The objective of the Public Sector Development Policy Loan Program for Paraguay is to contribute to the effectiveness and efficiency of the public sector. This is expected to be reached via the following specific objectives: (i) exerting effective state-owned enterprises (SOE) oversight; (ii) improving central administration's internal financial control; and (iii) strengthening the tax system. This Development Policy Loan (DPL) supports the Government reform plans and builds upon the significant achievements in several areas of a previous programmatic DPL in 2009.
Document of The World Bank FOR OFFICIAL USE ONLY Report No. 52959-PY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO THE REPUBLIC OF PARAGUAY FOR A PUBLIC SECTOR DEVELOPMENT POLICY LOAN November 3, 2011 Poverty Reduction and Economic Management Argentina, Paraguay and Uruguay Country Management Unit Latin America and the Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document would be made publicly available in accordance with the Bank’s policy on Access to Information. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 52959-PY
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR A PROPOSED LOAN
IN THE AMOUNT OF US$100 MILLION TO
THE REPUBLIC OF PARAGUAY
FOR A
PUBLIC SECTOR DEVELOPMENT POLICY LOAN
November 3, 2011
Poverty Reduction and Economic Management
Argentina, Paraguay and Uruguay Country Management Unit
Latin America and the Caribbean Region
This document is being made publicly available prior to Board consideration. This does
not imply a presumed outcome. This document may be updated following Board
consideration and the updated document would be made publicly available in accordance
with the Bank’s policy on Access to Information.
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PARAGUAY - GOVERNMENT FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of October 25, 2011)
Guaraní 4,175
US$ 1.00
Weights and Measures
Metric System
ABBREVIATIONS AND ACRONYMS
AGPE Internal Audit Office of the Executive Power (Auditoría General del Poder
Ejecutivo)
ANDE National Electricity Administration (Administración Nacional de Electricidad)
BCP Central Bank of Paraguay (Banco Central de Paraguay)
CCT Conditional Cash Transfer
CEP Council for State-Owned Enterprises (Consejo de Empresas Públicas)
COPACO Paraguayan Communications Company (Compañía Paraguaya de
Comunicaciones)
CPI Consumer Price Index
CPS Country Partnership Strategy
CNEP National Council of State-Owned Enterprises (Consejo Nacional de Empresas
Públicas)
DGEP Directorate of State-Owned Enterprises (Dirección General de Empresas
Públicas)
DPL Development Policy Loan
EC European Commission
ERSSAN Regulatory Entity for Sanitation Services (Ente Regulador de Servicios Sanitarios)
ESSAP Sanitation Services Company of Paraguay (Empresa de Servicios Sanitarios del
Paraguay)
FSAP Financial Sector Assessment Program
FY Fiscal Year
GDP Gross Domestic Product
Gs. Guaraníes (Paraguayan local currency)
IADB Inter-American Development Bank
ICR Implementation Completion Report
IFA Integrated Fiduciary Assessment
IFI International Financial Institution
IMAGRO Agricultural Income Tax (Impuesto a la Renta de Actividades Agropecuarias)
IMF International Monetary Fund
LAFE Financial Administration Law (Ley de Administración Financiera)
LTU Large Taxpayer Unit
MECIP Paraguayan Standard Model of Internal Control (Modelo Estándar de Control
Interno del Paraguay)
OECD Organization for Economic Co-operation and Development
OP/BP Operational Policy/Bank Procedure
PDPL Programmatic Development Policy Loan
iii
PEES Strategic Economic and Social Plan (Plan Estratégico Económico y Social)
PEFA Public Expenditure and Financial Accountability
PETROPAR Paraguayan Oil Company (Petróleos Paraguayos)
PFM Public Financial Management
SBA Stand-By Arrangement
SEAM Secretariat for Environment (Secretaría del Ambiente)
SET Undersecretariat of Taxes (Subsecretaría de Estado de Tributación)
SIAF Integrated Financial Management Information System (Sistema Integrado de
Administración Financiera)
SOEs State-Owned Enterprises
SSEI Under-Secretariat of Economics and Integration (Sub-Secretaria de Economía e
Integración)
UMEP SOE Monitoring Unit (Unidad de Monitoreo de Empresas Públicas)
USAID United States Agency for International Development
VAT Value-Added Tax
WB World Bank
y-o-y Year-on-year
Vice President:
Country Director:
Sector Director
Sector Manager:
Sector Leader:
Task Team Leaders:
Pamela Cox
Penelope Brook
Rodrigo A. Chaves
Arturo Herrera
Zafer Mustafaoglu
Alexandre Arrobbio & Friederike Koehler-Geib
iv
REPUBLIC OF PARAGUAY
PUBLIC SECTOR DEVELOPMENT POLICY LOAN
TABLE OF CONTENTS
LOAN AND PROGRAM SUMMARY ............................................................................................................... V I. INTRODUCTION ............................................................................................................................................. 1 II. COUNTRY CONTEXT ................................................................................................................................... 1
A. POLITICAL CONTEXT ......................................................................................................................... 1 B. ECONOMIC CONTEXT ......................................................................................................................... 1 C. RECENT ECONOMIC DEVELOPMENTS IN PARAGUAY ............................................................... 7 D. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ................................................... 8
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES .................................... 12 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM .................................................................. 13
A. LINK TO CPS ....................................................................................................................................... 13 B. COLLABORATION WITH THE IMF AND OTHER DONORS ........................................................ 14 C. RELATIONSHIP TO OTHER BANK OPERATIONS ........................................................................ 14 D. LESSONS LEARNED .......................................................................................................................... 16 E. ANALYTICAL UNDERPINNINGS ..................................................................................................... 17
V. THE PROPOSED OPERATION ................................................................................................................. 18 A. OPERATION DESCRIPTION .............................................................................................................. 18 B. POLICY AREAS ................................................................................................................................... 20
VI. OPERATION IMPLEMENTATION .......................................................................................................... 35 A. POVERTY AND SOCIAL IMPACTS .................................................................................................. 35 B. ENVIRONMENTAL ASPECTS ........................................................................................................... 36 C. IMPLEMENTATION, MONITORING, AND EVALUATION ........................................................... 37 D. FIDUCIARY ASPECTS ....................................................................................................................... 38 E. DISBURSEMENTS AND AUDITING ................................................................................................. 38 F. RISKS AND RISK MITIGATION ........................................................................................................ 39
ANNEXES
ANNEX 1: LETTER OF DEVELOPMENT POLICY .................................................................................... 41 ANNEX 2: POLICY MATRIX ........................................................................................................................... 52 ANNEX 3: FUND RELATIONS NOTE ............................................................................................................ 54 ANNEX 4: DEBT SUSTAINABILITY ANALYSIS ......................................................................................... 59 ANNEX 5: COUNTRY AT A GLANCE ........................................................................................................... 62
ACKNOWLEDGEMENTS The Public Sector Development Policy Loan (PSDPL) was prepared by a World Bank team led by Alexandre Arrobbio and
Friederike (Fritzi) Koehler-Geib (Task Team Leaders). Jasmin Chakeri took a leading role in the preparation of this operation
in its earlier stages. The team included Rossana Polastri, Raul Junquera, Francis Fragano, Carolina Díaz-Bonilla, Federico
of which FX-denominated 22.2 17.5 15.1 14.6 12.3 10.4 8.8 7.9
* Central government
** excl. Central Bank debt
Actual Projections
4
triggering a 3.8 percent real contraction of the economy in 2009. The agricultural sector was hit
most. Its production fell by an estimated 23.8 percent in real terms, primarily as a result of the
prolonged drought earlier in the year (Figure 2). In terms of aggregate demand, private
investment fell by 13 percent and household consumption by 2.9 percent in 2009. Despite a
significant fall in export revenues, Paraguay’s external position remained stable, based on the
drop of imports, a less than expected drop in remittances, and a relatively stable Guaraní
throughout 2009 (Figure 3). The financial sector also proved relatively resilient, after it had
previously recovered from the 1995-2003 banking crisis. There was no wide-spread credit
crunch, even though credit growth to the private sector ―slowed‖ down significantly to 33
percent in 2009—down from a peak of 75 percent year-on-year (y-o-y) growth in May 2008
during the 2007-2008 credit boom. The share of foreign currency denominated loans remained
more or less stable at a high of 40 percent of the loan portfolio. Yet, foreign currency deposit
growth accelerated sharply from around 10 percent y-o-y in earlier years to a brief peak of 60
percent in July 2009. In addition, the already high share of short-term deposits rose slightly to
70 percent in 2009. Overall, the quality of banks’ loan portfolios remained adequate, and
liquidity and capitalization levels were sufficient.3
Figure 2: Real GDP growth
by economic sector
Figure 3: Real GDP growth
by demand component
Source: Central Bank
9. The Government’s policy response was instrumental in containing the impact of
the crisis, and the macroeconomic framework remained appropriate. The Government’s
Anti-Crisis Plan, which was presented to Congress in January 2009, included measures aimed
at: providing a fiscal stimulus through expanded public spending programs; ensuring sufficient
liquidity in the financial system; ensuring access to financing for the productive sectors; and
accelerating the mobilization of external resources.4
At the same time, the Government has also
remained committed to the prudent macroeconomic policies laid out in the Government’s
Strategic Economic and Social Plan. Concretely, the Government’s Anti-Crisis Plan boosted
public consumption and investment with current expenditure up by 2.8 percent of GDP relative
to 2008 and capital expenditure up by 1.9 percent. The increase in current expenditure included
3 For a more detailed description see World Bank (2010): ―Financial Sector Assessment Program Update—
Paraguay‖, November. 4 See Annex 4.
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
20
08
Q1
20
08
Q2
20
08
Q3
20
08
Q4
20
09
Q1
20
09
Q2
20
09
Q3
20
09
Q4
20
10
Q1
20
10
Q2
20
10
Q3
20
10
Q1
20
11
Q1
Agriculture Cattle, Forest and Fishing
Industry and Mining Gas, electricity, water
Construction Trade and Services
GDP Growth (value added)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2008 Q1
2008 Q2
2008 Q3
2008 Q4
2009 Q1
2009 Q2
2009 Q3
2009 Q4
2010 Q1
2010 Q2
2010 Q3
2010 Q4
2011 Q1
Private consumption Public consumption
Investment Net exports
5
the expansion of the conditional cash transfer program as well as other social programs.
Despite the increase in spending, the fiscal balance closed in surplus due to an increase in tax
revenues. Despite the increase in spending and a fall in economic activity, the fiscal balance
closed in surplus due to an increase in tax revenues, underlining the positive impact of the tax
administration reforms of recent years. Also, the Central Bank drastically reduced its reference
rates in 2009, remaining below 2 percent during the second half of the year. In addition, it
lowered legal reserve requirements to zero percent for local currency deposits of one year or
more, and foreign currency deposits of 541 days or more. Finally, in March 2009, it introduced
an emergency liquidity facility available to all banks.5
Economic Structural Challenges
9. Reducing poverty and inequality remains a top priority and challenge. Moderate
and extreme poverty levels fell significantly during recent years, yet have remained at
comparatively high levels. Total poverty fell from 49.7 percent in 2002 to 34.7 percent in 2010.
The reduction of extreme poverty has been more volatile; it oscillated between 24.4 percent in
2002 to 16.5 percent in 2005. In 2010, extreme poverty rose from 18.8 percent to 19.4 percent
despite the strong economic growth. Extreme poverty remains particularly prevalent in rural
areas with an incidence of 32.4 percent, compared to 10.3 percent in urban areas (Figure 4 & 5).
10. Despite record growth in 2010, extreme poverty increased. This suggests that
extremely poor households did not benefit. In particular, the incidence of rural extreme poverty
remained constant between 2009 and 2010, while urban extreme poverty increased by 1
percentage point. Initial analyses suggest that Paraguayans at the low end of the income
distribution were negatively affected by sticky nominal wages at the same time as international
food prices surged. The positive effects of high growth seem not to have reached them. In
2010, extraordinarily strong meat and soy production were main drivers for growth, products
that small-scale and subsistence farmers do not produce. Inequality increased as well; the Gini
coefficient of income distribution moved up from 0.487 in 2009 to 0.512 in 2010, one of the
highest in Latin America. The wealthiest 10 percent hold 41.1 percent of the nation’s income
while the poorest 10 percent hold merely 1.1.
11. Economic informality is both a challenge and an impediment to sustained growth
in Paraguay. A 2008 IMF study estimated the size of the Paraguayan informal economy at
around 70 percent of formal GDP. It also identified labor rigidities as a significant factor
contributing to this result.6 Sizable informal activities combined with public sector performance
induce high transaction costs, divert the allocation of resources away from key social
investments, and reduce the quality and quantity of basic public services.
5 The Government has been collaborating with the World Bank to identify areas where the crisis management
framework can be further strengthened, in particular with regards to the banking sector and pension supervision. 6 International Monetary Fund WP/08/102: ―Measuring the Informal Economy in Latin America and the
Caribbean‖.
6
Figure 4: Total poverty incidence* Figure 5: Incidence of extreme poverty**
Source: Staff calculations based on household survey data using new methodology.
