document of the world bank for official use only uy...
TRANSCRIPT
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. UY-61568
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
FOR A PROPOSED LOAN
IN THE AMOUNT OF US$260 MILLION
TO
THE ORIENTAL REPUBLIC OF URUGUAY
FOR A
SECOND PROGRAMMATIC PUBLIC SECTOR, COMPETITIVENESS AND SOCIAL INCLUSION DEVELOPMENT POLICY LOAN WITH A DEFERRED DRAWDOWN OPTION
September 21, 2011 Poverty Reduction and Economic Management Argentina, Paraguay and Uruguay Country Management Unit Latin America and Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updates document will be made publicly available in accordance with the Bank’s Policy on Access to Information.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
THE ORIENTAL REPUBLIC OF URUGUAY FISCAL YEAR
January 1–December 31
CURRENCY EQUIVALENTS (Exchange Rate Effective September 7, 2011)
Currency Unit = Uruguayan Peso (UR$) UR$18.7 = US$1
WEIGHTS AND MEASURES Metric System
SELECTED ABBREVIATIONS AND ACRONYMS
AAA Analytical and Advisory Activities AGESIC Agencia para el Desarrollo del Gobierno de Gestión Electrónica y la Sociedad de la Información y del
Conocimiento (Agency for the Development of the Electronic Management Government and the Information and Knowledge Society)
ANEP Administración Nacional de Educación Pública (National Agency for Primary Education) ASSE Administración de los Servicios de Salud del Estado (State Health Services Administration) BEVSA Bolsa Electrónica de Valores del Uruguay (Uruguay Electronic Stock Exchange) BPS Banco de Previsión Social (Social Security Bank) BHU Banco Hipotecario del Uruguay (Mortgage Bank) BSE Banco de Seguros del Estado (State’s Insurance Bank) BVM Bolsa de Valores de Montevideo (Uruguay Stock Exchange) CAIF Centro de Atención Integral a la Infancia y la Familia (Children and Family Assistance Centers) CAF Corporación Andina de Fomento (Andean Development Corporation) CAS Country Assistance Strategy CBU Central Bank of Uruguay (Banco Central del Uruguay) CFAA Country Financial Accountability Assessment CIACEX Comisión Interministerial para Asuntos de Comercio Exterior (Inter-ministerial Commission of Foreign Trade) COFIS Contribución al Financiamiento de la Seguridad Social (Social Security Financing Contribution Tax) COPAB Corporación para la Protección del Ahorro Bancario CPAR Country Procurement Assessment Report CPS Country Partnership Strategy CONALOG Comisión Nacional de Logística (National Commission of Logistics) CY Calendar Year DB Doing Business DDO Deferred Drawdown Option DINAMA Dirección Nacional de Medio Ambiente (National Environmental Agency) DINEM Dirección Nacional de Evaluación y Monitoreo (National Evaluation and Monitoring Agency) DPL Development Policy Loan DGI Dirección General Impositiva (General Directorate of Taxation) ECLAC Economic Commission for Latin America and the Caribbean EMBI Emerging Markets Bond Index FCTC Framework Convention on Tobacco Control FDI Foreign Direct Investment FIDECOM Fondo de Investigación y Desarrollo para la Competitividad (Competitiveness Research and Development
Fund) FRTL Fiscal Responsibility and Transparency Law FSAP Financial Sector Assessment Program FY Fiscal Year GDP Gross Domestic Product GEF Global Environment Facility IADB Inter-American Development Bank IAS International Accounting Standards IBRD International Bank for Reconstruction and Development IBTAL Institution-building Technical Assistance Loan ICA Investment Climate Assessment
ICT Information and Communications Technology ICR Implementation Completion and Results Report IDF Institutional Development Fund IFRS International Financial Reporting Standards IFS International Financial Statistics IMF International Monetary Fund INALOG Instituto Nacional de Logística (National Institute of Logistics) INAU Instituto del Niño y Adolescente del Uruguay (Uruguayan Institute for Children and Youth) INE Instituto Nacional de Estadística (National Bureau of Statistics) INHI Integrated National Health Insurance IRP Impuesto a las Retribuciones Personales (Tax on Salaries) IRPF Impuesto a la Renta de las Personas Físicas (Personal Income Tax) JUNAE Junta Nacional de Empleo (National Employment Board) JUNASA Junta Nacional de Salud (National Health Board) LAC Latin America and Caribbean LATU Laboratorio Tecnológico del Uruguay (Technological Laboratory of Uruguay) MEF Ministerio de Economía y Finanzas (Ministry of Economy and Finance) MIDES Ministerio de Desarrollo Social (Ministry of Social Development) MSP Ministerio de Salud Pública (Ministry of Public Health) MVOTMA Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente (Ministry of Housing, Regional Planning
and Environment) NCDs Non Communicable Diseases NHI National Health Insurance NFPS Non-financial public sector NPL Non-performing loan OECD Organization for Economic Cooperation and Development OPP Oficina de Planeamiento y Presupuesto (Office of Planning and Budget) PER Public Expenditure Review PFM Public Financial Management PRIDPL Programmatic Reform Implementation Development Policy Loan PSIA Poverty and Social Impact Assessment Q Quarter R&D Research and Development SIIAS Sistema Integrado de Información del Área Social SINARE Sistema Nacional de Registro de Empresas (National Registry System) SPDPL Social Program Development Policy Loan SSAL Social Sectors Special Structural Loan TAL Technical Assistance Loan TFP Total Factor Productivity UCA Unidad Central de Adquisiciones (Procurement Central Unit) UN United Nations U.S. United States UTE Administración Nacional de Usinas y Transmisiones Eléctricas (Electric Transmissions of Uruguay) VAT Value Added Tax
Vice President: Pamela Cox Country Director: Penelope J. Brook Sector Director Rodrigo A. Chaves Sector Manager: Oscar Calvo-Gonzalez (Acting) Sector Leader: Zafer Mustafaoglu Task Team Leaders: Norbert Fiess and Peter
Siegenthaler
ii
THE ORIENTAL REPUBLIC OF URUGUAY SECOND PROGRAMMATIC PUBLIC SECTOR, COMPETITIVENESS AND SOCIAL
INCLUSION DEVELOPMENT POLICY LOAN WITH A DEFERRED DRAWDOWN OPTION
TABLE OF CONTENTS
LOAN AND PROGRAM SUMMARY ...................................................................................... iv
SECOND PROGRAMMATIC PUBLIC SECTOR, COMPETITIVENESS AND SOCIAL INCLUSION DEVELOPMENT POLICY LOAN ................................................................... iv
I. INTRODUCTION ....................................................................................................................1
II. COUNTRY CONTEXT ...........................................................................................................2
A. Recent Economic Developments ........................................................................................... 2 B. Macro Economic Outlook and Debt Sustainability ............................................................... 6 C. Debt Sustainability ................................................................................................................. 8
III. THE GOVERNMENT PROGRAM ........................................................................................9
IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM .................................................10
A. Link to the Country Partnership Strategy ............................................................................ 10 B. Consultations........................................................................................................................ 11 C. Collaboration with IMF and Other Donors .......................................................................... 12 D. Relationship to other Bank Operations ................................................................................ 12 E. Lessons Learned ................................................................................................................... 14 F. Analytic Underpinnings ....................................................................................................... 15
V. THE PROPOSED OPERATION ...........................................................................................18
A. Operation Description .......................................................................................................... 18 B. Policy Areas ......................................................................................................................... 23
VI. OPERATION IMPLEMENTATION .....................................................................................33
A. Poverty and Social Impact ................................................................................................... 33 B. Implementation, Monitoring and Evaluation ....................................................................... 34 C. Fiduciary Arrangements ....................................................................................................... 35 D. Disbursement and Audits ..................................................................................................... 36 E. Environmental Aspects ........................................................................................................ 36 F. Risks and Risk Mitigation .................................................................................................... 37
ANNEXES
Annex 1. Debt Sustainability Analysis ..........................................................................................41
Annex 2. Poverty and Social Impact Analysis for Social Insurance Programs .............................48
Annex 3. Letter of Development Policy ........................................................................................51
Annex 4. Policy Reform Matrix .....................................................................................................61
Annex 5. Description of Status of Initial Triggers for DPL II .......................................................61
Annex 6: Uruguay-IMF Relations .................................................................................................71
Annex 7. Uruguay at a Glance .......................................................................................................73
Annex 8. Uruguay Millennium Development Goals .....................................................................75
Annex 9. Map of Uruguay .............................................................................................................76
iii
TABLES
Table 1. Uruguay: Selected Macroeconomic Indicators ................................................................ 4 Table 2. Uruguay: Overall Public Sector Financing Requirements, 2010-2014 ............................ 9 Table 3. Policy Reforms and IBTAL Institutional Support .......................................................... 14 Table 4. Indicative Triggers for DPLII, Reform Status and Prior Actions for DPL II ................. 21
Annex: Figure A1. 1 Annual public debt as a share of GDP ..................................................................... 42 Figure A1. 2 Gross Public Debt-to-GDP: Stochastic Simulations ............................................... 45
FIGURES
Figure 1. Uruguay: Economic Growth and FDI Inflows (US$ million) ........................................ 5 Figure 2. Uruguay: Fiscal Performance Indicators (Percent of GDP) ............................................ 5 Figure 3. Uruguay: Public Sector Debt Profile ............................................................................... 6 Figure 5. EMBI Global Index Uruguay, Brazil, Chile, Colombia and Peru ................................. 40
Annex: Table A1. 1 Gross Public Debt: Alternative Scenarios and Bound Tests, 2011-2016 ................. 44 Table A1. 2 Uruguay: Public Sector Debt Sustainability Framework, 2006-2016 ...................... 46
BOXES
Box 1. Good Practice Principles on Conditionality ...................................................................... 23 Box 2. Global Economic Crisis of 2008 and 2009 and the Importance of Liquidity Risk ........... 40
ACKNOWLEDGEMENTS
This Second Programmatic Multisector Development Policy Loan was prepared by a team led by Norbert Fiess and Peter Siegenthaler and comprising: Cristian Aedo, Sylvia Albela Russo, Mariela Alvarez, Fabiola Altimari, Diego Ambasz, Amparo Ballivian, Daniel Alberto Benitez, Andrew Follmer, Ivanna Echegoyen, Enrique Fanta, Juan Martín Moreno, Victor Ordonez, Luis Perez, Luis de la Plaza, Rafael Rofman, Alejandro Solanot and Eduardo Urdapilleta.
The team gratefully acknowledges the support and guidance of Penelope Brook, Oscar Calvo-Gonzalez, Rodrigo Chaves and Zafer Mustafaoglu. The peer reviewers are Paloma Anos Casero, Mark Thomas and Francis Rowe. The team acknowledges and is grateful for the collaboration of the Uruguayan authorities, most notably Azucena Arbeleche, Michael Borchardt, Mariella Maglia, Andrés Masoller and María Eugenia Vázquez.
iv
LOAN AND PROGRAM SUMMARY
THE ORIENTAL REPUBLIC OF URUGUAY SECOND PROGRAMMATIC PUBLIC SECTOR, COMPETITIVENESS AND SOCIAL
INCLUSION DEVELOPMENT POLICY LOAN WITH A DEFERRED DRAWDOWN OPTION
Borrower The Oriental Republic of Uruguay
Implementing Agency
Ministry of Economy and Finance (MEF)
Financing Data IBRD Loan Amount: US$260 million
Terms: Flexible Loan with a variable spread, level repayment, with a Grace Period of 15 years, a Final Maturity of 20.5 years, and the Front-end Fee paid by the Borrower.
Operation Type The proposed development policy loan with a Deferred Drawdown Option (DPL-DDO) would be the second and final operation in the Uruguay Programmatic Public Sector, Competitiveness, and Social Inclusion Development Policy Loan series. The loan amount is to be made available for disbursement in various draw-downs of a single tranche following effectiveness. A condition for loan effectiveness is that the Bank is satisfied with the progress achieved by the Borrower in carrying out the Program and with the adequacy of the Borrower’s macroeconomic policy framework.
Main Policy Areas
The proposed DPL-DDO would support the Government of Uruguay’s reform program in three strategic areas: public sector management, competitiveness and social inclusion. The proposed loan builds on the achievements of the previous series of DPLs (PRIDPL I and II).
The proposed DPL-DDO would also assist the Government in addressing the potential adverse impacts of global financial shocks on public expenditures between 2012 and 2014.
Key Outcome Indicators
The key outcome indicators are as follows:
Strengthening the efficiency of the public administration Improving competitiveness Supporting social inclusion
For details on progress on meeting these outcome indicators per policy area see last column of the policy matrix (Annex 4).
Program Development Objectives and Contribution to CPS
The main development objectives of the loan are the following:
(i) Strengthening public sector administration; (ii) Improving competitiveness through measures seeking to facilitate trade,
strengthen the business environment and develop financial markets; (iii)Improving social inclusion through measures seeking to enhance the
equity and efficiency of health, education and social protection services.
The proposed loan is fully consistent with the CPS and fits into three of the four pillars identified in the CPS, namely: (i) macroeconomic and public sector management; (ii) competitiveness; and (iii) social inclusion & equity.
v
Risks and Risk Mitigation
The overall risk is assessed as moderate. The three main sources of risks are:
Economic risks: moderate. The main economic risks arise from the economy’s vulnerability to external shocks, particularly related to reduced, but still considerable levels of debt, with a high content of debt in foreign currency, and the relatively high banking sector dollarization. Current global uncertainties have brought back a scenario in which market turbulences could produce volatility and shocks, which could cause stress to public and financial sectors in Uruguay. These risks are however mitigated by: i) a prudent fiscal policy stance maintained over recent years, ii) an active debt management strategy seeking to reduce short and medium-term borrowing requirements and the share of dollarized debt, and iii) continued efforts to enhance the prudential regulatory and supervisory framework for the financial system. Considering the lessons from past global financial crises, the Government wants to protect essential public expenditures as well as reform momentum under an adverse external scenario. The proposed DPL-DDO operation is part of a Government strategy to ensure contingent financing in order to protect essential public expenditures and reform efforts in key priority areas, supported by the current DPL series.
Political and social risks: low. The current Government, in power since early 2010, has followed through on its commitments to maintain prudent macroeconomic policies and consolidate the structural reform achieved by the previous administration. However, risk might arise from tensions between pressure to expand Government programs and the need to maintain a prudent fiscal stance with a view to keeping inflation and appreciation pressures at bay as well as preserving debt sustainability. This is mitigated by Government efforts to build support for policy reforms supported by this operation, in line with Uruguay’s tradition of consensus building. In addition, the Government’s efforts on enhancing social inclusion, through education, health and social protection programs is expected to offset potential social tension.
Implementation risks: low. These risks relate to potential challenges to implementing policy reforms supported by this loan. They are mitigated by continued advances on these reform areas and deepened efforts to strengthen capacity in key implementing agencies. The Bank-supported Institution-Building Technical Assistance Loan (IBTAL) will accompany the DPL-DDO through capacity-building support, as it did effectively under the first DPL and the previous DPL series. Government and Bank are currently preparing an Additional Financing to the IBTAL, to strengthen and extend this support.
Project ID P123242
1
I. INTRODUCTION 1. The proposed development policy loan with a Deferred Drawdown Option (DPL-DDO) is the second and final of a programmatic series of two loans. The series supports the implementation of economic and social sector reforms in the following areas: (i) strengthening the efficacy of the public sector; (ii) improving competitiveness; and (iii) making further advances on social inclusion, through improvements in efficiency and equity of social sector services delivery. These reform areas are at the heart of the priorities set by the new Government in the five year budget adopted in December 2010. As such, the DPL series is also fully consistent with the main objectives of the Uruguay CPS for 2010-2015. The first loan of the series disbursed in February 2011 (US$100 million) and the amount for the second loan is US$260 million. 2. The second DPL plays an important role in continuing and deepening support to existing components of the reform program supported by the first DPL. The Government has made good progress in implementing the DPL-supported reform program, as evidenced by the fact that eight out of nine indicative triggers that were identified in the first operation of the series have been fully met. The remaining trigger on e-governance reform has also been met in substance, even though it needed to be reformulated due to changing circumstances.
3. The move from the DPL envisaged in the CPS to a DPL with a DDO reflects growing concerns about deteriorating international financial market conditions. The Government is following a prudent debt strategy focused on ensuring contingent financing to secure medium-term borrowing requirements in a period with a global economic context which is still favorable for Uruguay but subject to considerable downside risks. In full accordance with the CPS, the DPL-DDO instrument would make resources available to be drawn down on request, unless the borrower has received prior notification from the Bank that one or more draw-down conditions have not been met and that a subsequent review is necessary. The Borrower intends to defer draw-down unless access to international capital markets deteriorate significantly1. Considering the lessons from past global financial crises, the Government wants to ensure that it could maintain essential public expenditures and also reform momentum even during an adverse external scenario. The requested change from a DPL to a DPL-DDO and the increase in amount from originally envisaged US$100 million to US$260 million is part of this Government strategy and will protect the reforms supported by the current DPL series.
1 This does not represent a legally binding condition for the Borrower and does not form part of the Loan Agreement. The only disbursement conditions for the DPL-DDO loan are that an adequate macroeconomic framework is maintained and that overall program implementation is consistent with the Letter of Development Policy.
2
II. COUNTRY CONTEXT 4. Uruguay has good prospects for further consolidation of the strong performance of economic and social policies of past years. 2010 was the eighth consecutive year of economic expansion since the 2002 crisis, marking one of the longest growth periods in the country’s history. Similarly, there has been a significant reduction in poverty, from 34.4 percent in 2006 to 18.6 percent in 2010. Prudent macroeconomic policies, improvements in structural areas, but also favorable external economic conditions, such as buoyant demand for its main export products and a booming regional economy, have contributed to the strong economic performance. 5. The main challenge ahead is to sustain economic growth at a high level and to further advance on social inclusion and poverty. Meeting this challenge requires the continuation of a bold reform strategy to improve the effectiveness of public policies, particularly in social services, and to strengthen economic competitiveness. The latter requires a substantial increase in investment, particularly for transport and power generation.2 Further improvements in the regulatory and administrative environment of the economy to facilitate trade and transit of goods and services are also critical for strengthening Uruguay’s position as a regional logistics hub. Furthermore, consolidating and deepening public sector reforms remains critical to ensuring that public services are delivered efficiently, most notably in the social sector, which benefited from significant increases in public spending in recent years. Reform needs are also important in the education sector, where the observed stagnation in the quality of education services threatens to erode human capital and social stability. 6. Uruguay seems well positioned to mitigate risks related to the potential effects of increasing global uncertainties. Increasing global uncertainties have brought back a scenario in which market turbulence could produce a shock similar to the one experienced during the 2008 and 2009 global financial crisis. However, a continued favorable economic outlook and adherence to a prudent fiscal stance significantly mitigate this risk. As the results of the Debt Sustainability Analysis show (Annex 1), not even a significant and protracted shock would derail debt sustainability. Furthermore, through a cautionary pre-financing strategy, which includes this DPL-DDO, the Government is building up a buffer against potential short-term liquidity challenges.
A. Recent Economic Developments 7. Following a moderate slowdown in 2009, economic performance exceeded expectations in 2010, with GDP growing by 8.5 percent. As a net food exporter, Uruguay benefitted from rising agricultural prices, particularly during the second half of 2010, albeit this was partly offset by a sharp increase in oil prices. Strong economic growth in the region further contributed to a favorable external environment. Furthermore, average economic growth reached 5.6 percent during the period 2003-2010, far outpacing that of the 20 years
2 To maintain the high growth of recent years, Uruguay would need to increase investment from 18-19 percent of GDP to 23-25 percent. See Policy Notes (Report No. 54393).
3
prior to that period (1.6 percent in 1983-2002). Due to the recent strong economic performance, unemployment reached new record lows, averaging 6.8 percent in 2010. 8. Domestic demand has been the main source of economic growth since 2003, except for 2009, when GDP growth was driven by the external sector. While final consumption contributed the most to domestic demand in 2010, investment - stimulated by substantial levels of FDI -3 proved most dynamic in 2010, expanding by 13.2 percent4 (Figure 1). The large increase in investment partially alleviates concerns about local productive capacity constraints. Furthermore, public efforts are geared towards closing the infrastructure gap by facilitating public and private investment in multimodal transport, energy and telecommunications. 9. Inflation closed 2010 within the target range, but inflationary pressures have since increased. Strong inflationary pressures, including rising international prices, a strong internal demand and supply restrictions for certain goods, led to an increase in CPI inflation to 8.3 percent by July 2011. In 2011, the Central Bank increased the monetary policy rate twice (from 6.5 to 7.5 percent in March and to 8 percent in June) to curb inflation and to help realign inflation expectations with the official inflation target range. 10. The current account deficit increased moderately in 2010. The current account balance posted a deficit of US$443 million in 2010 (-1.1 percent of GDP), after a deficit of US$ 106 million in 2009 (-0.3 percent of GDP). The deterioration was mainly explained by a larger deficit in net factor income, due to an increase in repatriated earnings and lower international interest rates. Despite imports growing slightly faster than exports in 2010, the trade balance increased moderately in dollar terms (but not as a share of GDP). The increase in imports was largely associated with growing domestic production; in 2010, intermediate and capital goods together explained over 70 percent of total imports of goods. 11. Fiscal accounts recovered significantly in 2010. The overall fiscal deficit reached 1.1 percent of GDP in 2010, thus meeting the official target of 1.2 percent. The primary surplus also improved from 1.2 in 2009 to 1.9 percent of GDP, slightly below the official target of 2 percent of GDP. These fiscal improvements were largely due to an increase in revenues that more than offset higher public expenditures. Greater tax revenues and a better performance of SOEs added about 1.2 percent of GDP to total revenues, while expenditures grew by a more moderate 0.6 percent of GDP. More recently, however, there has been a deterioration in public finances that led to a deficit of 1.4 percent of GDP in the 12 months ending May 2011. This was largely driven by higher costs in electricity generation and a delayed increase in public utilities’ fees to keep inflation within the target range.
