constitutes its strategy for bringing the country’s poorest and most deprived households into the national social policy fabric through an integrated package of supports in the form of cash grants, feeding programs, special health and education programs, and other assistance. The Bank will help Uruguay assure that program’s efficiency and quality, including key actions to: (i) ensure that PANES benefits reach the poorest Uruguayans hard-hit by the crisis; (ii) ensure that the Plan’s new benefit offerings mesh with ongoing programs and initiatives; and (iii) explore and adopt exit strategies that would see continued support to needy families and assure budget sustainability of these social protection policies.

3.21

Bolstering social sector institutions. Social sector support must be a two-pronged enterprise: help cushion the social emergency’s medium- and long-range impacts and at the same time address social sector challenges that predate the 2002 crisis.

This will mean improving the sector’s institutional infrastructure, tackling problems of weak coordination, segmentation, and overlaps of central government social policy actions which are making for inefficient use of resources. Uruguay’s current social policy vehicle is a collection of over 80 social programs which have not fully addressed the shifting face of poverty and inequality described earlier. These programs, in turn, are designed and administered by a host of public institutions (10 central government agencies have a say in social policy). To remedy this situation the Bank will support capacity building in the Ministry of Social Development (MIDES), recently created by the legislature, and formation of a Social Portfolios Cabinet. Specific MIDES support targets will be to strengthen policy coordination functions, devise instruments to identify, select, and track households receiving social program benefits, and build social program assessment capacity. The Bank also would lend support for updating and improving basic socioeconomic data collected by the National Statistics Bureau (INE).

3.22

Education. The following are prospective lines of action for Bank support to address the above-described challenges: (i) strengthen preschool education to achieve genuine universal coverage of four-year-old children from deprived families; (ii) provide extra support (outside the regular class timetable) to primary school students who have learning difficulties and scholarships to encourage student attendance in the first years of secondary school, and cost-effectively increase the number of full-day schools; (iii) increase secondary and postsecondary technical education offerings in fields of specialization in demand in goodsproducing and service industries; and (iv) upgrade teacher quality, in particular tapping the potential of information and communications technologies. The Bank would deliver support in these spheres via its ongoing program for modernization of secondary education and teacher training (1361/OC-UR) and, with the Uruguayan authorities, it plans to explore a possible sector-wide approach (SWAp) operation to improve different education levels and subsectors in a common financing framework.

- 25 -

3.23

Living conditions in cities. Since over 80% of Uruguay’s population are urban dwellers, the issue of access to safe water, sanitation services, and urban public transit merits special attention. The Bank will continue supporting government efforts to meet the Millennium Development Goals for water and sanitation, with an emphasis on expanding the reach of sanitary sewer systems. The strategy’s centerpiece in that regard is sewer and wastewater disposal system construction in Montevideo and urban centers outside the capital, with measures to improve the operational efficiency of Obras Sanitarias del Estado (OSE), strengthen water and sanitation regulation, and delineate the public and private sectors’ roles in the provision of these services. In addition to its ongoing Metropolitan Montevideo sanitation program (948/OC-UR) the Bank would help fund the fourth stage of the Montevideo sanitation plan (UR-L1005) and an environmental sanitation project in Ciudad de la Costa (UR-L1017). Another proposed support target is efficiency improvements in integrated solid waste management in Metropolitan Montevideo (UR-L1019), to pursue environmentally and economically viable solid waste treatment and disposal solutions. To help reverse social segmentation and territorial exclusion processes the Bank would continue executing its informal urban settlements integration program (1186/OC-UR) and launch a new neighborhood improvement operation (UR-L1009). The Bank could lend assistance for urban transportation upgrades to extend the reach of transit systems and, particularly, make it easier for Uruguayans of modest means to access health and education services and the labor market.

4. Cross-cutting issues

3.24

Environment. The Bank’s new strategy with Uruguay recognizes that environmental quality is one facet in sustainable economic growth, so Bank support to that end figures in all the above-described lines of action. The country’s foremost challenge is to strengthen the national environmental agency DINAMA (National Environment Directorate) so it can perform its planning and policy coordination, project evaluation, and impact monitoring mandates more efficiently. At the local level, municipal governments are in need of environmental management capacity building, which for many of them will mean bringing in compliance policies and instruments. Though some nongovernmental organizations are actively engaged in such efforts, their environmental management contribution is still insufficient. The Bank’s strategy proposes to help decentralize environmental management, strengthening municipal governance in that area.

3.25

Gender. In its ongoing dialogue with the authorities the Bank would focus on three main topics to further gender equity: (i) family violence: to build on the significant gains achieved with the citizen security program (1096/OC-UR) the Bank would consider support for systematic collection of data with which to monitor and examine the phenomenon of violence against women, and for avenues to encourage concerted public-private initiatives at the municipal level to prevent and deal with violence; (ii) women’s political participation: female participation is up in the new

- 26 -

administration;34 the Bank might support operations to advance women’s leadership; and (iii) the structural unemployment gender gap: actions targeted specifically to increasing women’s employability are planned.

C.

Implementing the strategy

3.26

Some major strengths should be leveraged to implement the new strategy effectively: a portfolio largely aligned to the new administration’s priorities and concordant with the Bank’s diagnostic assessment; the chance to design a new operations program targeting key concerns in each strategic area, for which the authorities can take a high degree of ownership; and the potential to deploy the Bank’s new products, for which Uruguay is a good candidate.

3.27

Once the central strategy guidelines have been agreed, a number of important considerations must be addressed to put together the lending program, including decisions on the best mix of instruments. First, in conformity with the government’s agenda and five-year budget, the strategy seeks a balance between investment projects that answer Uruguay’s needs now and the sector programs required to back public sector management, competitiveness, and social sector reforms.

3.28

Second, the strategy includes actions to quickly instill conditions for adoption of the Bank’s new investment lending policies and procedures. As well as affording greater flexibility to address country priorities, products such as sector-wide approach (SWAp) lending could better align Bank-financed programs with Uruguay’s fiscal strictures and ease problems such as slow implementation progress. The country’s financing program constraints are a third consideration.

These needs also should inform the program and financing-product selection exercise, to keep net lending flows neutral over the life of the strategy. Here it will be critical to strengthen operations development and execution capacity while assuring that budget funding is in place to implement the operations when and as planned.

3.29

A final feature of the country strategy’s implementation would be greater selectivity in programming new Bank operations in Uruguay, with careful regard to the country’s situation today and to past lessons. This would be achieved by concentrating Bank interventions in some key operations within the three major strategy focus areas. There are, admittedly, limits to this sharper targeting approach, given the Bank’s role as Uruguay’s leading external finance provider and the multiple concurrent demands, and it will only be achieved gradually, depending on the pace of portfolio execution and greater diversification of financing sources. For the latter purpose, in operating its strategy the Bank will endeavor to deepen lending institution-donor cooperation by seeking out complementarities, creating

34

The speaker of the House of Representatives and three cabinet ministers are women.

- 27 -

spaces for heightened engagement of these parties, and preventing duplication of efforts.

3.30

The following paragraphs discuss the main referents for the country strategy’s implementation.

1. Portfolio execution

3.31

One concern in implementing the new strategy will be to expedite active Bankfinanced projects in Uruguay in a bid to return to pre-crisis loan execution levels.

For the most part these operations fit the new strategy priorities and those of the new administration. In early November 2005 the Bank’s Uruguay portfolio consisted of 16 loans funding 16 projects and programs, with a total of US$1,189.8 million in financing, US$672.8 million of it undisbursed.35 At that time six projects (30% of the portfolio) were rated unsatisfactory for implementation progress; at the start of 2000 there had been no problem projects or operations with unsatisfactory implementation progress.

2. Country financing parameters36

3.32

The country financing parameters (CFPs) agreed on with the authorities provide the general framework for Bank lending in Uruguay, regarding: (i) the financing and local currency cost matrix; (ii) financing of recurrent costs, and (iii) taxes and fees.

3. Fiduciary risk status

3.33

Three key studies have been done or are forthcoming to measure fiduciary risk and identify areas in need of strengthening to secure the requisite financial safeguards for application of the Bank’s New Lending Framework programmatic approach for its three forms of lending (investment, policy-based, and emergency loans).

3.34

The Country Financial Accountability Assessment (CFAA) prepared jointly with the World Bank in 2003 indicated that the fiduciary environment in Uruguay did not present major issues and that overall the country presents a low level of fiduciary risk. This is because the public finances are being responsibly and

35

Disbursements in 2000-2004 came to a relatively high US$1,366.5 million, equivalent to 16% of Uruguay’s gross fixed investment over that interval. The disbursements were concentrated in 2002 and 2003. During this worst chapter in the economic and financial crisis and in the ensuing years the emergency sector loan and a number of policy-based loans accounted for 68% of total disbursements. The net lending flow to Uruguay in 2000-2004 was a positive US$950 million.

36

Pursuant to the policy that modified the use of Bank funds for investment lending (document GN-2331-5), cost eligibility as well as the Bank-financed share of a project’s total cost will be adjusted by reference to the country’s economic situation, using country financing parameters (CFPs) agreed upon beforehand with the authorities. The Ministry of Economy and Finance indicated its conformity with the CFPs in a communication dated 1 June 2005.

- 28 -

transparently, albeit bureaucratically, managed, observing the following financial practices: (i) clear division of the roles of the executive and legislative branches in terms of financial administration (IMF fiscal transparency indicators); (ii) mandatory use of a common financial reporting system across the central government; (iii) adoption of the International Accounting Standards for the Public Sector; (iv) internal auditing as an integral part of all reporting systems, verified by “central accountants” based in each ministry; and (v) submittal to Parliament of annual budget accountability and performance reports. Uruguay’s relatively high Transparency International index score attests to its high perceived level of transparency and accountability. Another telling external indicator is the Bank’s experience regarding financial management of projects in Uruguay and on-time delivery of audited financial statements for all Bank-funded operations.

3.35

Two further diagnostic studies slated for 2005 will look at the matter of Uruguay’s fiduciary responsibility. One is a Country Procurement Assessment Report (CPAR) being prepared with the World Bank. The government would receive assistance to implement the CPAR recommendations by way of the PRODEV program. The second study, the Report on Observance of Standards and Codes (ROSC) to be produced by the World Bank, will form part of the midterm review of the International Financial Reporting Standards program (ATN/MT-8476-UR). The ROSC’s central aim is to help the government improve private-sector accounting and audit practices to increase finance and business sector transparency. The prime development objective is to boost Uruguayan competitiveness and further the country’s regional and international integration in order to enhance its investment climate.

4. Support to the private sector

3.36

Private Sector Department (PRI). The Bank’s Private Sector Department will continue exploring opportunities to help carry through infrastructure, local capital market development, and international trade development projects. There are candidate energy and transportation ventures for PRI infrastructure finance, notably proposed pulp mill development projects near Fray Bentos, such as ports, rail access, and cogenerating power plants. The Bank also could share in the funding of other infrastructure initiatives, among them the Montevideo container terminal investment program. To help build local capital markets PRI would continue supporting initiatives that channel local financial resources into private production finance, including asset securitizations and corporate bond placements. On the trade development side PRI will continue to work with Uruguay’s financial and export sectors to explore alternative import and export finance vehicles, providing for instance partial credit guarantees to cover export finance portfolio risks as it did for the current ABN-AMRO operation.