* Total poverty incidence is defined as the percentage of the population living below the poverty line (urban
poverty line 2010: Gs.376,753 or US$82.05 a month; and metropolitan poverty line for Asunción 2010: Gs.525,960
or US$114.54 a month; versus rural poverty line 2010: Gs.325,707 or US$70.93 a month).
** Extreme poverty incidence is defined as the percentage of the population living below the extreme poverty line
(urban extreme poverty line 2010: Gs.243,662 or US$53.06 a month; and metropolitan extreme poverty line for
Asunción 2010: Gs.317,510 or US$69.14 a month; versus rural extreme poverty line 2010: Gs.225,470 or
US$49.10 a month).
12. Furthermore, sustainable economic growth is impacted by low expenditure
execution. Total expenditure execution in Paraguay is low by international standards. It
amounted to 84.8 percent in 2010, compared to 86.9 percent in 2009 (current expenditure
execution declined by 1 percentage point to 92.5 in 2010 relative to the previous year, and
capital expenditure execution declined by almost 7 percentage points to 64.2 percent). The
deteriorating trend in expenditure execution continued in 2011 with capital expenditure
execution rates amounting to 23.7 percent in July 2011 compared to 27.6 in July 2010.
13. Some contingent fiscal risks remain in SOEs that might bind public resources
when needed. Public enterprises generated operating surpluses of around 1 percent of GDP in
recent years and are projected to do so again in the coming years. Yet, total debt of the four
largest SOEs represents around 6 percent of GDP. In the past, comprehensive financial
information on SOEs was not publicly available, although recent SOEs reforms have allowed
for more transparency and financial monitoring, including the publication of annual audits. This
helped to reveal existing financial challenges. For instance, the 2010 audit of the oil company
PETROPAR (Petróleos Paraguayos) showed that the company had two times more liabilities
than assets, mostly because of payment arrears to foreign suppliers. At the end of 2010, the
company also had Gs.1.7 trillion (1.9 percent of GDP) in debt to foreign suppliers. Under the
current oil price mechanism, domestic prices for fuel do not reflect international oil prices; the
company’s fortunes thus depend to a large extent on the price of the oil products that it imports,
almost exclusively from the Venezuelan Oil Company PDVSA (Petróleos de Venezuela S.A.).
Public Sector Structural Challenges
14. Paraguay’s public sector performance remains a key challenge for equitable
growth and development. Stronger public sector performance could have enhanced further
equitable growth and development through more effective public policies, regulations, and
service delivery. Significant opportunities for improvement remain in areas such as financial
22.5 24.0 23.7
39.7 37.4 35.5 34.4 35.3 33.6 30.2
24.7 24.7
51.6 52.6 52.1
62.7
52.5 48.9
44.2
55.3 51.8
48.8 49.8 48.9
0
10
20
30
40
50
60
70
Urban Rural
7.2 5.9 6.7
13.1 13.4 12.2 10.7
14.9 15.4
10.6 9.3 10.3
32.0 31.4 28.2
39.2
31.2
26.2 24.3
35.9 34.0
30.9 32.4 32.4
0
5
10
15
20
25
30
35
40
45
Urban Rural
7
control; institutional reorganization and development; introducing basics for results-based
management frameworks; and tax administration. At the same time, there is a need to ensure
the sustainability of the public sector reforms that have been initiated. Areas that offer
opportunities of improvement and impact upon public sector performance include:
Public Service and SOEs: Paraguayan SOEs provide essential goods and services,
including oil, water, telecommunications and electricity. Their performance in terms of
service delivery and management could be significantly improved. For example, in 2010,
only 43.5 percent of urban households under the responsibility of the water SOE had
sewage coverage, and electricity production still experiences 32.6 percent production
technical loss.
Internal control: Effectiveness of internal control procedures and practices as well as
limited institutional capacities impacts on accountability and use of public resources for
their intended purpose.
Tax Administration: Tax administration capacities are limited, and this impacts on the
capability to collect taxes and implement existing tax policies, in turn restricting available
resources for public policies and service delivery.
15. These challenges are deeply seated in a number of structural constraints which
render public sector reforms in Paraguay more complex. These constraints include:
Discretionary practices in the public sector. Improving efficiency, effectiveness and
transparency and reducing discretionary practices remain a structural challenge for
Paraguay public sector, which the administration has inherited.
Role of Congress. The Constitution of 1992 and other major organic laws, give the
Legislature a strong role within Paraguay’s division of powers, which include attributes that
are usually associated with the Executive, inter alia, the authority to increase budget
expenditures, approval for externally financed projects, and influence in determining public
sector wages. This situation together with party fragmentation of Congress hinders the
ability of the Executive to undertake reform initiatives.
C. Recent Economic Developments in Paraguay
16. In 2010, the Paraguayan economy rebounded strongly based on an agricultural
export boom that carried over to the rest of the economy. Paraguay’s 15 percent real growth
rate in 2010 marks the country’s highest growth on record and indicated a strong recovery from
the 2009 recession. Real exports grew by 35.3 percent in 2010. Soy and meat were the most
important export goods, accounting for almost 39 percent and 18 percent respectively of the
total, and contributing to export growth with over 30 and 6 percent respectively. Increased
agricultural export revenues translated into additional disposable income, which bolstered
domestic demand. Private consumption contributed 6.8 percent to real growth followed by
investment with a 4.2 percent contribution. In terms of sectors, the agriculture sector
contributed most to overall growth (8 percent), followed by trade and services (5 percent).
Despite strong growth, the construction sector contributed little to overall growth (0.5 percent)
since its share in the economy remains low.
18. With fast economic growth, the Paraguayan economy has shown signs of
overheating. Capacity constraints and a surge in international commodity prices have lead to
significant inflation pressures in Paraguay. Consumer price inflation picked up strongly in the
second half of 2010. At the end of the year, Consumer Price Index (CPI) inflation reached 7.2
8
percent, close to the upper bound of the Central Bank’s target band of 5 percent +/- 2.5
percentage points. As of March 2011 Headline CPI inflation reached 10.3 percent, before
retreating to 8.8 percent in August 2011. In addition, private sector credit has expanded rapidly.
Its growth rate averaged 36 percent y-o-y throughout 2010, based on record low interest rates at
the beginning of the year. The Central Bank responded to elevated inflation and credit growth
by raising interest rates by 850 basis points between May 2010 and mid-September 2011. As a
consequence, credit growth peaked at 44 percent y-o-y in October 2010 and then flattened out,
it remained at elevated levels until February 2011 (40 percent y-o-y). In March 2011 private
credit growth began to fall significantly. As of July 2011, it stood at 23 percent y-o-y. In
addition, the Central Bank also raised reserve requirements and brought them back up to pre-
crisis levels in April 2011—3 and 4 percentage points for domestic and foreign currency
deposits respectively.
19. The country’s current account position weakened based on strong domestic
demand growth, while the overall external position remained relatively unchanged. Paraguay’s current account balance turned into a deficit of 3.2 percent of GDP in 2010. On the
basis of strong domestic demand, imports grew rapidly, so that net exports contributed less to
real growth than domestic demand aggregates. Over a third of imports were capital goods that
potentially facilitate higher growth in the medium term. In addition to rapid import growth,
remittances continued to drop in 2010 explaining the current account deficit. However, on the
basis of strong foreign direct inflows, the Central Bank continued to accumulate international
reserves. International reserves reached US$4.2 billion (or 23 percent of GDP) by the end of
2010 and continued to increase throughout 2011. As of end July 2011, the Guaraní appreciated
by 16.5 percent relative to the US Dollar compared to end-2010. Improved terms of trade,
strong foreign direct investment inflows, and seasonal liquidation of export proceeds are the
main factors behind this rise.
20. Fiscal policy remained expansionary in 2010, yet the fiscal balance remained in
surplus due to strong revenue collection. Total public expenditures remained above pre-crisis
levels relative to GDP in 2010, based on sustained attention to social programs and an effort to
keep up public investment. The continued expansion of conditional cash transfer programs, the
non-contributory pensions, increased health expenditures, and infrastructure spending all
explain, to a large extent, an increase of 8.9 percent of total expenditure in nominal terms that
translated into a 1.8 percentage point decrease relative to GDP. Total expenditure amounted to
17.8 percent of GDP in 2010. Capital expenditure declined by 0.8 percentage points of GDP in
2010 and reached 3.8 percent of GDP. At the same time, booming economic growth led to a
significant increase in tax collection in 2010. Overall, total revenues in 2010 reached 19.2
percent of GDP. As of July 2011, revenues were still growing at an accelerating rate of 19.7
percent (nominal y-o-y).
D. Macroeconomic Outlook and Debt Sustainability
Short and medium-term growth outlook
21. Under the baseline scenario, economic growth is expected to slow down in 2011 but
to remain above long-term trend growth. Based on a return of agricultural growth to more
normal levels and tighter monetary conditions, growth is expected to slow to 5.5 percent in
2011. The soy crop in 2011 is even expected to surpass the record numbers for 2010. This,
together with high international commodity prices, explains the above trend growth. If credit
9
growth remains higher than expected and it is accompanied by higher domestic demand,
growth could be higher still in the short-run. The current, fast expansion of credit also involves
the risk of an abrupt deceleration, which poses a down-side risk to growth in the medium-term.
22. In terms of down side risks, Paraguay is exposed to fluctuations in international
demand and commodity prices through its strong dependence on agricultural exports. To
account for this risk the debt sustainability analysis shows a scenario that is consistent with a
significant slowdown in the global economy. In the medium term, growth is expected to revert
to its trend of around 4 percent.
23. Inflation is expected to remain above the Central Bank’s target range until 2013. CPI inflation is expected to reach over 10 percent y-o-y, well above the Central Bank’s target
band of 5 percent (+/- 2.5pp). This development hinges on the economy’s signs of overheating
(e.g. hitting capacity constraints in the construction sector), and continuously high international
commodity prices. With growth reverting to trend growth and commodity prices moderating,
inflation is expected to return to a level within the target range by 2013. If growth remains
stronger in line with international commodity prices, inflation pressures could remain strong.
24. The current account deficit could worsen further in 2011 and then slowly improve
in the medium term. The current account is projected to worsen as imports recover, to around
-4.0 percent of GDP in 2011. The current account deficit is expected to be financed through
capital inflows as foreign direct investment increases and companies repatriate profits. With
lower economic growth and subsiding commodity prices the current account deficit is expected
to moderate over the medium-term.
25. Driven by a robust economic recovery, the fiscal balance is expected to show a
modest overall surplus in 2011 that will slip into deficit as presidential elections get closer.
For 2011, an overall surplus of 0.3 percent is projected. The budget foresees a continued fiscal
stimulus, with spending projected to be around 19.8 percent of GDP. This includes a continued
effort to maintain higher levels of capital expenditure. On the revenue side, customs and
import-related VAT revenues are expected to recover to pre-crisis levels. Tax revenues have
increased to 13.4 percent of GDP in 2010 from 13.0 percent in 2009. They are expected to
reach 14.1 percent in 2011 and 14.0 percent in 2012 under the baseline scenario. These
increases are expected to be caused by continued improvements in tax administration, tax
policy, increases in the profits of domestic companies and imports. Other revenues, especially
royalties from Yacyreta and Itaipu (which are denominated in US$), are projected to increase in
the medium term, as an agreement with Brazil on the increase in Itaipu royalties becomes
effective. The proposed increase in royalties for energy sold to Brazil was approved by the
Brazilian House of Representatives and still has to be approved by the Brazilian Senate. The
increase would imply US$360 million in royalties instead of US$120 million.
26. Financing needs are expected to be manageable. Gross financing needs are projected
to increase from US$259 million in 2011 to US$349 million in 2013, 1.2 percent of GDP in
both cases. The financing needs stem to a large extent from total amortizations that peak at
US$317 million in 2011 and then subside to US$217 million in 2013 (Table 2). In 2012 and
2013 modest primary deficits of 0.3 and 0.2 percent of GDP respectively, add to the financing
needs. Disbursements of external loans are expected to reach US$283 million in 2012 and
US$233 million in 2013, including new budget support. After abstaining from bond issuance in
2010, the Government is planning to issue domestic bonds in the amount of US$143 million
10
and US$116 million in 2012 and 2013 respectively. If all or part of the budget support
operations are not approved by Congress in the course of 2012 or 2013, the Government has
some room to increase the issuance of domestic bonds and/or use part of the net public sector
deposits with the Central Bank, these amounted to US$1.04 billion as of September 12, 2011.7
In 2010 alone, the Government deposited US$314 million, including US$100 million of the
Inter-American Development Bank (IADB), which have not yet been spent.
Use of public sector deposits at Central Bank -314 100 0 0
Financing gap 0 0 0 0 1/ 2010: IADB (US$100million), Corporacion Andina de Formento (CAF) (US$45.2 million); 2012: PSDPL
(US$100 million); 2013: IADB (US$75 million), the authorities also expressed interest in further World Bank
funding in that year.