3 FDI is a significant determinant of domestic investment, averaging 6.2 percent of GDP during the period 2006-2010 (compared to 2.7 percent in 2001-2005). Total gross fixed investment reached 19.1 percent of GDP during the same period. 4 This follows a 12.7 percent decline in gross domestic investment in 2009, largely caused by an abnormal change in stocks that had taken place in 2008 (growth of over 300 percent).
4
12. Overall, the recent economic environment has been beneficial for Uruguay. As a net food exporter, Uruguay benefitted from rising agricultural prices, particularly during the second half of 2010, although this was partly offset by a sharp increase in oil prices. Furthermore, high global liquidity favored access to low-cost financing and large FDI inflows. Strong economic growth in the region further contributed to a favorable external environment. Likewise, the greater geographic diversification of exports, associated to growing commercial ties with other dynamic developing economies has helped to insulate the economy from the economic slow-down in developed countries.
Table 1. Uruguay: Selected Macroeconomic Indicators
Source: Central Bank of Uruguay, Ministry of Economy and Finance, National Bureau of Statistics (INE), ECLAC, IMF and World Bank staff calculations. 1/ Includes small cities (less than 5,000 inhabitants). Period average. 2/ Central Government and BPS. Public debt-to-GDP ratio is calculated using end-of-period exchange rate. “—” refers to data that are not available.
2006 2007 2008 2009 2010 2011p 2012p 2013p 2014p 2015p
National accountsReal GDP growth (%) 4.3 7.3 8.6 2.6 8.5 6.5 4.5 4.0 4.0 4.0GDP (US$ billion) 19.8 23.9 31.2 31.3 40.3 49.1 53.1 57.3 61.8 66.6
External sectorCurrent account balance (% of GDP) -2.0 -0.9 -5.5 -0.3 -1.1 -1.5 -2.5 -3.5 -3.4 -3.3Exports of goods and services (volume, % change) 3.2 7.4 10.0 2.5 9.1 11.7 10.2 8.6 8.5 8.5
Imports of goods and services (volume, % change) 15.3 5.3 22.1 -8.6 16.5 16.6 11.0 9.1 8.7 8.7
Trade balance (% of GDP, incl. services) -0.5 0.7 -3.1 2.2 2.0 0.8 -0.3 -1.4 -1.4 -1.4
PricesCPI (% change, period average) 6.4 8.1 7.9 7.1 6.7 7.6 6.6 6.0 6.0 6.0Exchange rate (average) 24.1 23.5 20.9 22.6 20.1 18.9 19.4 19.8 20.3 20.7Real effective exchange rate (2005=100, + = appreciation) 102.3 104.0 115.8 104.2 111.1 -- -- -- -- --Merchandise terms of trade (2000=100) 88.6 88.7 94.1 96.9 96.9 -- -- -- -- --
Labor market (% )Unemployment (INE) 1/ 10.9 9.1 7.6 7.3 6.8 -- -- -- -- --
Fiscal (% of GDP) Primary balance (deficit (-)/surplus (+)) 3.6 3.5 1.3 1.1 1.9 1.3 1.5 1.7 1.8 1.7 Revenues 2/ 26.7 25.7 25.3 26.6 26.9 27.3 27.5 27.9 28.1 28.1 Current surplus of public enterprises 1.4 2.4 0.8 1.3 2.2 1.3 1.8 2.0 2.0 2.0 Current expenditures 2/ 22.0 21.9 21.8 23.8 24.0 24.2 24.6 25.2 25.3 25.3 Public investment 2.6 2.9 3.3 3.4 3.5 3.3 3.3 3.2 3.2 3.3 Current Surplus BSE 0.0 0.2 0.2 0.2 0.3 0.2 0.1 0.1 0.1 0.1 Current Surplus Local Governments 0.4 0.2 0.1 0.3 0.1 0.1 0.1 0.2 0.2 0.2 Current Surplus CBU -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1Interest payments 4.2 3.5 2.9 2.8 3.0 2.8 2.5 2.5 2.5 2.0Overall fiscal balance (deficit (-)/surplus (+)) -0.5 0.0 -1.5 -1.7 -1.1 -1.5 -1.0 -0.8 -0.7 -0.3
Savings and investment (% of GDP)Gross domestic investment 19.4 19.6 22.3 17.2 17.9 18.9 18.9 19.0 19.2 19.4Gross national savings 17.4 18.6 16.7 16.9 16.8 17.4 16.4 15.6 16.0 16.2Foreign savings 2.0 0.9 5.5 0.3 1.1 1.5 2.3 3.3 3.3 3.2
Indebtedness (% of GDP)Public sector gross debt 70.4 62.8 61.7 60.8 57.7 49.2 45.2 41.5 38.2 34.9o/w foreign-currency denominated (gross) 47.8 42.6 40.0 35.5 32.3 29.9 28.9 26.2 24.5 23.0
Projected (*)
5
Figure 1. Uruguay: Economic Growth (%) and FDI Inflows (US$ million)
Consumption contributed the most to GDP growth in 2010
FDI inflows increased in 2010
Source: Central Bank of Uruguay
Figure 2. Uruguay: Fiscal Performance Indicators (Percent of GDP)
Source: Ministry of Economy and Central Bank of Uruguay
13. Uruguay’s debt profile continued to improve. Gross debt as a share of GDP declined significantly in recent years, reaching 57.5 percent in 2010, compared to 89.6 percent in 2004. This declining trend slowed somewhat with the crisis in 2009, but regained momentum in 2010. High economic growth and an appreciating peso contributed to the decline in the debt-to-GDP ratio. Effective debt management strategies lead to a smoother debt amortization profile, lower dollarization, longer maturities, and a reduction of interest rate risk. Despite these significant improvements, foreign currency debt still represents 56.6 percent of total gross debt.
‐6%‐4%‐2%0%2%4%6%8%
10%12%14%
2006 2007 2008 2009 2010
Government consumption Private consumption
Investment Net Exports
GDP growth
0
100
200
300
400
500
600
700
800
900
1000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
‐2
‐1
0
1
2
3
4
2006 2007 2008 2009 2010
PS Primary Balance
PS Overall Balance
6
Figure 3. Uruguay: Public Sector Debt Profile
Sources: Central Bank of Uruguay and World Bank staff calculations. Note: Public debt is defined as the total public sector and central bank gross debt, unless otherwise indicated.
B. Macro Economic Outlook and Debt Sustainability 14. The economic outlook for Uruguay is generally positive. Provided the current solid macroeconomic framework stays in place, the economy is expected to keep growing in the medium term, albeit at a slower pace. It is also expected to gradually converge to a long-term growth rate of about four percent. Internal demand is projected to remain the key driver of economic growth, as consumption, favored by higher salaries and low unemployment, is expected to increase and investment, supported by large FDI inflows, is expected to remain strong. 15. Inflationary pressures are expected to decline moderately in the course of 2011. Given the recent increases in the policy rate and an expected decline in key commodity prices in the second half of 20115, inflation is expected to decline from the higher levels observed in recent months. However, without additional policy measures or a sudden decline
5 According to World Bank commodity price projections.
Debt-to-GDP ratio on the decline FX-debt remains high, although de-dollarization has continued even during the global crisis
Long-term debt(*) still represents the largest share of total, but short-term instruments gained importance in
2010
Fixed-rate instruments recover in 2010 and remain at high levels
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
5,000
10,000
15,000
20,000
25,000
2004 2005 2006 2007 2008 2009 2010
% GDP
US$
million
Net debt Gross Debt Net debt/GDP Gross Debt/GDP
0% 20% 40% 60% 80% 100%
2004
2005
2006
2007
2008
2009
2010
US Dollar SDR Euro Yen Other
50%
55%
60%
65%
70%
75%
80%
85%
90%
2004 2005 2006 2007 2008 2009 2010
Fixed‐rate debt (%
total gross debt)
0%
10%
20%
30%
40%
50%
60%
70%
80%
2004 2005 2006 2007 2008 2009 2010
Less than 1 year Between 1 and 5 years More than 5 years
(*) Remaining maturity
7
in global prices, inflation is expected to remain at about 7.6 percent in 2011, above the newly established 4 to 6 percent target range. In the medium-term, inflation is expected to return to its target range. 16. The current account deficit is likely to increase moderately in 2011. In the medium term, the current account balance is expected to follow a similar trend as in 2010: the trade balance is expected to decline gradually as a share of GDP, thus increasing the current account deficit. Imports are expected to grow at a faster pace than exports, supported by a real appreciation of the domestic currency and strong domestic demand. An expected medium-term decline in commodity prices will further weigh on the trade balance. As GDP converges to its long-term trend and commodity prices stabilize, we expect the current account deficit to converge to about 3.3 percent of GDP by 2015. FDI inflows are expected to grow steadily. 17. The fiscal deficit is expected to widen in 2011, but to decline again from 2012 onwards. Given the deterioration in SOE revenues due to unfavorable climate conditions, the fiscal deficit is expected to reach 1.5 percent of GDP in 2011. With fiscal revenues projected to grow faster than expenditures and with interest payments declining as a share of GDP, the fiscal balance is expected to improve between 2012 and 2015. 18. The banking system appears stable, although with low profitability. Credit to the private sector grew by 13.3 percent in 2010. The banking system remains liquid and well capitalized, with deposits at almost twice the level of private sector loans. Asset quality remains at a sound level, with non-performing loans at 1.2 percent in December 2010. The capital adequacy ratio of the banking system reached 17 percent - one of the highest in the region. At the same time, the system's liquidity remains high, with the 91 days liquidity ratio close to 67 percent. Despite strong growth, a recovery in credit and record low non-performing loans, several private banks continued to incur losses in 2010. Return on equity stood at 7.0 percent and return on assets at 0.8 percent in September 2010. The low profitability of the banking system is a longstanding problem which is partly related to low returns on liquid assets which account for a large share of banks’ portfolios. Risks to Macroeconomic Outlook6 19. Uruguay has shown resilience to the recent global crisis and experienced a fast recovery in 2010. Furthermore, a relatively long period of continuous economic expansion, together with remarkable improvements in labor and social indicators, seem to have placed the economy on a sustained growth path. 20. Nevertheless, the economy remains vulnerable to external shocks, due to its dependence on Argentina and Brazil, commodity prices, and FDI inflows. Uruguay’s dependence on its MERCOSUR partners remains a significant vulnerability factor. The correlation with economic activity in Argentina remains high, while the correlation with Brazil has increased significantly in recent years. Furthermore, a large proportion of
6 Risks and risk mitigation strategies are further discussed in the Risk Section.
8
Uruguayan exports are concentrated in Brazil.7 Consequently, Uruguay could be severely affected by a regional shock. In addition, the large share of agricultural commodities in total exports, as well as the country’s reliance on oil imports (18 percent of total goods imported in 2010), make the economy vulnerable to fluctuations in global commodity prices. FDI inflows have been an important driver of economic growth and, should these flows revert due to changing external conditions, the negative impact on economic performance would be strong. 21. Concerns about debt sustainability and economic recovery in the USA and Europe are increasingly threatening the global economic outlook. A disorderly resolution to the debt crisis in Europe would likely push up the costs of borrowing in international markets while a pronounced recession in developed countries would depress global demand, commodity prices and capital flows. (See risk section for further details.)
C. Debt Sustainability 22. A Debt Sustainability Analysis indicates that the trajectory of public debt is stable and declining under the baseline scenario. Under conservative assumptions, the public debt-to-GDP ratio (in gross terms) is projected to decline from 57.5 percent in 2010 to 34.9 percent in 2015. The effects of simulated negative shocks are consistent with Uruguay’s public debt profile: while an increase in the real interest rate has a limited effect on public debt, an exchange rate shock, modeled as a one-time real depreciation of 30 percent in 2012, would lead to a high, but declining, debt ratio of 63.8 percent by 2015 (Annex 1). Public debt sustainability is therefore not a major concern in the medium term. 23. Despite a high concentration of payments in the medium term, public sector gross borrowing requirements seem manageable. Uruguay’s gross borrowing requirements are expected to reach US$ 4.4 billion in 2011 (Table 2). However, unless international capital market conditions deteriorate dramatically, Uruguay should be able to readily access financing from capital markets and multilateral financial institutions. 24. In summary, Uruguay’s macroeconomic policy framework is considered adequate for this proposed World Bank Development Policy Loan. Medium-term fiscal policy remains prudent and monetary and exchange rate policies are supportive of macroeconomic and financial stability.
7 The share of exports of goods to Brazil represented 21.1 percent of total in 2010, up from 16.6 percent in 2008.
9
Table 2. Uruguay: Overall Public Sector Financing Requirements, 2010-2014
Source: Central Bank of Uruguay, Ministry of Economy and Finance and World Bank staff estimates. (*) World Bank Staff projections, except for public sector amortization projections that are those published by the Central Bank of Uruguay as of June 2011. 1/ Defined as the overall balance plus amortization of the overall public sector. 2/ Primary balance of overall public sector (NFPS and Central Bank).
III. THE GOVERNMENT PROGRAM 25. The coalition government under President Mujica, which took office in March 2010 has continued the reform efforts of the previous administration. A clear commitment to maintaining the sound fiscal and economic policies of the previous administration guided the Government in the first year of its mandate, and was reflected in the 2010-2014 budget adopted in December 2010. With this budget, the Government aims to further reduce macroeconomic vulnerability and sustain equitable economic growth. 26. The 2010-2014 budget reaffirms the Government’s reform strategy. It attaches priority to public spending on infrastructure, education, health, social protection and security.8 This is in line with the reform program set out at the beginning of the Government’s term:
With a view to enhancing economic competitiveness, the Government has adopted a long-term strategy to develop Uruguay as a regional logistics hub9. The Government aims to generate value through logistics services, but also by facilitating the development of connected sectors such as software and agro-business. This would require substantial infrastructure upgrading as well as enhancing the regulatory and administrative environment for trade facilitation.
8 While GDP is expected to grow by approximately 29.4 percent in real terms during 2009 and 2014, expenditure allocations to Government entities in charge of public security, education, social protection and transport and public works increase by 54 percent, 30.4 percent, 45 percent and 29 percent, respectively. 9 This strategy was formally adopted in June 2011 under the title “Uruguay 2030”.
2010 2011 2012 2013 2014
Gross borrowing requirements (% GDP) 1/ 3.4 8.9 5.3 3.3 3.7Primary balance (deficit (-)/surplus (+)) (% GDP) 2/ 1.9 1.3 1.5 1.7 1.8Debt service (% GDP) 5.2 10.2 6.8 5.0 5.5
Interest 2.9 2.8 2.5 2.5 2.5Amortization 2.3 7.4 4.2 2.5 3.1
Gross borrowing requirements (US$ million) 1/ 1,353 4,366 2,788 1,862 2,304 Primary balance (deficit (-)/surplus (+)) (US$ million) 2/ 757 626 810 993 1,101 Debt service (US$ million) 2,110 4,992 3,598 2,854 3,405
Interest 1,187 1,375 1,351 1,448 1,520 Amortization 923 3,617 2,247 1,407 1,884
Memorandum items:Real GDP growth assumption 8.5 6.5 4.5 4.0 4.0Nominal GDP (US$ million) 40,265 49,086 53,088 57,265 61,770
Projections (*)
10
Embarking on a “green growth” path that promotes the development of high-value and environmentally-friendly production, particularly in the agricultural sector, is another key policy objective. It also entails strengthening the capacity of producers to reduce their vulnerability towards climate risks.
Improving education outcomes has been labeled by the Government as the “priority of priorities”. Overcoming current problems with coverage and quality of secondary education are seen as crucial to enhancing both economic productivity and social stability.
The Government has further committed itself to maintaining a strong focus on social protection with the objective of eradicating extreme poverty during its administration. Improving the targeting of social programs as well as enhancing the capacity for monitoring and evaluating social service delivery remains a key priority.
Social service reforms also include the objective of completing the second phase of the comprehensive health reform, by advancing towards universal coverage of the national health insurance system, and by improving the efficiency of health service delivery.
There is a strong emphasis on addressing the deterioration in public safety, responding to the perception that public safety ranks currently among the top concerns of Uruguayans.
A cross-cutting theme for all reform priorities is the aim of intensifying the previous Government’s efforts on public sector reform. There is a clear mandate to redesign the public sector to enhance efficiency and transparency.
IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM
A. Link to the Country Partnership Strategy 27. The proposed DPL, the second and final of the current programmatic DPL series, is a cornerstone of the Uruguay CPS (2010-2015)10. The loan series seeks to support implementation of the new Government’s reform program in three key areas: (i) public sector management, (ii) competitiveness and (iii) social inclusion. The first loan became effective and was fully disbursed in February 2011. The CPS envisages an amount of complementary investment lending of about US$500 million. 28. The programmatic DPL series is fully consistent with the reform agenda set out in the CPS. The main objectives of the Uruguay CPS for 2010-2015 are the following:
To reduce macro-economic vulnerability and to support public sector management. This will be achieved by supporting Government efforts in gradually reducing the
10 Report No. 55863-UY, discussed by the Board on August 18, 2010.
11
overall debt burden and the dollarization of the debt, and in consistently achieving annual fiscal targets.
To strengthen infrastructure and competitiveness. The CPS thereby emphasizes support measures aimed at increasing depth and efficiency of the financial sector, promoting innovation and efficiency of export supply chains and modernizing public institutions.
To support efforts to address challenges related to the environment and climate change and toward strengthening natural resource management.
To foster social inclusion and equity. The CPS will support Government efforts to expand and increase effectiveness of the National Plan for Social Equity; the implementation of the health sector reform program, as well as continued work on education, social inclusion and efforts toward greater gender equity.
29. The DPL-DDO, if fully disbursed, would bring total policy lending under the CPS to US$ 360 million, compared to US$ 200 million initially envisaged. The increased loan amount and DDO feature for the second operation are a response to a Government request for contingent financing to support its precautionary financing strategy in the context of current global economic uncertainties. 30. The flexible nature of the CPS enables it to accommodate this change. The CPS explicitly stated that the program could be adjusted in the event of unforeseen domestic or external developments, so as to maintain reform momentum. Uruguayan authorities stated that they would only request disbursement under the DPL-DDO if international financial conditions were to deteriorate significantly11.
B. Consultations
31. Preparation of this programmatic DPL series has been informed by a series of consultations conducted by the authorities with key stakeholders in the main policy reform areas. The reform priorities supported by this DPL are based on broad and in-depth political consultations within the executive branch of Government; all political parties and other key stakeholders in the private sector and civil society. The results of these consultations are reflected in the Government’s five-year budget. The loan preparation has also benefited from specific consultations with representatives from Parliament, civil society organizations, research institutes, and the private sector conducted by the Ministry of Economy and Finance (MEF) in Montevideo in May 2010. 32. In these meetings, broad consensus emerged about the need and relevance of the reform areas supported by the DPL series. With regard to the efficiency of public sector administration, meeting participants supported progress on e-government and performance-based budgeting agenda. Measures to strengthen the country’s competitiveness and improve social inclusion were also welcomed. Meeting participants did not foresee major political or
11 See also footnote 1.
12
social risks that could jeopardize reform progress; Uruguay’s tradition of consensus-building was expected to help in mitigating social tensions.
C. Collaboration with IMF and Other Donors 33. The Bank has been collaborating very closely with Uruguay’s main development partners, in particular the IADB and the IMF. At the analytical level, the Bank has started a formal collaboration with the IADB in the preparation of the Public Expenditure Review (PER), and the Public Expenditure and Financial Accountability (PEFA) assessment; the latter also receives support from the EU. In the preparation of these assessments, the IMF will also be closely associated. These core assessments will inform the implementation of reforms in several areas covered by the DPL over the coming years. 34. The macroeconomic assessment underlying the DPL is in line with the conclusions in the recent IMF Article IV consultations for Uruguay. Article IV recommendations call for policies that moderate domestic demand and build policy space to cope with future shocks, and for reforms to address infrastructure gaps and to enhance the skills of the labor force. It is also in line with the IMF’s advice to improve public sector efficiency, to improve the business climate and to promote social inclusion. Similarly, the IMF regards the social inclusion of disadvantaged segments of society as a key objective, this requires that budget resources sustain and improve well-targeted social programs as a priority. The next Article IV mission is scheduled for end-October 2011. 35. The Inter-American Development Bank adopted a new country strategy for Uruguay in July 2011. This strategy re-affirms the priorities of the current engagement of the IADB in Uruguay, and aims to help sustain economic growth while creating conditions for lasting improvements in living standards. There have been close consultations between IADB and Bank teams on the DPL as well as on possible IADB programmatic financing in the future. Apart from this and the joint analytical work mentioned above, linkages between the DPL and IADB initiatives also exist on selected reform aspects, also supported by IADB’s technical assistance activities.
D. Relationship to other Bank Operations 36. As of August 2011, a number of active and projected IBRD projects are complementary to the reform agenda supported by the DPL series. These projects help build capacity in public administration, competitiveness, and social inclusion:
The Additional Financing loan for the Third Basic Education Quality Improvement Project (P111662) finances activities aimed at increasing equity, quality, and efficiency in the provision of preschool and primary education by: (i) expanding the full-time school model, and (ii) improving the capacity of primary education institutions to enhance the quality of education quality.
13
The loan on Promoting Innovation to Enhance Competitiveness Support (P095520) seeks to improve the economy’s competitiveness by promoting R&D capacity, with a focus on promoting partnerships between the public and private sectors in this area.
The Non Communicable Diseases Prevention Project (P050716) aims to support the Government's efforts to (i) to expand accessibility and quality of primary health care services related to selected Non Communicable Diseases (NCD)'s early detection and medical care; and (ii) to avoid and reduce exposure to selected NCD risk factors as well as their health effects.
As part of the implementation of the new CPS, a cluster of new activities on managing climate change is being developed, including a new loan for Natural Resource Management and Climate Change, and an analysis of low carbon growth. These activities have the objective of helping the Government implement a climate change management agenda that reduces vulnerability of the economy, in particular of the agricultural sector to the increased climate variability, while promoting Uruguay’s products as environmentally friendly in international markets.