3.37

MIF. To date Uruguay has successfully tapped the MIF’s potential. Going forward, central focuses of MIF support might be: (i) capital and microfinance market

- 29 -

development; (ii) strengthening corporate governance in family businesses; (iii) entrepreneurial development, and (iv) fostering public-private partnerships.

3.38

Inter-American Investment Corporation (IIC). The IIC’s priority clientele will continue to be small and medium-sized enterprises, which it will assist through direct long-term fixed-asset lending and medium-term (two to five years) working capital and export finance. In June 2005 the Corporation approved a US$5 million loan to Uruguay’s national milk producers cooperative (Cooperativa Nacional de Productores de Leche—Conaprole).

5. Lending scenarios for 2005-2009

3.39

Two lending scenarios—a target scenario and an alternative—were devised for the country strategy’s implementation over the scheduled span. Both assume that the government will adhere to the economic program worked out in the 2005-2008 IMF standby arrangement; both would increase in the event of loan approvals to the private sector. The scenarios are concordant with Uruguay’s five-year budget for 2005-2009, which was approved by Parliament in late 2005 and is aligned to the country’s fiscal and debt sustainability goal. Budget lines for new agreed Bank lending operations would be inserted by way of Uruguay’s annual performance reporting laws. Different financing products would be considered to give the government more flexibility to tackle country priorities in a climate of fiscal restraint.

3.40

The target lending scenario of US$1.2 billion in approvals concentrated in the first years of the strategy (see Annex I) assumes continued operation of the base-case macroeconomic program needed for the strategy to work as planned, and advances on key reforms—public sector, competitiveness, and social sectors—to underpin the new lending. On the operations side a concerted effort will be needed to normalize the pace of execution of active Bank projects in Uruguay and develop the programmed new operations. Consideration might be given to ways of restructuring the active portfolio, with the twofold purpose of using the five-year budget appropriations for priority sectors and concerns and making active use of the New Lending Framework, in keeping with the fiscal soundness and debt sustainability improvements being pursued.

3.41

Were there to be slippage in the government’s programmed reform agenda the Bank would adopt an alternative lending scenario with a lower approvals level of around US$900 million over the five years and a slower portfolio execution pace.

3.42

Uruguay’s projected debt repayments to the Bank over this period come to US$1.205 billion. Nearly US$800 million would come due in 2005-2007, reflecting the large repayment for the 2002 social protection and sustainability emergency

- 30 -

program loan.37 These scenarios take account of existing commitments regarding multilateral lending flows generally and of the Bank in particular, and disbursements from active loans. The net lending flow between the country and the Bank between 2005 and 2009 would be neutral in the target scenario, negative in the alternative scenario.

6. The Bank’s exposure 3.43

Uruguay’s total outstanding debt to the Bank at the end of November 2005 stood at US$2.229 billion, which was 4.7% of the Bank’s total outstanding loans (up from 4.1% in November 2002) and 39% of Uruguay’s multilateral public debt stock.38 This situation needs to be carefully monitored, especially in light of the concentration of maturities in 2005-2007, but the country is considered capable of servicing its debt under the base case. According to estimates run for the target scenario, Uruguay’s debt to the Bank would hold more or less constant in nominal terms and drop as a percentage of GDP from 13.5% of gross output in 2005 to 10.4% in 2009.

7. Coordination with other multilateral organizations

3.44

The IDB, Uruguay’s leading provider of multilateral finance, coordinates its work closely with the IMF and the World Bank. This interagency interface was particularly intensive during the government changeover. IDB-IMF joint efforts to coordinate relevant data for development of the new standby arrangement’s financing program included discussions on priority reform focuses. With the World Bank, the IDB prepared the Country Financial Accountability Assessment and has started work on an update to the 2000 Country Procurement Assessment Report.

The IDB will be collaborating on the Financial Sector Assessment Program (FSAP) study headed by the IMF and World Bank. It has participated in preparatory work for development of the World Bank’s strategy with Uruguay (Country Assistance Strategy – CAS), including workshops, information sharing, and relevant studies. Most IDB-World Bank coordination over the span of the new IDB country strategy will center on the 2005-2010 CAS lending program. The program’s base case calls for US$800 million in financing, US$600 million of it in the first three years of the CAS. The proposed mix of investment project and development policy loans complements the IDB lending program. The World Bank’s plan to increase its participation in multilateral financing to Uruguay is significant because in the immediate post-crisis period that organization, unlike the IDB, approved no new investment projects for Uruguay.

37

The Government of Uruguay prepaid the remaining installments and interest on this emergency loan on 25 February 2005.

38

As of 30 September 2005.

- 31 -

3.45

The World Bank investment loans, which complement IDB investment lending, include support for energy and road transportation infrastructure and integrated natural resources management, to help boost investment in agriculture, and a second stage of the OSE modernization and systems rehabilitation project (APL-II).

World Bank lending focuses for quality-of-life improvements take in potentially complementary spheres such as possible social insurance reforms and education system equity improvements, and areas in which the Bank is not planning to engage (health insurance reforms). In the field of innovation, science and technology, the World Bank proposes to help Uruguay with national innovation system enhancements; the IDB would coordinate activities planned in the innovation component of the competitiveness sector program. As for development policy lending, the World Bank intends to support reforms in key public administration areas, the financial sector, and social sectors such as health and social security.

3.46

The IDB also is coordinating efforts with the Andean Development Corporation (CAF) and other donors including the Spanish cooperation agency and European Union (see Annex V). The CAF plans to support infrastructure ventures such as electric interconnection with Brazil and other neighboring countries and a second stage of the road “mega-concession” to rehabilitate Uruguay’s main arterial roads.

8. Monitoring the strategy

3.47

The Bank will monitor the country strategy in close concert with the Uruguayan authorities—particularly the Ministry of Economy and Finance, Office of Planning and Budget, and Central Bank—and with project executing agencies. A set of benchmarks worked out with the authorities to track the strategy’s operation reference country targets in each Bank action area (see Appendix A). With these indicators as guideposts the Bank and the authorities can gauge progress in priority areas of the country strategy that tie in to the government’s agenda.

3.48

To track the strategy’s operation the Bank will examine progress being made toward the established monitoring indicators by way of: (i) periodic portfolio reviews; (ii) programming and portfolio review missions; (iii) sector missions and special workshops; (iv) project administration missions, and (v) periodic reviews of the country dialogue agenda.

9. Strategy implementation risks39

3.49

39

The base-case macroeconomic scenario for the 2005-2009 country strategy’s operation assumes that the Uruguayan economy will lock in sustained growth with price and financial stability. This would entail the continued pursuit of prudent macroeconomic policies aimed at producing a substantial enough primary surplus

IDB. Paper by M. Santo (2005), “Uruguay. Riesgos en la implementación de la estrategia del BID con Uruguay [Uruguay: Implementation risks of the IDB country strategy with Uruguay].”

- 32 -

to make the public debt sustainable, along with structural reforms to boost the economy’s competitiveness and productivity in the medium and long term. There are, however, some external and domestic contingencies that could affect the base case.

3.50

External risks. One of the most important external risks in a regional environment that could well be less benign than in 2004 is the impact of rising international interest rates, oil price jumps, and the drop in agricultural commodity prices. U.S. short-term interest rate hikes deal Uruguay a double blow: interest payments on the variable-interest portion of the debt go up40 and it becomes more difficult and more expensive to go into the global capital markets when investors are shying away from emerging markets generally—all of which would complicate Uruguay’s public debt management.

3.51

Oil price surges in 2004 and 2005 and the prospect that the price of petroleum may stay high or trend up in the next few years41 pose another base-case risk. Other contingencies would be a drop in farm commodity prices and a reappearance of foot and mouth disease (FMD), which could hurt Uruguayan meat producers’ access to FMD-free with vaccination markets.

3.52

One last potential risk for the base case would be an external regional shock of the kind that buffeted the Uruguayan economy in 2002. Though Uruguay still is vulnerable to shocks emanating from within the region, particularly spillovers from Brazil and Argentina, it has been striving to diversify its major export markets to reduce the economy’s vulnerability. The Bank’s proposed country strategy would support actions in fiscal, financial, and other critical areas and offer a mix of products to give the authorities greater flexibility to manage any sudden change in conditions.

3.53

Domestic risks. As experience in other countries that have had to manage a recovery from severe financial crisis can attest, it will be vital in Uruguay for there to be sustained political support over time for the main economic policy thrusts, particularly the target of primary surpluses of 3.6% to 4% of GDP over the fiveyear span. This would become especially important were external conditions to deteriorate enough to prompt even tighter fiscal restraint in order to keep the debt sustainable. Other potential risk drivers are nominal wage increase pressures in collective bargaining or pressures in Parliament to raise the general expenditure budget over the current executive branch proposal. Electric energy and

40

According to Central Bank estimates, every 100 basis point rise in LIBOR pushes up the debt cost by around US$34 million annualized, equivalent to 0.2% of GDP.

41

By way of example, Uruguay’s gains from higher meat export prices in 2004 (owing to its U.S. market entry) largely countered that year’s oil price increase. In 2005 the price of oil climbed again, this time with nothing to offset it. If crude oil price averages hold above US$50 a barrel for the remainder of 2005 and thereafter, the higher oil bill would mean an additional cost to Uruguay of close to 1% of GDP annually.

- 33 -

transportation bottlenecks for export goods (forest products) that might diminish output growth capacity are another contingency. Longer-range concerns might be a materialization of some contingent liabilities, associated mostly with problems left over from the 2002 banking crisis, and continuing structural problems in the social security system.42 3.54

The government’s program addresses these contingencies and sets out mitigating measures. The Bank’s country strategy is aligned to those actions and proposes to assist in some of the areas mentioned.

D.

Country dialogue agenda

3.55

The new administration achieved two agenda milestones during its first year in office: (i) negotiations with multilateral financial institutions to work out a standby arrangement with the IMF and preliminary lending programs for the period with the IDB and World Bank, in order to firm up resources to fund the administration’s economic program; and (ii) elaboration and approval of the five-year budget.

3.56

One priority topic for the dialogue agenda with the government is the importance of continued Bank support in areas where changes are needed to be able to exert greater influence on growth and social cohesion in the country. Another is the need for investment climate improvements, including public sector reforms, by way of micro interventions that can strengthen Uruguay’s competitiveness profile.

3.57

Given the magnitude of undisbursed loan funds for active Bank projects in Uruguay, a further key dialogue item is the need to ensure budget allotments for those operations, accenting the fact that competitiveness and social welfare improvements were two of the selection criteria for these unfinished projects.

Measures identified by the Bank and the authorities to improve portfolio execution are being implemented.

3.58

Another item to examine with the authorities is the merit of continuing implementation of a nonfinancial products program (see Annex VI) to enrich the policy dialogue and develop a common diagnostic assessment with the country regarding the state of selected sectors.

3.59

Lastly, the country dialogue should address the need to implement the CFAA and CPAR recommendations, which would enable the Bank’s New Lending Framework policies and products to be deployed and harmonize work with other organizations, thereby lowering transaction costs.

