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Implementation Completion Report (ICR) Review - Py Economic Recovery Loan


  
1. Project Data:   
ES Date Posted:
07/19/2005   
PROJ ID:
P086543
Appraisal
Actual
Project Name:
Py Economic Recovery Loan
Project Costs(US $M)
 30  30
Country:
Paraguay
Loan/Credit (US $M)
 30  30
Sector, Major Sect.:
,
Cofinancing (US $M)
   
L/C Number:
L7210      
   
Board Approval (FY)
  4
Partners involved
 
Closing Date
12/31/2004 12/31/2004
         
Prepared by: Reviewed by: Group Manager: Group:  
Michael R. Lav
Zeynep Taymas Laurie Effron OEDCR

2. Project Objectives and Components:

a. Objectives
Improved public sector management and fiscal sustainability to support a solid economic recovery in the medium term that would pave the way for sustained higher growth rates, a return to positive per capita economic growth and significant poverty reduction.

b. Components
1. Fiscal Stabilization: (a) acceptable macroeconomic framework, (b) withdrawal of supplemental budget requests to Congress during calendar 2003 except for those for the purpose of external debt payments and social sector expenditures, (c) no increase in central administration salaries by the new administration during 2003, (d) sixty percent of all public employees in the central administration checked for duplicative salary payments, a draft law for the CY2004 budget consistent with achieving a primary surplus in the central administration to be submitted to Congress.

2. Tax Reform: (a) increase the excise tax on gasoil to 26 percent, (b) new draft law submitted to Congress to (i) broaden the VAT based through generalization of VAT to agriculture, services, and current contributors to the Tributo Unico, (ii) reduction of exemptions, (iii) increase in excise tax on alcohol and cigarettes, (iv) reduction of the income tax rate on firms; and (v) broaden the income tax base; (c) adopt measure to combat tax evasion, including (i) removal of all non-customs employees from customs areas; (ii) eliminate ad-hoc checkpoints along transport routes; (iii) create a special technical unit to improve coordination of efforts on combating tax evasion; (iv) launch an educational and awareness raising campaign for tax compliance

3. Public Administration and Anti-Corruption: (a) draft law for calendar 2004 budget to shift to program and results format; (b) draft law submitted to Congress to simplify administrative procedures, promote selective audits, grant financial autonomy to the Customs Administration and upgrade its staff; (c) enact a decree regulating Public Procurement and a resolution creating the Directorate General of Public Procurement (DGCP) ; (d) Adopt a Procurement Action Plan including development and implementation of (i) the institutional and operations framework for the DGCP, (ii) a human resource development plan, (iii) an electronic information and procurement system, and (iv) strengthened contract management; (e) agreement with Transparency International Paraguay for a set of actions to improve the transparency in the use of public resources in the Ministry of Finance; (f) Launch a census of public sector employees to determine the number of employees and their positions; (g) create the Central Unit of Public Investment in the Ministry of Finance; (h) Adopt a financial management action plan including (i) introduction of accrual accounting in the Sistema Integrado de Administracion Financiera-SIAF); (ii) implement SIAF in the public decentralized agencies of the nonfinancial sector.

4. Financial Sector: The Deposit Guarantee and Bank Resolution Fund law approved by Congress and in effect.

5. The Public Sector Pension Fund: (a) public bidding launched to hire technical assistance to (i) design a database system, (ii) digitalize contributor and beneficiary files; and (iii) design a process for the restructuring of contributory and non-contributory pensions; (b) public bidding launched to hire technical assistance to design a process for the restructuring of the contributory and non-contributory pensions of the Public Sector Pension System; and (c) draft law reforming the Public Sector Pension System submitted to Congress including the following measures (i) increase the retirement age; (ii) lengthen the time period over which the salary base for pension benefits is calculated; (iii) reduction in replacement rates for mandatory and early retirement; (iv) raising the age and years of contribution required for early retirement; and (v) harmonization of contributions and benefits of the Public Sector Pension Fund with those of other existing pension funds.

c. Comments on Project Cost, Financing and Dates
The ERSAL cost US$30 million financed by a one tranche IBRD loan of US $ 30 million. The project was appraised October, 2003, approved by the Board on December 16, 2003, made effective on December 24, 2003, and closed on schedule on December 31, 2004.


3. Achievement of Relevant Objectives:

All of the components were successfully implemented except for the increase in gasoil taxes, and the gasoil tax was actually decreased from 20 % to 14% rather than increased to 26% as agreed.