The new CPS also foresees a series of activities to support the Government’s infrastructure agenda. A new transport operation is underway, which aims to build capacity in the logistics sector. Furthermore the Bank is providing technical assistance to the PPP reform through a trust-funded project and WBI seminars.
37. This loan builds on the achievements supported by the first operation in this series and by previous programmatic series of DPLs: Programmatic Reform Implementation DPL (PRIDPL) I12 and PRIDPL II13. The PRIDPL series supported reforms in three areas: (i) tax reform, (ii) business climate and capital markets development; and (iii) social security system reform. The latter component of the PRIDPL series built on progress achieved under the predecessor DPL (Social Program DPL – SPDPL) in two important aspects. First, it supported the expansion and consolidation of the non-contributory family allowances system, a core component of the social protection strategy to provide assistance to poor families operating in the informal sector. Second, it supported efforts to increase transparency and accountability of the Banco de Previsión Social (BPS). These efforts form part of the broader strategy to improve service coverage and effectiveness of revenue collection in the social security system. 38. An Institutional Building Technical Assistance loan (IBTAL) has been accompanying the current and previous DPL series. The IBTAL (P097604) supports core elements of the Government’s plan to modernize public administration. It also supports institutional strengthening needs arising from the reform program supported by the DPL series. The IBTAL was approved by the Board together with PRIDPL I. It assists with the design and implementation of reforms in the fiscal, financial, and social areas. Additional Financing for IBTAL is currently being prepared. Table 3 shows the linkages between the reforms supported by the DPL series and the institutional support provided by IBTAL.
12 P083927, Loan No. 7452-UY. 13 P106724, Loan No. 7667-UY.
14
Table 3. Policy Reforms and IBTAL Institutional Support
Policy Reform Institutional support provided through IBTAL
Public Sector Management Reforms:
Performance-based budgeting (DPL)
Improvements in public sector procurement
Development of program indicators by the Office for Planning and Budget (OPP).
Strengthen OPP’s evaluation function.
Creation of Unified Registry of Public Sector suppliers by AGESIC.
Strengthen centralized purchases unit of MEF.
Capital Markets Development:
Increase investment and increase overall transparency of the corporate and financial sectors. (DPL)
Capital market development including drafting laws and regulations.
Market promotion activities, institutional strengthening of the regulator, development of the regulatory framework, and provision of information technology.
Enhancing corporate transparency through updating and strengthening the regulatory and institutional framework and implementation of reporting standards and control processes.
Business Climate:
Reforms to improve the business climate. (DPL)
Implementation of legal reforms on bankruptcy through regulatory development, logistical support for courts, and outreach and dissemination.
Policies aimed at strengthening social protection:
Expand and consolidate social protection system. (DPL)
Reinforce protection of the poor and vulnerable. (DPL)
Increase efficiency, transparency and accountability of social protection institutions. (DPL)
Implementation of an integrated, inter-institutional information system (SIIAS) that brings together data on the characteristics and beneficiaries of social programs from various entities (Data processing equipment, systems development services, institutional strengthening activities, and operational costs associated with the logical and physical design).
PPP reform Legal assessment of new law.
Health Reform Fiscal impact of reform.
E. Lessons Learned 39. The Bank’s experience underscores the importance of taking into account the consensual nature of policy making in Uruguay. Reforms generally take a long time to mature, but once agreed, tend to be sustained and implemented. Insufficient attention paid to building political consensus in the preparation stage increases the probability of policy reversal. Related to this, country ownership of the reform program is critical. The Bank is able to play an effective role in reform processes if it focuses on discussing policy options and if it supports reform implementation in those priority areas determined by the Government.
15
40. The flexible design of the 2005-2010 CAS and the programmatic nature of development policy lending allowed the Bank to assist Uruguay with contingent financing at the outset of the global financial crisis. This was refined by the 2008 Country Assistance Strategy Progress Report (Report No. 42789-UY), which laid out a plan for dealing with the global financial turbulence. By contrast, the 2000-2005 CAS proposed a more rigid program, linked to country performance. When the country was hit by a deep economic crisis in 2002, the Bank had to resort to Special Structural Adjustment Loans (SAL) to provide short-term relief, at the expense of adding to medium-term payment problems. 41. The Implementation Completion and Results (ICR) Report14 on the previous programmatic series of development policy loans, PRIDPL I and II, was completed in August, 2010. The ICR concluded that the Borrower and Bank’s performance on loan design and implementation was satisfactory. It also outlined three main lessons, namely that: (i) clear allocation of responsibilities is crucial for the timely implementation of programs and effective achievement of program development objectives and related indicators; (ii) the results framework needs to be realistic to provide a fair measure of progress without compromising the credibility of the program; and (iii) a development policy loan can be an important and effective instrument for building and deepening the relationship between the Bank and the Borrower. 42. The design of the current DPL series reflects these lessons. First, the reform measures contained in the policy matrix are selected on the basis of a realistic assessment of the time needed for reforms to come to fruition. Second, the DPL series focuses on areas of reform that the Government has deemed a priority and is informed by results of the Bank’s analytical work and on-going consultation with the Government. Latest analytical findings, such as those of the Trade and Logistics Study, are used to adjust the reform program support by this second DPL. Third, the DPL series emphasizes the importance of enhancing capacity on reducing vulnerability to external shocks and sustaining growth through policy reform. With regard to program risks, substantial analytical work carried out by the Government, the Bank and other organizations underlies the reform program.
F. Analytic Underpinnings 43. The policy content of the proposed loan is informed by analytical work carried out in the period 2008- 2011. This includes a series of Policy Notes that were discussed with the new Government in early 201015. A summary of the main findings and policy recommendations of other key studies that informed this DPL series is provided below. In addition, an analytical work program on public financial management is underway, consisting of a PEFA (Public Expenditure and Financial Accountability) assessment and a Public Expenditure Review. This is a collaborative exercise by the Government, the World Bank, the European Commission (EC), and IADB. Results from the PEFA assessment are expected for November 2011, while the PER is scheduled for completion in mid-2012. 14 Report No. ICR1585. 15 Report No. 54939.
16
Trade and Logistics Study (2009)16 44. The study assesses Uruguay’s potential as a logistics hub and a regional distribution center. It analyzes the competitiveness of Uruguay’s logistics system from an international perspective and provides policy recommendations towards further efficiency gains. The study focuses on policies related to enhancing domestic and regional trade facilitation and assesses the wider economic impact of such reforms on logistics costs and trade. 45. Over the last two decades, Uruguay has developed into a regional hub for the Southern Cone. The Port of Montevideo, Uruguay’s principal port, currently handles about 7 percent off all MERCOSUR container shipping. Currently, 63 percent of goods that pass through Uruguay’s ports originate from the port’s hinterland (Paraguay, Bolivia and parts of Argentina and Brazil). Uruguay’s attractiveness as a logistics hub is due to several factors. Its central location in the south-eastern South American market; its free-trade-zone legislation; more competitive transit times to major destinations than from Buenos Aires; low port costs and the Paraguay-Paraná river connection to inland production areas. 46. To reap its full potential as a regional logistics hub, the challenge is to achieve an integrated logistics chain system with a strong focus on inter-modality. For this to materialize, transport policy, customs administration, and the regulatory environment need to re-oriented towards supporting an integrated logistics chain, in both a national and transnational context. The size of Uruguay’s GDP and external trade alone do not generate sufficient cargo volumes to make Montevideo an attractive main port for shipping lines on the East Coast of South America. Uruguay’s potential as a regional logistics hub therefore depends on its ability to increase the scale of its operations while reducing overall logistics costs with trade facilitation reforms. Policy measures should therefore aim to facilitating both domestic trade and regional transit flows. Such a strategy should consider three main strains (i) strengthening of the port logistics system to function as a gateway port for Uruguay’s domestic cargo; (ii) development of Montevideo as highly efficient, intermodal hub for Argentinean, Paraguayan and Brazilian cargo; and (iii) developing efficient hinterland logistics systems. All three strains are related and mutually reinforcing. 47. Cost-effective handling of transit cargo is critical for the development of Uruguay’s domestic economy and industry. Transit cargo generates the necessary scale economies that will allow local exporters and importers to benefit from more competitive shipping costs. In addition, transit cargo generates additional revenues and provides the opportunity to develop Uruguay’s logistics industry based on the resources of the transshipment cargo industry.
16 Report No. 52303-UY.
17
Investment Climate Assessment (2008)17 48. The Investment Climate Assessment (ICA) identifies microeconomic constraints to growth and employment generation. The report benchmarks Uruguay’s performance against survey data from other upper middle income countries within and beyond Latin America, to identify the shortcomings and reform priorities. The primary data source for the report is an investment climate survey undertaken in 2006 that covers 617 small, medium, and large Uruguayan firms in a range of sectors. Data from the investment climate survey is complemented by other cross-country databases such as the World Competitiveness Report and the Doing Business Report, as well as Uruguay’s Expanded National Household Survey (2006). Focus groups with workers and with entrepreneurs were also conducted in April 2007 to better understand the functioning of the labor market and the dynamics of labor relations in the country. 49. Uruguay performs well in some areas of the investment climate, but it lags behind others. A summary of the main findings of the ICA is provided below:
Labor regulations and skills. Uruguay ranks high in labor market rigidity. Also, Uruguay under-invests in training relative to other countries.
Innovation. The Government has developed an innovation strategy comprising four pillars: (i) strengthening of the policy and institutional framework; (ii) investment in high-quality research teams; (iii) stimulus to technology development and innovation as well as fostering of linkages between supply and demand for research and technology transfer; and (iv) inclusive innovation. The implementation of this strategy, which requires a strong partnership with the private sector, is supported by the above-mentioned Bank loan on innovation.
Access to finance. External financing for local firms is limited when compared to other countries, on account of low demand and supply constraints. Capital market development is another challenge. Currently it plays a minimal role in investment financing, since public securities represent most of the traded value on the stock exchanges. The approval of the Bankruptcy Law and the Capital Markets Law in 2008-2009 significant enhanced the regulatory framework for local capital markets, yet this will have to be complemented by efforts to promote market volume and activities. Finally, additional efforts are required to improve access to finance by SMEs, which form the bulk of Uruguayan firms.
17 P104170.
18
V. THE PROPOSED OPERATION A. Operation Description 50. The proposed loan will be the second and final of a programmatic series of two loans that support the implementation of the Government’s priority reforms. The policy content reflects the Government’s commitment to promoting economic growth and social inclusion. The loan’s development objective relates to three priority reform areas:
Public sector management: improve the efficiency of public sector administration;
Competitiveness: increase quantity and quality of investment, by enhancing business climate and access to finance; facilitate trade, and thereby contribute to sustaining high growth rates;
Social inclusion: improve social inclusion through enhanced coverage, equity and efficiency of social services (education, health and social protection).
51. The DPL II continues and deepens support to existing components of the reform program supported by DPL I. The substance of the proposed loan remains consistent with the program design presented under DPL I and its prior actions link directly to the indicative triggers established under the first operation. As such, the main change to the original project design relates to the increase in the requested loan amount (US$260 million) and change in the withdrawal option (DDO). 52. The Government has made good progress in implementing the DPL-supported reform program, consolidating reform achievements recognized by DPL I:
1. Public sector management:
The Government has set the legal basis for the e-Government reform by mandating technical interoperability in the administration in Articles 157 to 160 of the 2010-2014 Budget Law (Ley de Presupuesto N° 18.719). The number of administrative processes that can be completed electronically has increased from the baseline of 20 in 2009 to 25 in 2011.
The 2010-2014 Budget Law introduced a performance-oriented budgeting approach for the first time. The number of expenditure programs for which output and outcome indicators are identified increased from a baseline of 0 in 2009 to 31 in 2011.
2. Competitiveness:
In July 2010 Customs started operating an econometric model-based risk management system for streamlining and rendering more effective physical inspections for fraud detection. This has increased the number of irregularities detected relative to the total number of inspections from a baseline of 0 percent in 2009 to 2 percent in 2011.
The capital markets law was implemented through issuance of enforcing regulation, which includes provisions on promoting capital market development, particularly tax incentives and the establishment of the Capital Market Promotion Commission, also through adoption of IOSCO standards. There has been an improvement in market
19
capitalization – from US$ 139 million in December 2009 to 154 million in September 2010.
3. Social Inclusion:
Social programs aimed at eradicating extreme poverty were strengthened through the increase of food allowance payments to households under the extreme poverty line (currently corresponding to 15,000 households) as mandated in the Budget Law. A poverty and social impact analysis recently conducted estimates that this and other measures to strengthen the social protection program have contributed to a decline of extreme poverty to 0.6 percent of all households in 2010, relative to the baseline of 0.8 percent in 2009.
Health insurance coverage was expanded to (i) all spouses and domestic partners of already covered workers in families with three or more children, (ii) all workers from low income groups that retired before 2008 (iii) as well as all workers that retired after 2008. Coverage was thereby increased from a baseline of 43 percent in 2009 to 45 percent in 2011.
Equity in access to modern information and communication technology was improved through increased coverage of the One-Laptop-Per-Child Program (Plan Ceibal). In July 2011, more than 90 percent of secondary school students (first and second grades in Montevideo and Canelones, first to third grade in the rest of the country) had a Laptop in their possession. This was accompanied by a further increase in primary school coverage, from 95 percent in 2009 to 98 percent in 2011. At the same date, WIFI connections were established in 248 secondary schools (out of a total of 258 participating schools).
53. The prior actions reflect full achievement of the program triggers outlined in the DPL I document for five out of seven policy actions. This reflects satisfactory progress on reform implementation by the Government. A detailed description of progress in relation to each indicative trigger and formulation of prior actions is contained in Annex 5, and summarized in Table 4 below. Intermediate progress towards expected outcomes in the three reform areas is presented in the policy matrix in Annex 4. Expected Outcomes are to be evaluated at the time of the ICR evaluation (about end-2012). 54. The prior action related to e-government reform needed to be reformulated, yet was met in substance. Articles 157 to 160 of the 2010-2014 Budget Law set the legal basis for technical interoperability, and hence the e-government platform. It was decided to introduce these provisions through the Budget Law rather than through a separate Inter-operability Law, as originally envisioned. The wording of other prior actions was adjusted to ensure consistency with the wording adopted in the corresponding legal provision or reform steps taken. 55. The prior action related to SIIAS database construction needed to be modified to reflect a change in the implementation strategy, yet was also met in substance. While the SIIAS database of social indicators for children and adolescence is expected to be completed by mid-November, the implementation strategy of the Borrower has changed to what was initially envisaged at the time of preparation of DPL1. While originally the Borrower had
20
planned to complete in a first phase the database for children and adolescents, and then to incorporate other indicators in a second phase, both phases have been implemented in parallel rather than in sequence. This has somewhat slowed the progress of database completion under the first phase. It was decided to adjust the wording of the prior action to reflect the change in the implementation strategy. 56. The operational design is summarized in the Policy Matrix (Annex 4). The Matrix is divided into three sections: (i) Efficiency of public sector management; (ii) Competitiveness and (iii) Social inclusion. 57. No triggers are proposed for a subsequent operation as no further DPL operation is envisaged under the 2010-2015 CPS. Box 1 shows how the operation seeks to meet the good practice principles on conditionality. For each of the eight prior actions supported, the Matrix identifies: the objective, the DPL Policy Prior Action for DPL I and DPL II, and, the Expected Outcomes. Expected Outcomes are to be evaluated at the time of the Implementation Completion Report evaluation (about end-2012). 58. The operation is designed to contribute to the debt management strategy of the Government. The DPL-DDO is intended to provide Uruguay with a risk management tool in the event that market borrowing is interrupted. A DPL-DDO provides the option of deferring loan disbursement for up to three years from loan signing and is renewable for an additional three years, thereby creating a contingency form of financing for Uruguay over an extended period of time. The DPL-DDO loan funds would provide alternative financing for the budget in the event of reduced market access or increased sovereign risk spreads.
59. The Uruguayan authorities could elect to draw on the DPL-DDO loan proceeds, at any time during the three-year draw-down period, provided that: (1) the macro economic framework remains satisfactory; and (ii) Uruguay continues to adhere to the overall program set out in the Letter of Development Policy (LDP). These two draw-down conditions would be continually monitored as part of regular loan supervision. The entire amount of the loan, less any premia capitalized for exercising the option of caps and collars, would be made available for disbursement upon effectiveness.
21
Table 4. Indicative Triggers for DPLII (as described in the previous operation), Reform Status and Prior Actions for DPL II
Reform Objective
Indicative Trigger for DPL II (as described in the previous operation)
Prior Action for
DPL II
Comments
1. Efficiency of Public Sector Management
Making public administration more transparent, flexible and agile
The Borrower has continued supporting the e-government agenda as evidenced by the drafting and presentation to its Parliament of the Ley de Inter-Operabilidad (inter-operability platform law).
The Borrower, in support of its e-government agenda, has mandated all public entities to adopt the necessary measures to enable these agencies to exchange information that is electronically available, as evidenced by Articles 157 to 160 of the 2010-2014 Budget Law.
Indicative Trigger met in substance. The prior action was reformulated, as authorities decided to adopt key principles and criteria of inter-operability platform law in the Budget Law (those referring to technical inter-operability).
Implementing Performance-Based Budgeting
The Borrower, in support of its performance-oriented budgeting reform agenda, has identified output and outcome indicators for selected expenditure programs in its 2010-2014 Budget Law.
The Borrower has adopted output and outcome indicators for thirty one selected expenditure programs in seven priority areas, as evidenced by the updated Volume II of the 2010-2014 Budget Law.
Indicative Trigger fully met.
For consistency with the wording of the 2010-2014 Budget Law, the prior action has been adjusted.
2. Competitiveness
Expanding and Facilitating Trade
The Borrower has increased the effectiveness of its Customs’ physical inspections through the introduction of risk management and ex-post auditing systems for selected inspections.
The Borrower has introduced a risk management system for selecting customs operations that shall be subject to physical inspection and ex-post audit, rendering the customs control system more effective and streamlined.
Indicative Trigger fully met. Adjustment in wording of prior action to better reflect the actual reform steps taken.
Promoting Financial Market Development
The Borrower has implemented the Capital Markets Law, as evidenced by: (i) the introduction of IOSCO standards; and (ii) the establishment of the Commission for Capital Market Promotion with private sector participation.
The Borrower has further implemented the Capital Markets Law, as evidenced by the issuance of the Executive Decree No. 322-011, dated September 16, 2011, which includes, inter alia: (i) provisions on promoting market development, including tax incentives such as reductions on capital gains taxes for stock issuers and the abolition of the withholding tax for pension funds; (ii) the establishment of the capital market promotion commission with private sector participation; and (iii) measures to adopt additional aspects of IOSCO standards, such as establishing minimum requirements for stock offerings related to public availability of business information and accounting and corporate government standards.
Indicative Trigger fully met. Adjustment in wording of prior action to better reflect the actual reform steps taken
22
Reform Objective
Indicative Trigger for DPL II (as described in the previous operation)
Prior Action for
DPL II
Comments
3. Social Inclusion
Strengthening Social Protection
The Borrower has (i) strengthened social programs that seek to eradicate extreme poverty, in particular, increasing the food allowance (through the Tarjeta Alimentaria program) to households that are in extreme poverty or those that are vulnerable to extreme poverty; and (ii) implemented the first phase of SIIAS, incorporating indicators related to childhood and adolescence.
The Borrower has: (i) as of January 2011, doubled the amount transferred to the poorest 15,000 families via the Tarjeta Alimentaria program with respect to the total amount transferred as of December 2010, under said program; and (ii) formally established SIIAS under the overall coordination of the Borrower's Ministry of Social Development.
Indicative Trigger met in substance.
For consistency with the wording of the 2010-2014 Budget Law and to reflect parallel rather than sequential progress in database implementation, the prior action has been adjusted.
Expanding coverage and improving efficiency of the health care services
The Borrower has expanded insurance coverage to all spouses with 3 or more children.
The Borrower has expanded health insurance coverage to: (i) spouses and domestic partners of public and private sector workers with health insurance coverage and who have three or more children; (ii) public and private sector workers from lowest income groups that retired from their employment before January 1, 2008; and (iii) all public and private workers that retired from their employment before January 1, 2008, as evidenced by the Borrower’s Decree No. 318-010, dated October 26, 2010 and published in the Borrower’s official gazette on November 1, 2010, and the Borrower’s Laws No. 18.731, dated January 7, 2011, and published in the Borrower’s official gazette on January 25, 2011.
Indicative Trigger fully met.
To reflect progress beyond the initial trigger, the wording of the prior action has been adjusted.
Improving equity and quality of the education system
The Borrower has continued to promote equity in access to information through the expansion of the Plan Ceibal to students in secondary public schools and provided these schools with wireless connectivity to the Internet.
The Borrower has: (a) expanded the Plan Ceibal by delivering laptops to: (i) students in grades 1 to 3 of secondary public schools in the Borrower’s territory other than in Montevideo and Canelones (94.4% of such students as of July 2011, from a baseline of 30.3% of such students as of July 2009); and (ii) students of public secondary schools in grades 1 and 2 in Montevideo and Canelones (93% of such students as of July 2011 from a baseline of 0% of such students as of July 2009); and (b) provided WIFI connections to 248 of the secondary schools mentioned in (i) and (ii) herein (96.1% of said schools as of August 2011 from a baseline of 44.6% of said schools as of November 2009).
Indicative Trigger fully met. Adjustment in wording of prior action to better reflect the actual reform steps taken
23
B. Policy Areas 60. The proposed loan supports three priority areas of reform: (i) efficiency of public sector management; (ii) competitiveness and (iii) social inclusion. Under each of these areas, this section reviews a set of specific policy measures that the loan will support. This section has a threefold objective: (i) describe reform progress to date; (ii) outline reform challenges ahead; and (iii) identify a set of prior actions for Board approval of this loan (DPL II).