42

The bulk of the country’s contingent liabilities have to do with the publicly owned banks (BROU and BHU). Were these liabilities to materialize the cost would run about US$1 billion, equivalent to roughly 6% of GDP (US$354 million in BROU trust fund guarantees, US$508 million in guarantees of BHU debts to BROU, and US$128 million for costs of the arbitral award in favor of former Banco Comercial shareholders).

Appendix A Page 1 of 2

COUNTRY STRATEGY MONITORING INDICATORS 1. Improve public management and sustain fiscal soundness Country target: Reduce the public debt stock from 92% of GDP in 2004 to 59% in 2009.

Objectives The central government is allocating and managing expenditure efficiently.

Strategy implementation indicators *

Goal-based expenditure analysis system developed and implemented in 2008.

*

Revised government procurement rules and procedures implemented in 2008 to expedite government purchasing and contracting.

Central government human resources management is governed by a cross-cutting, coherent policy set featuring consistent employment, promotion, and remuneration structure standards and procedures.

*

Integrated Compensation and Employment System is being implemented in central government agencies in 2008.

The tax system is more equitable and efficient and tax administration more effective.

*

Progress has been made on consolidating modernization of the Tax Directorate, evidenced by the institution of a professional career stream.

*

VAT evasion rate has been brought below 36%.

*

Public Debt Management Office created and operating in 2006.

The public debt is being efficiently managed to help lower debt costs and keep the debt sustainable.

2. Strengthen Uruguay’s competitiveness and international positioning Country target: Raise the investment ratio from 14% of GDP in 2004 to 18% in 2009 and R&D investment from 0.37% to 1% of GDP in that interval.

Objectives High levels of productive investment achieved as Uruguayan business and industry become more specialized and operate to high quality standards.

Science, technology and innovation capacity strengthened.

Strategic sectors are more competitive.

Quality of pro-productivity public services and infrastructure has improved.

Financial sector is more resilient, financial intermediation has improved.

Strategy implementation indicators *

Competitiveness sector program completed in 2009.

*

Proposals on institutional infrastructure for trade development and investment promotion presented in 2007.

*

Institutional framework for innovation restructured in 2007.

*

Institutional infrastructure for agricultural health quality and controls restructured in 2007.

*

Progress made on public-private partnering in two transportation projects.

*

Port of Montevideo cargo handling capacity increases to 597,000 TEU1 in 2010 (up from 428,000 TEU in 2005).

*

Bank regulation and supervision mechanisms strengthened in 2006.

Appendix A Page 2 of 2

3. Reduce poverty and increase social inclusion Country target: Lower the poverty rate from 31% in 2003/2004 to 20% by 2009.

Objectives

New institutional apparatus for social policy coordination, monitoring and evaluation devised and instituted.

Indigent persons receive effective emergency assistance.

Secondary school retention and enrollment ratios increase.

Sanitation service coverage and quality improves.

(1) Twenty Foot Equivalent Unit

Strategy implementation indicators

*

Centralized benefit recipient registry created and operating in 2007.

*

105,000 children of poor families added to family assistance system roll in 2004-2007 (cumulative) (following entry into force of Law 17.758).

*

Net enrollment ratio in 12-14 age group rises to 85% in 2008 (baseline: 72% en 2004).

*

Construction has begun by 2009 on a final disposal system that will see wastewater discharges into Montevideo Bay cease.

ANNEX I Page 1 of 4

OPERATIONS PROGRAM 2005-2009 (US$ millions)

Lending program 2005-2006 Competitiveness and international positioning UR-0141 UR-1007 UR-L1020 UR-L1018 UR-L1015 UR-L1010 UR-L1012

Productivity and development of new livestock products1 Sector program to boost competitiveness5 Productive system support program Competitiveness of tourist destinations Strengthening of foreign trade negotiating capacity Support for microfinance for productive development Carrasco International Airport

UR-L1008 UR-L1021 UR-L1026 UR-L1027 UR-L1028

Public Debt Management Office3 Modernization of the tax administration and improvement in public spending efficiency4 Support for civil service reform7 Support for the Office of Planning and Budget7 Support for tax management7

UR-L1003 UR-L1005

Social sector program2, 5 Sanitation in Montevideo, stage IV

PRI

15.8 100.0 9.0 5.0 5.0 20.0 51.2

Public management and fiscal sustainability

2.5 50.0 1.0 2.0 5.0

Poverty and social inclusion

250.0 80.0 596.5

Total 2005-2006

Other projects identified 2007-2009 Competitiveness and international positioning UR-L1004 UR-L1013 UR-L1016 UR-L1022 UR-L1025 UR-L1029 -UR-L1014 --

Program to modernize the port of Montevideo Financial sector reforms5 Agricultural health Montevideo ring road Public transport in Montevideo Road maintenance6 Electric power Celulosas de M’Bopicuå (ENCE) Montevideo container terminal

UR-L1021 --

Modernization of the tax administration and improvement in public spending efficiency4 Program to improve social security

Public management and fiscal sustainability

Poverty and social inclusion UR-L1009 UR-L1017 UR-L1019 --

Notes:

Slum and shantytown improvement Environmental sanitation in Ciudad de la Costa Solid waste management in Montevideo Support for modernization of the education system6

(1) Approved 20 July 2005 (2) Approved 3 August 2005 (3) Approved 17 November 2005 (4) Three-year programmatic loan (5) Sector loan (6) Possible SWAp operation (7) This operation will support meeting the targets set in the policy commitments matrix of programmatic loan UR-L1021.

PRI PRI

Annex I Page 2 of 4

LINKAGE BETWEEN THE 2005-2006 OPERATIONS PROGRAM AND THE BANK’S SECTOR STRATEGIES Project

Amount (US$ millions) 15.8

UR-0141

Productivity and development of new livestock products

UR-L1007

Sector program to boost competitiveness

UR-L1020

Productive system support program

9.0

UR-L1018

Competitiveness of tourist destinations

5.0

UR-L1015

Strengthening of foreign trade negotiating capacity

5.0

100.0

Project objectives The general objective of the project is to boost the competitiveness of the Uruguayan livestock sector on sustainable bases, focusing on the weakest links in the beef and lamb agroindustrial chain when measured against international comparator standards. The project will tap the experience introduced in the pilot livestock development project (UR-0137), expanding the universe of producers assisted.

The project objective is to boost the competitiveness of Uruguay’s private sector through institutional and/or legislative reforms to improve the business climate and entrepreneurial development in exports, investments, innovation, and quality.

The project objective is to boost the competitiveness of Uruguay’s productive sectors, particularly those located in productive centers known as clusters.

The project objective is to help boost the competitiveness of the tourism sector through actions involving institutional strengthening and improvements in the legal and fiscal framework with a direct impact on tourism; improvements in the organization of the sector; and investments in small tourism infrastructure in strategic tourist zones.

The general objective of the project is to help boost the competitiveness of tradable goods and services and facilitate the country’s trade. The specific objective is to modernize and build up the capacity of the Ministry of Industry and Trade and the Ministry of Foreign Affairs and other public and private agencies with responsibilities in the sector to: (i) formulate and apply trade policy, including international negotiations; (ii) promote the attraction of flows of private and foreign investment; and (iii) develop and apply trade promotion policies, programs, and strategies.

Linkage to the Bank’s sector strategies Competitiveness strategy (Development and assimilation of new technologies). The program will contribute to the competitiveness of the national livestock sector, with stress on innovation by small and medium-sized producers/finishers and the linkage and commercial impact of the chain. The program forms part of the country’s overall economic and social development strategy intended to reactivate the economy through improvements in the competitiveness of the livestock sector.

Competitiveness strategy. The project will contribute to the competitiveness of Uruguay’s private sector.

Competitiveness strategy. The project will contribute to the competitiveness of Uruguay’s productive sector.

Competitiveness strategy (Competitiveness and sustainable management of natural capital). The project will contribute to the competitiveness of the tourism sector, preserving natural capital and avoiding overexploitation and increased pollution.

Regional integration strategy (Expansion of markets—strengthening of institutions that promote integration agreements). The program will contribute to establishing the necessary rules and institutions for viable and economically-advantageous trade agreements.

ANNEX I Page 3 of 4

Project for

Amount (US$ millions) 20.0

UR-L1010

Support for microfinance productive development

UR-L1008

Public Debt Management Office

UR-L1021

Modernization of the tax administration and improvement in public spending efficiency

UR-L1026

Support for civil service reform

1.0

UR-L1027

Support for the Office of Planning and Budget

2.0

UR-L1028

Support for tax management

5.0

UR-L1003

Social sector program

UR-L1005

Sanitation in Montevideo, stage IV

2.5

50.0

250.0

80.0

Project objectives This project will design and implement a strategy to address the problems of different target groups of microentrepreneurs and microenterprises whose access to financial services needs to be facilitated, expanded, and/or made more efficient.

The project seeks to improve domestic and foreign public debt management, by integrating decision-making units into a single government agency.

This project seeks to strengthen and improve management by the central administration and the efficiency of public spending, including stronger budget institutions and better human resource management. The program also seeks to support the modernization and strengthening of the tax administration to implement the government’s proposed tax reform.

Linkage to the Bank’s sector strategies Competitiveness strategy (Financial and capital resources). The project will focus on support for an increase in the financial resources available for productive activities.

Strategy for modernization of the State (Modernization of public management). An improvement in public debt management is a key for reducing the country’s vulnerability, particularly with respect to fiscal and debt sustainability.

Strategy for modernization of the State (Modernization of public management). The program will improve the efficiency of public management in the design and execution of policies to address the needs of excluded sectors, while supporting the consolidation of fiscal sustainability.

These three operations support meeting the targets set in the policy commitments matrix of programmatic loan UR-L1021.

The objective of the program is to support the development of a social policy to reduce poverty and social exclusion, improve human capital, and strengthen sector institutions to make social policy more effective.

The program is intended to rehabilitate the environmental quality of Montevideo bay through the construction of trunk sewers, pumping stations, and sanitary sewage outfalls.

Social development strategy. To support social reforms for poverty reduction and human capital development.

Social development strategy (Environment and social development). The program will link the areas of social development and environmental management, giving priority to environmental activities that will improve social conditions.

