Page 1 PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB5508 Operation Name Paraguay Second Public Sector Programmatic Development Policy Loan Region LATIN AMERICA AND CARIBBEAN Sector Central government administration (100%) Project ID P117043 Borrower(s) REPUBLIC OF PARAGUAY Implementing Agency MINISTRY OF FINANCE Date PID Prepared February 19, 2010 Estimated Date of Appraisal Authorization March 10, 2010 Estimated Date of Board Approval May 25, 2010 1. Key development issues and rationale for Bank involvement Between 2003 and 2008, Paraguay experienced its biggest economic expansion since the 1970s, supported by a favorable external environment and sound macroeconomic policies. The country underwent a period of economic stagnation in the late 1990s and early 2000s which resulted from a domestic banking crisis and the negative fallout from the economic turbulence experienced by the Southern Cone at the time. The economic turnaround, which began in 2003, was supported by the favorable external environment, especially strong demand for Paraguay’s exports, and an economic stabilization program, implemented by the previous administration which assumed office in 2003. As a result, average annual GDP growth reached over 4.6 percent between 2003 and 2008, compared to an average of 2.7 percent for the preceding two decades. Private consumption recovered strongly, representing the main driver of growth, and investment also increased at historically high levels (8 percent per year on average). 2004 2005 2006 2007 2008 Real GDP growth (%) 4.1 2.9 4.3 6.8 5.8 GDP per capita (US$) 1,205 1,267 1,546 2,003 2,709 CPI inflation (eop, % change) 2.8 9.9 12.5 6.0 7.5 Central government primary balance (% of GDP) 2.7 2.0 1.5 1.8 3.1 Central government overall balance (% of GDP) 1.6 0.8 0.5 1.0 2.5 Current account (% of GDP) 2.1 0.2 1.3 1.3 -2.1 Real effective exchange date (2000=100) 127.7 145.3 127.3 117.9 145.9 The international economic crisis, coupled with the severe drought that afflicted the region, has had a significant effect on Paraguay’s economy . On the supply side, agricultural production fell by 23 percent in real terms in the first semester of 2009, primarily as a result of the prolonged drought earlier in the year, with the production of soy and cotton particularly hard hit. Economic activity also fell in manufacturing industries (-5 percent) and construction (-4 percent) during the first semester. On the demand side, the contraction was due to a fall in private consumption (which fell by 1.8 percent) - mostly of durable goods – and private investment (which contracted by 20.7 percent) in the first semester of 2009. Overall, GDP fell by 4.3 percent in the first semester of 2009, which led to a downward revision of growth projections for the year, to -3.8 percent. The Government’s policy response has been instrumental, and its macroeconomic policy framework remains appropriate. The Government’s Anti-Crisis Plan, which was presented to Page 2 Congress in January 2009, included measures aimed at ensuring sufficient liquidity in the financial system; providing a fiscal stimulus through expanded public spending programs; ensuring access to financing for the productive sectors; and accelerating the mobilization of external resources. The implementation of the Plan has played an important stabilizing role. The Government also remains committed to the prudent macroeconomic policies pursued in recent years, focusing on fiscal sustainability, improved competitiveness and equitable growth – as laid out in the Government’s Strategic Economic and Social Plan. Despite the disruption of the recent economic crisis, the Government continues to pursue its medium-term Economic and Social Plan for 2008-13, including a broad set of public sector reforms. The Plan remains highly relevant to the country’s development challenges. The operation aims to support the main areas of public sector reform: tax system, public financial management control, state-owned enterprises, civil service and public sector human resources management. It also aims to support the government in maintaining an adequate macroeconomic policy framework. 2. Proposed objective(s) The proposed US$75 million Programmatic Development Policy Loan II (PDPL II) to the Republic of Paraguay is the second in a planned series of three operations aimed at supporting fiscal management and public sector reforms. The programmatic series as envisaged under the FY09- FY13 Country Partnership Strategy (CPS) would total US$200 million, representing approximately 40 percent of the indicative CPS envelope. The PDPL-I was fully disbursed in September 2009 (US$100 million). The PDPL II will tentatively be approved in 2010 (US$75 million), and the PDPL III (US$25 million) in 2011. The overall development objective of the proposed PDPL series is to contribute to the effectiveness and efficiency of the public sector, while maintaining a stable macroeconomic policy framework. This is expected to be reached through achieving the following specific objectives: (i) improving revenue collections and the equity of the tax system; (ii) improving the effectiveness of Central Administration internal financial control; (iii) exerting effective SOE oversight; (iv) improving the efficiency and equity of social and capital expenditures; and (v) contributing to the professionalization of the civil service. The operation has a direct link to the Government Plan . The operation aims to contribute to the Government Plan’s overall objective of achieving sustainable and more equitable growth through direct support to three of its pillars: (i) macroeconomic policy; (ii) state-owned enterprises; and (iii) state modernization. Beyond the Government Plan, the areas covered by the PDPL are relevant to Paraguay’s broader development challenges. 3. Preliminary description The proposed Second Programmatic Development Policy Loan (PDPL) is intended to support the Government of Paraguay in implementing its reform program to improve the public sector. The loan supports four areas of policy reform: (i) tax system; (ii) public sector financial control; (iii) expenditure management; and (iv) human resources management. 4. Environment Aspects Not Applicable Page 3 5. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 75 Total 75 6. Contact point Contact: Alexandre Arrobbio Title: Sr. Public Sector Mgmt. Spec. Tel: 5260+3715 / 54-11-4316-9715 Fax: Email: aarrobbio@worldbank.org Location: Buenos Aires, Argentina (IBRD)