Box 1. Good Practice Principles on Conditionality Principle 1: Reinforce Country Ownership There is a strong ownership of the proposed operation as the reform areas included are identified by the government as priority areas for Bank support. The operation supports the implementation of reforms, which have been based on strong consensus-building process put in place by the previous administration and supported by the newly elected government. Many of the reforms supported (prior actions) have already been presented or passed through Parliament. Uruguay’s track record of solid macroeconomic performance and commitment in advancing key economic and social reforms underlies the proposed operation. Bank analytical work assisted in the formulation of policies supported by the operation. Principle 2: Agree upfront with the government and other financing partners on a clear division of labor The main areas of cross-over with other financing partners is public sector management (performance-based budgeting) and competitiveness (business climate), where support is also provided by the IADB. In preparing the PRIDPL series, a clear division of labor was agreed among the government, the World Bank and the IADB. The current DPL series builds on these collaborative efforts and seeks a clear division of labor on the specific policy actions that each institution will support.
Principle 3: Customize the components and structure of the operation to country circumstances By nature, policy-making in Uruguay is done by consensus, which can often make reform a time-consuming process, but helps ensure that agreed reforms are sustained. They very nature of the challenges by the government in the areas of public sector reform, competitiveness and social inclusion, mean that the reform process is likely to be lengthy and the results longer-term in nature. The programmatic nature of the proposed loan series allows Bank support to reflect the changing nature on an on-going reform process, providing flexibility to achieve the expected results over the medium-term. Principle 4: Choose only actions critical for achieving results as conditions for disbursement The policy matrix used a limited set of conditions as prior actions for DPL I and indicative triggers for DPL II. These were identified as critical actions for reform implementation in each of the policy areas. The prior actions for DPL II reflect indicators of implementation progress in the chosen policy areas since the Board approval of DPL I.
Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support All of the prior actions as well as the expected outcome indicators for the proposed operation focus on the results of implementation of the supported reforms. The programmatic nature of the loan series allows for sufficient time in which these outcomes can be observed.
24
Reform Objective 1: Efficiency of Public Sector Management
Making Public Administration More Transparent, Agile and Flexible
61. Important progress has been achieved on the Government’s public sector management reform agenda since Board approval of the first DPL in this series. Through the five-year Budget Law, approved by Parliament in December 2010, a number of measures aimed at improving the efficiency and transparency of public sector management have been adopted, most notably the shift towards a performance-oriented budget, but also the promotion of an e-government platform and the professionalization of the civil service. 62. There have been further advances on the implementation of an e-government reform, as evidenced by 25 administrative processes that can now be completed electronically. There has also been progress in simplifying client interfaces by important institutions like the national social security agency (Banco de Previsión Social – BPS), which is moving towards a paperless management system for payments and contributions. Under the coordination of the Agencia para el Desarollo del Gobierno de Gestion Electronica y la Sociedad de la Informacion y del Conocimiento (AGESIC), the Government plans to further increase the number of transactions that can be completed online over the next years and to make forms for all key administrative processes available electronically. 63. The Budget Law created a legal basis for introducing technical interoperability in the administration18. Articles 157 to 160 of this Law mandate all government units to exchange information electronically and establish technical criteria for this purpose. A draft decree that specifies these criteria has been prepared and is expected to be before the end of 2011. More ambitious aspects of the e-government reform will be regulated to a complementary law on Administración Electronica, which is scheduled for submission to Parliament in early 2012. 64. Advances on Medium-Term indicators: There has been an improvement relative to the established base line. The number of processes that are started and completed electronically increased from the base line of 20 in 2009 to 25 in 2011. 65. Prior Action: The Borrower, in support of its e-government agenda, has mandated all public entities to adopt the necessary measures to enable these agencies to exchange information that is electronically available, as evidenced by Articles 157 to 160 of the 2010-2014 Budget Law.
Implementing Performance-oriented Budgeting 66. The introduction of a functional classification of expenditures and a performance-oriented approach in the 2010-2014 Budget is a critical reform step. For the first time, the budget is presented in a programmatic format, rather than institution-by-
18 Technical interoperability refers to ensuring compatibility and openness between government units as regards interfaces, data access and presentation. It also includes security aspects and a move towards database integration, and service interconnections.
25
institution. All budget items are classified as 17 programmatic areas, which contain 84 cross-sectoral budget programs (programas transversales).19 This change enhances transparency and facilitates the impact analysis of fiscal policies. For a subset of 31 budget programs, which correspond to seven priority programmatic areas20, the Government has defined result indicators with baselines for the 5-year budget period. This change in budget formulation marks an important first step towards performance-oriented budgeting, it allows for evaluation of the performance of specific budget program expenditures. A performance report was presented for the first time as part of the 2011 annual budget update, submitted to Parliament in August 2011. To accompany this methodological change, a substantial upgrading of capacity is underway, such as the development of internal performance evaluation systems (Sistema de Planificación y Evaluacion– SPE) and the strengthening of the Public Management, Planning and Evaluation Unit. 67. The Budget Law also laid the foundation for Civil Service Reform by adopting a number of measures aimed at professionalizing the civil service. These measures concern both the harmonization of recruitment processes, which have been rendered more transparent and competitive, and also a clearer and more merit-based definition of the positions and ranks in the civil service. 68. Advances on Medium-Term indicators: There has been an improvement relative to the established base line. The number of expenditure programs for which output and outcome indicators have been identified increased from the base line of 0 in 2009 to 31 in 2011, and is expected to increase to 40 expenditures programs by 2015. 69. Prior Action: The Borrower has adopted output and outcome indicators for thirty one selected expenditure programs in seven priority areas, as evidenced by the updated Volume II of the 2010-2014 Budget Law.
Reform Objective 2: Competitiveness 70. In recent months, the Government has managed to consolidate progress on the competitiveness agenda. Important achievements include the institutionalization of Uruguay’s logistics system through the creation of the Instituto Nacional de Logística (INALOG); renewed impetus in customs reforms; continued progress in the use of the one-stop window for registering new businesses; and advances on strengthening financial sector regulation and promotion (Capital Markets, Payments Systems and Securities Settlement and Bankruptcy laws). Perhaps the most ambitious initiative in the competitiveness agenda is the adoption of a legal framework on public private partnerships (PPP), which aims to regulate and promote PPPs for increased investments in infrastructure21.
19 This budget classification is similar to and consistent with the United Nation's Classification of the Functions of Government (COFOG) as presented in the IMF Government Financial Statistics Manual (GFSM) 2011. 20 These are: housing, infrastructure, public security, education, productive development, social protection and health. 21 Law 18.786 approved by Parliament on July 19, 2011.
26
Expanding and Facilitating Trade 71. The Government has committed to improving the efficiency of Uruguay’s logistics system, and with the creation of INALOG has adopted its institutionalization. INALOG became operational in April 2011, after its creation by law in November 2010.22 The main objectives of INALOG are to promote the professionalization and efficiency of logistics in Uruguay in an effort to increase export competitiveness of logistics services, strengthen Uruguay as a regional distribution center and promote sector-specific regulation. The establishment of INALOG marks an important step towards institutionalizing and implementing the Government’s plans to promote Uruguay as a regional logistics hub. By bringing together different stakeholders, INALOG will be an important platform to promote and coordinate efforts to reduce overall logistics costs, by aiming at a more efficient integration of the logistics chain and enhancing regional trade and transit facilitation. 72. Revamping the customs system as an integral component of the trade facilitation reform agenda has gained impetus over the past months. In the past, customs processes have relied largely on physical inspection and ex-ante reviews of entry documentation regarding shipments and transit. The Government has taken steps to improve customs efficiency by adopting a risk-based approach, with a view to: (i) enhancing security by focusing efforts on high risk imports and detecting dangerous, banned or restricted goods; (ii) facilitating international trade by generally reducing the need for physical inspections, accelerating clearance of "low risk" importers and allowing for "fast-track" clearance (green channel) of low-risk imports; and (iii) reducing port congestion by reducing the need for full physical inspection upon arrival. 73. Concrete steps towards facilitating customs processes and making them more effective are underway. Customs has introduced an econometric model-based risk management system for streamlining and rendering more effective physical inspections for fraud detection. The model has been in operation since July 2010 and has significantly reduced the number of unnecessary physical inspections.23 There has also been progress towards the introduction of a one-stop-shop for processing customs requirements. Another important step towards trade facilitation is the introduction of electronic tracking for goods in transits, to be formalized by a regulatory decree, which is expected to be signed into effect by September 2011. In a first phase, electronic tracking will apply to all containerized goods and will later be extended to all cargo in transit.24
22 Law No. 18.697 was approved and became effective in November 12, 2010 and INALOG started its operations in April 2011, with an annual budget of UYU$ 14.5 million. 23 As an example, prior to July 2011, only about 50 percent of imports passed through the green channel (no inspection), while 34 percent went through the red channel (detailed physical inspection). Since July 2011, the number of imports passing through the green channel increased to an average of 80 percent, while the number of goods passing through the red channel declined to about 15 percent, cutting the time that imports spent in customs by about half. 24 Containers in transit will be fitted with an electronic seal which emits a GPS signal that can be tracked by customs to establish if the cargo deviates from the agreed transit route or if any unauthorized stops are made, both could indicate fraudulent activity.
27
74. Advances on Medium-Term indicators: There has been an improvement relative to the established base line. The number of irregularities detected by the risk management system relative to the total number of inspections increased from the base line of 0 percent in 2009 to 2 percent in 2011. 75. Prior Action: The Borrower has introduced a risk management system for selecting customs operations that shall be subject to physical inspection and ex-post audit, rendering the customs control system more effective and streamlined. Improving the Business Climate 76. While credible policies have further strengthened Uruguay’s business climate, there is still room for improvement in the regulatory and administrative environment for firms. Uruguay’s rank in the 2011 World Bank Doing Business indicators dropped to 124 (out of 183 countries) from 114 in 2010. The Government has started to address this, in particular through implementing the SINARE project (Sistema Nacional de Registro de Empresas), which seeks to establish a single registry for businesses and to simplify administrative procedures for firms. 77. A first stage of SINARE, the one-stop-shop for firm creation, has been in operation for a year and its use has increased steadily during this period. Between May 2010 and August 2011, 523 new companies were created through this streamlined system. Under the new system, a company is created in an average of 7 days using a 5-step procedure. This marks a significant improvement over the traditional system, which, on average, required 65 days and 11 steps. As the streamlined system can today only process two specific types of companies, the expansion beyond the pilot phase remains the next challenge. Meeting the overall goal of establishing a Single Business Registry by 2015 requires strong institutional support for the project. To this end, the Budget Law has allocated additional resources to the initiative and mandated its conversion into an administrative unit within the Government. 78. In compliance with initial triggers specified under DPL 1, no prior action was defined for this policy reform area. Promoting Financial Market Development 79. Uruguay’s financial markets remain very small, although legal and regulatory measures are supporting their development. While stock market capitalization stood at only 0.4 percent of GDP in December 2010, steps have been taken in recent years to promote financial market development and to enhance investor confidence. The legal framework to develop local capital markets has been significantly strengthened and the following legislation has been adopted: (i) a bankruptcy law in 2008, (ii) a capital markets law in December 2009, and (iii) a payments systems law in 2010. Similarly, Uruguay started implementing the International Organization of Securities Commission (IOSCO) standards
28
on the basis of an action plan adopted in 2007. This culminated in the inclusion of Uruguay in the IOSCO Multilateral Memorandum of Understanding in June 2010. 80. Implementation of this comprehensive legal reform on capital markets has advanced in past months, mainly through the adoption of enforcing regulation. An important achievement here was the issuance of a regulatory decree on the implementation of the capital markets law in September 2011. The preparation of this decree was informed by consultations with key market participants from public and private financial institutions. The decree regulates the minimum requirements for stock offerings related to aspects like public availability of business information as well as accounting and corporate governance standards. It also contains important provisions on promoting market development, which remains at an early phase of development, i.e., the establishment of a Capital Markets Development Commission and a 5-year tax holiday on capital gains for stock issuers. 81. In parallel, the Central Bank’s Superintendent on Financial Services (SFS) has made further progress in fully adopting IOSCO standards. For this purpose, the IOSCO standards action plan was updated in December 2010. While awaiting the issuance of the regulatory decree, the SFS promulgated several circulars that define specific market entry requirements for three key market players: intermediaries, investment advisors and stock issuers. 82. The new Public Private Partnership (PPP) law is expected to help close the infrastructure gap while at the same time boosting local capital market development. In particular, PPPs could help increase investment opportunities for the local financial sectors, such as Administrators of Pension and Saving Funds (AFAP). This has also been facilitated by adjustments in regulations on AFAPs, which significantly increase the amount they can invest in infrastructure projects in the country. The adoption of a legal PPP framework in July 2011 by Parliament constitutes an important first step in this direction. It will have to be complemented by enforcing regulation and by the development of financial instruments that could support the mobilization of long-term funds for infrastructure investments through local capital markets. 83. Advances on Medium-Term indicators: There has been an improvement in market capitalization – from US$ 139 million in December 2009 to 154 million in September 2010 - as well as stock market activity relative to the baseline. 84. Prior Action: The Borrower has further implemented the Capital Markets Law, as evidenced by the issuance of the Executive Decree No. 322-011, dated September 16, 2011, which includes, inter alia: (i) provisions on promoting market development, including tax incentives such as reductions on capital gains taxes for stock issuers and the abolition of the withholding tax for pension funds; (ii) the establishment of the capital market promotion commission with private sector participation; and (iii) measures to adopt additional aspects of IOSCO standards, such as establishing minimum requirements for stock offerings related to public availability of business information and accounting and corporate government standards.
29
Reform Objective 3: Social Inclusion 85. Further improving social inclusion remains a top priority for the Government, as reaffirmed through the composition of the 2010-2014 budget. Allocations to health, social security and protection and education constitute more than 50 percent of the multi-year budget25. The expenditure approved in the budget law corresponds to an increase, from 2009 to 2014, in allocations to education and social protection26 of 30.4 and 45 percent, respectively. Since approval of first DPL in this series, there have been further efforts to consolidate policy improvements in social sectors, aimed at improving coverage, targeting and cost-efficiency of service delivery, as explained below. Social Protection 86. There have been significant improvements in reaching vulnerable people through non-contributory social programs in 2010. Family allowances (asignaciones familiares) now cover 83 percent of children from low-income households. Coverage to citizens between 65 and 70 years of age in extreme poverty remained almost unchanged (3,054 beneficiaries in December 2010, compared to 3,118 in December 2009), despite the general improvement in social and economic conditions27. These achievements also reflect progress in reaching the most vulnerable. As indicated by the findings of the Poverty and Social Impact Analysis (see below), there seem to be a link between these benefit increases and the observed decline in poverty and inequality in 2010. 87. The increase in coverage of food card allowances as well as the increase on the amounts of the allowance is an important component of the ongoing social protection reform. The Ministry of Social Development (MIDES) has continued to expand coverage of the food card (Tarjeta Alimentaria) program, incorporating households (with presence of children and pregnant women) that are vulnerable to extreme poverty, as defined by an index measuring extreme poverty. The main benefit of the program is a debit card that can be used to purchase food. As mandated by the Budget Law (Article 617) in December 2010, the monthly amount transferred to the 15,000 poorest families was doubled as of January 2011. 88. Efforts are also underway to improve targeting as well as monitoring and evaluation in delivering social protection services, most notably via the establishment of the new beneficiary identification system. This system (Sistema de Información Integrada para el Área Social – SIIAS) brings together information about different social programs and their beneficiaries. It also offers user-friendly access. Under the Budget Law, SIIAS was formally established and MIDES was charged with overall coordination. In recent months, the elaboration of the software for SIIAS has advanced significantly. Phase 1 of the database
25 See published Budget Law: http://www.cgn.gub.uy/presupuestos/Presupuesto2010/Ley/Cuadros/tomo_I/cuadro_I_004.pdf 26 Allocations for social protection refer to expenditures approved for the Ministry of Social Development (MIDES), which coordinates budget outlays for contributory and non-contributory social protection programs. 27 Source: Dirección Nacional de Evaluación y Monitoreo (DINEM), MIDES. This is complemented by an old-age pension paid by BPS to retirees above the age of 70 years.
30
containing information on children and adolescents is near completion and the system is estimated to be operational by end-2011. The next step will be to integrate information on other beneficiaries (expected to be completed by January 2012) and to gradually expand SIIAS to cover programs of other institutions, beyond the four participating today (ASSE, BPS, MIDES, and MSP). 89. Advances on Medium-Term indicators: There has been an improvement relative to the established base line, extreme poverty declined relative to the baseline of 0.8 percent at the household level to 0.6 in 2010. The government expects extreme poverty to decline further to 0.4 percent by 2015. 90. Prior Action: The Borrower has: (i) as of January 2011, doubled the amount transferred to the poorest 15,000 families via the Tarjeta Alimentaria program with respect to the total amount transferred as of December 2010, under said program; and (ii) formally established SIIAS under the overall coordination of the Borrower's Ministry of Social Development. Health 91. With the creation of an Integrated National Health System (INHS), and the expansion and harmonization of insurance and financing mechanisms, the first phase of the comprehensive health reform has been largely completed. The INHS was formally launched by law in January 2008, together with the National Health Board which governs the system (Junta Nacional de Salud – JUNASA). A National Health Fund (Fondo Nacional de Salud – FONASA) aimed at providing health insurance for retirees and formal employees was also launched and health administration was decentralized. 92. These changes in the institutional framework and in the financing scheme are spearheading a transformation of the health sector in Uruguay. Important reform measures to complete this transformation are well underway, notably: i) the creation of a common set of rules for health insurance coverage, including the unification of insurance rates across the various sub-systems and an adjustment of age- and gender-risk premia; ii) a gradual increase in population coverage; iii) a substantial shift in the epidemiological focus towards preventive intervention; iv) a change in the health care model towards an integrated approach. 93. Since the adoption of DPL 1 there has been significant progress towards universal coverage of national health insurance system. This was also confirmed by a new law adopted in January 201128. As of July 2011, national health insurance covers all public and private employees and their children, all spouses of already covered workers in families with three or more children, retired workers from the lowest income group that retired before January 2008 and all remaining workers that retired after this date. A gradual process of integrating people covered by private insurance providers into the national health insurance system started in 2011. 28 Laws 18.731 and 18.732, approved by Parliament in January 2011.
31
94. The second phase in health reform, now underway, focuses on further improving the efficiency of health service delivery. The main challenges relate to lack of managerial and organizational capacity, quality of services delivered to patients and rising trends on costs. An important priority in addressing these challenges is the proposed definition of content and governance of the Integrated Health Assistance Program, which determines the scope of services that the system will cover. This is supported by analytical work conducted with the World Bank. Other ongoing reform efforts include the preparation of an Integrated Health Information System (Sistema Nacional Integrado de Información en Salud - SNIIS), and the implementation of a pilot project to reduce red tape in administrative processes related to the provision of health care services. 95. Advances on Medium-Term indicators: There has been an improvement relative to the established baseline, the health insurance system increased its coverage from the base line of 43 percent in 2009 to 45 percent in 2011. In lines with plans to further increase coverage, it is expected that this indicator will reach 60 percent by 2015. 96. Prior Action: The Borrower has expanded health insurance coverage to: (i) spouses and domestic partners of public and private sector workers with health insurance coverage and who have three or more children; (ii) public and private sector workers from lowest income groups that retired from their employment before January 1, 2008; and (iii) all public and private workers that retired from their employment before January 1, 2008, as evidenced by the Borrower’s Decree No. 318-010, dated October 26, 2010 and published in the Borrower’s official gazette on November 1, 2010, and the Borrower’s Laws No. 18.731, dated January 7, 2011, and published in the Borrower’s official gazette on January 25, 2011. Education 97. The Government emphasizes education as the “priority of priorities” and particularly recognizes challenges related to coverage and quality of secondary education. Universal access has been achieved for preschool children (up to age 5) and for all grades in primary education (grades 1 to 6). However, at the secondary level, important challenges remain in terms of coverage and quality, especially for the poorest groups. Net enrollment rates for the poorest quintile are 37 percent below that of the richest. 98. Insufficient learning achievements as well as high repetition and high drop-out rates represent major challenges for the education system. Out of 100 children that enter school, 96 complete primary, 71 secondary (ciclo basico) and 39 high school (bachillerato). Uruguay also seems to stagnate in terms of learning results, as evidenced by a drop in PISA from position 39 in 2006 (out of 56 countries assessed) to 47 in 2009 (out of 65 countries). While this is still a relatively good result in regional comparisons (only Chile performs better), Uruguay’s 14 year-old students lag behind students in OECD countries in both math and language skills by an average of two years.
32
99. Several measures are underway to address these challenges. The expansion of pre-school access to all children from age four has especially benefited low-income households. Also, a program that added community teachers to 40 schools, with a high attendance of disadvantaged students, helped reduce repetition rate from 50 to 20 percent. There is also an increasing emphasis on enhancing technical education and establishing a better link between school curricula and labor market requirements. 100. The one-laptop-per-child program (Plan Ceibal) – the flagship education reform - has started its extension to secondary level by equipping most of Uruguay’s 1st and 2nd grade secondary students with a laptop. The objective to further expand this program and to narrow the digital divide by promoting equal opportunities in access to information and technology has been met. By the end of 2010, Plan Ceibal had been fully implemented in primary schools and in 2010 the Government took action to roll out the scheme to secondary schools grade by grade. By July of 2011, over 90 percent of students in grades 1-3 in secondary schools located in the interior of the country, and students in grades 1-2 in secondary schools in Montevideo and Canelones had received a laptop. More than 96 percent of secondary schools had internet access through WIFI as of August 2011. 101. Plan Ceibal focuses increasingly on educational aspects and its expansion to pre-schools. The following are key initiatives:
• Teacher training: In 2011, the Government has been building on previous experience and to focus on a mix of online and offline training for educators in kindergarten, primary and secondary schools. The Government is also designing ICT certification and accreditation schemes for teachers. There are also plans to enhance learning outside the formal school environment by specifically supporting families.