Annex I Page 4 of 4

OPERATIONS PROGRAM 2005-2006 (US$ thousands)

Technical cooperation program Competitiveness and international positioning UR-T1006 UR-T1008 -

Strengthening negotiating capacity

1

115.5

Enhanced competitiveness of tourist destinations in Uruguay

6

150.0

Environmental certification of forest projects

150.0

Public management and fiscal sustainability 2

UR-T1003

Strengthening the DGI’s capacity for e-government Poverty and social inclusion

UR-T1007

Information and sensitization regarding the status of Afro-Uruguayans Volunteerism and social capital

145.0

Support for municipal environmental governance

400.0

UR-T1002 -

300.0 3

55.0

Total 2005-2006

1,315.50

MIF program Competitiveness and international positioning 4

UR-M1004

Microlending by local credit unions

UR-M1005

Expansion of microcredit outside the capital of Uruguay

UR-M1007

200.0 140.0

5

Strengthening the culinary herb production and marketing chain

7

100.0 7

UR-M1008

Improvement in the competitiveness of microenterprises operated by rural women

100.0

UR-M1006

Consolidation of actions for corporate social responsibility in Uruguay

100.0

8

UR-M1009

Development of the Salto tourism cluster

UR-M1010

Program to support young entrepreneurs in the creation of microenterprises

UR-M1011

100.0

Improvement in the territorial competitiveness of the department of PaysandĂş

100.0 8

8

80.0

UR-M1012

Profitable partnerships and environmental management for MSMEs

75.0

UR-M1013

Pilot project on distance training for the agricultural sector

100.0

-

Improvement in the competitiveness of cooperatives

(A/D)

-

Promotion of corporate social responsibility

85.0

-

Linkage and competitiveness of dryland farming in Uruguay

60.0

-

Hydroponics project

80.0 Total 2005-2006

Notes: (1) Approved 6 January 2005 (2) Approved 30 June 2005 (3) Approved 22 February 2005 (4) Approved 31 May 2005 (5) Approved 4 August 2005 (6) Approved 5 October 2005 (7) Approved 19 August 2005 (8) Approved 10 November 2005

1,320.00

Annex II Page 1 of 1

Millennium Development Goals Goal 1

2

3

4

5

6

7

8

1990

1995

2000

2003/4

Target

Eradicate extreme poverty and hunger Poverty: Percentage of people living belong the indigence line, urban (INE) Official poverty: Percentage of people living below the poverty line, urban (INE) Children under five moderately or severely underweight, percentage (MSP*)

3.0 29.7 4.6

1.6 17.4 4.1

1.55 17.8 4.9

4.0 32.1 –

1.5 n/s 2.3

Achieve universal primary education Education: Rate for the cohort that completed primary school, both sexes (UNESCO) Education: Net enrolment rate, both sexes (UNESCO)

– 91.9

– –

97.0 90.4

– –

100 100

– 1.01

107.5 –

105.14 –

– 1.01

100 1

Reduce child mortality Mortality rate in children under five per 1,000 live births (UNICEF*) Mortality rate in children under one per 1,000 live births (UNICEF*) Vaccination against measles in children under one, percentage (UNICEF*)

24 20 97

23 20 90

17 15 89

14 12 95

8 n/s n/s

Improve maternal health Maternal mortality rate per 100,000 live births (WHO, UNICEF, UNFPA) Births attended by health care providers, percentage (WDI)

856 –

506 –

277 99.64

– –

21 n/s

54 5 – – – 28

– – 76 68 123 1322

35 3 80 83 200 106

33 3 80 82 235 –

1.3 –

1.4 232

1.7 107

– –

n/s n/s

111 441

– –

63 433

5 385

5 22

24.9 134.3 –

24.6 207.5 21.9

34.2 437.64 1104

33.0 4725

Promote gender equality Ratio between boys and girls in primary and secondary school, percentages (WDI) Equality indexes between women and men as a percentage of literacy rates, population 15-24 years of age (UNESCO)

Combat HIV/AIDS, malaria and other diseases Tuberculosis rate per 100,000 people (WHO) Tuberculosis mortality rate per 100,000 people (WHO) Cases of tuberculosis detected under DOTS, percentage (WHO) Cases of tuberculosis cured under DOTS, percentage (WHO) HIV number of new cases per year (MSP) HIV number of deaths per year (MSP) Ensure environmental sustainability CO2 emissions, metric tonnes per capita (CDIAC) Ozone layer deterioration caused by CFC consumption, metric tonnes ODP (UNEP – Ozone Secretariat) Potable water, percentage of population without access; urban (INE) Sanitation, percentage of population without access; urban (INE) Develop a global partnership for development Unemployment rate among youths between 15 and 24 (WDI) Fixed and mobile telephone lines per 1,000 inhabitants (WDI) Personal computers per 1,000 inhabitants (WDI)

Source: World Bank based on United Nations statistics (Statistics Division) and official data.

Notes: 1. 1991 2. 1996 3. 1998 4. 2001 5. 2002 6. Data from the demographic statistics register: good records of mortality but with unreliable reporting of causes of death.

7. Data from the demographic statistics register: good records of mortality with good reporting of causes of death. ns Not specified * Estimates

1.

2.

3.

4.

5.

6.

7.

8.

Goal

Target

Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for development

Goal 2015= reduce poverty and malnutrition rates by half (1990) Goal 2015 = net enrolment 100% Goal 2015 = education rate 100% Goal 2015 = reduce mortality in children under five by two thirds (1990) Goal 2015 = reduce maternal mortality by three quarters (1990) Goal 2015 = contain the advance and begin to reduce HIV, etc.

Goal 2015 = various Goal 2015 = various

Source: World Development Indicators (WDI), 2004.

Annex III Page 1 of 3

DESCRIPTION OF THE CONSULTATION PROCESS FOR THE BANK’S COUNTRY STRATEGY WITH URUGUAY 1. When the Bank’s country strategy with Uruguay for the period 2005–2009 was being prepared, meetings and workshops were organized for the purpose of consulting and studying issues with government authorities, legislators, the private sector, academics, and civil society organizations. The meetings were an opportunity to gather opinions about the identification and nature of the main challenges, the definition of objectives, areas of action, and the measures and actions that should be adopted in each area. The meetings took place in Montevideo between September 2004 and June 2005.

2. The exchanges began with workshops to discuss the preliminary results of studies commissioned by the Bank. In September 2004, workshops were held to discuss nine sector studies on competitiveness, in which company executives and advisors, and representatives of business organizations and government agencies with links to the sectors under study took part. In December 2004, a workshop was held on progress in the studies on: (i) economic growth; (ii) fiscal and public debt sustainability; and (iii) the social security system, in which professionals from agencies linked to each of these areas, directors, advisors of the government-elect, and other sector experts took part.

3. In January 2005, a high-level policy dialogue meeting was held with authorities designated by the government-elect. The meeting attracted the interest of the government-elect and its main authorities. The president-elect, Dr. Tabaré Vázquez, the vice-president designate, Dr. Rodolfo Nin Novoa, the cabinet of ministers-elect, each accompanied by their vice-ministers and principal advisors, attended. For the Bank, President Enrique Iglesias participated actively in the meeting, which was also attended by the manager and deputy manager of Regional Operations Department 1, Ricardo L. Santiago and Luisa C. Rains; the manager of the Research Department, Guillermo Calvo; staff from different Bank departments from Headquarters as well as the Country Office; and foreign and local consultants who had written background papers for the strategy. The meeting lasted for a day and a half, and the great interest of the national authorities was reflected in the large number of representatives of the government-elect who participated (60 people on average). Based on a policy dialogue paper prepared by the Bank and presentations by Bank staff, opinions were exchanged on the situation and the main challenges in each of the sectors. Advisors and the minister-elect of economic affairs and finance were substantially in agreement with the analysis of the situation and the importance attached in the paper to strengthening the fiscal front, public debt management, and the promotion of competitiveness. Ministers and advisors in the social and economic areas communicated the government-elect’s determination to immediately implement as a priority a national plan to address the social emergency, intended to assist and strengthen the population living in extreme poverty, while not jeopardizing the fiscal objectives. Ministers-elect and advisors from different sectors also expressed a

Annex III Page 2 of 3

marked interest in the areas of government management and rationalization of public sector human resources.

4. In February and March 2005, four sector workshops were held: social protection (14 February), modernization of the State (22–23 February), competitiveness (23-24 February) and trade and positioning in the international economy (14 March).

The workshops dealt with specific proposals by the new government and their content revolved around thematic notes prepared for each of the topics. Ministers and viceministers, advisors, and government officials involved in each of the areas took part, as did Bank staff from the relevant divisions and independent experts. The workshops were a very valuable opportunity for closer identification and analysis of the challenges in each sector and for formulating action guidelines and concrete measures in each of them. The workshop on modernization of the State was attended by advisors and the heads of many ministries and the National Civil Service Bureau. In addition to their general agreement with the analyses included in the studies and thematic notes prepared by the Bank, the participants went into greater depth, making numerous references to situations in which human resources were not rationally allocated, restrictions on the incorporation of trained teams, and regulatory limitations on matching salaries to job profiles and responsibilities.

5. A specific workshop on the situation in the private sector was held on 3-5 May, at which representatives of private business, the government, and the Bank exchanged views on the factors that affect private business activity, its competitiveness, and its investment prospects. Close to 80 productive sector representatives attended the meeting. Representatives of the government and the Bank also participated, including President Enrique Iglesias. The views of workers were also reflected in a presentation by a union delegate.

6. Consultation workshops on the strategy were held with business associations (25 April), legislators (26 April), and civil society and academics (15 June). The representatives were given the policy dialogue paper in advance of the meeting and they contributed to the discussion from their respective viewpoints. Some members of business associations stressed the need for the new government to provide a context of policy certainty and stability, with no ambiguities or contradictions, and asked the Bank to identify concrete projects to be promoted during the term of the government that had just taken office. The legislators were interested in the estimated impact of Bank action on the fiscal results during the new government’s term and they also asked Bank representatives about the performance and financial execution levels of projects currently under way. Representatives of civil society organizations were interested in learning more about the Bank’s possibilities of providing financial and technical support for activities in their fields of interest.

7. Lastly, a meeting was held to exchange information with multilateral and bilateral technical and financial cooperation agencies active in Uruguay (15 June), which detected that more than one international institution would probably cooperate in the same area with the new government’s entities, which would require leadership by the

Annex III Page 3 of 3

authorities to coordinate the specific objectives and modes of intervention by the different agencies during the design of operations.

Annex IV Page 1 of 5

TECHNICAL DOCUMENTS USED AS SUPPORT FOR THE BANK’S COUNTRY STRATEGY WITH URUGUAY I.

Policy dialogue •

II.

III.

Inter-American Development Bank (2005), “Uruguay. Los Grandes Desafíos para el Desarrollo de Mediano y Largo Plazo” [Uruguay. The main challenges for medium- and long-term development]. Analytical summary of the economic and social development challenges facing Uruguay and the best economic policy options for surmounting them. This document was based on technical papers that were specially prepared for the Uruguayan country strategy, which are cited below grouped by thematic area.

Fiscal and public debt sustainability •

Inter-American Development Bank (2004) Artana, D., Bour, J., Catena, M. and Navajas, F., “Sostenibilidad fiscal y de la deuda pública en Uruguay” [Fiscal and public debt sustainability in Uruguay]. Presents a diagnostic assessment of Uruguay’s public finances, analyzes the sources of vulnerability, and examines the fiscal and debt dynamics under different assumptions and possible corrective measures that are compatible with fiscal sustainability.

•

Inter-American Development Bank (2004). Giordano, O., “La reforma a la seguridad social en Uruguay: evaluación y propuestas de política” [Social security reform in Uruguay: Evaluation and policy proposals]. Analyzes the situation in the social security system after the 1996 reforms, its prospects, and a possible agenda for reforms to optimize the system.

Productivity of the economy and investment levels •

Inter-American Development Bank (2004), “Nota temática de competitividad de Uruguay” [Thematic note on Uruguay’s competitiveness]. Analysis of Uruguay’s strengths and weaknesses in terms of international competitiveness, including infrastructure, the science, technology and innovation system, key markets, institutions, and policies, industrial and commercial policies, and cultural and political aspects. Strategic proposals for the medium and long terms.

•

Inter-American Development Bank (2004), “Lineamientos estratégicos para elevar la competitividad del sector agropecuario” [Strategic guidelines to boost agricultural competitiveness]. Proposes strategic guidelines to boost competitiveness in the agricultural sector.