Source: Government and staff estimates
Debt sustainability analysis
27. Paraguay’s debt burden and debt servicing indicators are manageable under
reasonable assumptions. Under the baseline scenario, public debt levels will remain
sustainable. Central government debt is projected to decrease from an estimated 16.5 percent of
GDP in 2010 to 12.3 percent in 2011, and to then gradually fall to 10.5 percent by 2014.
Sensitivity analyses suggest that the main vulnerabilities of Paraguay’s fiscal accounts stem
from low growth and a depreciation in the exchange rate, since a large share of public debt is
denominated in foreign currency. If the economy grew on average 1.8 percentage points less
than under the baseline scenario throughout the projection period, debt levels would reach 14.6
percent by 2014.
7 The annual budget law usually authorizes the issuance of domestic bonds up to US$250 or US$300 million.
11
28. An additional scenario indicates that debt levels would remain sustainable under
the assumption of a significant slow-down in global growth and the impact of the foot and
mouth disease in 2012. Recent estimates, including those of market analysts, suggest that
growth in an average Latin American country could potentially drop by 2 percentage points in
the case of the materialization of a drop of 5 percent in growth in China. Such a potential
reduction of growth in China would be one potential realization of the looming risks on global
economic activity. Taking this risk into account, one scenario shows debt development under a
3 percent growth slow-down in Paraguay in 2012. This scenario would be consistent with the
assumed slow-down in growth in China for that year together with a negative impact of foot
and mouth disease. The scenario further assumes a recovery in 2013. Also in this case, debt
levels are expected to remain sustainable reaching 12.5 percent in 2014. Finally, a one-time 30
percent exchange rate depreciation in 2011, would cause the debt-to-GDP ratio to deteriorate
rapidly to 18.3 in 2011, falling to 17.7 in 2012 and remaining volatile thereafter.
29. Contingent liabilities also pose a risk. Total debt of the four largest SOEs represent
around 6 percent of GDP and all SOEs represent 30 percent of total public expenditure. If
Government had to cover debt and/or deficits of these entities, in a negative scenario, a shock
of around 10 percent of GDP could occur. Such a contingent liability shock of 10 percent of
GDP over the baseline would have a significant impact on debt levels, pushing them up to 19.7
percent by the end of the projected period. However, the Government has taken measures to
mitigate this risk employing SOE oversight reform, which is supported by this operation.
30. There are a number of downside risks to the baseline macroeconomic scenario.
While the immediate threat from uncertain weather conditions and the attendant lower
agricultural production in 2011 appear to have passed, Paraguay remains primarily vulnerable
to external factors. The slow recovery in developed economies and the demand impact on
emerging economies pose a risk to Paraguay, particularly through its exposure to Brazil and
Argentina. The main concern in the medium term is the high cost of energy, especially oil, and
the high price of other raw materials. Slower growth in Argentina and Brazil, as well as in
Paraguay’s other main export markets, could negatively impact the pace of economic growth.
In addition, Paraguay’s heavy dependence on agriculture means that its economic prospects are
vulnerable to climatic factors such as droughts, extreme temperature swings and floods. A
potentially abrupt deceleration of the fast expansion of credit is a domestic risk factor.8
31. Notwithstanding certain downside risks to the economic outlook, Paraguay’s
macroeconomic framework is deemed adequate for this proposed loan. In particular, the
low debt-to-GDP ratio and the prudent fiscal policy management throughout the economic
downturn suggest a low level of risk for this operation. Based on very low debt-to-GDP ratio,
Paraguay seems to have the fiscal space to maintain spending even under the assumption of
severe shocks to economic growth. Medium-term borrowing requirements are manageable,
given the Government’s fiscal position and planned levels of multilateral financing. Monetary
and exchange rate policy management is also supportive of macroeconomic and financial
stability. If tail risks to global and domestic growth materialize, the expectation is that the
Government would take appropriate measures and that multilateral financing could provide
additional contingent financing to mitigate such risks.
8 See World Bank (2010): ―Financial Sector Assessment Program Update—Paraguay‖, November for an in depth
analysis of the current credit expansion, involved risks, and policy options to address it.
12
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES
32. The overall objective of the Government Plan, presented in September 2008, was
to achieve more sustainable and equitable growth for Paraguay through six strategic
objectives: (i) fostering growth with a focus on employment generation and improved income
distribution, while preserving a sound macroeconomic framework; (ii) strengthening
Government institutions to improve the rule of law, policy making, and the delivery of services;
(iii) improving the efficiency of public sector social expenditures while focusing on extreme
poverty alleviation; (iv) promoting the diversification of the production structure, through the
optimal use of national energy and human resources while safeguarding the environment; (v)
fostering economic development and ensuring broader citizen participation; and (vi) supporting
decentralized development. These objectives were planned to be achieved through the
implementation of the eight strategic pillars of the Government Plan (Plan Estratégico
Económico y Social - PEES).9
33. As the economic crisis unfolded, the Government adapted its priorities to the
changing circumstances through the 2009 Anti-Crisis Plan. Following the economic
deceleration, which started in Q4 2008, the Government launched its 2009 Anti-Crisis Plan,
aimed at smoothing the impact of the international economic crisis on unemployment and
poverty. Despite the dramatic economic downturn, the Plan ensured that the private sector
continued to have access to credit and that an increasing share of the extreme poor was covered
by the social safety net.10
34. Priorities from the Government Program have now shifted back to longer-term
challenges, including public sector strengthening. Post-crisis priorities are to pursue the
goals of the 2008 Government Plan with three main strategic dimensions: social development
and poverty reduction; economic growth with a focus on competitiveness and private sector
development; and public sector strengthening.
35. Public sector strengthening is now focused on public finance and supports both
consolidation of previous achievements and progress of the reform agenda. On the one
hand, the Government plans to consolidate achievements in: (i) revenue mobilization, through
continued strengthening of the tax administration and efforts to introduce a personal income
tax; (ii) expenditure management, with emphasis on budget execution, internal control and
audit functions, and SOEs oversight; and (iii) strengthening public finance institutional
framework through legal changes and clarification of responsibilities. On the other hand, the
Government is contemplating advancing the reform agenda in fiscal risk management and
public investment. Within public investment, policy actions will be strongly related to the
management of additional public revenues from Itaipu royalties. To this end, the Government
envisages creating a counter-cyclical stabilization fund and a special development fund. The
latter will be exclusively dedicated to investment in highways, health, education, research and
development. In addition, a Public Investment Directorate will be established at the Ministry of
Finance to enhance management and coordination with the Technical Planning Secretariat.11
9 These eight pillars were: (i) stable and consistent macroeconomic policy framework; (ii) strengthened financial
sector; (iii) effective provision of services by state-owned enterprises (SOEs); (iv) modernization of the State;
(v) enhanced productivity and competitiveness; (vi) comprehensive land reform; (vii) employment generation
and poverty alleviation; and (viii) promote infrastructure development. Source: PEES. 10
See Annex 4. 11
Law No. 4.394.
13
Regarding fiscal risk management, the Government will implement a new debt management
strategy; enhance fiscal control of local governments and decentralize public entities; it will
also strengthen supervision and monitoring of cooperatives.
Participatory Process and Consultations
36. The Government’s reform program is an outcome of extensive consultations with
stakeholders. The Government has worked together with civil society and relevant actors in
the policy areas covered by the PSDPL. Prior to assuming office, the Government widely
disseminated its strategy, with particular attention to public sector reform. This strategy was
made accessible on the Ministry of Finance website. At the same time, the Government
developed an inter-ministerial dialogue on these topics. The priorities defined as a result of
these consultations are consistent with current reforms related to SOE oversight, Internal
Control, and Tax System.
37. In addition to these initial consultations, current reforms targeted by this
program benefitted from specific consultations. With regard to SOE oversight, workshops
and conferences were held with members of Congress and the media in order to disseminate
and explain the objectives and scope of the reform. Constant communication and consultation
were also established with representatives from SOEs. In the area of internal control, a
continuous process of consultation and setting-up of committees was developed in parallel to
the design and implementation of the new internal control framework.
38. During PSDPL implementation, the Government also envisages continuing
consultations with the civil society, with a focus on the social monitoring of SOEs service
delivery indicators. The Government, through UMEP, is considering introducing mechanisms
for information exchange with citizens regarding the evolution of performance indicators on
public services provided by the SOEs. These actions could reinforce the monitoring and
oversight of SOEs, and generate a demand-side request for sustaining the reform process.
IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
A. Link to CPS
39. The Public Sector DPL (PSDPL) is supporting the governance and equitable
growth objectives of the 2009-2013 CPS. Two out of the three cross-cutting themes addressed
by the Country Partnership Strategy (CPS) (Report No. 48087, discussed by the Executive
Directors on May 5, 2009 )– governance, poverty reduction, and equitable growth – are
supported by the PSDPL. On the one hand, the PSDPL serves as a central instrument through
which the CPS provides direct support to the governance theme. On the other hand, the PSDPL
contributes to the sustainable growth objectives of the CPS by supporting tax revenue
objectives. There are also strong synergies between this Development Policy Loan (DPL) and
several other Bank operations in Paraguay. Finally, the PSDPL is expected to continue to play a
key role in donor coordination, as evidenced in the cooperation for the preparation of the
previous Public Sector Programmatic DPL.12
12
See IV.3. Collaboration with the IMF and other Donors.
14
Table 3: Link between the PSDPL Components and CPS Outcomes
PSDPL Components Corresponding CPS Outcome
State-Owned Enterprises
Oversight
Finances and operations of SOEs are transparent and subject to greater
scrutiny by Government and civil society.
Central Administration
Public Sector Financial
Control
Increased effectiveness of internal control and internal audit function
(upgrade PEFA indicators for internal control and internal audit, PI-20 & PI-
21).
Tax System Increased tax-to-GDP ratio (Baseline: 11.8% (avg 2004-08) Target: 12.7%
(2013))
B. Collaboration with the IMF and Other Donors
40. Since Paraguay’s successful completion of two consecutive Stand-By
Arrangements (SBA) with the IMF in August 2008, no new IMF program has been
requested. Macroeconomic performance under the SBAs, which supported the previous
Government’s economic reform program, was strong. All outcomes under the second program,
except inflation, exceeded program targets. The SBAs also targeted structural measures in four
areas: (i) public sector reforms;13
(ii) financial sector reforms;14
(iii) pro-growth reforms,
including strengthening the management of SOEs; and (iv) improving the social safety net by
expanding coverage of the conditional cash transfer program. Most of the structural
benchmarks were met, although there were delays in the implementation of results-based
management contracts with some of the SOEs. The IMF maintains an open dialogue with the
authorities, and IMF staff conducted annual Article IV missions in March 2009, April 2010,
and June 2011. The IMF also has a number of technical assistance activities in Paraguay,
including: financial soundness of the cooperatives sector, energy subsidies, banking
supervision, and monetary policy. A joint Financial Sector Assessment Program visited
Paraguay in November 2010. Based on this, a Financial System Stability Assessment15
was
published in July 2011. The Bank and IMF teams consult each other through regular meetings
and bi-annual country-team level consultations.
41. Preparation of the PSDPL provides the opportunity to strengthen donor
coordination on related policy areas. Building on the 2009 Bank First Public Sector
Programmatic DPL (P113457, Loan 7700-PY), which represented a significant proportion of
the multi-donor program supporting the 2009 Anti-Crisis Plan, the PSDPL is fostering
International Finance Corporation (IFI) and multi-donor support to public finance reforms in
Paraguay. On the one hand, the Bank and IADB are leading the work on public finance and
fiscal management through complementary development policy programs with distinct and
complementary policy areas. On the other hand, with regard to the area of Internal Control of
the Central Administration, PSDPL budgetary support and USAID Umbral Technical
Assistance are mutually supportive.
C. Relationship to Other Bank Operations
42. The current operation builds on the previous public sector programmatic
development policy loan series that started in 2009. The programmatic series was prepared
in the context of an in-coming government and an uncertain economic outlook; it was
13
Including financial management, public investment system, tax and customs administration and pension reform. 14
Ensuring an adequate capitalization of private and public banks and the Central Bank, also improving the
regulatory framework for financial institutions. 15
IMF Country Report No 11/189.
15
conceived to support the Government Plan for public sector reforms and the Anti-Crisis Plan
for the most part. This three-loan series supported the Government program and the Anti-Crisis
Plan via four components: internal financial control, oversight of SOEs, efficiency of public
expenditure, and civil service reform. The first operation (First Public Sector Programmatic
DPL (P113457, Loan 7700-PY), was successfully executed during the first semester of 2009.
However, the triggers for the second operation were completed not long after the two-year
period authorized between the board dates of two operations in programmatic series, and hence
the series could not be continued.
43. Despite the termination of the programmatic series, outcome indicators were
achieved faster than expected, and many indicators from the previously planned PDPL2
and PDPL3 were met. Despite the slower reform pace, the Government remained committed
and cooperated with the Bank, which led to achieving indicators before deadline, and the
fulfillment of numerous triggers from PDPL2 and PDPL3.16
44. The Government requested World Bank support for its reform effort representing
a streamlined continuation of the efforts supported by the previous programmatic DPL
series. The government reform program now focuses on the oversight of SOEs, internal
control, and the tax system. The program has adapted to the changing environment, Paraguay
came out of the crisis following a strong recovery in 2010. In addition, it has been adjusted to
focus on the most successful areas of reform. Given both the need for streamlining the reform
program on most successful policy areas and the normative requirements of programmatic
DPLs, particularly in terms of duration limits between each programmatic loan, the
Government has now requested a stand-alone operation, but indicated its commitment to
continue reforms in the medium term (see Annex 1).