• Online student assessments: The Government plans to expand several online evaluation schemes in key disciplines such as mathematics, language, and natural sciences which have been supported by Plan Ceibal since 2009. To date, more than 300,000 student assessments in grades 2 and 6 have been performed online, and timely feedback has been provided to teachers and schools. In 2012, grades 3, 4 and 5 are scheduled to be incorporated into the online assessments.
• Plan Ceibal library: The Government plans to link all schools to a digital library. Schools will be able to access the digital library via their servers. Initially the library will contain about 100 literature books from both contemporary as well as classical authors. The primary objective of this initiative is to improve students’ reading capabilities.
• Math Olympics and Robotics: The plan here is to develop software that allows students to practice mathematics and basic logics; this will be complemented by a nationwide mathematics contest. A primary goal of this project is to demonstrate that mathematics can be fun. For robotics, there are plans to transform technical/science labs in schools into digital labs.
102. Broken computers present an important challenge for Plan Ceibal. According to one study, almost one third of computers are in a state of disrepair; improving the repair system is therefore an important priority. In 2011, in-school support was extended via mobile
33
repair teams and collaboration with certified tech-support companies. Plan Ceibal initiated an additional program this year to allow teachers to exchange XOs for other laptops. Secondary schools students may also exchange their XOs for a more modern version. While these exchanges benefit users, it also signals a strong financial commitment of the Government to Plan Ceibal. 103. Advances on Medium-Term indicators: There has been an improvement relative to the established baselines: (1) the number of students in public primary schools with access to wireless internet through Plan Ceibal increased from the baseline of 95 percent in 2009 to currently 98 percent, and is expected to reach 100 percent by 2015. (2) Relative to the baseline of 30.3 percent in 200929, by July of 2011, about 94.4 percent of students in grades 1-3 in secondary schools located in the interior of the country and about 93 percent of students in grades 1-2 in secondary schools in Montevideo and Canelones had received a laptop (compared to 0 percent in 2009); full coverage is expected to be reached by 2015. By August 2011, more than 96 percent of secondary public schools had internet access through, a significant improvement over the baseline of 44.6 percent in November 2009. 104. Prior Action: The Borrower has: (a) expanded the Plan Ceibal by delivering laptops to: (i) students in grades 1 to 3 of secondary public schools in the Borrower’s territory other than in Montevideo and Canelones (94.4% of such students as of July 2011, from a baseline of 30.3% of such students as of July 2009); and (ii) students of public secondary schools in grades 1 and 2 in Montevideo and Canelones (93% of such students as of July 2011 from a baseline of 0% of such students as of July 2009); and (b) provided WIFI connections to 248 of the secondary schools mentioned in (i) and (ii) herein (96.1% of said schools as of August 2011 from a baseline of 44.6% of said schools as of November 2009).
VI. OPERATION IMPLEMENTATION A. Poverty and Social Impact 105. Policy reforms supported by the DPL series are likely to have a positive and significant social impact, in particular for the poorer groups of society. The reforms aim to reduce poverty through the expansion of coverage and increased efficiency of social services for low-income households. In addition, reforms will have an indirect positive impact on poverty reduction by encouraging private investment and promoting public sector efficiency. 106. There is no evidence that public sector and competitiveness reforms will impact negatively on poverty or social conditions. Rather, their impact is expected to be positive. By seeking to improve efficiency in the delivery of key services, public sector reforms will
29 The DPL 1 document reports a baseline of 80 percent for 2009. This baseline is applicable only to students in the first grade of public secondary school in the interior. Given that coverage has been expanded to grades 1 to 3, the baseline for 2009 has been changed to reflect a corresponding large group of students. The corrected baseline is 30.3 percent.
34
enhance targeting and lower the costs of Government services. Competitiveness reforms (trade facilitation, logistics, business climate or capital market development) aim at fostering private investment and growth, and thereby contribute to boosting employment creation and to reducing poverty. The simplification of the business start-up process has already positively affected the creation of small and medium sized companies. 107. Social inclusion reforms supported by the DPL explicitly focus on improving equity and reducing poverty. Education and health reforms, as well as those aimed at strengthening the social protection system are geared toward improving the welfare of low-income groups. A number of measures included in these reforms have produced a positive effect on poverty reduction, as presented in the previous section. Measures supported by the DPL series are also expected to improve the targeting of existing programs and reduce the number of duplicate payments from different sources to the same beneficiaries. 108. A Poverty and Social Impact Analysis (PSIA) conducted for the social inclusion reforms indicates that existing social protection programs play an important role in preventing people from falling into poverty, in particular into extreme poverty. Simulations show that in the counterfactual absence of any social protection programs, moderate poverty would be 65 percent higher than the actual figures reported in 2010. Moreover, extreme poverty would be more than four times higher. Even the Gini coefficient, a stable income inequality indicator, would increase by 10 percent if social protection did not play a redistributive role. (See Annex 2 for further details.) B. Implementation, Monitoring and Evaluation 109. The Government will monitor and the Bank will assess progress of implementation of the DPL program using different sources including:
Central and non-financial public sector budget monitoring from the Ministry of Economy and Finance;
CBU reports and analysis;
DGI and BPS information systems;
Credit rating agencies reports (several sources);
Doing Business indicators;
Investment climate surveys;
Reviews and analyses of laws and implementing regulations from the World Bank and other stakeholders;
Financial audits and follow up of CFAA recommendations;
World Bank supervision missions and reports; and
IMF and IADB reports.
110. The Government and the Bank have been monitoring progress of the DPL program. A comprehensive stocktaking on reform progress was undertaken as part of the preparation of this second loan. The Ministry of Economy and Finance, which is the main counterpart agency for the loan, collected the data necessary to assess implementation
35
progress from appropriate sources, including relevant line ministries, the Central Bank (for capital market issues), DGI and BPS. Going forward, the Bank will schedule supervision missions, at least every twelve months, to assess continued adherence to the overall program. As indicated in the loan agreement, the Borrower and the Bank shall from time to time, at the request of either party, exchange information on the Borrower’s macroeconomic policy framework and views on the progress achieved in carrying out the program. C. Fiduciary Arrangements 111. According to the Uruguay Country Financial Accountability Assessment (CFAA) Uruguay's PFM fiduciary risk is low. Public financial management (PFM) in Uruguay is generally sound, reliable and with an acceptable level of transparency. Notwithstanding, there is room for improvement, particularly with regards to flexibility and efficiency. Taking into account the CFAA conclusions and an update on the assessment of fiduciary risks, no additional condition for the proposed operation are required. The Bank, jointly with the European Commission (EC) and the Inter-American Development Bank (IDB), is currently carrying out a review of the Uruguay public financial management (PFM) system following the Public Expenditure and Financial Accountability (PEFA) methodology. The review will help provide updated knowledge on the country’s PFM system (the last diagnostic work was the CFAA performed in 2005); it will also provide analytic underpinning/due diligence for development partners’ budget support/development policy lending. As per provisions of its political constitution, Uruguay has a five-year budget that coincides with the government term and is supplemented by yearly reporting on uses of budgetary funds: Budget Execution Reporting Law (Rendición de Cuentas). Budget law No. 18.719 for the period 2010-2014 including detailed information on public expenditure was passed by the Legislative in 2010; it has been published by the official gazette and is available to the public in the external website of the Accountant General Office (CGN, by its Spanish acronym). Budget Execution Reporting for 2010 was timely submitted to the Legislative in June 30 2011 and has been is posted in CGN’s external website. 112. The current foreign exchange control environment within the Central Bank is satisfactory. The conclusions of the 2002 IMF Safeguard Assessment were overall satisfactory. Another IMF Safeguard assessment was completed in September 2005 and IMF review under the 2007 and 2009 Article IV consultations confirmed that most of the recommendations from the last safeguard assessment were already implemented.30 113. The 2005 Country Procurement Assessment Report (CPAR) found that the procurement function in Uruguay needs significant improvement. This is still largely valid. While Uruguay’s procurement function is generally considered to be free of corruption, the system is slow and inefficient. Agencies often find alternative ways—mainly through exceptions and waivers to competition—to acquire goods and services, thus reducing competition and business opportunities in a relatively small market. These exceptions to the normal procedures appear to be the response of the purchaser to a lengthy decision making process and cumbersome procedures. Among the main issues to be addressed are: creating a 30 An update is expected in October/ November 2011.
36
dedicated regulatory body for procurement; introducing specialized legal and regulatory provisions on procurement; enhancing internal and external control mechanisms; merging and simplifying of registers; and strengthening e-procurement. On the latter, there has been some progress through IBTAL’s support to the implementation of e-procurement processes in the Unidad Central de Adquisiciones (UCA). D. Disbursement and Audits 114. The administration of this loan will be the responsibility of MEF. The disbursement will follow the Bank’s disbursement procedures for development policy loans. The loan proceeds will be disbursed after the loan is approved by the Board and the loan is declared effective. Pursuant the legal agreement, a condition for loan effectiveness is that the Bank confirms its satisfaction with (i) the progress achieved by the Borrower in carrying out the Program and (ii) the adequacy of the Borrower’s macroeconomic policy framework against satisfactory implementation of the development policy program. 115. Deposits of loan amounts. Once the loan is approved by the Board and becomes effective, the Borrower may submit a withdrawal application requesting the Bank to deposit the proceeds of the loan in an account designated by the Borrower and acceptable to the Bank at the Central Bank of Uruguay upon the request of the Borrower. The Borrower shall ensure that upon the deposit of the loan into said account, an equivalent amount is credited in the Borrower’s budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited to the budget management system. While the whole amount of the loan will be available upon effectiveness, there could be more than one disbursement of loan proceeds. This is particularly relevant in case disbursements will take place in Uruguayan pesos, where the amount disbursed would be dependent on the market appetite for a local currency bond issuance. Disbursements will be processed prior compliance with the requirements established in the Loan Agreement. 116. Bank audits. An audit of the deposit account where loan funds will be deposited will not be required. However, the Bank will retain the right to request an audit of the deposit account in which loan proceeds are received. Upon the Bank’s request, the Borrower shall have the designated account for loan proceeds audited by independent auditors acceptable to the Bank, in accordance with consistently applied auditing standards acceptable to the Bank. If the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, IBRD will require the Borrower to promptly, upon notice from IBRD, refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. E. Environmental Aspects 117. The proposed operation is not likely to have any significant effects on the environment, forests, and other natural resources. However, to the extent that actions
37
supported by the loan program are successful, over time, in attracting new private investment, there will be a need to continue strengthening Uruguay’s institutional capacity to identify and address environmental policy and regulatory issues. 118. Environmental policies and regulations are in place, and implementation is improving. The Ministry of Housing, Planning and Environment (Ministerio de Vivienda, Ordenamiento Territorial y Medio Ambiente, MVOTMA), through its National Environment Directorate (Dirección Nacional de Medio Ambiente, DINAMA) is responsible for implementing a national plan for environmental protection, harmonizing the needs of environmental protection with sustainable development. Uruguay's large new foreign-financed investments in the pulp industry have elevated the importance of monitoring and compliance with environmental regulations. Faced already with a significant increase in climate variability, the Government adopted a National Plan of Response to Climate Change to coordinate institutional action on mitigation and adaptation strategies and render them more effective. The Bank is supporting the implementation of these plans with a new cluster program on natural resource management and climate change consisting of an investment loan, analytical and technical assistance, as well as GEF and Adaptation Fund grants. F. Risks and Risk Mitigation Economic Risks 119. Uruguay’s main economic risks relate to the vulnerability of the economy to external shocks. In this small and open economy that is still characterized by a relatively large degree of dollarization, the potential implications of external shocks on fiscal and growth prospects are still significant, notwithstanding important improvements achieved in recent years:
The commodity-dependent export base is vulnerable to a trend reversal in respect to the currently favorable agricultural commodity prices and external demand.
While the country has diversified its export markets and reduced export concentration in Brazil and Argentina, economic performance still depends to a great extent on developments in these two large neighboring economies.
Uruguay’s success as a regional logistics hub is closely linked to its ability to attract transit flows in order to increase scale economies. While greater trade volumes will generate more competitive shipping costs for domestic cargo and also provide additional revenue and opportunities for Uruguay’s logistics industry, greater openness to transit flows also adds to Uruguay’s vulnerability to external shocks.
Despite having further improved the debt profile since the first DPL in the series was presented to the Board, the size of public debt relative to the economy and its share that is denominated in foreign currency remains an important vulnerability factor. Debt levels still limit the Government’s room to implement effective countercyclical measures.
38
120. The Government has taken a proactive stance towards managing economic risks in recent years, making the reduction of economic vulnerabilities a key policy priority. This refers to vulnerability at the level of the economy as a whole, of the fiscal situation and also different economic actors. More specifically, these risk mitigation policies have reduced Uruguay’s exposure to economic risks, by bolstering a number of mitigating factors: First, growth outperformed expectations in 2004-2010, partially due to very favorable
external developments, partially because of a conductive policy environment.
Second, a strong fiscal performance led to higher than expected primary surpluses in 2004-10. The prudent fiscal stance was confirmed by the 2011 budget update (Rendición de Cuentas 2010) submitted to Parliament in August 2011. In this update, no discretional increases in spending levels were introduced over-and-above those determined by the 5-year budget adopted in December 2010 despite higher than expected GDP growth.31
Third, the public debt management strategy has been successful in reducing medium-term borrowing requirements (Annex 1).
121. These three mitigating factors are expected to remain valid over the coming years. Growth prospects remain strong in the medium term. The five-year budget and in particular the 2012 budget update allow for additional fiscal space. And even under conservative assumptions regarding economic recovery, public debt is projected to decline from 49.6 percent of GDP in 2011 to 41.5 percent of GDP in 2015. 122. Financial sector vulnerability is another source of economic risk. The main risks posed by the financial sector in the 2002 crisis were the high levels of dollarization, the importance of State Banks, and a combination of inadequate supervision of foreign banks and high levels of non-resident deposits. While substantial progress has been made32, some of these factors still pose risks. For one, the Government continues to face large contingent liabilities arising from explicit and implicit guarantees to the public banks, which hold more than 50 percent of total banking system assets. While financial sector indicators have improved overall, a deep and protracted deterioration in international economic conditions may increase non-performing loans. Also, the current level of unremunerated reserve requirements has negatively affected bank profitability. 123. A strengthened prudential regulatory and supervisory framework has helped to contain risks. Authorities have been moving to a consolidated supervision framework and greater transparency. During 2009, several reforms were introduced, including: reforms to improve the control and supervision by the bank superintendent, regulations specifying the preconditions for selling investment instruments issued by third parties, and regulations to bolster the rights of bank clients (particularly credit card holders).
31 When preparing the budget, the government projected a GDP growth rate of 6.5 percent for 2010. This excludes legally mandated increases related to public education (public spending set at 4.5 percent of GDP), the incorporation of retired workers to the public health insurance and endogenous increases in transfers that are indexed to measures linked to the economic activity (such as the wages index). 32 Since December 2000, Uruguay has experienced a progressive decline in banking sector dollarization from 87.8 percent of total deposits in foreign currency to 74.2 percent in December 2010. At the end of 2010, credit in foreign currency represented 50 percent of total credit.
39
124. Finally, concerns about debt sustainability and economic recovery, both in the USA and Europe, are increasingly threatening the global economy. Even the more dynamic group of emerging economies - to which Uruguay belongs - is likely to be affected. A disorderly resolution to the eurozone debt crisis will likely weigh on investor confidence and, similar to past crises, could push up risk premia, thus raising borrowing costs and restricting access to international capital markets (Box 2). In addition, a slow recovery or more severely a “double-dip” recession in developed countries would depress global demand, commodity prices and capital flows. With emerging market economies leading the current growth recovery, such a scenario would more likely slow, rather than stall economic activity in emerging markets. But a persistent global recession would eventually also dent the export driven-growth of many emerging market economies, including Uruguay. 125. The Government has locked in commitments for contingent financing from multilateral institutions with a view to pre-empt deteriorating conditions in international debt markets. An agreement for additional credit lines has been reached with the Corporación Andina de Fomento (CAF) (US$400 million). The Uruguayan authorities are also in advanced discussions with the Fondo Latinoamericano de Reservas (FLAR) for a similar arrangement.33 This DPL-DDO would also serve this purpose. It is therefore expected that this precautionary strategy would enable the Government to meet Central Government debt service obligations until end-2013, should market financing no longer present a viable option. Political and Social Risks 126. Political and social risks remain low. The Government of President Mujica continues to signal commitment to the same prudent fiscal and monetary management that characterized its first year in office. Low political risk is also reflected by the fact that the 2011 budget draft law that was passed by the Parliament with strong support. Only a few key proposals, such as the PPP draft law, generated some delay due to several changes being proposed by the Parliament. Also, despite some debate on tax reform, no distortionary changes are expected. Implementation risks
127. Implementation risks are low. Managerial risks relate to potential difficulties in implementing the proposed reforms because of a potential shortage of trained staff. These risks are mitigated by Government efforts to strengthen capacity in key implementing agencies. The IBTAL series which accompanies the DPL series as well as related TA from other donors are supporting these efforts. In spite of this, there might be residual risks related to the achievement of expected outcomes in some of the reforms supported by the loan. 128. Sustainability risks might arise if the reform process loses momentum or is reversed. This could become an issue in case the external economic environment takes a
33 Currently, these funds can be disbursed to the Central Bank, but a legal amendment included in the 2011 budget update makes it possible that they could eventually also be transferred to the Central Government without being considered as a credit from the Central Bank.
40
negative turn for Uruguay. However, these risks are mitigated by the Government’s continued strong commitment, and its broad political support to maintaining a prudent fiscal stance and implementing key structural reforms.
Box 2. Global Economic Crisis of 2008 and 2009 and the Importance of Liquidity Risk The global crisis impacted Uruguay initially through the financial sector. The Lehman Brothers bankruptcy in mid-September 2008 sharply raised risk aversion in global financial markets which quickly spread to Uruguay. Sovereign debt spreads widened substantially in 2008, by over 500 points, peaking at 907 basis points in October 2008 and remaining at high levels throughout the remainder of 2008. The peso depreciated by 25 percent against the U.S. dollar over the same period and foreign-currency deposits increased from 76 percent of total deposits in August 2008 to 82 percent in May 2009. Inflation started to increase in September 2008 to a high of 9.2 percent in January 2009. In 2009, net capital inflows dropped and their composition changed in favor of multilateral financing. The overall fiscal deficit widened from 1.5 to 1.7 percent of GDP in 2009, while the primary surplus declined from 1.3 to 1.1 percent of GDP, as revenues slowed with the crisis and expenditures increased with fiscal stimulus. A severe drought further raised fiscal pressures as a shortfall in hydroelectric power generation needed to be covered by energy imports at increasing costs.
The substantial rise in Uruguay’s sovereign spreads during the global crisis is largely explained by a global increase in risk aversion, as country-specific macro fundamentals remained broadly adequate. The fact that Uruguay’s spreads increased however beyond that of other LAC countries with similar fundamentals seems to support the contention that bond spreads are also determined by liquidity, as measured by the relative size of a country’s sovereign debt market, as investors find it more difficult to shift in and out of illiquid markets. Recent research on behavior of sovereign bond spreads during the global financial crisis in Europe confirms that such spreads are not only driven by a flight-to-quality, but also flight-to-liquidity.1 Although the bulk of spreads is explained by differences in credit quality, liquidity plays a nontrivial role, especially during times of heightened market uncertainty. As such, countries like Uruguay, where sovereign debt is less liquid, face in times of market distress in addition to a global increase in risk aversion also a higher liquidity premia, thus further increasing borrowing costs and restricting market access. According to the Government, Uruguay lost access to international capital markets for about one year following Lehman Brother’s collapse.
Figure 4. EMBI Global Index Uruguay, Brazil, Chile, Colombia and Peru
Source: Bloomberg
1 See for example: Beber. A.; Brandt, M.W., Kavajecz, K.A. (2009): Flight to quality or flight to liquidity? Evidence from the euro-area bond markets, Review of Financial Studies, 2009, 22, 3, 925-957.
0
100
200
300
400
500
600
700
800
900
Jan‐06
Apr‐06
Jul‐06
Oct‐06
Jan‐07
Apr‐07
Jul‐07
Oct‐07
Jan‐08
Apr‐08
Jul‐08
Oct‐08
Jan‐09
Apr‐09
Jul‐09
Oct‐09
Jan‐10
Apr‐10
Jul‐10
Oct‐10
Jan‐11
Apr‐11
Jul‐11
In basis points
Brazil Chile Colombia Peru Uruguay
41
130. Program outcome risks relate to the implementation of the proposed measures not bringing about the expected results. These risks remain substantial in some of the areas supported by the proposed operation. For example, in spite of efforts to support capital market development and the business climate, the outcomes of these reforms depend not only on the Government, but also on private sector participation.
42
Annex 1. Debt Sustainability Analysis
Debt Management Strategy A1.1 The Government’s proactive debt management strategy has led to a significant improvement of the debt profile. The 2010-2015 strategy of the Debt Management Unit (DMU) aims at further improving the debt profile by setting the following priorities: (i) reduce re-financing risk, (ii) reduce exchange rate risk, (iii) reduce interest rate risk, (iv) achieve an appropriate combination of debt contracted in the capital markets and of that with multilateral credit organizations, (v) promote the domestic capital market and (vi) diversify financing sources of the Government (attract new investors). In line with this strategy, the Central Government issued US$ 1.3 billion in local currency as well as Index Units indexed instruments (linked to CPI) in January 2011. As a result of this operation, the domestic market was left with a more liquid benchmark, the maturity profile of public sector debt was extended, the concentration of payments coming due in 2011 was reduced and the share of local currency-denominated debt increased from 34 percent to 39 percent. Public Debt Trends and Structure A1.2 Public debt levels have been on a marked decreasing trend since 2003. Uruguay experienced continuous economic growth in the period 2003-2010, averaging 5.6 percent. This economic expansion, together with the appreciation of the Uruguayan peso and a better fiscal position, led to a considerable reduction of debt-to-GDP ratio that dropped from 105 percent in 2003 to 57.5 percent in 2010. A1.3 A successful debt management strategy improved the composition of debt that is now less exposed to exchange and interest rate risks. Though dollarization is still high, a considerable increase in the share of local-currency gross public debt from 9.8 percent in 2004 to 43.4 percent of total in 2010 made the public sector less vulnerable to changes in the exchange rate. During the same period, interest rate risk was reduced, as fixed-rate debt instruments grew from 55.0 percent to 82.1 percent of total public gross debt. Long-term debt (over 5 years) reached 56.5 percent in 2010, up from 43.0 percent in 2004.