•

Inter-American Development Bank (2004). Bértola, L., Bianchi, C., Darscht, P., Davyt, P., Pittaluga, L., Reig, N., Román, C., Snoeck, M. and Willebald, H., “Ciencia, tecnología e innovación en Uruguay: diagnóstico, prospectivas y

Annex IV Page 2 of 5

políticas” [Science, technology, and innovation in Uruguay: Diagnostic analysis, prospects, and policies], Montevideo, Facultad de Ciencias Sociales, Universidad de la República. Analysis of the demand and supply of scientific and technological knowledge; proposals for increasing supply and effectively matching demand.

•

Inter-American Development Bank (2003). Del Castillo, G., “Promoción de la inversión extranjera directa orientada a la exportación en la República Oriental de Uruguay” [Promotion of foreign direct investment for Uruguay’s exports]. Analysis of the possibilities of reactivating investment and increasing employment through a well-targeted and bold promotion of foreign direct investment, which would have a positive impact on the country’s economic, educational, technological, and scientific capacity.

•

Inter-American Development Bank (2004). Del Castillo, G., “El clima de negocios en la República Oriental del Uruguay” [The business climate in Uruguay]. Analysis of the obstacles to business and the entrepreneurial culture in Uruguay and its impact on the rise of competitive companies.

•

Inter-American Development Bank (2004). Hausmann, R., Rodríguez, A. and Rodrik, D., “Towards a Strategy for Economic Growth in Uruguay.” Analysis of the relationship between market failures and the attitudes of private agents to the adoption of new technologies. Analysis of industrial and development policies to correct externalities.

•

Inter-American Development Bank (2004). Kantis, H., “Empresarialidad y contexto emprendedor en Uruguay” [Entrepreneurship and the entrepreneurial context in Uruguay]. Study of the business culture in Uruguay that reviews the main impacts it has on the creation and development of competitive companies and proposes measures to strengthen it. The report makes reference to best international practices in the field and presents benchmarks for evaluating the business culture in Uruguay, measured through a survey of more than 100 companies and the opinions of key individuals (entrepreneurs, civil servants, and academics).

•

Inter-American Development Bank (2004). Lorenzo, F., Berretta, N., Laens, S., Osimani, R., Paolino, C. and Pessano, O., “Política industrial y de inversión en el Uruguay” [Industrial and investment policy in Uruguay], Montevideo, CINVE. Compilation and analysis of existing incentives for the Uruguayan private sector, taking account of all fiscal and commercial policies, special regimes, and regional promotion policies in effect for the different economic sectors.

•

Inter-American Development Bank (2004). Santo, M., “Uruguay: principales restricciones al crecimiento sostenible” [Uruguay: Main restrictions on

Annex IV Page 3 of 5

sustainable growth]. Analysis of the main restrictions and prospects for maintaining sustainable growth.

•

IV.

Increased openness to foreign trade •

V.

VI.

Inter-American Development Bank (2004). Villamil, R., “Servicios de apoyo para la competitividad en el Uruguay” [Support services for competitiveness in Uruguay]. Study of the system of services to support competitiveness, their main strengths and weaknesses, and possible improvements in the system.

Includes an analysis of public institutions and private actions for certification, standardization, and quality assurance; metrology and technical compliance standards; the animal and plant health system; and business development mechanisms and services.

Inter-American Development Bank (2004), “Nota temática sobre comercio e integración” [Thematic note on trade and integration]. Analysis of the impact of trade liberalization and competitiveness policies; identification of short-term challenges and medium-term priorities for integration and competitiveness.

Strengthening of the State for more efficient and effective management •

Inter-American Development Bank (2004), “Nota temática sobre capacidades estatales para la gobernabilidad en Uruguay: institucionalidad presupuestaria y del servicio civil” [Thematic note on State capacity for governance in Uruguay: Budget and civil service institutionality]. Proposed potential lines of action for more effective and efficient administration by central government agencies.

•

Inter-American Development Bank (2004). Schick, A., “State Modernization in Uruguay.” Evaluation of the status of modernization of the central government administration and proposed lines of action.

Recovery of social welfare in the context of fiscal restrictions •

Inter-American Development Bank (2004). Amarante, V., Arim, R., Rubio, M. and Vigorito, A., “Pobreza, red de protección social y situación de la infancia en Uruguay” [Poverty, social safety net, and the status of children in Uruguay].

Analysis of the characteristics of poor individuals and families in Uruguay and of the existing social safety net and transfer systems and their impact on the well-being of families in the past.

•

Inter-American Development Bank (2004). “Nota técnica de agua potable y saneamiento” [Technical note on water and sanitation]. First survey of the process of preparing the sector strategy in Uruguay’s water and sanitation sector.

Annex IV Page 4 of 5

VII.

•

Inter-American Development Bank (2004). Caraballo, D., De Armas, G., and Glejberman, D., “La ANEP tras un proceso de reforma y dos administraciones (1995-2004)” [The National Public Education Administration after a reform and two administrations (1995-2004)]. Analysis of the education system and educational policy proposals to consolidate progress and to develop new areas.

•

Inter-American Development Bank (2004). Flood, C., Perez, C. and Melgar, A., “Uruguay, análisis del gasto público social” [Uruguay, analysis of public social spending]. Analysis of public social spending and its past impact.

Recommendations for boosting its effectiveness and efficiency.

•

Inter-American Development Bank (2004). Pagés, C., “Diagnóstico del mercado de trabajo en Uruguay” [Diagnostic assessment of the labor market in Uruguay]. Analysis of developments and the status of employment; possible lines of action.

Sector competitiveness studies •

I.

Competitiveness studies in nine subsectors of the Uruguayan economy prepared by researchers from CINVE, Instituto de Economía, and the Economics Department of the Universidad de la República, sponsored by the InterAmerican Development Bank under the technical coordination of ECLAC. Agricultural sector (Center for Economic Research, CINVE)

La competitividad del sector agroindustrial [Competitiveness of the agri-business sector] (Rosa Osimani and Carlos Paolino) 1. Subsector Carne Vacuna [Beef subsector] (Silvia Laens and Carlos Paolino) 2. Subsector Lácteos [Dairy subsector] (Nora Berretta and Carlos Paolino) 3. Subsector Forestal [Forestry subsector] (Rosa Osimani and Carlos Paolino) II.

Manufacturing sector (Department of Economics, School of Social Sciences, Universidad de la República)

La competitividad del sector manufacturero [Competitiveness of the manufacturing sector] (María Inés Terra and Rosario Domingo) 1. Subsector Textil [Textile subsector] (María Inés Terra) 2. Subsector Vestimenta y Diseño [Garment and design subsector] (Héctor Pastori) 3. Subsector Farmacéutico [Pharmaceutical subsector] (Gustavo Bittencourt) Annex: Políticas Públicas en Uruguay [Public policies in Uruguay] (Álvaro Ons)

Annex IV Page 5 of 5

III.

Services sector (Instituto de Economía, Faculty of Economics, Universidad de la República)

La competitividad del sector servicios [Competitiveness of the services sector] (Walter Cancela) 1. Subsector Turismo [Tourism subsector] (Walter Cancela and Gustavo Sención) 2. Subsector de Tecnologías de la Información [Information technologies subsector] (César Failache) 3. Subsector Transporte y Logística [Transportation and logistics subsector] (Luis Porto) VIII. Lessons learned from the Bank’s activities

IX.

•

Inter-American Development Bank (2004). Van Ryckeghem, W., “Lessons Learned From IDB Lending to Uruguay 1993-2003.” Analysis and evaluation of the contributions of the Bank’s programs to the country’s development in the recent past (10 years).

•

Inter-American Development Bank (2004). Oddone, G., “Documento de apoyo para la Preparación de la Estrategia País del Banco con Uruguay” [Background paper for preparation of the Bank’s country strategy with Uruguay]. Analyzes the Bank’s activities in Uruguay since 1991 with a view to identifying problems in implementation and lessons learned, and extracting recommendations.

Implementation of the country strategy with Uruguay •

Inter-American Development Bank (2005). Oddone, G., “Evaluación de la factibilidad de las principales líneas de acción de las políticas públicas en Uruguay (2005-2010)” [Evaluation of the feasibility of the main lines of action of public policies in Uruguay (2005-2010)]. The document identifies and sets priorities for Bank action to support the country’s public policies identified in the document “Uruguay. Los Grandes Desafíos para el Desarrollo de Mediano y Largo Plazo” [Uruguay: Great development challenges in the medium and long term].

•

Inter-American Development Bank (2005). Santo, M., “Riesgos de la implementación de la Estrategia de País del Banco con Uruguay“ [Risks entailed in implementing the Bank’s country strategy with Uruguay]. This study contains an analysis of the main risk factors that could undermine the effectiveness of the Bank’s country strategy with Uruguay for 2005-2009.

Annex V Page 1 of 2

CURRENT AND FUTURE AREAS OF ACTION FOR INTERNATIONAL COOPERATION

Public management and fiscal sustainability Donor European Union AECI

Counterpart agency

Contribution (in millions)

Taxation: Modernization of the Directorate General of Taxation (DGI)

MEF-DGI

Є5.5

Taxation: Institute for tax training and studies

MEF-DGI

n.d.

Project description

AECI

Departmental governments: Institutional strengthening of the municipal governments, the mayors association, and subregional associations

AECI

Justice: Strengthening of the rule of law (justice and police)

European Union UNDP OAS

Mayors association Judicial branch Ministry of the Interior

n.d. n.d.

Legislative branch: Institutional strengthening and reengineering

Legislative branch

n.d.

Legislative branch: Institutional strengthening Legislative branch: Electronic government

Legislative branch Legislative branch

n.d. n.d.

Competitiveness and international positioning Cooperant

Project description

Counterpart agency

Contribution (in millions)

World Bank

Infrastructure: Maintenance of transportation infrastructure and project for access to rural areas

MTOP

US$70

MTOP-UTE

US$70

UDELAR

Є3.0

n.d.

US$35

World Bank European Union World Bank

Infrastructure: Transportation and energy Technology development: Strengthening of the Pando technology park in the chemical and biotechnology areas and information technologies Innovation, science, and technology

UNESCO

Technology development: Support for the technology development program (IDB-MEC)

MEC

n.d.

European Union

Business management: Support for competitiveness and promotion of exports by small and medium-sized companies

MIE

Є5.4

Entrepreneurial fabric: Development of microcredit and technical assistance mechanisms

n.d.

n.d.

Agriculture: Competitiveness of small farmers, natural resources, and biodiversity

MGAP

US$37

IFAD

Agriculture: Competitiveness and integration in family farming

MGAP

n.d.

AECI IICA

Agriculture: Reduction in the vulnerability of exportable products Agriculture: Institutional strengthening for MGAP

INIA MGAP

n.d. n.d.

MERCOSUR Secretariat

n.d.

Ministry of Tourism

n.d.

UTE

US$11

AECI World BankGEF

European Union

Regional integration: Strengthening of MERCOSUR

UNESCO

Tourism: Promotion of domestic tourism

AECI

Wind park – electric power generation facility

Annex V Page 2 of 2 Poverty and social inclusion Cooperant

Project description

Counterpart agency

Contribution (in millions)

World Bank

Social development policy loan: Health, education, and social protection

MEF

US$75.4

UNDP World Bank UNESCO

Training and technical assistance for the Ministry of Social Development Education: Expansion of full-time schools Education: Institutional strengthening

MIDES ANEP ANEP

n.d.