45. The PSDPL is also linked to a number of projects in Paraguay through its focus on
governance. The PSDPL addresses governance challenges associated with the management of
SOEs and strengthens the Government’s internal control function. Other projects contribute to
strengthening good governance practices in specific sectors: (i) The Water and Sanitation
Sector Modernization Project (P095235, Loan No. 7710-PY) promotes institutional-based and
social accountability activities, improving corporate governance of the water company ESSAP
(Empresa de Servicios Sanitarios del Paraguay) and consolidating the sector governance and
regulatory framework; (ii) the Energy Sector Strengthening Project (P114971, Loan No. 7994-
PY) enhances overall business related processes at ANDE (Administración Nacional de
Electricidad) and its environmental, social and internal auditing units in particular, with the
goal of increasing transparency of planning, execution, and evaluation processes;17
(iii) the
Road Maintenance Project (P082026, Loan No. 7406-PY) that elevates the profile of activities
towards increased transparency within the Ministry of Public Works and Communication
primarily with the help of an electronic tool to implement and monitor the Improved
Governance Control Framework; and (iv) the Sustainable Agriculture and Rural Development
16
See Implementation Completion Report (Report No: ICR00001966) on the First Public Sector Programmatic
DPL, Annex 7 and 8. 17
The proposed PSDPL is complementary to the Energy Sector project because it supports the adoption of a
management contract with ANDE, and the establishment of a Dashboard Panel electronically connecting the
SOE Monitoring Unit (UMEP) to ANDE, in order to monitor indicators on financial performance, quality of
customer services, corporate resources, technical losses (distribution/transmission), and other performance
indicators agreed under ANDE’s management contract.
16
Project (PRODERS) (P088799, Loan No. 7503-PY) supports agricultural development by
reaffirming leadership and coordination of different public sector agencies in provision of
services to producers and indigenous communities.
46. Complementarities also exist between the PSDPL and programmatic non-lending
technical assistance foreseen in the CPS. The programmatic non-lending technical assistance
for public sector reform is building on the dialogue developed by the PSDPL, with the purpose
of providing advisory services and the transfer of know-how needed by the Government to
achieve its public sector reform goals. The technical assistance program includes a recently
approved Bank-executed Spanish Trust Fund Paraguay Enhancing Public Sector Effectiveness
– SFLAC (P120699), which supports the Government on SOEs reforms.
Table 4: Support from other Donors and IFIs on policy areas covered by the PSDPL
PSDPL Component Development Policy Lending Technical Assistance
State Owned Enterprises Oversight WB WB
Central Adm. Internal Control WB USAID Umbral Program
Tax System WB IMF
D. Lessons Learned
47. Previous development policy operations suggest that adapting to country context
and strong national ownership is critical for smooth implementation. The 2003 Economic
Recovery Adjustment Loan (P086543, Loan No. 7210-PY) provided a quick response to the
Government’s financing needs, while at the same time taking advantage of the momentum for
reform.18
Its successful implementation was due to strong national ownership; consensus
among political actors as well as international financial entities; and balance between political
feasibility and depth of reform. Similarly, in the case of Paraguay’s Programmatic DPL I
approved in 2009, ownership led directly to: the achievement of the PDO; fostered the
country’s dialog on development priorities; and made it possible to adapt to internal and
external changes affecting the program’s implementation. Careful assessment of the program’s
support across a wide range of constituencies, including NGOs, IFIs, and other stakeholders,
conducted during the preparation stage played a critical role in helping to correctly gauge
political risk.
48. Sustained engagement on the part of the Bank is key to supporting reform
processes over the medium and long term. As in most countries, Paraguay’s path toward
reform has been long and uneven. Some pieces of legislation which form the cornerstone of the
reform process were approved a decade ago, including the Financial Administration Law
(1999) and the Tax Reform Act (2004). Likewise, the reforms supported under the 2003
Economic Recovery Adjustment Loan (P086543, Loan No. 7210-PY) and the 2005 Financial
Sector Adjustment Loan (P039994, Loan No. 7187-PY) provided the foundation for the reforms
supported under the Programmatic DPL I. Although momentum for reform subsided during the
late 2000s, the Bank continued its engagement with Paraguay’s Ministry of Finance through
fiduciary assessments and other non-operational tasks. This sustained engagement made it
possible for the Bank to respond quickly and effectively to the new administration’s request for
support of its reform program under programmatic DPL I.
18
The loan covered five policy areas: (i) fiscal stabilization; (ii) tax policy; (iii) public administration and anti-
corruption; (iv) financial sector; and (v) public sector pension fund.
17
49. In the context of Paraguay, continuation of medium-term reforms should focus
primarily on areas where there is consensus and clear leadership for change. With the
support of strong political will, the Ministry of Finance is actively promoting a well-defined set
of reforms that are both technically and politically feasible. Yet, the political support needed to
carry out a broad civil service reform is still lacking.
E. Analytical Underpinnings
50. The proposed PSDPL is based on a series of analytical studies including those
undertaken by the Bank; lessons learned from the previous DPL; and reports prepared
jointly with other donors. The substantial body of analytical work has provided the basis for
an in-depth dialogue with the Government and has supported, jointly with the Government
Plan, the design of the PSDPL. Table 5 shows the links between the policy areas and the
macroeconomic framework included in the PSDPL as well as the main findings and
recommendations of the analytical work.
Table 5: Links between the PSDPL and Prior Analytical Work
PSDPL
Policy Area Analytical Work
Oversight of
State
Owned
Enterprises
OECD Survey on Corporate Governance of SOEs in Member States (2005)
The survey showed that the general trend for organization of the ownership function was to move
from the decentralized model – still valid in Paraguay– where ministries supervise SOEs related to
their respective sectors, to the centralized model whereby a single entity acts as the SOE
shareholder on behalf of the State. In all OECD countries, SOEs are audited annually by an
international private audit firm and their financial statements are public. Finally, SOEs are usually
public corporations and the regulatory framework is controlled by independent agencies.
Bank Report on the Observance of Standards and Codes (ROSC) for Accounting and
Auditing (2006)
Auditing standards for SOEs are extremely limited; most notably annual audits in accordance
with international standards are not mandatory;
Audited financial statements of SOEs are not required to be published.
Understanding Sector Performance: The Case of Utilities in LAC (2009)
The LAC survey showed that the strength of SOE’s corporate governance in Paraguay was low in
comparative terms, although it was increasing in terms of legal soundness and transparency. In
addition, Paraguay scored highest in the Region in performance orientation, and CEP was singled
out as one of the few initial examples of centralized responsibilities in the SOEs oversight in LAC.
Implementation Completion Report: First Public Sector Programmatic DPL (2011)
The ICR shows that the Government has succeeded in creating since 2008 an institutional
framework to oversee the performance and financial soundness of SOEs, by: introducing results-
based management contracts for the major SOEs; enhancing rationality in budget allocations for
SOEs; improving transparency regarding their financial management; and initiating actions to
correct the debt balance in favor of SOEs. The government has also submitted a draft Law to
Congress in order to consolidate this institutional framework.
Central
Admin.
Internal
Control
Integrated Fiduciary Assessment (IFA, 2008) & Non-Lending Technical Assistance IFA
Action Plan Follow-up (2008), jointly prepared by the Bank, IADB and the European
Commission (EC)
Control effectiveness is Paraguay’s main financial management and procurement issue. Main
problems identified in this area include: (i) internal control shortcomings in most expenditure
categories; (ii) ineffective internal audit function; and (iii) a weak control environment.
Tax System IMF Tax Policy and Tax Administration Assessments (September 2008)
In the area of tax administration, priorities include implementing an effective human resources
policy; strengthening the tax audit function; and reorganizing the Large Taxpayer Unit.
In turn, proposed tax policy measures aim at increasing tax pressure and tax equity by completing
and improving the efficiency of taxes defined by the 2004 Fiscal Adjustment Law.
18
V. THE PROPOSED OPERATION
A. Operation Description
51. The overall development objective of the proposed PSDPL is to contribute to the
effectiveness and efficiency of the public sector. This is expected to be reached via the
following specific objectives: (i) exerting effective Oversight of SOEs; (ii) improving Central
Administration’s internal financial control; and (iii) strengthening the Tax System.
52. The PSDPL (US$100 million) is a stand-alone DPL expected to be executed in
FY12. The PSDPL includes three components: SOEs oversight; public sector financial control
in the Central Administration; and Tax System. The policy matrix for the Program, including
the prior actions, and key outcomes indicators, is presented in Annex 2.
53. The scope of the PSDPL was determined by building on lessons learned from
previous operations, particularly from Programmatic DPL1. Expected achievements will
build on the active reform agenda of the Government, and on the successes from the previous
DPL.19
These program components and actions have been selected with the country’s most
relevant development challenges in mind, as well as priorities communicated by the
Government. They also consider both structural institutional constraints and the current
political context. Aware of implementation difficulties to previous reform efforts, prior actions
and triggers were defined with the Government in order to maintain flexibility and to minimize
the risk of potential political gridlock.
54. The operation has a direct link to the Government Plan (Plan Estratégico
Económico y Social - PEES). The operation directly supports Government plans to consolidate
previous achievements in reforming revenue mobilization; internal control and audit functions;
and SOEs oversight.
55. The proposed PSDPL program incorporates current good practice guidelines. These practices for development policy lending are outlined in Operation Policy/Bank
Procedure (OP/BP) 8.60, Development Policy Lending, as summarized in Box 1. While
maintenance of a satisfactory macroeconomic framework is not an explicit prior action or a
trigger for DPLs, it is a fundamental requirement for DPL lending under OP 8.60.
19
Main successful reforms supported by the previous operation included: SOEs oversight reform, internal
financial control, and tax system strengthening.
19
Table 6: PSDPL Outcomes and links with CPS
PSDPL
Policy
Areas
Corresponding CPS
Outcomes PSDPL Key Outcome Indicators
SOEs
Oversight
Finances and
operations of SOEs
are transparent and
subject to greater
scrutiny by
Government and civil
society.
SOEs financial operations are carried out in a transparent manner and
are subject to scrutiny by the Government and civil society. Target:
online publishing of SOEs audited financial statements.
Timely delivery of SOEs audited financial statements. Target: SOEs
audited financial statements are available no later than June 30 of the
following year.
Recovery of 20% of the past-due debt accumulated by Central
Administration entities with SOEs. (Baseline 2010: 0% of the
certified aggregated amount of debt was reimbursed (Gs 365 billion).
Rate of timely payments reaches 80% for basic services provided to
the State by SOEs (Electricity, Telecommunication, and Water).
(Baseline Jan-Jun 2010: 51%)
At least 5 SOEs have established targets that can be monitored on a
regular basis by UMEP.
The number of hours of power outage as measured by hs/year per user
has declined to 11 hours (Baseline: 2010: 11.2 hs/year per user)
The coverage of ESSAP water access as measured by the percentage
of households in urban areas with access to water has increased to
89.2% (Baseline January 2010: 79.4%).
The percentage of user complaints to ESSAP has decreased to 18%
(Baseline 2010: 19%).
Fixed telephone lines installation time has decreased to 17 days
(Baseline 2010: 20 days).
Central
Admin.
Internal
Control
Increased
effectiveness of
internal control and
internal audit
function (upgrade
PEFA indicators for
internal control and
internal audit, PI-20
and PI-21).
PEFA Indicators for internal control and internal audit (PI-20 and PI-
21) for 50% of the ministries are rated C, which shows: (i) A more
comprehensive set of internal control rules, and (ii) a broader
coverage and quality of internal audit function and a higher degree of
management response to internal audit findings. (Baseline: 2008
Integrated Fiduciary Assessment rating for PI-20 and PI-21: D+)
Tax
System
Increased tax-to-GDP
ratio (Baseline:
11.8% (avg 2004-08)
Target: 12.7%
(2013))
Tax-to-GDP ratio is at least at 13.8%. (Baseline 2010:13.4 percent)
Ratio of audits of large tax payers that result in additional assessment
exceeds 70%. (Baseline 2010: 55%)
20
Box 1. Good Practice Principles on Conditionality Principle 1: Reinforce Country Ownership
Ownership has been a critical aspect of both the design and the implementation of this program. The Bank has
actively cooperated with the Government since President Lugo won elections in April 2008. To this end, the Bank
presented a set of policy notes to the authorities in June 2008. Since 2008, the Bank has provided technical
assistance in oversight of SOEs, which has been instrumental to the current reform achievements. Also, while the
Executive could not advance at the expected pace due to legislative challenges, alternative solutions were
implemented in targeted policy areas, showing government commitment to the objectives of reforms being
supported by the PSDPL. Finally, PSDPL components are aligned with the pillars of the Government’s Strategic
Economic and Social Plan for 2008-2013.