1. Fiscal stabilization. The overall deficit was reduced from 3.1 percent of GDP in 2002 to 0.1 percent in 2003 in contrast to the projected deficit for that year of 3 percent of GDP. A surplus of 3.2 percent of GDP was achieved in 2004, better than the fiscal surplus of 0.3 percent of GDP targeted in the IMF's SBA. Current revenues increased by 27 percent in 2003, current expenditures increased by only 8 percent. Budget supplements greatly reduced. Salary increases controlled but not fully frozen. A number of double-dipping employees have been identified, some of whom have been removed (while others appear to be entitled to this).

2. Tax policy. Tax revenues including customs increased by 36 percent in 2004 due to reduced evasion, increased efficiency and reduced corruption in tax and customs administration. However, the gasoil tax increase to 20 percent which was targeted to increase further to 26 percent was actually reduced to 14 percent (with the government's justification being the impact of higher petroleum prices on the population). The new Tax Reform Law introduced a personal income tax and broadened the VAT.

3. Public Administration and Anti-Corruption. A Procurement Action Plan has been launched. A new procurement law was introduced, a public procurement portal launched on the Web, and a public process for the competitive selection of the head and key staff of the Directorate General of Public Procurement has taken place. Ten ministries are using performance budgeting linking disbursements to objectives.

4. Financial Sector. The new deposit guarantee system is working and is financed by the commercial banks.

5. Public Sector Pension System has been put on a better financial footing by raising contribution rate from 14 percent to 16 percent, increasing the retirement age from between 40 and 50 years (depending on gender, occupation, and years of service) to a mandatory 62 years. The base wage used to compute pension benefits has been changed from the last year to the average over the last five years of service. The replacement rate was reduced from 93 percent of the base wage to 20 percent of the base wage plus 2.7 percent per year of service, applicable only after 10 years of service. Pension indexation is linked to CPI inflation rather than public sector wage increases. The subsidy embedded in non-contributing Chaco-war pensions has been made explicit by separating them from the system of contributing pensions and financing them from the budget.

4. Significant Outcomes/Impacts:

An acceptable macro framework has been achieved, and Paraguay has reversed its slide towards insolvency and achieved a measure of financial health.

The improved public procurement system is beginning to have an impact and, for example, a 37 percent reduction in health expenditures was achieved for January-April 2004 compared to same period the previous year.

The actuarial deficit of the pension system from 2003-2050 has been reduced by approximately half.

5. Significant Shortcomings (include non-compliance with safeguard features):

The tax on gasoil was not raised and was actually lowered.

6. Ratings:ICROED ReviewReason for Disagreement/Comments
Outcome:
SatisfactorySatisfactory
Institutional Dev.:
SubstantialSubstantial
Sustainability:
LikelyNon-evaluableSustainability must be questioned for such a wide-ranging reform prepared "without actions on inequality, rural poverty and insecurity of tenure for indigenous people which can potentially lead to a large social backlash" as stated in the ICR. Follow-on operations must address these issues if sustainability and support for further reforms is to be achieved.
Bank Performance:
Highly SatisfactoryHighly Satisfactory
Borrower Perf.:
SatisfactorySatisfactory
Quality of ICR:
Satisfactory

7. Lessons of Broad Applicablity:

1. The Bank needs a stock of ESW to be able to take advantage of reform opportunities. In Paraguay, the existence of such work enabled rapid preparation of a policy options paper which lead to a CAS and this operation. The absence of such work would have caused delays and made it much more difficult for the Bank to pursue this window of opportunity. 2. There is a delicate balance between political feasibility and the depth of reform efforts. In this case, exceptions given to teachers and the army in the pension reform made possible the broader reform program. 3. Utilizing the services of outside agencies, in this case, Transparency International, can buttress reform programs and lend important credibility to a range of reforms.

8. Audit Recommended?  Yes

          Why?  This operation supports a major turnaround in performance, and is being accompanied by other adjustment lending. There are many further reforms to be accomplished, and the follow-on adjustment loans should be assessed as a package with this loan.

9. Comments on Quality of ICR:

The ICR is clearly written, presenting a great amount of detail in an fully readable fashion.
However, there is an important defect in the ICR. The ICR does not contain any partners' comments, only comments about partners. The Region informed that no partners' comments had been received despite repeated requests. This fact should have been stated forthrightly in the ICR, rather than inserting a description of partners' activities as was done. It should be noted that the comments in section 9 about the IMF correspond to statements in the IMF's Fourth Review of the SBA (see Press Release No. 05/70, dated March 29, 2005).

Despite these shortcoming, the ICR is rated "satisfactory" because the material it does present meets stated criteria and is well presented.

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