US$25 n.d.

UDELAR

n.d.

ANEP

Є10,6

n.d.

n.d.

MVOTMA

Є2.5

n.d.

MIDES IMM

n.d. n.d. n.d.

n.d.

n.d.

MSP/ASSE MSP/ASSE MSP/ASSE n.d.

US$20 n.d. n.d. n.d.

OSE

US$30

UDELAR, MIE, MGAP

n.d.

AECI

Human capital: Development of information technologies and communications – virtual campus

European Union

Human capital: Strengthening of arts, crafts, and trades in Montevideo and Artigas

UNESCO

Human capital: Training for rural and suburban youths

European Union

Employment: Integration of women and youths into the labor market in rural zones in northern Uruguay

UNDP AECI AECI UNICEF

Nutrition: Family gardens Gender: Institutional strengthening for the Women’s Institute Gender: Second plan for women’s equality Children: Children’s rights observatory and strengthening of public agencies and civil society organizations

World Bank PAHO JICA AECI

Health: National health insurance system Health: Support for dental health programs Health: Mother and child health programs Health/human capital: Nursing school

World Bank

Water and sanitation: Modernization of the OSE, potable water supply, and expansion of sanitation

AECI

Environment: Development of clean development mechanisms

JICA

Water quality management in the metropolitan area

MVOTMA

n.d.

AECI

Environment: Strengthening of the system of protected areas

MVOTMADINAMA

n.d.

Environment: Management of cross-border aquifers Environment: Management of water resources in the River Plate basin Environmental management of coastal zones and soil erosion prevention

n.d.

MVOTMA MVOTMA

n.d. n.d. n.d.

MIDES

n.d.

UNESCO UNESCO UNESCO FAO

Nutrition: Income and food security

Abbreviations: AECI Agencia Española de Cooperación Internacional [Spanish International Cooperation Agency] ANEP Administración Nacional de Educación Pública [National Public Education Administration] ASSE Administración de Servicios de Salud del Estado [Public Health Services Administration] DGI Dirección General Impositiva [Directorate General of Taxation] DINAMA Dirección Nacional de Medio Environment [National Environment Directorate] IFAD International Fund for Agricultural Development IICA Inter-American Institute for Cooperation on Agriculture IMM Intendencia Municipal de Montevideo [Montevideo Municipal Government] INIA Instituto Nacional de Investigación Agropecuaria [National Agricultural Research Institute] JICA Japan International Cooperation Agency MEC Ministry of Education and Culture MEF Ministry of Economic Affairs and Finance MGAP Ministry of Livestock, Agriculture, and Fisheries MIDES Ministry of Social Development MIE Ministry of Industry and Energy MSP Ministry of Public Health MTOP Ministry of Transport and Public Works MVOTMA Ministry of Housing, Land Management, and the Environment PAHO Pan American Health Organization OAS Organization of American States OSE Obras Sanitarias del Estado [State-owned Sanitary Works Utility] UTE Administración Nacional de Usinas y Transmisiones Eléctricas [National Power Plant and Transmission Administration] UDELAR Universidad de la República [University of Uruguay]

Annex VI Page 1 of 1

NONFINANCIAL PRODUCTS

Macroeconomy

Update of the study on fiscal and debt sustainability

Private sector

Private sector development strategy

PRODEV

Action plan and implementation

CPAR

Report evaluating procurement in the country

Social security

Evaluation of the results of the social security reform

Education sector

Comprehensive study for modernization of the education sector (linked to a possible SWAp project)

Agricultural sector

Workshop on agricultural policies

Housing sector

Workshop on housing strategy

Integration infrastructure

Hydrological study of the Santa LucĂ­a river Study on variants for the layout of Route 11

Annex VII Page 1 of 3

MANAGEMENT’S ACTIONS IN RESPONSE TO THE RECOMMENDATIONS MADE BY OVE IN ITS COUNTRY PROGRAM EVALUATION: URUGUAY 1991-2004 Recommendations

Management’s actions

Recommendation 1. The analysis of the country’s external debt position indicates that today the Bank is a factor in its macroeconomic stability and fiscal sustainability. Keeping this in mind, the Bank should establish a schedule for flows in the coming years that helps to resolve the country’s critical financial situation and is attuned to the macroeconomic balances and the need for long-term fiscal savings.

Agreed. The process of implementing the strategy considers two lending scenarios, a target scenario and an alternative, which assume compliance with the government’s economic program defined in the context of the Stand-By Arrangement with the IMF, and which are compatible with the five-year budget for 2005-2009—aligned with the objective of fiscal and debt sustainability (paragraphs 3.39 and 3.40). In addition, the target scenario, which demands a major effort to regularize the pace of execution of projects in the portfolio and the formulation of new operations, will allow a neutral flow of loans to be maintained between the country and the Bank during the period. In estimates associated with the target scenario, Uruguay’s debt with the Bank would remain fairly constant in nominal terms and would be reduced as a percentage of GDP from 13.5% in 2005 to 10.4% in 2009 (paragraph 3.40). Also, one of the priority areas of Bank action is to support better public management and the consolidation of fiscal sustainability, which includes support for the government in the formulation and execution of a medium-term borrowing plan intended to improve the debt profile (paragraph 3.7).

Agreed. The new country strategy with Uruguay is intended to contribute to sustained growth that will reverse the deterioration in social indicators triggered by the recession that began in 1999 and the 2002 crisis and lay the groundwork for a lasting improvement in the standard of living (paragraph 3.1). The strategy is attuned to national priorities. It is intended to contribute to the government’s efforts to revisit the agenda for reforms in priority areas and support the government’s development programs and policies for the period (paragraph 3.4). (a) Agreed. In this context, the Bank’s action focuses on three strategic areas to achieve the proposed objective. The area of boosting competitiveness and better positioning in the global economy to achieve sustained growth gives priority to support for the country’s efforts to boost its competitiveness and private investment, based on export-oriented production that draws on its comparative advantages and the inclusion of modern technology to improve its international position (paragraph 3.10). However, we do not believe that efforts

Recommendation 2. This evaluation notes that performance was generally better in those areas where the Bank found a niche with strategic long-term relevance, where it could concentrate its operations over time. Continuing in this direction, the Bank should establish a future program that is geared to the objectives of the national development agenda—in some cases for more than one administration’s term of office—focusing its efforts on the areas where it can have the greatest impact, particularly: (a) promoting economic growth as the main variable around which the recovery program revolves, by providing more support for improvement in the investment climate and revisiting actions to improve the efficiency of the economic services provided by public companies, among other measures; and (b) adapting the structure of the social welfare system to the new long-term challenges related to poverty and a more unequal social structure, and improving the system’s quality.

Annex VII Page 2 of 3

Recommendations

Management’s actions

Recommendation 3. The processes of formulating country strategies and technical-cooperation programs have resulted in a buildup of know-how and capacity, although at discrete points in time. To continue these efforts, the Bank’s programming should be backed up by a program of studies and ongoing institutional development. In particular, support should be provided for the government to identify the best opportunities for: (i) strengthening of growth or redefining the social security model; (ii) developing management by results in the public administration; and (iii) performing cost-benefit analyses of interventions during the design stage to determine, in particular, the returns from investment, sector, or emergency loans compared to the cost of the debt.

should be restricted to services provided by public companies, since economic services are also provided by other entities, such as the municipal governments. (b) Agreed. The strategy proposes to support the government’s social policy, with the objectives of providing assistance for people living in poverty, helping to improve human capital, and building up social sector institutions (paragraph 3.19) to address the medium- and long-term consequences of the emergency and the challenges that were affecting the social sectors even before 2002 (paragraph 3.21).

Agreed. The strategy is the result of a process of work and dialogue that began in 2004 with a major analytical effort to identify the challenges facing the country in the medium term to achieve sustained growth (Annex IV), which resulted in the preparation of different studies and thematic notes whose main conclusions were consolidated in the policy dialogue paper. After the policy dialogue meeting in January 2005, the discussion with the government-elect deepened and continued in the form of workshops on the strategic areas identified as priorities for Bank action (paragraph 3.2). (i) Agreed. Continuing those efforts, a permanent dialogue will be held with the country (paragraph 3.56) and a program of nonfinancial products described in Annex VI will be implemented. (ii) Agreed. Progress is being made in implementing PRODEV to help Uruguay build up its capacity for financial administration, management by results, and compliance with the requisites for gaining access to the Bank’s new flexible financial instruments (paragraph 3.9). The strategy proposes to support the country in implementing the CFAA recommendations prepared in 2003, through PRODEV. (iii) Agreed. Each specific project has a quantifiable process to evaluate costs (including opportunity costs) and benefits. With regard to sector policy programs that involve structural changes, the available evaluation techniques are applied to the extent possible.

Annex VII Page 3 of 3

Recommendations

Management’s actions

Recommendation 4. Analysis of the outcomes framework and conditionality matrices of the sector programs indicates that the latter frequently served as reference points and incentives for coordination of the different stakeholders involved. In the current context of fiscal constraints, the Bank should support the establishment of a programmatic results framework that would permit: (a) the establishment of financing relations with the ministries responsible for execution, based on periodic accountability and results-based performance, from a position of partnership with the finance authorities; and (b) maintenance of flexible financing relations with the Bank that are compatible with periods when there is a need for liquidity, associating disbursements with progress in national programs rather than specific projects, and that are a more effective way of addressing emergency situations that might arise.

Agreed. The strategy proposes to support the country in its objective of improving the quality, efficiency, and effectiveness of public management, to which end it is necessary to address key issues to strengthen it from the standpoint of the provision of quality public services: cost management, revenue management, and human resource management (paragraph 1.8). (a) Agreed.

The strategy proposes to link financing to results, specifically, a programmatic operation to strengthen and improve central government management and public spending efficiency so that the new roles of the State can be efficiently administered and the burden of bureaucratic and regulatory costs on the private sector can be reduced (paragraph 3.70). (b) Agreed. The strategy proposes the adoption of instruments such as SWAp loans, which would allow greater flexibility for attending to the country’s priorities, while helping to better align the Bank’s programs with the fiscal restrictions reflected in the five-year budget and mitigate problems such as delays in execution (paragraph 3.28).

Agreed. The strategy considers the following key elements for implementation: (a) consistent with the government’s program and the five-year budget, to strike a balance between investment projects related to the country’s present needs and the necessary sector programs (paragraph 3.27); (b) to quickly bring about conditions for the adoption of the new policies and procedures for investment loans (paragraph 3.28); and (c) to ensure that budget resources are available for normal execution of operations and build capacity to formulate and execute them (paragraph 3.28). Alternatives for restructuring the portfolio could also be considered, so as to use the funds allocated in the five-year budget for priority sectors and areas and actively utilize the new lending framework consistent with the consolidation of fiscal and debt sustainability (paragraph 3.40).