Principle 2: Agree upfront with the Government and other financing partners on a clear division of labor
On macroeconomic and fiscal issues, the Bank and the IMF coordinate regularly, but there is currently no active
IMF program. In addition, the previous PDPLI became a significant part of a multi-donor funding package
supporting the Government’s 2009 Anti-Crisis Plan, and the policy areas covered by the loan received additional
support from IFI/donor technical assistance programs spelled out in section IV.3. Development stakeholders
coordinated their actions to ensure clear division of labor and complementary actions. Of particular note: for the
areas under the auspices of the PSDPL, development policy lending is covered by the Bank while TA is covered
by the Bank for SOEs, USAID/UMBRAL for Internal Audit and Control, and IMF for Tax System. Finally, the
PSDPL is deepening the reform of some policy areas covered by the previous DPL, and it will consequently enjoy
the same level of inter-institutional coordination in terms of priorities and actions.
Principle 3: Customize the components and structure of the operation to country circumstances
The operation supports an important part of the Government’s reform program; the scope and sequencing of
PSDPL prior actions and targets are based on a realistic assessment of in-country capacity for completing the
reforms. This assessment was carried out in consultation with the Government. The DPL has been structured so as
to accompany the reform process to the next stage, it also has built-in flexibility to allow it to respond to any
internal or external changes which may shape the reform agenda.
Principle 4: Choose only results-based actions as conditions for disbursement
The policy matrix contains 9 prior actions for the PSDPL. These were identified following an assessment of their
importance for progress in the individual reform areas.
Principle 5: Conduct transparent progress reviews conducive to performance-based financial support
The program matrix includes clearly defined outcome indicators, which have verified baseline values and can be
tracked through existing systems and processes.
B. Policy Areas
Component I: SOEs Oversight
56. The Government program has made significant strides in addressing the SOEs
challenge by improving state oversight. The size and performance of SOEs represent a
significant challenge for Paraguay’s economy, from an institutional as well as from a political
economic point of view. The Government has therefore made SOEs oversight a priority in its
public sector reform program. Three main areas have been addressed: the institutional
framework for oversight of SOEs; financial transparency; and results-based management. Since
the end of 2008, the Government has achieved strong results, it has been assisted in its efforts
by the Bank (technical and financial assistance), by regional peer institutions, and by the
OECD. Given Paraguay’s track record in SOE reform, this could be viewed as a clear success
of the present government. Current achievements include the establishment of an effective
institutional framework; the attempt to consolidate this framework through the adoption of a
specific law; the publication of annual audited financial statements of SOEs; the adoption of
results-based agreements between SOEs and the State. The present section provides
information on sector challenges; implementation of the various aspects of the reform;
description of selected prior actions; and outcome indicators.
21
57. SOE size and performance represent a significant challenge for Paraguay’s
economy and service delivery effectiveness. Paraguayan SOEs account for around 30 percent
of Public Sector expenditures and provide essential goods and services, including oil, water,
telecommunications and electricity. Their performance in terms of service delivery and
management could be significantly improved. For example, in 2010, only 43.5 percent of urban
households under the responsibility of the water SOE had sewage provision, electricity
production still experiences 32.6 percent technical loss. This poor performance is due, to a
large extent, to the institutional limitations that prevailed until 2008 and include: ineffective
oversight of the institutional framework, non-disclosure of audited financial statements,
asymmetric financial information and a partial regulatory framework for utilities.
Table 7: Paraguay Non Financial SOEs
Enterprise Sector Legal Status
Under
Management
Contract*
2010 SOE
Expenditure
(Mill. USD)
2010
% Total SOE
Expenditures
ANDE Electricity Public Sector
Decentralized Entity YES 1,054.03 35.90%
ANNP
River Transport /
Harbor
Management
Public Sector
Decentralized Entity NO 26.04 0.89%
CAPASA Beverage
Production Public Corporation NO 9.11 0.31%
COPACO Telecommunicati
on Public Corporation YES 297.25 10.13%
ESSAP Water Public Corporation YES 77.54 2.64%
DINAC
National Civil
Aeronautic
Directorate
Public Sector
Decentralized Entity NO 49.94 1.70%
FEPASA Railway Lines Public Corporation NO No Activity nil
INC Cement
Production
Public Sector
Decentralized Entity YES 142.59 4.86%
PETROPAR Oil Public Sector
Decentralized Entity YES 1,278.96 43.57%
TOTAL 2,935.45 100% Note: In 2010, SOE total expenditures represent the equivalent of 30 percent of public sector total expenditure and 62 percent
of Central Administration total expenditure.
58. Beyond operational aspects, the SOE sector represented a challenge to the political
economy. Before the reform process, the political economy of SOE oversight was
characterized by fragmented responsibilities between different Government actors, with
overlapping functions and responsibilities. There was also asymmetric information between
SOE management on the one hand and Government and civil society on the other. There was
no available information on the performance or the financial situation of SOEs; there were
limited vertical accountability mechanisms; and a limited number of channels for civil society
participation in the oversight of SOEs. There was also no clear incentive for SOE management
to change the status quo.
59. The Government designed a reform program for SOE oversight based on three
pillars: institutional framework; financial transparency; and results-based management. Given the critical role of SOEs in Paraguay, the Government has targeted SOE oversight as one
of the key priorities of its public sector reform program. Reforms and measures in this area are
focused on three key aspects: (i) creating an adequate institutional framework for SOE
22
oversight and ownership based on regional examples and good practice; (ii) increasing
transparency by strengthening audit and financial management of SOEs and by publishing
annual financial statements; and (iii) introducing the fundamentals of results-based
management in the largest SOEs, with a view to improving service delivery performance.
60. Factors that contributed to the success of this reform include: realism, flexibility,
identification of stakeholder consensus, and caution for political economy challenges. First, over the last three years, the Government showed realism and pragmatism in
implementing this reform. Starting with a broader scope and more ambitious targets, the
program was narrowed down during the 2008-2009 crisis. In particular, it decided to focus
more exclusively on the oversight of SOEs reform and drop the establishment of an overall
regulatory model, given public sector technical capacities and the ability to handle the political
economy and institutional challenges. Second, the Government intended to generate consensus
around the reform of oversight of SOEs. This was achieved by, broad consultation on
institutional design and legal documents with international experts, peer institutions from the
region and OECD countries. Extensive communication with civil society, the Congress and the
media via conferences, press articles and dialogue with stakeholders was carried out. Finally,
with an inclusive and non-confrontational approach, the Government managed to progressively
gain support from SOE management and representatives from Congress.
Subcomponent Institutional Framework for State Oversight of SOEs
61. The institutional settings established in 2008 include a supervisory body and a
technical monitoring unit, which defined the road-map for SOEs oversight. The Inter-
ministerial Council of SOEs (CEP) and the SOEs Monitoring Unit (UMEP) were established as
a result of a reform plan aimed at strengthening the institutionalization of SOEs ownership
function. In 2009, CEP’s inter-institutional board20
agreed on strategic priorities, which
included (i) improving financial management of SOEs; (ii) consolidating the institutional
framework for effective supervision of SOEs performance, investment plans, and aggregate
fiscal risk; (iii) aligning SOEs budget management to the Government’s fiscal program; and
(iv) providing adequate human resources and training to the Monitoring Unit. In this respect,
UMEP —the technical advisory body under CEP— was staffed by highly professional
personnel, paving the way for rapid progress in 2009-2011.
62. During 2009-2011, progress was impressive on CEP/UMEP institutional
strengthening, given Paraguay’s context and structural constraints. In a background of
limited capacity and low-paced institutional responsiveness, the ability to combine CEP’s fast
inter-institutional decision-making capacity with the professional and technical monitoring of
UMEP created a responsive, technically-sound SOE supervisory body. The Board of CEP
meets every two weeks, and its agenda is jointly prepared by CEP’s executive secretary and
technical inputs provided by UMEP. CEP’s Board is able to make expedited executive
decisions, which are implemented and monitored by UMEP’s specialized staff. This process has
been sequenced through the design and follow-up of CEP multi-annual strategic plan.
63. The professional quality and commitment of UMEP’s managerial and technical
staff have significantly contributed to the institutional strengthening of SOE oversight.
20
The board of CEP includes the Ministers of Finance, Industry and Trade, and Public Works, as well as the State
Attorney.
23
UMEP staff members are qualified, professional and highly motivated. One or two persons are
assigned to closely monitor each SOE, and have progressively developed technical knowledge,
thus becoming specialists in their assigned sectors. In 2009, UMEP’s staff received extensive
training in topics including financial analysis, procurement, management, negotiation, strategic
planning, and comparative experiences from other countries on SOE oversight.
64. This institutional strengthening was guided and supported by the adoption of
UMEP’s functional manual in November 2010, selected as PSDPL prior action. Initially
started on an empirical basis and supported by Bank technical assistance, institutional
strengthening of the framework for oversight of SOEs was implemented through the
preparation of a series of strategic planning documents, and by the adoption by decree of
UMEP’s organizational and functional manual. This provided a clear definition of
responsibilities of UMEP’s management and staff, and also allowed UMEP to work with a
strategic focus.
65. In addition, a draft law was submitted to Congress in December 2010 to strengthen
the sustainability of CEP/UMEP; this key measure was selected as PSDPL prior action. Although the final outcome depends on the adoption by Congress, this measure is significant
and supports the Government commitment to sustain SOE oversight reform. It is a major step
in ensuring the continuity of the new institutional framework because the current decree, which
established CEP/UMEP could be more easily reversed In addition, this measure is substantial
for the following reasons:
Ownership and commitment to institutional reform. The preparation of this draft law
generated a very fruitful dialogue within the executive. It helped relevant actors take
enhanced ownership of this reform and it increased awareness about the need to strengthen
the sustainability of the institutional framework through the adoption of a new law.
Gradual and consensus building law drafting. The draft law is simple and provides key
definitions and scope for CEP/UMEP, while decrees and resolutions define detailed
implementation. This is deliberate to ensure broader consensus and higher probability of
adoption.
Communication adapted to Context. As mentioned above, aspects of communication and
political economy have been taken into account. The law was presented in December 2010,
after disseminating information about the reform and working on building up a consensus,
including through the organization of an international conference.
66. The new law is expected to provide a stronger legal backing for CEP/UMEP than
current decrees. In the proposed law, the CEP will be denominated National Council of State-
Owned Enterprises (CNEP). The law will substitute the 2008 decree which established CEP,
and will specify CNEP’s composition, role, governing principles, and interaction with other
Government institutions. Like CEP, CNEP will be made up of the Ministers of Finance, Public
Works, Industry, and the State Attorney. It will organize the SOE portfolio to maximize the
achievement of SOEs objectives through the institutionalization of monitoring, evaluation and
control mechanisms.21
In a similar move, UMEP will be taking the title of General Directorate
21
Specifically, CNEP will be in charge of (i) providing technical and strategic policy advice to the Government
regarding the SOE portfolio; (ii) advising the President of the Republic in the appointment and removal of SOE
directors; (iii) reviewing SOEs planning processes to ensure achievement of results; (iv) reviewing SOEs draft
budgets; (v) promoting coordination between SOEs; and (vi) recommending the direct intervention on SOE
24
of State-Owned Enterprises (DGEP). It will continue to provide technical support to CNEP,
like UMEP with CEP now. The law is also confer on DGEP control activities that are currently
carried out by UMEP such as use of the balance scorecard control panel; review of SOEs audit
reports; and investment programs.
67. The strategy for submitting the draft law aims at building consensus and takes into
account Paraguay Congress specifics, even though this requires a longer process. In
Paraguay, this type of law requires the sequential adoption by Senate and then by Chamber of
Deputies, but submission to the review of Congress Technical Commissions is not compulsory.
However, the Government decided to submit the draft to four internal Senate Committees22
,
before the vote of the Senate, given that recommendations of approval by Commissions
contribute to a higher likelihood of enacting the draft. Favorable recommendations were
received from the Commissions of Finance in May 2011, and the Commission of Economy in
August 2011. Once the Senate will have adopted the draft law, the Government is planning to
submit it to 3 Commissions for the Chamber of Deputies, following a similar strategy.
Although this approach takes longer than a mere submission to Senate and Chamber of
Deputies, it generates a transparent and more thorough dialogue between Executive and
Legislative, which broadens the support for reforms and the probability of law adoption.
68. These achievements have been obtained in a comparatively short period of time,
which sets the groundwork for a more ambitious medium-term strategy. This strategy is
building on prior actions, which included the provision of an enhanced legal backing for the
new organizational structure for CEP and UMEP, and to better define specific functions and
operational responsibilities for each management sector within UMEP, also clarification of
specific functions and operational responsibilities for each management sector within UMEP,
i.e, the planning and implementation of SOE monitoring mechanisms; oversight of the SOE
portfolio using management tools, planning, studies and regulation. This new organizational
framework will solidify institutional foundations to increase financial transparency and a
results-based management of SOEs, the two main goals of the Government Program.