43
Figure A1. 1 Annual public debt as a share of GDP
Source: Central Bank of Uruguay and WB staff calculations.
Debt Sustainability Analysis A1.4 The debt sustainability analysis is performed on the basis of two methodological approaches. The deterministic approach presents the evolution of main determinants of public debt over time. The stochastic approach shows how the main determinants of public debt are affected by stochastic shocks. A1.5 Under conservative assumptions, a medium-term stable debt path for Uruguay’s public debt is projected. Our baseline assumes a slower economic growth pace (6.5 percent) in 2011 that would gradually converge to the long term economic growth rate at about 4 percent. Fiscal accounts are expected to moderately deteriorate in 2011, in response to lower surplus from SOEs, and get back to the improving trend of previous years in 2012. Based on these assumptions, we project gross public debt to decline from 57.5 percent of GDP in 2010 to 32.0 percent of GDP in 2016. A1.6 Following a deterministic approach to the debt sustainability analysis, we test the effect of adverse shocks on public debt trends. Consistently with Uruguay’s public debt profile, characterized by a still large share of FX-denominated debt, the highest impact is found when a one-time 30 percent exchange rate depreciation in 2012 is assumed. This shock would cause the debt-to-GDP ratio to increase to 77.1 percent in 2012, declining gradually thereafter. The second most extreme stress test corresponds to a combined shock (primary surplus-to-GDP ratio, real growth rate and real interest rates) in 2011-2012. Under this shock, public gross debt would increase to 59.4 percent and 63.9 percent of GDP, respectively, showing a declining path in subsequent years. A growth slow-down in 2011 and 2012 constitutes the third most severe scenario. Indeed, debt trends show considerably more sensibility to GDP growth than to interest rate, as can be seen by comparing the impact of similar shocks applied to both variables (B2 and B1, respectively).
0
20
40
60
80
100
120
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Per
cent
of G
DP
Total PS Debt
PS External Debt
PS Domestic Debt
44
Table A1. 1 Gross Public Debt: Alternative Scenarios and Bound Tests, 2011-2016
(in percent of GDP)
Source: World Bank Projections. Note: gross debt of the overall public sector (NFPS and Central Bank)
A1.7 We also test the effects on public debt trends of a double dip recession in the developed world. First, we assume trends in GDP, interest rate, fiscal deficit and exchange rate to be similar to those seen after the Lehman Brothers collapse. Under this first scenario, the public debt trend would still be decreasing, but showing a moderate slow down during the period. As an alternative, we assume a double dip recession to have a persistent effect on GDP growth rates, which would be reduced to 2 percent in the period 2012-2016. According to the analysis, this shock would have a stronger effect than a replica of the Lehman Brother’s collapse, but would not revert the trend decline in the public debt-to-GDP ratio. A1.8 Stochastic simulations are then run to assess the impact of volatility and uncertainty on debt sustainability. Based on the historical variances of four simulated variables (real GDP growth, change in real exchange rate, real interest rates of domestic and external debt), and abstracting from any feedback of rising debt levels on fiscal policy, Monte Carlo simulations were run to obtain confidence bands around the baseline projections of the gross-debt-to-GDP ratio. Our simulations indicate a 97.5 percent likelihood that gross public debt will be below 82.8 percent of GDP and a 50 percent probability that it will be below 35.2 percent of GDP by 2016.
Actual 2010 2011 2012 2013 2014 2015 2016
Baseline 57.5 49.2 45.2 41.5 38.2 34.9 32.0
A1. Key variables are at their historical averages in 2011-16 14/ 57.5 50.6 47.0 43.6 40.5 37.7 35.2A2. No policy change (constant primary balance) in 2011-16 57.5 49.3 45.3 41.6 38.3 35.1 32.1
B1. Real interest rate is at historical average plus two standard deviations in 2011 and 2012 57.5 52.0 50.5 46.5 43.0 39.6 36.5B2. Real GDP growth is at historical average minus two standard deviations in 2011 and 2012 57.5 57.1 60.1 55.9 52.1 48.3 44.8B3. Primary balance is at historical average minus two standard deviations in 2011 and 2012 57.5 51.7 47.6 43.8 40.4 37.1 34.0B4. Combination of B1-B3 using one standard deviation shocks 57.5 59.4 63.9 59.5 55.5 51.7 48.0B5. One time 30 percent real depreciation in 2012 16/ 57.5 64.0 77.1 72.4 68.2 63.8 59.5
C. Double dip recession scenario
C1- Replicating 2008-2009 impact on GDP, interest rate, fiscal deficit and exchange rate 57.5 49.4 48.6 43.9 40.8 37.7 34.8
C2. Assuming GDP growth at 2% in 2012-2016 57.5 49.4 47.0 44.7 42.9 41.3 40.1
Summary 2010 2011 2012 2013 2014 2015 2016
Baseline 57.5 49.2 45.2 41.5 38.2 34.9 32.0
Most extreme stress test (B5) 57.5 64.0 77.1 72.4 68.2 63.8 59.5Second most extreme stress test (B4) 57.5 59.4 63.9 59.5 55.5 51.7 48.0Third most extreme stress test (B2) 57.5 57.1 60.1 55.9 52.1 48.3 44.8
Projected
45
Figure A1. 2 Gross Public Debt-to-GDP: Stochastic Simulations
Source: World Bank staff projections. Note: gross debt of the overall public sector (NFPS and Central Bank).
0
10
20
30
40
50
60
70
80
90
100
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Per
cent
of G
DP
2.5 - 5.0 / 95.0 - 97.5
Baseline
46
Table A1. 2 Uruguay: Public Sector Debt Sustainability Framework, 2006-2016 (in percent of GDP, unless otherwise indicated)
Notes: 1/ Gross debt of the overall public sector (NFPS and Central Bank). 2/ The domestic real interest rate contribution is derived as (id-)/[(1+)(1+g)] times previous period net domestic debt ratio as defined in footnote, with id=domestic interest rate, =domestic inflation rate; g=real GDP growth rate. 3/ The foreign real interest rate contribution is derived as (if-*)/[(1+*)(1+g)] times previous period gross external debt ratio, with if=foreign interest rate, *=US inflation rate; g=real GDP growth rate.
4/ The real exchange rate contribution is derived as )1()1(/))1()1( *1
*1
*^
ttttl
ttf
t gnfaibie , with the change in real exchange rate êt defined as in note 8/ and all other variables defined as in notes 2/ and 3/. 5/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. 6/ Derived as nominal interest expenditure divided by previous period gross public debt stock. 7/ The real interest rate on public debt is calculated as 1)1/()1()1(1)1/()1()1( * t
dtttt
ftt iei
, with t as the share of foreign currency denominated debt in total public debt and all the other variables defined as in footnotes 3/, 4/ and 6/. 8/ Change in the real exchange rate êt is defined as (et·Pt*/Pt)/(et-1·Pt-1*/Pt-1) = (1+st)·(1+t*)/(1+t), in percent.
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Public sector debt 1/ 70.4 62.8 61.7 60.8 57.5 49.2 45.2 41.5 38.2 34.9 32.0o/w foreign-currency denominated (gross) 47.8 42.6 40.0 35.5 32.1 29.9 28.9 26.2 24.5 23.0 21.2
Change in public sector debt -8.9 -7.7 -1.1 -0.9 -3.4 -8.3 -4.0 -3.7 -3.3 -3.2 -3.0Identified debt-creating flows -8.9 -17.0 -4.4 -11.4 -6.4 -8.3 -4.0 -3.7 -3.3 -3.2 -3.0
Primary deficit -3.6 -3.5 -1.3 -1.1 -1.9 -1.3 -1.5 -1.7 -1.8 -1.7 -1.7Revenue and grants 28.2 28.3 26.4 28.4 29.4 28.8 29.4 30.1 30.2 30.3 30.3Primary (noninterest) expenditure 24.6 24.8 25.1 27.2 27.5 27.5 27.9 28.4 28.5 28.6 28.6
-Seignorage -1.5 -1.2 -2.0 -0.9 -0.7 -1.0 -0.7 -0.4 -0.2 0.0 0.2 +Automatic debt dynamics: -3.7 -12.2 -1.0 -9.4 -3.9 -6.0 -1.8 -1.5 -1.4 -1.5 -1.5
Contribution from interest rate/growth differential -2.1 -4.2 -4.8 0.4 -3.5 -2.7 -1.4 -1.1 -1.0 -1.1 -1.2Of which contribution from real interest rate 1.1 0.6 0.2 1.9 1.3 0.8 0.8 0.7 0.6 0.4 0.2
Contribution from domestic real interest rate 2/ -0.6 -1.1 -0.3 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0Contribution from real interest rate on foreign debt 3/ 1.7 1.8 0.5 1.9 1.2 0.8 0.8 0.7 0.6 0.4 0.2
Of which (-) contribution from real GDP growth excl. OSF -3.3 -4.8 -5.0 -1.6 -4.7 -3.5 -2.1 -1.7 -1.6 -1.5 -1.3Contribution from real exchange rate depreciation 4/ -1.6 -8.0 3.7 -9.8 -0.4 -3.2 -0.4 -0.5 -0.4 -0.3 -0.3
Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -Privatization receipts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Residual, including asset changes 0.0 9.3 3.3 10.6 3.1 0.0 0.0 0.0 0.0 0.0 0.0
Public sector debt-to-revenue ratio 1/ 249.4 221.6 233.4 214.4 195.4 170.8 153.5 137.8 126.1 115.2 105.3
Gross financing need 5/ 33.6 5.1 7.7 7.3 14.2 21.7 14.5 12.6 13.2 13.0 13.4in billions of U.S. dollars 6.7 1.2 2.4 2.3 5.7 10.6 7.7 7.2 8.1 8.7 9.6
Key Macroeconomic and Fiscal Assumptions
Nominal GDP (local currency) 476.7 560.4 653.1 706.9 807.7 925.6 1031.0 1136.6 1253.0 1381.3 1522.8Real GDP growth (in percent) 4.3 7.3 8.6 2.6 8.5 6.5 4.5 4.0 4.0 4.0 4.0Average nominal interest rate on public debt (in percent) 6/ 5.9 5.9 5.3 4.9 5.5 6.3 5.6 5.2 5.3 5.0 4.8Average real interest rate (including exchange rate revaluation on foreign currency denominated debt) 7/ -0.6 -11.3 6.8 -13.0 1.6 -4.6 0.7 0.4 0.4 0.0 -0.2Exchange rate, end of period (LC per US dollar) 24.5 21.6 24.4 19.6 20.1 18.9 19.4 19.8 20.3 20.7 21.2Change in the real exchange rate (Local currency per US dollar) 8/ -2.8 -17.3 9.4 -23.9 -1.2 -10.5 -1.3 -1.7 -1.5 -1.5 -1.4Nominal depreciation of local currency, end of period (LC per dollar) 1.2 -11.9 13.0 -19.4 2.4 -6.2 3.0 2.2 2.2 2.2 2.2GDP deflator (in percent) 7.5 9.5 7.3 5.5 5.3 7.6 6.6 6.0 6.0 6.0 6.0Growth of real primary spending (deflated by GDP deflator, in percent) 5.9 8.2 9.9 11.3 9.7 6.5 5.9 5.7 4.4 4.5 4.0Primary deficit -3.6 -3.5 -1.3 -1.1 -1.9 -1.3 -1.5 -1.7 -1.8 -1.7 -1.7
Actual Projected
47
i-rate shock
27
Baseline 27
0
20
40
60
80
100
120
2006 2008 2010 2012 2014 2016
Interest rate shock (in percent)
Country: External Debt Sustainability: Bound Tests 1/(External debt in percent of GDP)
Sources: Central Bank of Uruguay, International Monetary Fund and World Bank' staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. 2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 30 percent occurs in 2012.
Historical
41
Baseline
27
0
10
20
30
40
50
60
0
20
40
60
80
100
120
2006 2008 2010 2012 2014 2016
Baseline and historical scenarios
CA shock 33
Baseline 27
0
20
40
60
80
100
120
2006 2008 2010 2012 2014 2016
Combined shock
32
Baseline 27
0
20
40
60
80
100
120
2006 2008 2010 2012 2014 2016
Combined shock 2/
30 % depreciation
42
Baseline 27
0
20
40
60
80
100
120
2006 2008 2010 2012 2014 2016
Real depreciation shock 3/
Gross financing need under baseline
(right scale)
Non-interest current account shock (in percent of GDP)
Growth shock
31
Baseline 27
0
20
40
60
80
100
120
2006 2008 2010 2012 2014 2016
Growth shock (in percent per year)
Baseline:
Scenario:
Historical:
4.9
5.3
7.1
Baseline:
Scenario:
Historical:
4.5
2.2
3.3
Baseline:
Scenario:
Historical:
-1.3
2.3
3.1
48
Annex 2. Poverty and Social Impact Analysis for Social Insurance Programs A1.9 Uruguay is one of the pioneer countries in Latin America in launching broad-based social insurance programs. The coverage of people of advanced age in Uruguay is amongst the widest in the region. Over the last decade, Uruguay has also expanded the coverage of the non-contributory social assistance components within social protection. In 2005, as part of response to the economic crisis, a series of programs were launched under the umbrella of the national plan for equity (Plan Nacional de Equidad -PANES). Through PANES, more weight was given to non-contributory family transfer programs, such as the Ingreso Ciudadano, which rapidly expanded to reach nearly 80 thousand households, covering almost all the extreme poor people in Uruguay at that time. In 2008, PANES was reformed to , by introducing a more broad-based non-contributory Family Allowance program. Another important program rapidly expanded under PANES was the Social Cards (Tarjeta Alimentaria) that provided poor families with the purchasing power to buy food through the use of a debit card. The amount transferred via the Social Cards was doubled for the poorest 15 thousand families as recent as January 2011.
A1.10 The absolute values resulting from household surveys (such as the ones reported in Table 1) normally underestimate the administrative records of these programs. For example, according to MIDES, 86 thousand households are covered by the Tarjeta Alimentaria program, a figure slightly higher than the 77 thousand shown in Table 1. A second caveat needs to be made since programs classified as social insurance usually refer to individuals, while social assistance programs generally target households. Weighting benefits by the amount paid by each program reveals that the actual social insurance provided represents a much larger share of the resources transferred by the social protection programs.
Households Individuals Recipients
All observations 1,179,174.0 3,368,598.0
For households that receive the indicated transfer only
All social protection 740,671.0 2,242,240.0 621,224.0
All social insurance 493,781.0 1,186,141.0 621,224.0
Pension 355,911.0 818,561.0 432,558.0
Survival Pension 263,370.0 644,996.0 285,104.0
All labor market programs 0.0 0.0 0.0
All social assistance 311,416.0 1,355,148.0 1,355,148.0
Family Allowances 305,644.0 1,336,400.0 1,336,400.0
Social Card 77,114.0 389,494.0 389,494.0
**) The population columns show the number of households, individuals and recipients of SP programs, expanded to the population using expansion factors.
Table 1: Social Protection programs according to the hhold' survey, 2010
Population**
49
A1.11 In Uruguay, more people are covered than not by social protection. SP programs are complementary and up to one fifth overlap at the household level. The largest part of the population lives in households that are covered by only one SP program. Table 2 shows that 33 percent of the Uruguayan population lives in households that receive no benefit from any of the four main cash transfer programs analyzed here. One out of four individuals lives in a household that receives more than one benefit from these cash transfer programs. Women, who normally outlive men, normally are recipients of their own pensions (conditional on having contributed), and are entitled to receive a survival pension when becoming widows. Finally, Table 2 shows that the overlap is greater among the poor, and the non-poor account for a larger fraction of the uncovered population. Coverage and overlaps are not qualitatively different between rural and urban population, although the share of uncovered population in the urban areas is slightly larger. A1.12 Social protection programs play an important role in preventing people from falling into poverty, in particular into extreme poverty. Table 3 presents counterfactual welfare indicators in the absence of benefits from the social protection programs. Without any social protection programs, moderate poverty would be 65 percent higher than the actual figures reported in 2010. Moreover, extreme poverty would be more than four times larger. Even the Gini coefficient, a stable income inequality indicator, would increase by 10 percent if social protection did not play a redistributive role. The headcount ratio (FGT0) reported in Table 3 shows that social insurance plays a much larger role in avoiding people from falling into poverty. In the absence of these programs, extreme poverty would be 52 percent larger in the case of social insurance, and 13 percent larger for social assistance. The latter reflects the differential volume of resources mobilized by these two components of the social protection income transfer programs. The simulations are consistent with the results observed for the income inequality indicators, which would be 6.5 percent lower in the absence of social insurance and 3.3 percent lower without social assistance. The results for extreme poverty are much larger in relative terms but qualitatively similar. Poverty gap and severity indices provide a similar picture.
Total XP NP Urban Rural
Number of transfers received
0 33.4 12.4 38.7 35.1 25.8
1 42.1 38.1 43.0 41.0 47.1
2 21.1 40.9 16.2 20.9 22.2
3 3.2 7.9 2.0 2.8 4.6
4 or more 0.2 0.6 0.1 0.2 0.2
Notes:
Share of population participating in social programs by population group.
Households are weighted using household weights multiplied by the household size.
Table 2: Transfer Duplication in each population group (% )
Poverty Status Area of residence
50
A1.13 Targeted programs are particularly efficient in reducing moderate poverty. This fact is in part a consequence of the almost inexistent extreme poverty rate. Table 4 shows the cost-benefit ratios derived from spending an additional unit of resources on the different social protection programs. The simulation indicates that an extra dollar spent reduces the extreme poverty gap by 1.8 percent, while the same dollar spent reduces the moderate poverty gap by 15.8 percent - eight times more efficient. Social insurance programs are eleven times more efficient in reducing moderate poverty than in reducing extreme poverty, while this relationship is seven times larger in the case of social assistance. The latter reflects the fact that the targeting instruments for enrolling and selecting beneficiaries into social assistance programs are relatively more efficient in reducing extreme poverty than moderate poverty gaps.
Inequality
FGT0 FGT1 FGT2 Gini FGT0 FGT1 FGT2
Indicator 0.1996 0.0581 0.0249 0.424 0.0124 0.0025 0.0009
Indicator without listed transfer
All social protection 0.3298 0.1292 0.0711 0.466 0.0659 0.0244 0.0143
All social insurance 0.3047 0.1078 0.0548 0.451 0.0434 0.0146 0.0086
Pension 0.2689 0.0861 0.0402 0.439 0.0260 0.0076 0.0041
Survival Pension 0.2256 0.0718 0.0334 0.431 0.0217 0.0058 0.0028
All social assistance 0.2254 0.0780 0.0391 0.438 0.0303 0.0099 0.0049
Family Allowances 0.2223 0.0744 0.0360 0.436 0.0260 0.0076 0.0035
Social Card 0.2028 0.0615 0.0273 0.426 0.0157 0.0036 0.0013
Notes:
The simulated impact is the change in a poverty or inequality indicator due to transfer,
assuming that household welfare with diminish by the full value of that transfer
Table 3: Impact of programs on Poverty and Inequality measures - simulating the absence of the program
Moderate Poverty Extreme Poverty
Extreme Poverty Moderate Poverty
All social protection 0.018 0.158
All social insurance 0.011 0.121
Pension 0.006 0.092
Survival Pension 0.011 0.128
All social assistance 0.068 0.507
Family Allowances 0.054 0.470
Social Card 0.083 0.729
Notes:
Cost-Benefit is the poverty gap reduction in $ for each unity ($1) spent in the social program.
Amounts in LCU.
Cost-Benefit (dPG0/X)
Table 4: Cost-Benefit Ratios
51
Annex 3. Letter of Development Policy
52
53
54
55
56
Letter of Development Policy (English Translation)
República Oriental del Uruguay Ministro de Economía y Finanzas
Montevideo September 16, 2011
President of the World Bank Mr. Robert E. Zoellick Washington, DC
Letter of Development Policy Dear Mr. Zoellick: It is my pleasure to contact you in representation of the Government of the Oriental Republic of Uruguay to request the Bank’s support in the reform process that the Government is undertaking in the areas of public sector management, competitiveness, and social inclusion, and which the Bank has been supporting through a series of programmatic loans. It is of interest to the Government to continue the reforms in those sectors, despite the current instability in the international context. Bank’s support is particularly important under these circumstances. This policy letter presents a synthesis of Uruguay’s economic situation, of some of the policies being executed by the Government and, in particular, of the objectives and specific actions that are planned in order to face these aforementioned challenges. Economic Situation The Uruguayan economy reported high levels of growth in the 2004-2008 period, growing by 6.5 % per year on average. This represents growth that systematically tops the Latin American average, which was slightly above 5% per during the same period. During 2009, the Uruguayan economy went through a significant deceleration due to the impact of the international crisis. However, its performance was good compared to other countries, and Uruguay did not enter into recession. Despite a growth deceleration in 2009, the economy picked up a more dynamic pace growing by 8.5% in 2010. Figures for 2011 Q1 indicate that the economy continues to grow at a high pace. Discounting seasonal effects, GDP grew by 2.3% compared to 2010Q4.