Recommendation 5. The analysis of the program points to the country’s existing capacity for efficient and flexible portfolio design and administration, based on a programmatic approach. Keeping this in mind, the financing modalities used in future should make the most of the possibilities provided by the New Lending Framework, such as: (i) discretion to use national capacity in designing programs and local administrative systems; (ii) combination of sector, investment, and technical-cooperation programs for a single purpose; (iii) disbursement against results rather than for payment of inputs or compliance with procedures; (iv) a single program approach for the existing and future portfolios, including the possibility of restructuring; and (v) local currency financing.

Annex VIII Page 1 of 16

COUNTRY STRATEGY MATRIX

Government strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

I. Public management and fiscal sustainability I.1. Fiscal and debt sustainability Solidify the public finances while honoring the country’s considerable debt-service obligations and meeting urgent social needs, especially of the extremely poor and indigent. Preserve a stable fiscal, macroeconomic, and financial environment and thereby lay foundations for increased investment and sustained growth.

IMF. The new 36-month standby arrangement will help achieve fiscal soundness by way of mounting primarysurplus targets (3.5% of GDP in 2005, 3.7% in 2006, 4% in 2007 and thereafter) and help the government manage heavy debt maturities coming due in the next three years.

The Bank’s strategy aim in this area is to see the State modernization process completed and further advances achieved, building on past years’ gains.

Design and implement a comprehensive strategy to keep the public debt sustainable.

IMF. Technical assistance to devise a public debt management strategy.

Assist the government in creating a public debt management office in the Ministry of Economy and Finance (MEF) with the aim of improving the debt profile and reducing the relative weight of the debt.

Issues note on governance.

Workshop: Central government reform (February 2005).

Tax administration modernization and improvements in public expenditure efficiency (UR-L1012; programmatic PBL).

Program for tax administration modernization and improvements in public expenditure efficiency completed by December 2009.

Primary surplus rises from 3.5% of GDP in 2005 to 4% in 2007 and holds at that level.

Public debt is reduced from 92% of GDP in 2004 to around 59% of GDP by end-2009.

Uruguay’s sovereign debt rating is upgraded.

Public Debt Management Public Debt Management Office (UR-L1008).

Office created within the MEF and operating in 2006.

Debt management strategy devised is implemented in the MEF, in coordination with the Central Bank.

Annex VIII Page 2 of 16

COUNTRY STRATEGY MATRIX

Government strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

I. Public management and fiscal sustainability Improve and modernize tax administration.

IMF. Support for tax reform preparation.

Modernization of tax administration and improvements in public expenditure efficiency (UR-L1012; programmatic PBL).

Modernization of tax administration. Provide support to remedy institutional shortcomings and current problems in the system, improving its efficiency and efficacy.

Large Taxpayers Unit created in the Tax Directorate (DGI).

Revenue collection management is more cost-effective.

Average evasion level has been reduced.

Improve efficiency of public expenditure allocation and public sector management.

World Bank. One piece of the Country Assistance Strategy (CAS) is financial and technical support for debt sustainability and fiscal management (tax policy and administration, public expenditure management, institutional reforms).

Modernization of public sector management.

Strengthen and improve central government management, by way of civil service reform, to create a higher-skilled, motivated civil service equipped to efficiently administer the State’s new roles and reduce bureaucratic and regulatory burden costs on private enterprise.

World Bank. Policy development loan: Institutional reform.

.

Agencia Española de Cooperación Internacional. Tax administration.

Support for public administration modernization (1337/OC-UR, 17%).

Two technical cooperation operations: reducing State costs on private activity, and governance in AR-CHBR-UR.

By 2008 at least 60% of central government spending is being managed for results.

Pro-investment tax reform, including a system with fewer taxes and a broader tax base, implemented in 2007.

Tax administration and revenue collection agencies’ compliance activities improved by 2007.

Institutional capacity of Oficina Nacional del Servicio Civil [National Civil Service Office] strengthened.

Annex VIII Page 3 of 16

COUNTRY STRATEGY MATRIX

Government strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

I. Public management and fiscal sustainability Modernize the budget process in line with international best practices to ensure sound resource allocation and expenditure controls in the medium term.

Improve municipal administration and reduce municipal government deficits.

IMF. TC to review the budget institution apparatus.

World Bank. Report on Compliance with Standards and Codes (ROSC).

Support to strengthen budget institutions so they can become a strategic tool for effective resource allocation in a medium- and long-range planning context.

Modernization of tax administration and public expenditure efficiency improvements (UR-L1012; programmatic PBL).

Municipality of Montevideo modernization program (1425/OC-UR, 87%).

Municipal development and management (outside Montevideo) (1489/OC-UR, 97%).

Improve judicial branch administrative and operational capacity.

Judicial system modernization (1277/OC-UR, 69%).

There is a closer tie-in between the budget management system and expected outcomes of use of public monies.

Five-year budget modernized, including revenue forecasts and deficit targets consistent with the IMF standby arrangement.

By 2008, 13 of the 18 departments outside Montevideo incur deficits of less than 5% of total annual expenditure and have fewer than 15 employees per 1,000 population or allocate less than 50% of revenues to remuneration.

Primary surplus rises from 3.5% of GDP in 2005 to 4% in 2007 and holds at that level.

Average central adminis- Judicial institutions trative processing times continue to have high in the justice system are credibility.

30% shorter in 2008 than in 2000.

Average processing time, court congestion rate, and age of court files included in the pilot experiment are halved (2008 vs. 2000).

Annex VIII Page 4 of 16

COUNTRY STRATEGY MATRIX

Government strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

I. Public management and fiscal sustainability I.2. Social security Extend the social security system to take in the specialized pension plans (bank, military, and police employees) and improve the personal pension savings accounts (“capitalization”) pillar.

World Bank. Support to extend the public pension system, and Social Security Fund (BPS) reform (DPL).

Support administrative efficiency improvements aimed at broadening effective coverage.

Social security system improvement program.

Average processing time Police and bank for services to employee pension plans contributors and benefit are revamped by 2008. recipients is shortened.

Social security system Benefit recipients’ and coverage is expanded and contributors’ perception BPS management of BPS service improves. improves.

PRODEV program

PRODEV action plan implemented.

Support BPS management capacity strengthening.

I.3. Institutional and fiduciary capacity Increase transparency, efficiency, and efficacy of public sector institutions.

World Bank. Studies.

With the IDB, Country Financial Accountability Assessment (CFAA) report preparation.

Support government Studies: CFAA implementation of CFAA CPAR recommendations regarding budgeting and controls.

With the IDB, Country Procurement Assessment Report (CPAR) preparation.

Support national financial management and procurement capacity building.

CFAA recommendations are substantially implemented by 2009.

CPAR recommendations are substantially implemented by 2009.

Funds are being appropriated within the Single Treasury Account and government financial reports show contingent liabilities.

Annex VIII Page 5 of 16

COUNTRY STRATEGY MATRIX

The government’s strategy

Other organizations’ strategies and actions

IDB actions

IDB strategy: Priority focuses

In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

II. Competitiveness and international positioning II.1. Business climate Enhance the business climate for private enterprise.

World Bank. Business climate enhancement in a stable macroeconomic setting.

Study: Business climate. Action plan to improve 100% of action plan activities implemented the business climate is Study: Foreign direct by 2009. validated in a investment. public/private process.

Workshop: Challenges Private sector and opportunities for the development strategy. private sector (May Sector program to 2005).

Support moves to reduce improve competitiveness barriers to business (UR-L1007). startups and operations, streamline regulations, and spur investment.

Help devise a coherent set of measures and standards to promote a private-enterprisefriendly business climate, World Bank. Investment enhancing private sector climate assessment. competitiveness.

Ongoing dialogue with the private sector is institutionalized by 2008.

Total factor productivity rate rises.

Gross investment ratio climbs from 14% of GDP in 2004 to 18% in 2009.

II.2. Micro interventions Put through microeconomic reforms to create an incentives scheme that will spur private investment.

World Bank.

Strengthening of innovation, science and technology.

Support moves to improve competitiveness, looking to exportoriented production that capitalizes on comparative advantages and incorporates advanced technologies to secure a firmer global market foothold for Uruguay.

Actions will target dynamic industry clusters.

Issues note on competitiveness.

Productive system support program (UR-L1020).

Workshop: Competitiveness Private sector challenges for Uruguay: development strategy.

Productive development policies and institutionality (February 2005).

Sector studies: agroindustry, manufacturing, services.

Member businesses of at least 50% of the clusters surveyed across the country pursue joint initiatives to improve competitiveness.

Total factor productivity rate rises.

Gross investment ratio climbs from 14% of GDP in 2004 to 18% in 2009.

Annex VIII Page 6 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

New institutional framework for innovation is modified in 2007.

R&D investment as a percentage of GDP increases, approaching the Latin American average.

II. Competitiveness and international positioning Improve in-country science, technology, and innovation capacity.

Support a national innovation strategy.

Proposed actions would help in design and implementation of a national innovation strategy.

Secure high levels of productive investment as Uruguayan business and industry become more specialized and operate to high standards of quality.

Increase competitiveness of strategic economic sectors, such as agriculture and tourism.

Review and adjustment of investment promotion policies.

World Bank. Integrated natural resources management; diversification of the supply of highest-value-added agricultural products.

Support improvements in agriculture sector competitiveness through a sector policy review of specific trading arrangements; promote technology innovation and product quality improvements.

Support State strategic planning and development functions to improve tourism industry competitiveness.

Technology development program (1293/OC-UR, 76%) Sector study: Science, technology, and innovation in Uruguay.

Sector program to Competitiveness sector improve competitiveness program conditionality (UR-L1007). fulfilled in due time and form.

Farm modernization and Program to increase development program livestock industry (1063/OC-UR, 14%). competitiveness (UR-0141).

Study: Strategy guidelines to enhance Agricultural health agriculture sector program (UR-L1016). competitiveness.

Tourism destination competitiveness (UR-L1018).

TC. Support for the tourism strategic plan.

At least 2,000 stock farmers have adopted production innovations by end-2010.

Institutional and policy framework to develop Uruguayan production has been rationalized and is contributing to more efficient public expenditure allocation by 2009.

The country has been certified foot and mouth disease free without vaccination.

Agricultural output, value added, and exports have increased.

Annex VIII Page 7 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

II. Competitiveness and international positioning Agricultural services program (1131/OC-UR, 32 %).

New institutional apparatus for agricultural health quality and controls operational by 2008.

Core functions are centralized in a modern, efficient agency as the agricultural health technical and administrative authority to Physical volume (MT) of improve government leading farm commodity action in this sphere. exports increases by end2006.

Incidence of brucellosis and bovine tuberculosis declines.

OIE certifies Uruguay free of swine brucellosis and classic swine flu.

TC. Environmental certification of forest products.

II.3. International positioning Promote policies on specialization and productive complementarity in the regional integration framework.

World Bank. Support for export development and market diversification.

Furthering Uruguay’s Issues note on trade and integration. international positioning. Review and improve export development mechanisms. Reduce foreign trade costs.

Sector program to Proposal for an improve competitiveness institutional apparatus for (UR-L1007). export development presented and approved.

Private sector development strategy.

MERCOSUR is fully operational in regard to access to member state markets, improvement of dispute resolution mechanisms, and opening to the rest of the world.

Annex VIII Page 8 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB actions

IDB strategy: Priority focuses

In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

II. Competitiveness and international positioning Support actions to improve technical capacity and the use of resources allotted for international trade negotiations in various fora, strengthening negotiating teams and the interagency structure of their government and private-sector participants, and give them the necessary negotiating tools.