Subcomponent Transparency, Audit, and Financial Management
69. Since 2010, CEP has required SOEs to hire professional audit firms, to provide
these audits to UMEP, and to publish them; the implementation of these audits has been
selected as a prior action for this operation. While they had already initiated a collection of
existing audits of 2008 financial statements, CEP and UMEP requested independent annual
audits for SOEs in 2010; submission of financial reports to CEP and UMEP, and their
subsequent publication. UMEP also established an audit follow-up mechanism including field
visits, letters highlighting audit main findings and recommendations, also a warning report to
the Minister of Finance, if needed, to discuss the content in the next CEP meeting. Audited
financial statements of SOEs are published in the Ministry of Finance’s website.23
As of June
2011, all SOEs had already signed their respective external audit contracts for 2010 financial
statements with independent audit firms according to procedures established by UMEP and
management to the President in extreme situations. It will comprise the Ministers of Finance, Public Works,
Industry, and the State Attorney. The CEP will exert centralized institutional responsibilities on SOE oversight,
and will be allowed to issue resolutions affecting the management of SOEs, as well as submit draft decrees for
presidential approval. 22
The selected Committees are: Finance, Economy, Public Works, and Legislation. 23
Institutional Framework for Government Ownership of State Enterprises
Prior Actions
The Government has strengthened the institutional framework associated with SOE management through: (i)
the submission to Congress of a law draft proposing the legal establishment of the CEP and the UMEP
Completed; and (ii) the approval by CEP of the UMEP’s Organizational-Operational Manual. Completed.
Transparency, Audit, & Financial Management
Prior Actions
CEP ensures greater transparency in SOE management via implementation of annual external audits,
elaborated according to CEP standards. Completed.
The Government has developed a strategy to liquidate expenditure payment arrears and ensure timely
payment of basic services by Central Administration entities to SOEs, which includes: (i) the creation of an
Inter-institutional Technical Commission made up of the Ministry of Finance, the State Attorney General, and
the SOEs. Completed; (ii) the validation of expenditure payment arrears between Central Administration and
the SOEs. Completed; and (ii) the Government has established specific mechanisms to ensure timely payment
of services provided by SOEs to Central Administration entities. Completed.
Key Outcome Indicators
SOEs financial operations are carried out in a transparent manner and are subject to scrutiny by the
Government and civil society. Target: online publishing of SOEs audited financial statements.
Timely delivery of SOEs audited financial statements. Target: SOEs audited financial statements are available
no later than June 30 of the following year.
Recovery of 20% of the past-due debt accumulated by Central Administration entities with SOEs. (Baseline
2010: 0% of the certified aggregated amount of debt was reimbursed (Gs.365 billion).
Rate of timely payments reaches 80% for basic services provided to the State by SOEs (Electricity,
Telecommunication, and Water). (Baseline Jan-Jun 2010: 51%)
SOE’s Results-Based Management
Prior Actions
The Government has introduced a results-based framework, aimed at increasing SOEs’ service delivery
capacities. At least 5 SOEs, representing around 80% of consolidated SOE expenditures, have signed their
respective performance management contracts, which include standardized management procedures and
financial targets. Completed.
UMEP has recently established a balanced scorecard that connects it directly to SOEs’ economic, financial
and technical follow-up indicators. Completed.
Key Outcome Indicators
At least 5 SOEs have established targets that can be monitored on a regular basis by UMEP.
The number of hours of power outage as measured by hs/year per user has dropped to 11 hours (Baseline:
2010: 11.2 hs/year per user)
The coverage of ESSAP water access as measured by the percentage of households in urban areas with access
to water has increased to 89.2% (Baseline January 2010: 79.4%).
The percentage of user complaints to ESSAP has decreased to 18% (Baseline 2010: 19%).
Installation time for fixed telephone lines has decreased to 17 days (Baseline 2010: 20 days)
79. Overall, the Government is on track to achieve the medium-term outcome
indicators. First, publication and dissemination of SOEs annual audited financial statements
are already in place. The Government has also successfully elaborated standard rules and
procedures pursuing the contracting of independent audit firms. Second, the recent validation of
Central Administration utility payment arrears, and the establishment of an inter-institutional
technical commission indicates progress towards their gradual cancellation. Third, significant
advances have also been made in timely payment of these services. Finally, the definition of
medium-term financial and performance targets for the five major SOEs, representing almost
28
80 percent of total SOE-consolidated expenditures, is expected to have a medium-term impact
on the efficiency and effectiveness of public service delivery. Outcome indicators on service
delivery in specific sectors were chosen to further incentivize the continuation of monitoring
efforts, even if targeted improvements are not large as for example in the electricity sector.
Challenges Ahead and Medium Term Framework
80. For the next two years, challenges ahead are focused on consolidating
achievements through enhancing sustainability and further improving audit timeliness.
Continuous capacity building combined with the adoption of the law consolidating the
oversight institutional framework could contribute to achieving sustainable results.
Furthermore, feasible improvements could be achieved in financial transparency of SOEs. The
delivery of audit reports is still experiencing significant delays, although the Government has
achieved publication of audited SOEs’ financial statements. Delivery of audit reports could be
the next target for the Government in improving transparency of SOEs management. Achieving
sustained adequate payment of services to SOEs, and netting payment arrears would be
important achievements, and would provide a positive conclusion to the current phase of
reform of SOE oversight.
81. Over the longer term, efficient service delivery and transparency in Paraguay
would benefit from strengthening the regulatory framework and the auditing profession.
The Government has achieved limited progress on strengthening the regulatory framework.
Given capacity constraints and the technical and political complexity of this topic, this issue
could be contemplated on a medium-term perspective. Similarly, strengthening the accounting
and auditing profession in Paraguay could contribute to a stronger control environment.
Component II: Central Administration Internal Financial Control
82. Improving the effectiveness of Central Administration’s internal financial control
is a priority of the Government Public Sector Program. Given the ineffectiveness of internal
control procedures and the limited institutional capacities, the Government believes that
addressing these issues would help improve accountability and ensure that funds are used for
their intended purposes. It believes that it would further contribute to the enhancement of the
public sector’s overall reliability and credibility.
83. Prevailing internal control procedures were ineffective during the first half of the
2000s. The control framework for payroll was limited by the absence of a proper payroll
calculation system, and there was a high risk that payroll calculations from spending units did
not reflect the actual number of days worked by civil servants. In the case of non-salary
expenditures, internal control constituted a mere formality and relied exclusively on the
spending units’ systems. This was compounded by the absence of a norm enabling
implementation of the integrated system for goods and services (SIABYS) and also by a lack of
integration between the different systems that made up the integrated state resources
management system (SIARE). 28
84. Despite reform efforts, it has been challenging to establish internal control and
audit systems effectively in the public sector in Paraguay. While the 1999 Financial
28
The SIARE includes the SIAF for PFM, the SINARH for human resources, and the SIABYS. However, the
latter still lacks a legal framework, indispensable for the reinforcement of the existing procurement system.
29
Administration Law established public sector internal control systems, internal audit
institutional framework was established by decree in 2001. By 2005-2006 their operational
effectiveness remained limited. First, the institutional capacities of both the Internal Audit
Office (Auditoría General del Poder Ejecutivo - AGPE) and the spending units’ Internal Audit
Units (AIIs) were undermined by organizational limitations and a lack of well-trained
personnel. Second, there was an absence of internal audit manuals and standardized norms, as
well as any legally defined sanctions regime. AIIs were insufficiently staffed, and experience
and skills were not always adequate. Recruitment procedures were not based on competitive
processes and job requirements were not properly defined.
85. In 2007-2008, Paraguay Integrated Fiduciary Assessment (Report No. 44007-PY)
identified internal audit as a key public financial management challenge, which triggered
Government and IFIs reaction. The report observed that the coverage and quality of the
internal audit function was negatively affected by the absence of systems and methodology;
there were issues with the frequency and the distribution of reports; and internal audit
recommendations were usually ignored. As a result, the Government initiated a program
focusing on the expansion of financial management information systems; the implementation
of a standardized internal control framework and strengthening of the internal audit function;
and the improvement of the control environment through strengthening and harmonization of
the financial and administration directorates of spending units.
86. Subsequently, the Government decided to strengthen the internal audit function,
with the help of the Umbral Program. Achievements made towards strengthening the internal
audit function included: the adoption of a decree in late 2007 which redefined the role,
organization and attributions of the AGPE; increase of AGPE’s human resource capacity; and
delivery of intensive training and development jointly with the Supreme Audit Institution of a
Government audit manual.
87. After the 2008 presidential elections, internal control remains a priority, and a
standardized internal control called MECIP framework was adopted. This framework was
introduced by Decree 962/08, and aimed at sustaining the continued improvement of public
institutions by strengthening internal control practices and capabilities. Using a systemic and
unifying approach, MECIP introduced the basis for a permanent control structure within the
country’s public entities and its underlying principles.
88. These actions were critical to further strengthen the internal control framework
and the internal audit function throughout the Central Administration. The USAID-
supported Umbral program provided technical assistance and intensive training to ensure
adequate and gradual implementation of MECIP. In a first phase, implementation support
focused on five ministries,29
the General Comptroller’s Office and the Internal Audit Office
(AGPE). The second phase of the Umbral Program, initiated in 2010, extended to five other
key Central Administration institutions.30
89. Advances in the effectiveness of the Central Administration’s internal and
financial control are already very significant. AGPE has notably expanded its coverage,
29
Ministries of Agriculture, Finance, Public Works, Health, and Education. 30
The additional five institutions were the Ministry of the Interior, National Congress, Office of the Attorney
General, the Supreme Court, and the National Customs Office.
30
increasing the institutions being audited from 70 to 100 between 2008 and 2009. At the same
time, the quality of internal control has increased, as shown by the following achievements:
On average, the level of implementation of Institutional Audit Units’ work plans increased
from 74 to 77 percent between 2009 and 2010, reports are regularly issued and submitted to
relevant authorities.
On average, the level of implementation of Self-Improvement Plans aimed to address
weaknesses detected by internal and external controls increased from 57 to 64.5 percent
between 2009 and 2010.
On average, the percentage of recommendations made by internal and external auditors that
have been successfully addressed increased from 48 to 69.5 percent between 2009 and 2010.
A comprehensive set of internal procedures (MECIP) has been implemented in the central
administration, and contributed to strengthening administrative integrity and effectiveness.
No penalties are applied to institutions lagging behind in the implementation of MECIP or
their self-improvement plans, or if they fail to address the observations made by internal
and external auditors. However, on a semi-annual basis the AGPE presents an Internal
Control Report to the President of Paraguay, who, in turn, discusses it with the heads of the
institutions and government entities. This practice has resulted in heightened visibility of
financial management and increased accountability for compliance with internal controls.
90. Throughout 2010, the gradual implementation of MECIP made solid advances,
and MECIP adoption and deepening was selected as a prior action for this operation. Around 2,000 Government civil servants from the 12 institutions that are part of the Umbral
program received training and technical assistance for the implementation of MECIP.
Meanwhile, MECIP implementation and development in the five original ministries has been
pursued.31
Overall, 50 training sessions and workshops were delivered to higher management
staff, internal auditors, MECIP implementation teams and, as part of a train-the-trainer module,
to staff from the Comptroller’s Office and the AGPE.
Table 8: Paraguay Internal Financial Control Achievements 2008-2010
Internal Financial Control
2008 2009 2010
Main Actions Implemented
Number of institutions being controlled by AGPE 70 100
Percentage of institutions implementing MECIP (%) * 66% 89%
Percentage of institutions in which progress made in the MECIP Implementation
Plan is acceptable or better * 2% 79%
Achieved Outcomes
Overall percentage of implementation of annual Internal Control Work Plans at
the institutional level 74% 77%
Overall percentage of implementation of the Self-improvement Plans at the
institutional level (%) 57% 64.5%
Percentage of recommendations made by internal and external auditors that have
been successfully addressed at the institutional level (%) 48% 69.5%
Note I: Data marked with an asterisk indicate data from to the second semester; otherwise, it is the annual average.
Source: AGPE (2011).
91. These improvements are reflected in the 2011 PEFA, showing an upward trend in
Paraguay’s internal control and auditing, and confirming that the achievement of the
31
Ministries of Agriculture, Finance, Public Works, Health, and Education.
31
outcome indicator is likely. The overall rating for PI-20 (Effectiveness of internal controls
over non-personnel expenditures) and PI-21 (Effectiveness of the internal audit) is expected to
be C for the ongoing 2010 PEFA assessment.32
Significant improvements observed in the areas
of internal control and internal audit have allowed for an increase in the PEFA score for these
two indicators from the D+ rating obtained in the same indicators for the 2008 IFA. PI-20 score
increased because internal control procedures and rules are more comprehensive, thanks to the
introduction of MECIP. PI-21 score increased because of a higher coverage of a more effective
internal audit function, and a higher extent of management response to internal audit findings.