57
The current recovery is being led by exports of goods and services, which grew by 9.1% in real terms in 2010, consolidating a recovery process that started in 2009Q2. After suffering the consequences of market closures, the industrial sector has also recovered, picking up the more dynamic sales growth trend experienced prior to the financial crisis. Gross fixed capital formation also grew considerably, largely driven by the increase in private sector investment, which expanded by 19.9% in real terms in 2010. As a result, the investment-to-GDP ratio reached 18.8%, a historically high figure, although still below the maximum level achieved in 2008. Continuity of reforms in the financial crisis context Structural reforms and institutional modernization implemented during the previous administration, coupled with a strong recovery in public investment (ports, energy, road infrastructure, telecommunications, education and innovation), dynamic private investment, which has been the result of the successful incentive policies, allowed the Uruguayan economy to increase its long-term growth rate. These transformations have helped the country to develop economic fundamentals that are significantly more solid than in the past, particularly in terms of its productive capacity. Likewise, the strategy and actions implemented by the past administration have allowed the country to reduce its financial and fiscal vulnerabilities. Indeed, a professional public debt management has helped the country to recover liquidity and investor confidence, to reduce the debt burden, restructure maturities and to make progress in debt de-dollarization. All of these elements, which combine into a framework of fiscal responsibility, have allowed the Uruguayan economy to develop stronger fundamentals to effectively withstand external turbulence. During the recent international crisis, Uruguay benefitted from a coordinated strategy of fiscal policy and public debt management, which helped face the crisis with a relatively low impact compared to other countries in the region. Among other factors, this was mainly due to fiscal consolidation and a precautionary debt management policy, which allowed Uruguay to count on the necessary financing with no need to resort to capital markets. This pre-funding policy allowed Uruguay to continue its public policies reforms, protecting existing programs. Faced with current global uncertainties, a continuation of the pre-financing strategy is crucial. The Government therefore seeks to ensure that it has at its disposal sufficient reserves to cover 12 months of debt service at all times. In addition, as in 2008, the Government is working towards establishing contingent credit lines, which would provide contingent financing to mitigate against a prolonged adverse international environment. This approach to debt management would allow the Government to protect ongoing reforms, in particular in the area of social protection. These reforms, together with adequate financial and fiscal management, are fundamental to achieve a higher level growth and economic development, in line with social justice and sustainable over time.
58
Challenges and Economic Policy Objectives The current Government aims to consolidate the ongoing process of economic development, via the promotion of productivity and competitiveness, in an effort to sustain a higher economic long-term rate of growth. The Government therefore continues to promote investment and innovation, international integration, infrastructure development and improvements in the quality of public investment in human capital. The national budget, approved in December 2010, provides the necessary financing for the Government program and represents a fundamental tool to facilitate the process of change that the current Administration seeks to promote. The budget reflects the priorities of the Government: housing, education, public security, consolidation and strengthening of the social protection net and infrastructure. At the same time, one of the Government’s primary objectives is to eliminate extreme poverty and to significantly reduce poverty levels by developing social policies targeting the most vulnerable sectors of society. In addition to this effort, another pillar of the Government’s strategy is anchored in achieving effective improvements in income distribution, for which the Government will strengthen the impact and quality of social public spending. The considerable progress made towards the implementation of a Public-Private-Partnerships Contracts regime is considered a key tool to increase investments in infrastructure to maximize the country’s growth potential. Policies for Public Sector Management, Competitiveness and Social Inclusion The proposed loan is the second of a series of two DPL Programmatic Loans and will continue the World Bank’s support to the process of implementation of the Government’s priorities in terms of economic and social reforms. The program’s content reflects the reforms that the Government has identified as avenues to achieve its main priorities: sustainable economic growth, lower poverty levels and increased social inclusion.
The Government continues to consolidate the reforms program that has been initiated in DPL I:
I. Improvement in public sector management:
The five-year Budget Law, approved in December 2010, contains a series of measures aimed at improving the efficiency and transparency of public sector management, particularly the change towards a results-oriented budgeting process, as well as the promotion of an e-government platform and the professionalization of the civil service.
Significant progress has been made in the implementation of the e-government reform, as evidenced by 25 administrative processes that are now available electronically. Under the coordination of the Agencia para el Desarrollo del Gobierno de Gestión Electrónica y la Sociedad de la Información y el Conocimiento (AGESIC), the Government plans to extend the number of transactions that can be completed online over the next years.
59
The Budget Law (articles 157 to 160) contains the legal base for the technical inter-operability in the Administration and mandates public entities to exchange electronic information; it also outlines the necessary technical criteriae.
The 2010-2014 Budget Law also introduced a functional expenditure classification and a performance-oriented approach. For the first time, the budget is presented in a programmatic format, rather than by institution. All the budget items are classified in 17 programmatic areas, containing 84 transversal programs.
II. Competitiveness:
Regarding the competitiveness agenda, considerable progress has been made in the past months: the creation of the Instituto Nacional de Logística (INALOG), a new push in the Customs reform, the continuous increase in the use of the one stop shop for firm creation and the progress made in the strengthening of the financial sector (e.g. capital markets, payments systems). As previously mentioned, these reforms also include the adoption of a new legal framework for public private partnerships (PPP).
III. Social Inclusion:
Coverage to most vulnerable sectors of population has been significantly improved through non-contributory social programs in 2010. Since January 2011, the monthly amount transferred through the Tarjeta Alimentaria program to the most vulnerable households (15,000 families) has been doubled.
Further progress has been made to improve focalization, as well as to follow up and better evaluate the provision of social protection services, especially through the establishment of a beneficiaries identification system called Sistema integrado de Información del Área Social (SIIAS). SIIAS has been formally established under the coordination of MIDES and the Budget Law assigned corresponding resources. The systems’ software development has progressed considerably in past months.
Health insurance coverage has been expanded to spouses and domestic partners with three or more children and with no previous health coverage of already covered workers, non-dependant workers performing personal services, workers covered by Cajas de Auxilio or conventional insurance and those covered affiliated to the Caja Notarial de Seguridad Social (starting on July 2011). A schedule for the gradual incorporation of spouses and domestic partners, as well as of retired workers who retired before 2008 has been established. In terms of education, pre-school access for children from age four has been expanded; this has particularly benefitted low-income households. A community teachers’ program is being implemented in 40 schools. The one-laptop-per-child program –Plan Ceibal- has started its expansion to secondary school, delivering laptops to students in grades 1-3 in secondary schools located in the interior of the country, and students in grades 1-2 in secondary schools in Montevideo and Canelones.
The second loan in this series will continue to support the same areas:
(I) Public sector management: consolidate macroeconomic stability and improve the efficiency of public sector management;
For this objective, the following prior actions have been agreed: i) introduction of technical inter-operability in the Administration (articles 157 to 160 of the 2010-2014 Budget Law) and ii)
60
adoption of output and outcome indicators for selected thirty-one expenditure programs in seven priority areas, as evidenced in the update of Volume II (“Planificación y Evaluación”) of the Budget Law. (II) Competitiveness: enhance both the quantity and quality of investment through improvements in the business climate, access to finance and trade facilitation, in order to contribute to economic growth;
The agreed actions for this component are: i) implementation in the Customs National Direction of a risk based control system for the selection of operations that will be subject to physical inspection and ex-post audit, making the customs control system more effective and simple and ii) approval of a Regulatory Decree of the Capital Markets Law.
(III) Social Inclusion: improve social inclusion through an expanded coverage, equity and efficiency of social services (education, health and social protection). The agreed actions are: Social Protection: i) starting in January 2011, the monthly amount transferred to the 15,000 poorest families through the Tarjeta Alimentaria program has been doubled, (ii) the Sistema Integrado de Información del Área Social (SIIAS) was formally established under the coordination of the Ministry of Social Development. Health: Health insurance coverage was expanded to: (i) spouses and domestic partners with 3 or more children and with no previous health coverage of already covered workers, (ii) retired workers from the lowest income group that retired before January 2008, and (iii) a schedule for the incorporation of all retired workers who retired before 2008 was established. Education: The one-laptop-per-child program –Plan Ceibal- was expanded, delivering laptops to students in grades 1-3 in public secondary schools located in the interior of the country (95 percent covered since March 2011) and students in grades 1-2 in public secondary schools in Montevideo and Canelones (93 percent covered in July 2011) and provided WIFI connections to 248 of these secondary schools (from a total of 258). Support from the World Bank By virtue of the above and in order to give continuity to the aforementioned reforms that have helped to consolidate economic growth with social equity, we request the Bank’s financial support through the Second Programmatic Development Policy Loan for US$ 260 million. This operation becomes particularly important in the current context of global uncertainty that could threaten the current reform process undertaken by Uruguay. Sincerely,
Fernando Lorenzo
Minister of Economy and Finance The Oriental Republic of Uruguay
61
Annex 4. Policy Reform Matrix
Reform Objective Prior Actions taken under the Program (DPL I)
Prior Action under the Program (DPL II) Expected Outcomes
I . Public Sector Management Making public administration more transparent, flexible and agile
The Borrower, in support of its e-Government agenda, has (a) approved the Law on Electronic Documents and Digital signature”, and said law is in full force and effect; and (b)implemented “Expediente Electrónico” in its Ministry of Industry, Energy and Mining, as well as in its Ministry of Public Health.
The Borrower, in support of its e-government agenda, has mandated all public entities to adopt the necessary measures to enable these agencies to exchange information that is electronically available, as evidenced by Articles 157 to 160 of the 2010-2014 Budget Law.
Increase the number of processes that are started and completed electronically. Baseline (2009): 20 Current status (2011): 25 Medium-term target (2015): 25
Implementing Performance-Based Budgeting
The Borrower has adopted output and outcome indicators for thirty one selected expenditure programs in seven priority areas, as evidenced by the updated Volume II of the 2010-2014 Budget Law.
Increase in the number of priority areas and expenditure programs for which output and outcome indicators have been identified. Baseline (2009) : 0 Current status (2011):7 priority areas, 31expenditure programs Medium-term target (2015): 40 expenditure programs
62
II Competitiveness Expanding and Facilitating Trade
The Borrower, in support of its trade facilitation agenda, has (a) created CONALOG; and (b) presented to its Parliament the draft law dated August 10, 2009, with the objective of creating INALOG, for approval thereof.
The Borrower has introduced a risk management system for selecting customs operations that shall be subject to physical inspection and ex-post audit, rendering the customs control system more effective and streamlined.
Increase in the number of irregularities detected by the risk management system relative to the total number of inspections. Baseline (2009):0% Current status (2011): 2%
Improving the Business Climate
The Borrower, in support to its investment climate agenda, has established “Empresa en el Día,” a one-stop shop for the creation of firms.
In line with DPL I, no prior action was defined for DPLII.
Reduction in the number of days to create a firm. Baseline (2009): 65 days** Current status (2011): 7 days
Promoting Financial Market Development
The Borrower has approved the Capital Markets Law, which is in full force and effect.
The Borrower has further implemented the Capital Markets Law, as evidenced by the issuance of the Executive Decree No. 322-011, dated September 16, 2011, which includes, inter alia: (i) provisions on promoting market development, including tax incentives such as reductions on capital gains taxes for stock issuers and the abolition of the withholding tax for pension funds; (ii) the establishment of the capital market promotion commission with private sector participation; and (iii) measures to adopt additional aspects of IOSCO standards, such as establishing minimum requirements for stock offerings related to public availability of business information and accounting and corporate government standards.
Rise in market capitalization Baseline (2009): US$139 million Current status (Sept 2011): US$154 million Increase in the total number of new private sector issuances (including stocks, corporate bonds and financial trusts). Baseline (2009): 8 Increase in stock exchange activity for both the primary and the secondary market. Baseline (2009): US$6,200 million
** Based on Doing Business (2010). Note that the DB indicator should be read with caution. The indicator is based on the average number of days to create a firm, following the official procedures for firm registration in Uruguay. It does not reflect the fact that some Uruguayan firms purchase licenses to shorten the registration process.
63
Reform Objective Prior Actions taken under the Program (DPL I)
Prior Action under the Program (DPL II) Expected Outcomes
III Social Inclusion Strengthening Social Protection
The Borrower, in support of the implementation of the Plan the Equidad, has: (a) expanded the family allowances system to a total of 390,000 beneficiaries, by the end of 2009 (from a baseline of 328,000 beneficiaries by the end of 2008); (b) covered a total of 87,500 households with the Tarjeta Alimentaria (food card) program by the end of 2009 (from a baseline of 62,000 households by the end of 2008); and (c) designed the SIIAS.
The Borrower has: (i) as of January 2011, doubled the amount transferred to the poorest 15,000 families via the Tarjeta Alimentaria program with respect to the total amount transferred as of December 2010, under said program; and (ii) formally established SIIAS under the overall coordination of the Borrower's Ministry of Social Development.
Decline in extreme poverty (as measured by the percentage of households that are in extreme poverty). Baseline (2009): 0.8% (households) Baseline (2009): 1.6% (individuals) Current status (2010): 0.6% (households) Medium-term target (2015):0.4% (household)
Expanding coverage and improving efficiency of the health care services
The Borrower, in support of its national health policy reform, has adopted a scheme linking public health financing to the achievement of health care targets related to primary care controls for children and pregnant women.
The Borrower has expanded health insurance coverage to: (i) spouses and domestic partners of public and private sector workers with health insurance coverage and who have three or more children; (ii) public and private sector workers from lowest income groups that retired from their employment before January 1, 2008; and (iii) all public and private workers that retired from their employment before January 1, 2008, as evidenced by the Borrower’s Decree No. 318-010, dated October 26, 2010 and published in the Borrower’s official gazette on November 1, 2010, and the Borrower’s Laws No. 18.731, dated January 7, 2011, and published in the Borrower’s official gazette on January 25, 2011.
The Health Insurance System increases its coverage. Baseline (2009): 43% Current status (2011): 45% Medium-term target (2015): 60%
64
Reform Objective Prior Actions taken under the Program (DPL I)
Prior Action under the Program (DPL II) Expected Outcomes
Improving equity and quality of the education system
The Borrower, in support of its educational policy reform seeking to reduce the digital gap, has completed the implementation of the Plan Ceibal, as evidenced by, inter alia, the distribution of XO laptops to all children in public primary schools and the provision of said schools with wireless connectivity to the Internet.
The Borrower has: (a) expanded the Plan Ceibal by delivering laptops to: (i) students in grades 1 to 3 of secondary public schools in the Borrower’s territory other than in Montevideo and Canelones (94.4% of such students as of July 2011, from a baseline of 30.3% of such students as of July 2009); and (ii) students of public secondary schools in grades 1 and 2 in Montevideo and Canelones (93% of such students as of July 2011 from a baseline of 0% of such students as of July 2009); and (b) provided WIFI connections to 248 of the secondary schools mentioned in (i) and (ii) herein (96.1% of said schools as of August 2011 from a baseline of 44.6% of said schools as of November 2009).
Increased access of public primary schools to wireless Internet through Plan Ceibal. Baseline (2009): 95% Current status (2011): 98% Medium-term target (2015): 100% Increased access to labtops through Plan Ceibal for secondary grade students: Baseline (2009): 30.3% (of students in grades 1 to 3 of public secondary school, in the Interior of the country); and 0% (of students in grades 1 and 2 of public secondary school, in Montevideo and Canelones). Current status (2011): 90% (of students in first to third grades of public secondary school, in the Interior of the country); and 90% (of students in first and second grade of public secondary school, in Montevideo and Canelones). Medium-term target (2015): 100% of students in first to third grades throughout the country
65
Annex 5: Description of Status of Initial Triggers for DPL II. REFORM OBJECTIVE I: MAKING PUBLIC ADMINISTRATION MORE TRANSPARENT, FLEXIBLE AND AGILE I.1.Efficiency of Public Sector Management Trigger: The Borrower has continued supporting the e-government agenda as evidenced by
the drafting and presentation to its Parliament of the Ley de Inter-Operabilidad (inter-operability platform law).
A1.14 Policy Developments and Status: The government has met the objectives of the trigger in substance. The prior trigger was reformulated, as authorities decided to adopt key principles and criteria of inter-operability platform law in the Budget Law (those referring to technical inter-operability). Articles 157 to 160 of the Budget Law created a legal basis for introducing technical interoperability in the administration. These provisions mandate all government units to exchange information electronically and establish technical criteria for this purpose. A draft decree that specifies these criteria has been prepared and is expected to be adopted in November 2011. More ambitious aspects of the e-government reform will be regulated to a complementary law on Administración Electronica, which is scheduled for submission to Parliament in early 2012. A1.15 There have been further advances on the implementation of an e-government reform, as evidenced by 25 administrative processes that can now be completed electronically. There has also been progress in simplifying client interfaces by important institutions like the national social security agency (Banco de Previsión Social – BPS), which is moving towards a paperless management system for payments and contributions. Under the coordination of the Agencia para el Desarollo del Gobierno de Gestion Electronica y la Sociedad de la Informacion y del Conocimiento (AGESIC), the government plans to further increase the number of transactions that can be completed online over the next years and to make forms for all key administrative processes available electronically. A1.16 The wording for the prior action for DPL II was adjusted to better reflect the actual reform steps taken: Prior Action: The Borrower, in support of its e-government agenda, has mandated all public
entities to adopt the necessary measures to enable these agencies to exchange information that is electronically available, as evidenced by Articles 157 to 160 of the 2010-2014 Budget Law.
A1.17 Advances on Medium-Term indicators. There has been an improvement relative to the established base line. The number of processes that are started and completed electronically increased from the base line of 20 in 2009 to 25 in 2011.
66
I.2. Implementing Performance-Oriented Budgeting Trigger: The Borrower, in support of its performance-based budgeting reform agenda, has
identified output and outcome indicators for selected expenditure programs in its 2010-2014 Budget Law.
A1.18 Policy Developments and Status: The trigger was fully met. The 2010-2014 Budget introduced a performance-oriented approach for the first time. From 2010 onwards, the budget will be presented in a functional classification of expenditures and programmatic format, rather than institution-by-institution. All budget items are organized within 17 programmatic areas, which contain 84 cross-sectoral budget programs (programas transversales). For a subset of 31 budget programs, which correspond to seven priority programmatic areas34, the government has defined result indicators with baselines for the 5-year budget period. This change in budget formulation marks an important first step towards performance-based budgeting, as it enables evaluating the performance of specific budget program expenditures. A performance report was presented for the first time as part of the 2011 annual budget update, submitted to Parliament in August 2011. To accompany this methodological change, a substantial upgrading of capacity is underway, such as the development of internal performance evaluation systems (Sistema de Planificación y Evaluacion– SPE) and the strengthening of the Public Management, Planning and Evaluation Unit. A1.19 For consistency with the wording of the 2010-2014 Budget Law, the prior action for DPL II has been formulated as follows: Prior Action: The Borrower has adopted output and outcome indicators for thirty one
selected expenditure programs in seven priority areas, as evidenced by the updated Volume II of the 2010-2014 Budget Law.
A1.20 Advances on Medium-Term indicators. There has been an improvement relative to the established base line. The number of expenditure programs for which output and outcome indicators have been identified increased from the base line of 0 in 2009 to 31 in 2011.
REFORM OBJECTIVE II: COMPETITIVENSS II. 1 Expanding and Facilitating Trade Trigger: The Borrower has increased the effectiveness of its customs’ physical inspections
through the introduction of risk management and ex post auditing systems for selected inspections.
A1.21 Policy Developments and Status: The trigger was fully met. Customs has introduced an econometric model-based risk management system for streamlining and rendering more effective physical inspections for fraud detection. The risk model, based on a logit model, has been in
34 These are: housing, infrastructure, public security, education, productive development, social protection and health.
67
operation since July 2010 and has significantly reduced the number of unnecessary physical inspections. As an example, prior to July 2011, only about 50 percent of imports past through the green channel (no inspection), while 34 percent went through the red channel (detailed physical inspection). Since July 2011, the number of imports passing through the green channel increased to an average of 80 percent, while the number of goods passing through the red channel declined to about 15 percent, cutting the time that imports spent in customs by about half. A1.22 The wording for the prior action for DPL 2 was adjusted to better reflect the actual reform steps taken: Prior Action: The Borrower has introduced a risk management system for selecting
customs operations that shall be subject to physical inspection and ex-post audit, rendering the customs control system more effective and streamlined.
A1.23 Advances on Medium-Term indicators. There has been an improvement relative to the established base line. The number of irregularities detected by the risk management system relative to the total number of inspections increased from the base line of 0 percent in 2009 to 2 percent in 2011.
II. 2 Promoting Financial Capital Market Development Trigger: The Borrower has implemented the Capital Markets Law, as evidenced by: (i) the
introduction of IOSCO standards; and (ii) the establishment of the Commission for Capital Market Promotion with private sector participation.
A1.24 Policy Developments and Status: The trigger was fully met. The government has advanced the implementation of the capital market reform through the adoption of enforcing regulation. The government issued a regulatory decree on the implementation of the capital markets law in September 2011, which marks an important step in advancing the capital market reform. The preparation of this decree was informed by consultations with key market participants from public and private financial institutions. The decree regulates the minimum requirements for stock offerings related to aspects like public availability of business information as well as accounting and corporate governance standards. It also contains important provisions to initiate promotion of market development, most notably the establishment of a Capital Markets Development Commission and a 5-year tax holiday on capital gains for stock issuers stands out in this regard. A1.25 In parallel, the Central Bank’s Superintendent on Financial Services (SFS) has moved further ahead in completing the full adoption of IOSCO standards. For this purpose, the IOSCO standards action plan was updated in December 2010. While awaiting the issuance of the regulatory decree, the SFS promulgated several circulars that define specific market entry requirements for three key market players: intermediaries, investment advisors and stock issuers. A1.26 The wording for the prior action for DPL 2 was adjusted to better reflect the actual reform steps taken:
68
Prior Action: The Borrower has further implemented the Capital Markets Law, as evidenced by the issuance of the Executive Decree No. 322-011, dated September 16, 2011, which includes, inter alia: (i) provisions on promoting market development, including tax incentives such as reductions on capital gains taxes for stock issuers and the abolition of the withholding tax for pension funds; (ii) the establishment of the capital market promotion commission with private sector participation; and (iii) measures to adopt additional aspects of IOSCO standards, such as establishing minimum requirements for stock offerings related to public availability of business information and accounting and corporate government standards.