Strengthening of foreign Negotiating teams and trade negotiating institutional capacity (UR-L1015). infrastructure of public and private participants are strengthened.

Out-of-region exports are up.

SWAp - Road maintenance.

Transportation costs are lower relative to the regional average.

Revamped institutional infrastructure for export development is operational.

II.4. Competitiveness infrastructure Improve public utility and infrastructure quality.

World Bank.

Strengthening of the infrastructure sector, especially energy and transportation.

CAF. Support for infrastructure projects, especially integration ventures.

Improve infrastructure for competitiveness: road transport, to enhance competitiveness and further regional integration; ports, to improve efficiency of the port of Montevideo; electric sector, so it will not become a future growth bottleneck.

Reduce transportation costs.

Road infrastructure program (1582/OC-UR, 100%).

Issues note on competitiveness.

Road system management indicators improve on two fronts:

Modernization of the port of Montevideo – State of repair: 48% of The country has adapted (UR-L1004). the road system is in to new international cargo good or very good traffic demands.

Montevideo beltway. condition in 2008, up from 39% in 2003.

Support for long-range energy strategy – Comfort level: 75% of development. the road system provides Investment loan for the a good or very good level of comfort in 2008, up electric sector. from 60% in 2003.

Support for regional Shipping channels are physical integration deepened to ventures under the accommodate largerIIRSA. draft vessels.

Annex VIII Page 9 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

IDB actions

IDB strategy:

Other organizations’ strategies and actions

Priority focuses

In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

II. Competitiveness and international positioning II.5. Financial sector and capital market development Continue pursuing financial sector reforms to make the financial system more resilient and improve financial intermediation.

World Bank. As part of the CAS, financial support to build financial system resiliency (continuation of the process of restructuring publicly owned banks, capital market, regulatory strengthening).

Study: Financial Sector Assessment (FSAP) in 2005.

Strengthen the financial system, increase intermediation levels, improve regulation and supervision, and institute reforms to improve financial sector efficiency.

Multisector global credit Private sector program (1407/OC-UR, development strategy.

38%).

Financial sector reform (UR-L1016).

Sector program to strengthen the banking system (1496/OC-UR, 60%).

Issues note on competitiveness.

M3 continues expanding Medium- and long-term at least in line with GDP saving and finance growth. increase.

Significant improvements achieved in bank capital strength, profitability, and efficiency indicators.

Stability and reliability of the country’s banking system is solidified.

Financial regulation and supervision has been Prudential regulations in bolstered to perform force are in line with oversight and compliance functions efficiently and international best effectively. practices recommendations.

A supervision and periodic inspection system in line with international best practices recommendations has been instituted.

Annex VIII Page 10 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

II. Competitiveness and international positioning Continue with reforms of World Bank. Support the public banks to for BHU reform. improve financial intermediation and minimize potential fiscal costs.

BHU operating costs decrease.

BROU operations are rationalized.

Continue with the (World Bank-backed) conversion of the housing bank BHU to a mortgage company.

Continue restructuring Banco de la República Oriental del Uruguay (BROU), strengthening loan approval procedures, modernizing operations to lower costs, and bolstering internal control and risk management systems.

Foster local capital market development, especially for pesodenominated products.

Public Debt Management Public Debt Management Local capital market Office (UR-L1008).

Office has been created. developed.

Debt management strategy has been implemented.

Annex VIII Page 11 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB actions

IDB strategy: Priority focuses

In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

II. Competitiveness and international positioning Increase the Central Bank’s operational independence and capacity to implement active monetary policy.

Support efforts to make the Central Bank more operationally independent by revamping its charter.

Consolidate financial supervision.

Support integration and consolidation of financial supervision and financial safety net implementation.

Strengthen the financial safety net.

Broaden the reach of financial services.

Support microfinance.

Financial sector reform (UR-L1016).

Microfinance study.

Microfinance strategy design (UR-P1034).

Proposal for Central Bank charter amendments completed.

Microfinance support for Microfinance strategy productive development implemented.

(UR-L1010).

Proposed amendments to Central Bank charter tabled in Parliament.

Social assistance recipients receive support to join the productive workforce.

Annex VIII Page 12 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB actions

IDB strategy: Priority focuses

In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

Indigent population as a percentage of the total drops from 4% in 2004 to 1.97%–3.3% range by 2008.

Unemployment rate falls below 10% by 2007.

III. Poverty reduction and social inclusion III.1. Poverty reduction Operate a “National Social Emergency Plan” (PANES) program with a finite duration and specific goals: assure a basic food basket for people who today cannot afford it; provide a comprehensive basic health care system for currently unserved groups; deliver effective emergency assistance to indigent persons (approximately 110,000); contain and reduce poverty in the most vulnerable population segments.

World Bank. Financial support for PANESrelated health and education programs.

Support the PANES emergency program.

Assist in funding and design work for World Bank. Public PANES’s effective social expenditure review implementation, with the goal of reducing extreme (PER). poverty and improving human capital.

Help extend the family allowance system (SAF) to take in more extremely poor and indigent people.

Study: Poverty, social safety net, and situation of children.

Workshop: Social sectors.

Program to assist at-risk children, adolescents, and families (1434/OC-UR, 86%).

Urban poverty rate declines from 31% in 2003/04 to 20% by 2009.

Average lowest-decile Child mortality rate (per household income rises 1,000 live births) falls 12%–20% by 2008 (base from 15% in 2004 to year 2005).

12%–14% range in 2008.

Net enrollment ratio for children age 4-5 in lowest-decile households increases from 77.8% in 2004 to 80%–88% range in 2008.

Net enrollment ratio for 14-17 age group in lowest-decile households rises from 68% in 2004 to 70%–75% range in 2008.

At least 105,000 children in poor households are added to the family allowance system (SAF) roll by June 2006, pursuant to Law 17.758.

Annex VIII Page 13 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

III. Poverty reduction and social inclusion Program for integration of unregulated settlements (1186/OC-UR, 66%).

Devise a new institutional infrastructure for social policy coordination, monitoring, and evaluation, creating and building capacity in the Ministry of Social Development (MIDES).

Help improve the social sector institutional base and social program coordination.

Neighborhood improvement (UR-L1009).

Over 10,000 families are benefiting under at least 100 low-income neighborhood improvement and social services projects (2008).

Social sector program (UR-L1003).

Centralized PANES Benefit Recipient Registry created and complete by December 2006.

New institutional apparatus created for social policy coordination, monitoring, and evaluation.

New Household Income and Expenditure Survey and Expanded Household Survey conducted by December 2006.

Program overlaps eliminated, more efficient use being made of resources, and more current information on benefit recipients.

Continuous Household Survey extended to take in rural areas; Expanded Household Survey conducted.

Annex VIII Page 14 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB actions

IDB strategy: Priority focuses

In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

III. Poverty reduction and social inclusion UNDP. Technical support to the national statistics bureau (Instituto Nacional de Estadística—INE).

Development and application of an assessment methodology to ascertain costeffectiveness of the main PANES and SAF-Low Income Household income programs.

Social sector program (UR-L1003).

PANES impact assessment system designed and implemented.

New poverty line, rural poverty and extreme poverty rates, and unmet basic needs index calculated by 2008.

Updating and improvement of sociodemographic and economic statistics for social sector intervention design and improvement.

III.2. Education Institute a new legal framework to configure a national education system, pursuing objectives such as more full-day schools, progress toward universal preschool education, and basic cycle access and completion.

World Bank. Support to improve education quality and equity, with continuing assistance for full-day schools in lowincome areas.

Strengthen preschool education to achieve universal coverage of four-year-olds.

Modernization of SWAp: Support for secondary education and education system teacher training modernization.

(1361/OC-UR, 61%).

Study: ANEP after reforms and two administrations (1995-2004).

Expand and strengthen technical education to improve workforce employability.

Provide extra support (outside regular class time) for learning-deficit children.

Bring school leavers back into the system.

Increase secondary and postsecondary technical education offerings.

Improve teacher quality.

By 2008, 60% of Primary and secondary secondary school entrants education quality and complete the full basic equity improve. cycle (baseline 2000: 39%).

Net enrollment ratio for 12-14 age group rises to 85% in 2008 (baseline 2000: 68%).

Secondary and postsecondary technical education enrollments are up.

Annex VIII Page 15 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

(Montevideo sanitation) Confirmation that sewage discharges into Montevideo Bay will cease by December 2011.

Percentage of population with sewer service rises from 55% in 2004 to 75% in 2015, thereby attaining the Millennium Development Goal for sanitation services.

III. Poverty reduction and social inclusion III.3. Living conditions in cities Improve basic utility services and extend their reach, particularly to the most vulnerable groups.

Achieve the United Nations Millennium Goals of universal access to safe water supply and sanitation services.

World Bank.

Modernization and rehabilitation program (OSE and SAL II).

Improve and extend sanitation services in Montevideo and Ciudad de la Costa.

Help remedy sanitation problems in Ciudad de la Costa, including water supply, sanitary sewerage and storm drainage.

Sanitation in Montevideo Fourth stage of and metropolitan areas Montevideo and (948/OC-UR, 15%). metropolitan areas sanitation program (UR-L1005).

Environmental sanitation Program has helped in Ciudad de la Costa increase number of (UR-L1017).

Ciudad de la Costa households connected to the new system.

Expand sanitation services outside the capital.

Initiatives to substantially Integration of improve living conditions unregulated settlements in low-income (1186/OC-UR, 65%). settlements.

Neighborhood improvement program (UR-L1009).

Concrete improvement measures are benefiting at least 30% of households in unregulated settlements

by December 2008, 50% by 2009, and 75% by 2011.

Increase efficiency of Montevideo solid waste integrated solid waste master plan management in Montevideo, supporting environmentally and economically viable solid-waste treatment and disposal solutions.

Montevideo solid waste management (UR-L1019).

The new Montevideo solid waste management plan and system are operating by 2010.

Annex VIII Page 16 of 16

COUNTRY STRATEGY MATRIX The government’s strategy

Other organizations’ strategies and actions

IDB strategy: Priority focuses

IDB actions In progress and completed

Monitoring indicators Proposed

Of IDB strategy implementation

Associated country targets

III. Poverty reduction and social inclusion Support urban transit improvements, giving low-income people in particular easier access to health and education services and workplaces.

Develop the regulatory system. Build institutional capacity in the national energy and water regulator (URSEA).

Montevideo public transit.

TC Municipal environmental governance.

URSEA powers strengthened.

URSEA is efficiently performing its regulatory functions.

Annex IX Page 1 of 1

NET FLOW OF RESOURCES 2002-2007 (in US$ millions)

2002

2003

2004

2005

2006 2007 Projections

a. Loan disbursement

559

367

53

242

266

273

Investment loans

149

62

53

57

76

78

70

145

0

185

190

195

340

160

0

0

0

0

73

104

113

220

521

138

0

0

0

100

400

0

485

264

-60

22

-255

135

97

112

105

112

124

112

388

152

-166

-90

-379

23

Sector loans Emergency loans b. Repayments Emergency loans c. Net loan flow (a-b) d. Interest and fees e. Net cash flow (c-d) Note: Does not include PRI loans.