Table 9: Comparative PEFA Scoring 2008/2011 for Indicators 20&21
Dimension Rating
2008
Rating
2011
PI – 20: Internal Control
Effectiveness of expenditure commitment controls. C C
Comprehensiveness, relevance and understanding of other internal control rules/ procedures. D C
Degree of compliance with rules for processing and recording transaction. C C
PI – 21: Internal Audit
Coverage and quality of the internal audit function D C
Frequency and distribution of reports C C
Extent of management response to internal audit findings D C
Challenges Ahead and Medium Term Framework
92. Further implementation of MECIP will require time, as well as continuous
political and financial support. MECIP is expected to gradually introduce a series of activities
in addition to human resources training. These will include the design of institutional and
operative plans and programs, and the development of policies based on risk analysis and
citizenship accountability. Further, MECIP is intended to be implemented gradually throughout
the Paraguayan public sector, which is a fairly ambitious goal given the baseline status of
standard internal control practices in the country. Strong political and financial support will be
required to achieve this. The recent upgrading of the Office of the Executive’s Internal Auditor
(AGPE) to ministerial level, accompanied by a significant increase of its budget and intensive
human resources training shows that there is the political will to support this matter.
Box 3: Prior Actions and Key Outcome Indicators - Central Administration Internal Financial Control
Prior Actions
Five ministries, representing approximately 70% of Central Administration’s overall budget, have
established internal control committees, internal control norms, and have trained staff to implement the
MECIP. Their respective internal audit units (AIIs) have an adequate number of employees Completed.
Key Outcome Indicators
PEFA Indicators for internal control and internal audit (PI-20 and PI-21) for 50% of the ministries are rated
C, which shows: (i) A more comprehensive set of internal control rules, and (ii) A broader coverage and
quality of internal audit function and a higher extent of management response to internal audit findings.
(Baseline: 2008 Integrated Fiduciary Assessment rating for PI-20 and PI-21: D+)
32
The 2010 PEFA was funded and implemented by the EU with a joint quality control from EU, World Bank and
IADB. The 2010 draft report has already been reviewed by the three institutions and the PEFA Secretariat. It has
been submitted to the Government, and is in the process of being published. EU representatives gave their
agreement to the disclosure of the 2010 PEFA rating for indicators PI20 and 21 and the text of this footnote.
32
Component III: Tax System
93. The Government has achieved significant progress in reforming the tax system,
particularly addressing the key challenge of low tax revenue. Paraguay’s tax-to-GDP ratio
reached an average of 12 percent of GDP between 2004 and 2009, up from 9 percent in the
1990s. The current tax-to-GDP ratio still represents one of the lowest ratios in the region and
only 51 percent of its estimated tax potential.33
As a result, expenditures including social
expenditures are lower in Paraguay than in most Latin American neighbors and public service
delivery is lagging. To address low tax revenues, the Government implemented a
comprehensive tax reform in 2004 aimed at simplifying and increasing the efficiency of the
Paraguayan tax system. As a result the active tax payer base and revenues increased. More
recently, the Government has shifted its reform effort to increasing the efficiency of its large
tax payers unit. This is another important step as it allows for further increases in tax revenues
in the medium term and also allows for pilot reforms which can be rolled out to other parts of
the tax base. Despite achievements, challenges remain and require continued reform effort.
94. Paraguay’s tax system is characterized by a number of structural challenges that
limit the state’s ability to raise revenues. The system relies heavily on indirect taxes and is
characterized by structural and political obstacles to improve tax equity. Indirect taxes –
primarily the VAT, excise taxes and customs duties – account for 80 percent of tax collections.
The corporate income tax (IRACIS) is the only significant direct tax in Paraguay, accounting
for around 16 percent of total tax collection. Indirect taxes tend to be more regressive than
direct taxes.34
Structural and political obstacles are clearly demonstrated by the light taxation of
the agriculture sector and the still outstanding introduction of a personal income tax. The
agricultural sector still only generates around 0.2 percent of total tax revenue despite
accounting for around 20 percent of GDP, as it benefits from VAT exemptions on its
agricultural products.35
The introduction of a personal income tax has so far not passed
Congress. In addition, Paraguay’s tax system also suffers from a widespread culture of tax
evasion associated with the informal economy.
95. Relevance and significance of changes to Paraguay’s tax system have to be
evaluated in the light of the country’s political economy challenges. The ability to reform
the tax system may be affected by overall public sector limitations, the role of Congress, and
the potential resistance from interest groups. The delay in implementing personal income tax
illustrates these challenges, the adoption of the draft law was postponed several times by
Congress in recent years. It became effective in January 2010, but has been postponed once
again by Congress until 2013.
96. In 2004, the Government initiated a comprehensive tax reform aimed at
simplifying the tax system and increasing its efficiency. As a first step the Government
approved the Fiscal Adjustment Law, which consisted of ambitious reform measures to
strengthen tax policy. The main objectives of the reforms were to formalize economic activity
and to gradually increase the progressiveness of the Paraguayan tax system. Changes in tax
policy included: the broadening of the tax base for VAT and for agricultural income tax
33
Tax potential is measured based on the country’s economic, geographic, demographic, social, and institutional
characteristics. IMF (2009), Diagnόstico del Sistema Impositivo Vigente en 2008. 34
See Goñi, Lόpez, and Servén (2008), Fiscal Redistribution and Income Inequality in Latin America. 35
IMF, Report of the Technical Assistance Mission on Tax Policy, September 2008.
33
(IMAGRO) through the elimination of several loopholes and exemptions; the increase of rates
and number of excises; and the introduction of two new income taxes: the personal income tax
and an income tax for small corporate taxpayers. Corporate income tax rates were reduced from
30 percent to 10 percent over a two-year period, and the base for this tax was broadened.
97. Meanwhile the Government also engaged in a range of tax administration
measures designed to boost tax revenues. In a first phase of the modernization of the
Paraguayan tax administration, the Undersecretariat of Taxes (SET) adopted an information
technology platform that supports core tax administration processes such as taxpayer register,
single taxpayer account, and tax returns processing. This has been rolled out to its regional
offices. In addition, services to taxpayers have improved: there is now telephone assistance and
online access. As a result of these significant measures, the number of active individual
taxpayers increased from 200,243 in 2005 to 408,656 in 2010; and the number of active
registered corporations increased from 24,248 in 2005 to 48,998 in 2010, i.e., it has more than
doubled in five years.
98. More recently, reform focus has shifted towards improving the performance of the
large taxpayer unit (LTU), given this segment’s importance in terms of revenue and tax
compliance risk. LTU reform is critical because it may lead to significant tax revenue yields
and can be used to pilot key processes that can be rolled out to other taxpayer segments and
functional areas. In Paraguay, the 500 largest taxpayers contribute almost 80 percent of total tax
collections and the largest 100 account for more than half of all tax collections.36
Focusing
reforms on the efficiency of the LTU is therefore indicated. Around the world LTUs have
become an increasingly strategic organizational tool to initiate the reform of low-performing
tax administrations.37
The Government’s focus on large tax payers shows its commitment to
shift from improving basic core processes to a second generation of reforms. The reforms of the
audit function of large tax payers in the LTUs can later on be rolled out to the rest of the tax
base. Tax administration in Paraguay has traditionally been weak, especially with regards to
audit and control functions, and recent focus on the LTU has opened an important window to
effectively begin addressing this challenge.
99. Strengthening the LTU’s audit capacity is a key component of this reform effort
and has been selected as prior action for this operation. The Government implemented two
measures in this context: in 2010 SET issued a joint resolution with the Superintendencia de
Bancos allowing the audit of financial institutions, for the first time, including those classified
as large taxpayers.38
In addition, it implemented a training program for auditors of the LTU. In
an environment where low capacity has constrained the Government’s ability to perform its
audit and control function, basic training is a significant first step.
100. The increase in tax audits performed by the LTU in 2009-2010 represents a second
significant step, and has also been selected as a prior action. The SET managed to double
the number of audits on large taxpayers from 20 in 2008 to 40 in 2009. In 2010, a total of 32
audits on large taxpayers were initiated, including 2 highly specialized cases.39
The relevance
36
Based on 2008 data. 37
W. McCarten (2004). Focusing on the Few: The Role of Large Taxpayer Units in the Revenue Strategies of
Developing Countries. Mimeo. 38
―Resolución General‖ 36/10. 39
A bank and an agro-exporting firm.
34
of this step becomes even more apparent in the light of several years without audits due to a
lack of transparency and adequately trained auditors.
101. In 2009-2010, the Government complemented LTU reforms with issuing tax-
compliance certificates; another prior action for this operation. The measure of issuing
certificates is an important reform step towards transparency and tax compliance.40
The
authorities demonstrated their commitment by issuing 122,609 certificates in 2009, and another
280,105 in 2010. Certificates can easily be requested either on-line (accessing the tax
management system Marangatu) or at SET customer-service platforms. An important feature
of the certificates is that taxpayers with payment arrears or delays in the submission of their tax
statements are not eligible for the certificate. These certificates are mainly required as a pre-
condition for engaging in contracts with the public sector.
102. Other recent reforms include increasing the number of VAT-withholding agents
and revising tax incentives and exemptions. Other reform measures include increasing the
number of VAT-withholding agents designated by the tax authority - usually exporters and
other large businesses - from 98 in 2008 to 754 in 2010. This has lead to a substantial increase
in tax collection.41
Furthermore, the SET started reviewing the current system of tax incentives
and exemptions, by targeting specific sectors. Most notably: (i) The General Directorate of Tax
Audit reviewed 22 requests for VAT credits claimed against the agricultural income tax
(IMAGRO) in 2009, amounting to Gs.58 billion; (ii) the SET included five companies under
the maquila regime in the internal control process in 2010; and (iii) the SET specified
procedures required for determining tax refunds, according to current legal dispositions.42
103. The selected prior actions strongly support the key outcome indicators of the tax
component of the reform plan, which are well on track for completion. Key outcome
indicators for the tax component are that (i) the tax-to-GDP ratio remain above 14 percent; (ii)
the ratio of stop-filers among large tax payers has to remain below 3 percent; and (iii) the ratio
of audits of large tax payers that result in additional assessment exceeds 70 percent.43
The
improvement of capacity and execution of audit at the LTU and the issuance of tax-compliance
certificates are likely to generate higher tax revenues in the medium term. The tax-to-GDP ratio
is not an optimal indicator of the Government’s tax effort for two reasons. First, the supported
reforms will take time to translate into higher tax revenues as they are geared to improve basic
core processes which take time to yield results. Second, many factors influence the tax-to-GDP
ratio which does not exclusively measure the results of the supported reforms. A better
indicator would be an estimate of the tax gap. However, such measure is unrealistic in the
context of Paraguay with its capacity constraints. To keep track of the tax effort, therefore the
tax-to-GDP ratio is the best available measure and is complemented with additional measures.
The stop-filer ratio reflects the efficiency of audit and control, as the incentive to not present
income tax decreases with a higher probability of detection. In addition, the rate of audits that
result in additional assessment reflects the efficiency of the selection process of the audits.
40
In the years 2008 and 2009 SET published three resolutions (―Resoluciones Generales‖ from SET 8/08, 16/09
and 23/09) introducing the requirement of tax-compliance certificates associated with the issuance of car license
plates, registration of real estate, etc. 41
VAT revenues collected through withholding agents increased from Gs.97 billion in 2008 to Gs.448 billion in
2009 and Gs.707 billion in 2010. 42
―Resolución General‖ from SET 52/11. 43
Stop-filers are tax payers that do not present tax returns when due.
35
Challenges Ahead and Medium Term Framework
104. Despite progress achieved over the past five years, improving the tax system
remains a challenge for reform in Paraguay. A favorable trend was clearly observed over the
past few years, seen in the significant increase in the number of active taxpayers; the gradual
decentralization of tax services; and the upgrading of computational and management
technologies. However, continued effort is needed to further improve tax administration and tax
policy in the medium- to long-term. Concretely, efficiency of the LTU unit needs to improve
further. Most importantly, an LTU strategy is needed for specialized training in advanced audit
methods, international taxation, and particular sectors. In addition, audit selection needs to be
improved to take into account risk criteria. Furthermore, pilot reforms for large tax payers have
to be rolled out to medium sized tax payers. Finally, introducing a personal income tax (IRP)
remains an outstanding reform effort that would potentially contribute to increased tax revenue
and improved equity and transparency of the tax system.
Box 4: Prior Actions and Key Outcome Indicators - Tax System
Prior Actions
SET has strengthened its audit capacities for large taxpayers through: (i) the issuance of a resolution by SET
and the Superintendencia de Bancos to allow for the audit of financial institutions classified as large
taxpayers. Completed; and (ii) the implementation of a training program for auditors from the large taxpayers
unit (DGGC). Completed.
SET has significantly increased the number of large taxpayers subject to tax audits (Baseline: 2008= 20)
through: (i) 40 audits in 2009 Completed; (ii) 32 specialized audits of large enterprises in 2010, including two
highly specialized ones. Completed.
Tax Certificates. SET issued 122,609 tax-compliance certificates in 2009, and 280,105 certificates in
2010.Completed.