A1.27 Advances on Medium-Term indicators. There has been an improvement in market capitalization – from US$ 139 million in December 2009 to 154 million in September 2010 - as well as stock market activity relative to the baseline. REFORM OBJECTIVE III: Social Inclusion III.1 Strengthening Social Protection Trigger: The Borrower has (i) strengthened social programs that seek to eradicate extreme
poverty, in particular, increasing the food allowance (through the Tarjeta Alimentaria program) to households that are in extreme poverty or those that are vulnerable to extreme poverty; and (ii) implemented the first phase of SIIAS, incorporating indicators related to childhood and adolescence.
Policy Developments and Status: The trigger was met in substance. The Budget Law N° 18.719 mandated that from January 2011 onwards the amount transferred to the poorest families via the Tarjeta Alimentaria program. Furthermore, SIIAS has been formally established by Article 621 of Budget Law under the overall coordination of the Ministry of Social Development (MIDES) and phase 1 of database construction (on early childhood and youth) is expected to be completed by mid-November 2011. While originally the Borrower had planned to complete in a first phase the database for children and adolescents and then to incorporate other indicators in a second phase, both phases have been implemented in parallel rather than in sequence. This has somewhat slowed the progress of database completion under the first phase. A1.28 For consistency with the wording in the legal text (Budget Law N° 18.719) and to reflect a change in the implementation strategy for the SIIAS database construction, the prior action for DPL 2 has been formulated as follows: : Prior Action: The Borrower has: (i) as of January 2011, doubled the amount transferred
to the poorest 15,000 families via the Tarjeta Alimentaria program with respect to the total amount transferred as of December 2010, under said program; and (ii) formally established SIIAS under the overall coordination of the Borrower's Ministry of Social Development.
69
A1.29 Advances on Medium-Term indicators. There has been an improvement relative to the established base line, extreme poverty declined relative to the baseline of 0.8 percent at the household level to 0.6 in 2010. III.2 Expanding Coverage and improving efficiency of health care Trigger: The Borrower has expanded insurance coverage to all spouses with three or more
children. A1.30 Policy Developments and Status: The trigger was fully met. In fact, expansion of coverage went beyond what was envisaged in the indicative trigger. As of July 2011, the national health insurance covers all public and private employees and their children, all spouses of already covered workers in families with three or more children, retired workers from the lowest income group that retired before January 2008 and all remaining workers that retired after this date. A1.31 Since the adoption of DPL 1 and formally confirmed by a new law adopted in January 2011, there has been significant process towards universal coverage of the integrated national health insurance system. As of July 2011, the national health insurance now covers all public and private employees and their children, all spouses of already covered workers in families with three or more children, retired workers from the lowest income group that retired before January 2008 and all remaining workers that retired after this date. A gradual process of integrating people covered by private insurance providers into the national health insurance has started in 2011. A1.32 The second phase of the health reform, which is now underway, focuses on further improving the efficiency of health service delivery. The main challenges relates to lack of managerial and organizational capacity, quality of services delivered to patients and rising trends on costs. An important priority in addressing these challenges is the proposed definition of content and governance of the Integrated Health Assistance Program, which determines the scope of services that the system will cover. This is supported by analytical work conducted with the World Bank. Other ongoing reform efforts include the preparation of an Integrated Health Information System (Sistema Nacional Integrado de Información en Salud - SNIIS), and the implementation of a pilot project to reduce red tape in administrative processes related to the provision of health care services. A1.33 To reflect progress beyond the initial trigger, the prior action for DPL 2 has been formulated as follows: Prior Action: The Borrower has expanded health insurance coverage to: (i) spouses and
domestic partners of public and private sector workers with health insurance coverage and who have three or more children; (ii) public and private sector workers from lowest income groups that retired from their employment before January 1, 2008; and (iii) all public and private workers that retired from their employment before January 1, 2008, as evidenced by the Borrower’s Decree No. 318-010, dated October 26, 2010
70
and published in the Borrower’s official gazette on November 1, 2010, and the Borrower’s Laws No. 18.731, dated January 7, 2011, and published in the Borrower’s official gazette on January 25, 2011.
A1.34 Advances on Medium-Term indicators. There has been an improvement relative to the established baseline, the health insurance system increased its coverage from the base line of 43 percent in 2009 to 45 percent in 2011. III.3 Improving equity and quality of the education system Trigger: The Borrower has continued to promote equity in access to information through
the expansion of the Plan Ceibal to students in secondary public schools and provided these schools with wireless connectivity to the Internet.
A1.35 Policy Developments and Status: The trigger was fully met. By the end of 2010, the Government’s One-Laptop-per-Child Program (Plan Ceibal) had been fully implemented in primary schools. During 2010 the Government has taken action to roll out the scheme to secondary schools grade by grade. By July of 2011, about 94.4 percent of students in grades 1-3 in secondary schools located in the interior of the country, and about 93 percent of students in grades 1-2 in secondary schools in Montevideo and Canelones had received a laptop, and more than 96 percent of secondary public schools had internet access. A1.36 The wording for the prior action for DPL 2 was adjusted to better reflect the actual reform steps taken: Prior Action: 7. The Borrower has: (a) expanded the Plan Ceibal by delivering laptops to:
(i) students in grades 1 to 3 of secondary public schools in the Borrower’s territory other than in Montevideo and Canelones (94.4% of such students as of July 2011, from a baseline of 30.3% of such students as of July 2009); and (ii) students of public secondary schools in grades 1 and 2 in Montevideo and Canelones (93% of such students as of July 2011 from a baseline of 0% of such students as of July 2009); and (b) provided WIFI connections to 248 of the secondary schools mentioned in (i) and (ii) herein (96.1% of said schools as of August 2011 from a baseline of 44.6% of said schools as of November 2009).
A1.37 Advances on Medium-Term indicators. There has been an improvement relative to the established baselines. (1) The number of students in public primary schools with access to wireless through Plan Ceibal increased from the baseline of 95 percent in 2009 to currently 98 percent. (2) Relative to the baseline of 30.3 percent in 2009 for the interior and 0% for Montevideo and Canelones, by July of 2011, about 94.4 percent of students in grades 1-3 in secondary schools located in the interior of the country and 93 percent students in grades 1-2 in secondary schools in Montevideo and Canelones had received a laptop. By July 2011, more than 96 percent of secondary public schools had internet access, a significant improvement over the baseline of 44.6 percent in 2009.
71
Annex 6: Uruguay-IMF Relations
72
73
Annex 7. Uruguay at a Glance
Uruguay at a glance 8/31/11
Latin UpperKey D evelo pment Indicato rs America middle
Uruguay & Carib. income(2010)
Population, mid-year (millions) 3.4 572 1,002Surface area (thousand sq. km) 176 20,394 48,659Population growth (%) 0.3 1.1 0.9Urban population (% of to tal population) 92 79 75
GNI (Atlas method, US$ billions) 32.7 4,011 7,515GNI per capita (Atlas method, US$) 9,760 7,007 7,502GNI per capita (PPP, international $) 12,900 10,286 12,440
GDP growth (%) 8.5 -1.9 -2.6GDP per capita growth (%) 8.1 -3.0 -3.4
(mo st recent est imate, 2004–2010)
Poverty headcount ratio at $1.25 a day (PPP, %) <2 8 ..Poverty headcount ratio at $2.00 a day (PPP, %) <2 17 ..Life expectancy at birth (years) 76 74 72Infant mortality (per 1,000 live births) 12 19 19Child malnutrition (% of children under 5) 6 4 ..
Adult literacy, male (% o f ages 15 and o lder) 98 92 94Adult literacy, female (% of ages 15 and o lder) 99 90 91Gross primary enro llment, male (% of age group) 116 118 111Gross primary enro llment, female (% of age group) 113 114 110
Access to an improved water source (% o f population) 100 93 95Access to improved sanitation facilities (% of population) 100 79 84
N et A id F lo ws 1980 1990 2000 2010 a
(US$ millions)Net ODA and official aid 10 52 17 51Top 3 donors (in 2008): Italy 0 9 -2 13 Spain 0 7 3 12 European Union Institutions 0 1 2 12
Aid (% of GNI) 0.1 0.6 0.1 0.2Aid per capita (US$) 3 17 5 15
Lo ng-T erm Eco no mic T rends
Consumer prices (annual % change) 63.5 112.5 4.8 6.7GDP implicit deflator (annual % change) 54.8 106.8 3.5 5.3
Exchange rate (Atlas, annual average, local per US 0.0 1.3 11.7 22.1Terms of trade index (2000 = 100) 128 146 100 97
1980–90 1990–2000 2000–10
Population, mid-year (millions) 2.9 3.1 3.3 3.4 0.6 0.6 0.2GDP (US$ millions) 7,296 8,669 23,504 36,548 0.5 3.9 3.9
Agriculture 13.4 9.2 7.0 9.8 1.2 3.9 2.8Industry 33.1 34.6 24.5 26.9 3.3 1.3 4.2 M anufacturing 25.4 28.0 14.1 15.0 3.7 -0.4 6.2Services 53.5 56.1 68.5 63.3 4.1 1.7 3.9
Household final consumption expenditure 75.8 70.3 76.5 68.6 2.2 4.9 3.2General gov't final consumption expenditure 12.5 12.1 12.4 12.7 1.8 2.3 1.4Gross capital formation 17.3 12.2 14.5 17.9 -7.1 6.1 7.2
Exports o f goods and services 15.0 23.5 16.7 25.9 3.9 6.0 7.8Imports o f goods and services 20.6 18.1 20.0 25.0 0.0 9.9 6.9Gross savings 14.8 14.1 11.0 ..
Note: Figures in italics are for years other than those specified. 2010 data are preliminary. Group data are for 2009. .. indicates data are not available.a. A id data are for 2009.
Development Economics, Development Data Group (DECDG).
(average annual growth %)
(% of GDP)
6 4 2 0 2 4 6
0-4
15-19
30-34
45-49
60-64
75-79
percent of total population
Age distribution, 2009
Male Female
0
10
20
30
40
50
60
1990 1995 2000 2009
Uruguay Latin America & the Caribbean
Under-5 mortality rate (per 1,000)
-10-8-6-4-202468
10
95 05
GDP GDP per capita
Growth of GDP and GDP per capita (%)
74
Uruguay
B alance o f P ayments and T rade 2000 2010
(US$ millions)
Total merchandise exports (fob) 2,384 8,069Total merchandise imports (cif) 3,311 8,320Net trade in goods and services -533 791
Current account balance -566 -443 as a % of GDP -2.4 -1.1
Workers' remittances and compensation of employees (receipts) 0 101
Reserves, including go ld 2,774 7,744
C entral Go vernment F inance
(% of GDP)Current revenue (including grants) 17.9 26.9
Tax revenue 14.6 18.0Current expenditure 25.8 26.4
T echno lo gy and Infrastructure 2000 2009Overall surplus/deficit -9.5 -1.1
Paved roads (% of to tal) .. ..Highest marginal tax rate (%) Fixed line and mobile phone Individual 0 25 subscribers (per 100 people) 41 142
Corporate 30 25 High technology exports (% of manufactured exports) 2.1 5.4
External D ebt and R eso urce F lo ws
Enviro nment(US$ millions)Total debt outstanding and disbursed 8,408 12,770 Agricultural land (% of land area) 85 85Total debt service 1,210 1,974 Forest area (% of land area) 8.1 8.8Debt relief (HIPC, M DRI) – – Terrestrial protected areas (% of land area) .. ..
Total debt (% of GDP) 35.8 34.9 Freshwater resources per capita (cu. meters) 17,833 17,750Total debt service (% of exports) 27.2 17.6 Freshwater withdrawal (billion cubic meters) 3.2 ..
Foreign direct investment (net inflows) 274 2,346 CO2 emissions per capita (mt) 1.6 1.9Portfo lio equity (net inflows) 5 ..
GDP per unit o f energy use (2005 PPP $ per kg o f o il equivalent) 10.3 9.3
Energy use per capita (kg of o il equivalent) 932 1,254
Wo rld B ank Gro up po rt fo lio 2000 2009
(US$ millions)
IBRD Total debt outstanding and disbursed 552 1,099 Disbursements 134 450 Principal repayments 58 85 Interest payments 42 28
IDA Total debt outstanding and disbursed 0 0 Disbursements 0 0
P rivate Secto r D evelo pment 2000 2010 Total debt service 0 0
Time required to start a business (days) – 65 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 42.1 Total disbursed and outstanding portfo lio 24 191Time required to register property (days) – 66 o f which IFC own account 18 104
Disbursements for IFC own account 0 0Ranked as a major constraint to business 2000 2010 Portfo lio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 5 5 Anticompetitive or informal practices .. 32.6 Tax rates .. 20.8 M IGA
Gross exposure 28 301Stock market capitalization (% of GDP) 0.7 0.4 New guarantees 0 0Bank capital to asset ratio (%) 7.2 9.5
Note: Figures in italics are for years o ther than those specified. 2010 data are preliminary. 8/31/11.. indicates data are not available. – indicates observation is not applicable.
Development Economics, Development Data Group (DECDG).
0 25 50 75 100
Control of corruption
Rule of law
Regulatory quality
Political stability
Voice and accountability
Country's percentile rank (0-100)higher values imply better ratings
2009
2000
Governance indicators, 2000 and 2009
Source: Kaufmann-Kraay-Mastruzzi, World Bank
IBRD, 1,055IDA, 0IMF, 0
Other multi-lateral, 2,440
Bilateral, 117
Private, 7,608
Short-term, 1,550
Composition of total external debt, 2010
US$ millions
75
Annex 8. Uruguay Millennium Development Goals
Millennium Development Goals Uruguay
With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)
Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2009
Poverty headcount ratio at $1.25 a day (PPP, % of population) <2 <2 <2 <2 Poverty headcount ratio at national poverty line (% of population) .. .. .. .. Share of income or consumption to the poorest qunitile (%) 5.4 4.8 4.8 4.3 Prevalence of malnutrition (% of children under 5) .. .. 5.4 ..
Go al 2: ensure that children are able to co mplete primary scho o ling
Primary school enro llment (net, %) 91 .. .. 98 Primary completion rate (% of relevant age group) 95 94 97 106 Secondary schoo l enro llment (gross, %) 81 82 98 88 Youth literacy rate (% of people ages 15-24) .. 99 .. 99
Go al 3: e liminate gender disparity in educat io n and empo wer wo men
Ratio o f girls to boys in primary and secondary education (%) .. .. 105 98 Women employed in the nonagricultural sector (% of nonagricultural employment) 42 45 46 46 Proportion of seats held by women in national parliament (%) 6 7 12 12
Go al 4: reduce under-5 mo rtality by two -thirds
Under-5 mortality rate (per 1,000) 24 21 18 14 Infant mortality rate (per 1,000 live births) 21 18 15 12 M easles immunization (proportion of one-year o lds immunized, %) 97 90 89 95
Go al 5: reduce maternal mo rtality by three-fo urths
M aternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 20 B irths attended by skilled health staff (% of to tal) .. 100 100 .. Contraceptive prevalence (% of women ages 15-49) .. 84 .. ..
Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases
Prevalence of HIV (% of population ages 15-49) 0.1 0.2 0.3 0.5 Incidence of tuberculosis (per 100,000 people) 28 26 24 22 Tuberculosis case detection rate (%, all forms) 100 74 80 96
Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs
Access to an improved water source (% of population) 100 100 100 100 Access to improved sanitation facilities (% of population) 100 100 100 100 Forest area (% o f land area) 5.2 6.6 8.1 8.8 Terrestrial protected areas (% of land area) .. .. .. .. CO2 emissions (metric tons per capita) 1.3 1.4 1.6 1.9 GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) 10.1 10.7 10.3 9.3
Go al 8: develo p a glo bal partnership fo r develo pment
Telephone mainlines (per 100 people) 13.4 19.3 28.1 28.5 M obile phone subscribers (per 100 people) 0.0 1.2 12.4 113.7 Internet users (per 100 people) 0.0 0.3 10.6 55.5 Personal computers (per 100 people) .. 2.2 10.6 13.6
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 8/31/11
Development Economics, Development Data Group (DECDG).
Uruguay
0
25
50
75
100
125
2000 2005 2009
Primary net enrollment ratio
Ratio of girls to boys in primary & secondary education
Education indicators (%)
0
20
40
60
80
100
120
140
160
2000 2005 2009
Fixed + mobile subscribers
Internet users
ICT indicators (per 100 people)
0
25
50
75
100
1990 1995 2000 2009
Uruguay Latin America & the Caribbean
Measles immunization (% of 1-year olds)
Cerro CatedralCerro Catedral(514 m)(514 m)
CC hh uu cc hh ii ll llaa
dd eeHH aa ee dd oo
CC hh uu cc hh ii ll ll aa
GG rr aa nn dd ee
A RA R T I G A ST I G A S
S A LS A L T OT O
PPAAY S A N D UY S A N D U TTA C U A R E M B OA C U A R E M B O
D U R A Z N OD U R A Z N O
F L O R E SF L O R E SS O R I A N OS O R I A N O
R I O N E G R OR I O N E G R O
R O C H AR O C H AL AL AVVA L L E J AA L L E J A
F L O R I D AF L O R I D A
C O L O N I AC O L O N I A
C A N E -C A N E -L O N E SL O N E S
S A NS A NJ O S EJ O S E
M A L D O -M A L D O -N A D ON A D O
C E R R O L A R G OC E R R O L A R G O
T R E I N TT R E I N TAAY T R E SY T R E S
R I V E R AR I V E R A
ConstituciConstitucióónn
BelBeléénn
BaltasarBaltasarBrumBrum
JavierJavierde Vde Vianaiana
MasollerMasoller
GuichonGuichon
El EucaliptoEl EucaliptoQuebrachoQuebracho
San JavierSan Javier
ChapicuyChapicuy
TTresresArbelesArbeles
PiedraPiedraSolaSola
TTamboresambores
TTranquerasranqueras
AnsinaAnsina
KilKilóómetrometro329329
VVergaraergara
TTupambaeupambae
CebollatCebollatíí
Minas deMinas deCorralesCorrales
BiassiniBiassini
VVichaderoichadero
AceguAceguáá
BlanquilloBlanquillo
Pueblo delPueblo delCarCarmenmen
Rio BrancoRio Branco
JosJoséé Pedro PedroVVarelaarela
PirarajPirarajáá
MariscalaMariscala
Santa ClaraSanta Clarade Olimarde Olimar
SarandSarandíídel Ydel Yíí
Fray MarcosFray Marcos
CerroCerroColoradoColorado
Paso dePaso delos Tlos Torosoros
YYoungoung
DoloresDolores
CarCarmelomelo
CardonaCardona
JosJoséé E. Rodo E. Rodo
RosarioRosario
Juan I.Juan I.LacazeLacaze
CastillosCastillosAiguAiguáá
LazcanoLazcano ChuyChuy
San JosSan Josééde Mayode Mayo
CanelonesCanelones
FloridaFlorida
MinasMinas
ArArtigastigas
SaltoSalto
PaysandPaysandúú
TTacuarembacuarembóó
MeloMelo
TTreinta y Treinta y Trrèèss
DuraznoDuraznoMercedesMercedes
TTrinidadrinidad
RochaRocha
A R T I G A S
S A L T O
PAY S A N D U TA C U A R E M B O
D U R A Z N O
F L O R E SS O R I A N O
R I O N E G R O
R O C H AL AVA L L E J A
F L O R I D A
C O L O N I A
C A N E -L O N E S
MONTEVIDEO
S A NJ O S E
M A L D O -N A D O
C E R R O L A R G O
T R E I N TAY T R E S
R I V E R A
Bella Unión
Constitución
Belén
BaltasarBrum
Javierde Viana
Masoller
Guichon
El EucaliptoQuebracho
San Javier
Chapicuy
TresArbeles
PiedraSola
Tambores
Tranqueras
Ansina
Kilómetro329
Vergara
Tupambae
Cebollatí
Minas deCorrales
Biassini
Vichadero
Aceguá
Blanquillo
Pueblo delCarmen
Rio Branco
José PedroVarela
Pirarajá
Mariscala
Santa Clarade Olimar
Sarandídel Yí
Fray Marcos
CerroColorado
Paso delos Toros
Young
Dolores
Carmelo
Cardona
José E. Rodo
Rosario
Juan I.Lacaze
Atlantida San Carlos
Punta del Este
La Paloma
CastillosAiguá
Velazquez
Lazcano
La Coronilla
Chuy
San Joséde Mayo
Canelones
Florida
Minas
Maldonado
Artigas
Rivera
Salto
Paysandú
Tacuarembó
Melo
Treinta y Très
Durazno
Fray Bentos
Mercedes
Colonia delSacramento
Trinidad
Rocha
MONTEVIDEO
B R A Z I L
ARGENTINA
Negro
Cuareim
Urug
uay
Lago Artificialde Rincón del Bonete
Lagunade Castillos
LagunaNegra
LagunaMerin
Lago
a Man
gueir
a
Negro
Yáguarón
ATLANTICOCEAN
Rio de la Pla ta
LagoaMirim
To CuruzúCuatiá
To Uruguaiana
To Alegrete
To Rosáriodo Sul
To Bagé
To Pelotas
To Rio Grande
To Gualeguaychú
To Villaguay
To Federal
C h u c h i l la
d eH a e d o
C h u c h i l l a
G r a n d e
Cerro Catedral(514 m)
59°W 58°W 57°W 56°W 55°W 54°W 53°W
58°W 57°W 56°W 55°W 54°W 53°W
34°S
33°S
32°S
31°S
35°S
34°S
33°S
32°S
31°S
30°S
URUGUAY
0 5025 75
0 25 50 75 Miles
100 Kilometers
IBRD 33507
OCTOBER 2004
URUGUAYSELECTED CITIES AND TOWNS
DEPARTMENT CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
DEPARTMENT BOUNDARIES
INTERNATIONAL BOUNDARIES
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, o r any endorsemen t or a c c e p t a n c e o f s u c h boundaries.