Key Outcome indicator:
Tax-to-GDP ratio is at least at 13.8%. (Baseline 2010:13.4 percent)
Ratio of audits of large tax payers that result in additional assessment exceeds 70%. (Baseline 2010: 55%)
VI. OPERATION IMPLEMENTATION
A. Poverty and Social Impacts
105. The actions supported under the PSDPL are expected to entail indirect positive
poverty and social impacts. While the operation does not directly address social sector
reforms, the supported reforms on the oversight and management of SOEs and of the tax
system are likely to generate indirect positive impacts. In contrast, the reforms on improving
central administration internal financial control are likely to have a negligible effect on poverty
reduction and social matters.
106. Improving the oversight and management of SOEs is likely to positively impact the
delivery of basic services, thereby improving the living standard of the poor. SOEs in
Paraguay provide basic services like water, sanitation, electricity, and are involved in the
provision of commodities such as petrol and diesel fuel. Access to electricity and clean water is
not universal in Paraguay. Around 98 percent of households had access to electricity in 2008,
although in many cases this entailed intermittent access of a few hours per day. The number of
households with clean water amounted only to 68 percent in 2007.44
Improved SOE oversight
44
World Bank (2010): ―Paraguay: Estudio de Pobreza—Determinantes y Desafíos para la Reducción de la
Pobreza‖, Washington DC. Report No. 58638-PY
36
is likely to increase the efficiency of public service delivery and as a consequence has the
potential to increase number of households with electricity and particularly clean water. In
addition, higher efficiency of the state owned petrol processing SOE, PETROPAR, is likely to
lower production cost and hence lead to a decrease in petrol and diesel fuel prices for end
consumers. These are important cost factors for public transportation, which is extensively used
by the poor. Improved use of public funds also has the potential to free up resources for the
Government’s pro-poor policies.
107. The Government has demonstrated its commitment to improving social inclusion
and benefiting the poor with the help of SOEs. The Government has initiated concrete
measures in the SOE sector e.g., the Water and Sanitation Sector Modernization Project (Loan
No. 7710-PY) supported by the World Bank. Another example is the Government’s focus on
large users in the electricity sector, where higher efficiency of SOE oversight of is expected to
generate higher revenues. This will allow maintaining current tariffs for the next five years, a
measure that ensures that the poor will not be negatively impacted.
108. Tax system reforms are expected to positively impact poverty reduction and social
development indicators through maintaining macroeconomic stability and increasing
social sector spending. In the medium term the supported tax system reforms are likely to help
the Government generate higher tax revenues. This will help to maintain macroeconomic
stability and free public sector resources.
109. The Government has demonstrated strong commitment to social sector
development with the help of social expenditure during recent years. Additional resources
generated with the help of the tax system reform are likely to contribute to social sector
development given the Government’s commitment to the social agenda in recent years, as part
of the Government’s Strategic Economic and Social Plan. In the crisis year 2009 social
expenditures grew by 26 percent relative to the previous year, representing 51 percent of total
expenditure or 11 percent of GDP. In 2010, social expenditures increased by further 6 percent,
representing 50 percent of total expenditure, or 9.5 percent of GDP.
110. In particular, the expansion of the Government’s conditional cash transfer
program (CCT) Tekoporá has benefited the poor. The number of beneficiaries increased
from 13,679 in 2008, to 83,106 in 2010, and as of March 2011, reached 98,653. An incidence
analysis using micro-simulations carried out in the context of the World Bank’s 2010 poverty
assessment indicates that 80 percent of the beneficiaries of Paraguay’s CCT programs would be
concentrated within the poorest 15 percent of the population if the CCT’s targeting instrument
were perfectly implemented. No beneficiary of CCT programs would be found in the upper half
of the income distribution.45
46
B. Environmental Aspects
111. The specific policies supported by the PSDPL are not expected to significantly
impact the environment, forests or other natural resources. The policies are limited to
monitoring the performance of SOE’s and no direct investments are supported. The
45
Micro-simulations were used due to the lack of information on coverage of the CCT program in the Permanent
Household Survey in 2008. 46
World Bank (2010): ―Paraguay: Estudio de Pobreza—Determinantes y Desafíos para la Reducción de la
Pobreza‖, Washington DC. Report No. 58638-PY
37
environmental licensing and management of SOE’s is regulated under Paraguay’s
environmental institutional and policy framework as defined under Laws 1561 of 2000, 3679 of
2008 (institutional framework), and Law 294 of 1993 (on environmental assessment) among
others. The institutional framework consists of the Secretariat for Environment (SEAM) and
the National Environment Council which are responsible for defining environmental policy and
monitoring the environment as defined by Law 1561.
112. SEAM has limited capacity and insufficient coordination with other ministries and
SOE's in regard to infrastructure projects, especially in the areas of water and electricity.
These shortcomings may result in delays at planning, licensing, and construction stages which
could have an impact on overall efficiency in the provision of public services. However, the
Water and Sanitation Sector Modernization (P095235, Loan No. 7710-PY) includes a specific
sub-component to strengthen the Water Resources and the Environmental Licensing
Directorates of SEAM. In addition, to the extent that improvements in the management of
SOEs supported by the PSDPL are successful, Paraguay’s national institutional capacity to
identify and address environmental policy and regulatory issues will be strengthened. The
Energy Sector Strengthening Project (P114971, Loan No. 7994-PY) includes capacity
strengthening for ANDE that aims to improve capacity for environmental assessment and
management of potential impacts from infrastructure investments in this sector.
C. Implementation, Monitoring, and Evaluation
113. The Paraguayan Government has agreed to regularly monitor progress under the
PSDPL. The Bank and the Ministry of Finance agreed on the relevance of establishing
effective monitoring and evaluation activities to ensure adequate follow up of PSDPL
implementation. The Government is carrying out these activities using two interrelated
channels. First, the Under-Secretariat of Economics and Integration (SSEI) from the Ministry
of Finance is responsible for coordinating implementation and monitoring activities of this
DPL. Second, the institution responsible47
for each policy area is accountable for achieving
relevant prior actions.
114. The Government and the Bank will use the following data sources to assess
progress under the PSDPL program:
Public sector budget monitoring and execution reports from the Ministry of Finance,
including reports on revenue collection.
Economic Team’s quarterly monitoring reports of the implementation of the Strategic
Economic and Social Plan (2008-13).
Financial plan execution report from the Ministry of Finance.
Central Bank reports and analysis of key macroeconomic variables.
Reviews and analyses of laws and implementing regulations from the World Bank and
other stakeholders.
Government Internal audit reports.
Reports by the Council for SOEs.
World Bank supervision missions and reports.
World Bank DPL Implementation Completion Report (to be prepared upon project closure).
47
These institutions are: CEP for the SOE Component; AGPE for the Internal Audit Component; and SET for the
Tax Component.
38
D. Fiduciary Aspects
115. According to the IFA48
, Paraguay’s public financial management (PFM) remains
weak and represents a high risk. The three main PFM challenges are related to improvements
in: budget process efficiency; fiscal transparency; and control effectiveness. 49
The common
features underlying each of these challenges is their connection to Paraguay’s political and
institutional context and the difficulty in addressing their technical dimension without adopting
broader governance changes.50
116. The Government remains committed to addressing PFM and particularly control
effectiveness issues. This commitment is most clearly evidenced in (i) the reforms recently
initiated with the assistance of USAID programs Umbral I and II, and (ii) through outcomes
reached through the 2009 Programmatic DPL, including prior actions agreed within the
framework of PSDPL, aimed at strengthening effectiveness of public financial control.
117. The latest IMF safeguards assessment of foreign exchange control environment of
the Central Bank of Paraguay was performed in October 2006. The report states that while
the Central Bank has made some progress in strengthening the safeguard framework since the
2003 safeguard assessment, vulnerabilities remain in areas such as financial and program data
reporting to the Fund. However, according to the assessment, the current foreign exchange
control environment within the Central Bank is satisfactory. An unqualified audit opinion of the
Central Bank financial statements for the year 2010 has been published. The auditors reported a
deviation from the International Financial Reporting Standards (IFRS) on the Financial
Statements that according to the auditors could result in material adjustments if IFRS were fully
adopted. However, based on the review of the audited financial statements and previous DPL
external audit report, nothing came to the attention of the Bank that would indicate that the
BCP control environment into which the loan proceeds will flow is other than adequate under
the proposed arrangements. Arrangements are in place to mitigate identified risks.
Budget Transparency
118. The annual budget is publicly accessible through the Ministry of Finance’ website. In the fiscal year 2009, the Ministry of Finance also issued a quarterly report on budget
execution, which was published on their website.51
Furthermore, the audited annual financial
statements are submitted to Congress and being made public subsequent to their approval.
E. Disbursements and Auditing
119. The Bank would make the single loan disbursement to a dedicated account that
forms part of the country's official foreign exchange reserves at the Central Bank of
Paraguay. The disbursement would be made upon the Bank's assessment on satisfactory
compliance of prior actions agreed and compliance with the adequacy of the Borrower’s
macroeconomic policy framework. Disbursement will not be linked to any specific purchases
Real GDP growth (in percent) -3.3 2.1 0.0 3.8 4.1 2.9 4.3 6.8 5.8 -3.8 15.0 5.5 4.8 4.5 4.0
Average nominal interest rate on public debt (in percent) 6/ 4.3 4.7 4.2 3.0 3.1 3.5 3.7 4.4 3.2 3.2 2.5 3.4 3.6 2.5 2.9
Average real interest rate (nominal rate minus change in GDP deflator, in percent) -8.1 -0.2 -5.9 -15.0 -8.7 -4.6 -4.8 -5.8 -9.9 3.3 -4.3 -5.1 -7.0 -1.8 -4.6
Nominal appreciation (increase in US dollar value of local currency, in percent) -5.6 -24.7 -34.1 16.2 -2.2 2.1 17.9 6.5 -1.4 7.3 1.1 2.8 1.2 1.1 0.9
7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.
8/ The implied change in other key variables under this scenario is discussed in the text.
9/ Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).
10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
1/ Individual shocks are permanent one-half standard deviation shocks.
2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance. 3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, with real depreciation
defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP
deflator). 4/ One-time 3% GDP shock in 2012 (2% due global economic slowdown plus 1% due to foot and mouth disease in Paraguay)
Sources: Central Bank, World Bank staff estimates.
Figure A.4.1: Central Government Sustainability (Altnernative Scenarios) 1/ (% of GDP)
1/ Individual shocks are permanent one-half standard deviation shocks.
G ro w th s h o c k
Bas el in e
10
15
20
25
30
35
40
45
50
2005 2007 2009 2011 2013
A .3: G ro wth s ho c k
PB s h o ck
Bas elin e
5
10
15
20
25
30
35
40
45
50
2005 2007 2009 2011 2013
i- rate s h o c k
Bas el in e
10
15
20
25
30
35
40
45
50
2005 2007 2009 2011 2013
A .2: Interes t rate s ho c k
H is to r ic al
Bas el in e
9
14
19
24
29
34
39
44
49
2005 2007 2009 2011 2013
A .1: B as eline and his to ric al s c enario s
Bas el in e
10
15
20
25
30
35
40
45
50
2005 2007 2009 2011 2013
A .5: Co m b ined s ho c k 2/
A .4: P rim ary b alanc e s ho c k andno p o lic y c hang e s c enario
N o p o l ic y c hange
30 % d ep rBas el in e
10
15
20
25
30
35
40
45
50
2005 2007 2009 2011 2013
A .6: Real d ep rec iat io n and c o nting ent liab ilit ies s ho c k 3/
co n tin gen t liab ilities
G ro w th s h o c k Bas el in e
10
15
20
25
30
35
40
45
50
2005 2007 2009 2011 2013
A .7: G ro wth s ho c k (3% in 2012) 4/
Co m b in eds h o ck
62
Annex 5: Country at a Glance
63
Cerro León Cerro León (1,000 m) (1,000 m)
Cerro Pero Cerro Pero (842 m) (842 m)
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P R E S I D E N T E P R E S I D E N T E
H A Y E S H A Y E S S A N S A N P E D R O P E D R O
CANENDIYÚ CANENDIYÚ
CAAGUAZU CAAGUAZU CORDILLERA CORDILLERA
I TA P U A I TA P U A
PARA- PARA- GUARI GUARI
CENTRAL CENTRAL
AA LL TTOO
PPAA
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CC AA AA ZZ AA PPAA GGUUAAIIRRAA
MMIISSIIOO
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BBUUCCÚÚ
AMAMBAY AMAMBAY
CONCEPCION CONCEPCION
PPiillccoommaayyoo
PPiillccoommaayyoo VVeerrddee
PPaarraagguuaayy
PPaarraannáá
Ita Ita
Villa Villa Oliva Oliva
Desmochado Desmochado
San Ygnacio San Ygnacio San Pedro San Pedro del Paraná del Paraná
Abaí Abaí
Curuguaty Curuguaty
San San Estanislao Estanislao
Lima Lima
Capitán Capitán Bado Bado
Yby Yaú Yby Yaú
Puerto Pinasco Puerto Pinasco
Puerto Puerto Tres Palmas Tres Palmas
Puerto Puerto Bahía Negra Bahía Negra
Mariscal Mariscal Estigarribia Estigarribia Puerto Puerto
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.
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