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2010 - 2015August 18, 2010
COUNTRYPARTNERSHIP
STRATEGYFOR THE REPUBLICOF URUGUAY
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Document o The World Bank | FOR OFFICIAL USE ONLY | Report No. 55863-UY | INTERNATIONAL BANK FORRECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIPSTRATEGY FOR THE ORIENTAL REPUBLIC OF URUGUAY FOR THE PERIOD 2010-2015 | August 18, 2010 | Argentina,Paraguay and Uruguay | Country Management Unit | Latin America and the Caribbean Region
The last Country Assistance Strategy or Uruguay was discussed by the Executive Directors on June 9, 2005, (Report No.
31804-UY), and a Progress Report on the implementation o that Country Strategy was noted by the Executive Directors onApril 1, 2008, (Report No. 42789-UY).
CURRENCY AND EQUIVALENT UNITS (As o June 30, 2010)Currency Unit = Uruguay Peso US$1 = 21.12 Uruguay Pesos
WEIGHTS AND MEASURES Metric SystemFISCAL YEAR: January 1 December 31
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2010 - 2015August 18, 2010
COUNTRYPARTNERSHIP
STRATEGYFOR THE REPUBLICOF URUGUAY
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AAA Analytical and Advisory ActivitiesAPL Adaptable Program Loan
CAF Andean Development Corporation(Corporacin Andina de Fomento)
CAS Country Assistance StrategyCASCR Country Assistance Strategy Completion
ReportCBU Central Bank o Uruguay
(Banco Central de Uruguay)CC Climate ChangeCEM Country Economic MemorandumCFAA Country Financial Accountability AssessmentCPAR Country Procurement Assessment ReportCPI Consumer Price IndexCPS Country Partnership Strategy
DINAMA Direccin Nacional de Medio AmbienteDPL Development Policy LoanEMBI Emerging Markets Bond IndexESW Economic and Sector WorkFBS Fee-Based ServiceFDI Foreign Direct InvestmentFA Frente AmplioFMD Foot & Mouth DiseaseFX Foreign ExchangeGAC Government and AnticorruptionGCR Global Competitiveness ReportGDP Gross Domestic ProductGEF Global Environmental FacilityGHG Greenhouse GasGoU Government o UruguayIADB Inter-American Development BankIBRD International Bank or Reconstruction
and DevelopmentIBTAL Institutions Building Technical
Assistance LoanICR Implementation Completion and
Results ReportIDF Institutional Development FundIFC International Finance Corporation
IFIs International Financial InstitutionsIFRS International Financial Reporting Standards
IMF International Monetary FundLCR Latin America and the Caribbean RegionMDGs Millennium Development GoalsMEF Ministry o Economy and FinanceMERCOSUR Mercado Comn del SurMGAP Ministry o Livestock, Agriculture
and FisheriesMIC Middle-Income CountriesMSP Ministry o Public HealthM&E Monitoring and EvaluationNCD Non-Communicable DiseasesNGOs Non-Governmental OrganizationsNLTA Non-Lending Technical Assistance
OECD Organization or Economic Co-operationand Development
OPP Oce o Planning and BudgetOSE Obras Sanitarias del EstadoPEFA Public Expenditure and Financial
AccountabilityPFM Public Financial ManagementPIU Project Implementation UnitPPIAF Public-Private Inrastructure Advisory FacilityPPP Public-Private PartnershipPRIDPL Programmatic Reorm Implementation
Development Policy LoanR&D Research and DevelopmentSINARE National System or Registering CompaniesSMEs Small and Medium EnterprisesSWAp Sector-Wide ApproachUNDAF United Nations Development Assistance
FrameworkUNDP United Nations Development ProgramUNICEF United Nations Childrens FundUTE National Administration o Power Plants
and Electric Transmissions WBG World Bank Group WHO World Health Organization
Regional Vice President Pamela Cox Regional Vice President Thierry TanohCountry Director Penelope Brook Regional Director Vincent Gouarne
Country Representative Peter Siegenthaler Country Manager Salem Rohana
Task Team Leader Andrew Follmer Task Manager John Barham
Abbreviations and Acronyms
IBRD IFC
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The World Bank Group greatly appreciates the
collaboration and contributions o the Government
o Uruguay in the preparation o this Country
Partnership Strategy (CPS). The leadership o
President Jos Mujica during the policy notes
discussions provided invaluable direction, and
key participants included Mr. Danilo Astori, Vice
President; Mr. Fernando Lorenzo, Minister o
Economy and Finance; Mr. Ricardo Ehrlich, Minister
o Education and Culture; Mr. Tabar Aguerre,
Minister o Livestock, Agriculture and Fishery; Mr.
Roberto Kreimerman, Minister o Industry, Energy
and Mining; Mr. Daniel Olesker, Minister o Public
Health; Mr. Eduardo Brenta, Minister o Labour and
Social Security; Mr. Enrique Pintado, Minister o
Transport and Public Works; Ms. Liliam Kechichin,
Vice Minister o Tourism and Sports; Ms. Graciela
Muslera, Minister o de Housing, Territorial Orderand the Environment; and Ms. Ana Olivera,
designated Minister o Social Development.
In particular, the World Bank Group thanks Mr.
Fernando Lorenzo, Minister o Economy and
Finance, and Mr. Michael Borchardt, Head o
Budget Unit, Ministry o Economy and Finance
(MEF). In addition, we thank the ollowing
government ocials or their contributions to
the CPS: Pedro Buonomo, Vice Minister o
Economy and Finance; Pedro Apeztegua, General
Director; Andrs Masoller, Head, Macroeconomic
and Financial Advisory Department, and Martn
Vallcorba; Azucena Arbeleche, Public Debt
Management Unit; Mariella Maglia and Santiago
Moldes, Relations with International Organizations;
Adriana Rodrguez, Advisor (MEF); Gabriel
Frugoni, Director, and Diana Marcos, Coordinator
o Public Budgets, Oce o Planning and Budget
(Presidency o the Republic). Further, the
World Bank Group extends a special thanks to
representatives o Government, private sector,
the NGO community, and other stakeholders
who participated in CPS consultations in July and
August, 2010.
Other contributors to the preparation o this CPS
include Messes./Mmes: Marcelo Acerbi, Pedro
Alba, Sylvia Albela Russo, Keisgner Alaro, Diego
Ambasz, Amparo Ballivian, John Barham, Valeria
Bolla, Paloma Aos Casero, Carla Ctolo, Luis de la
Plaza, Franz Drees-Gross, Norbert Fiess, Geraldine
Garca, Ana Lariau, Jos Roberto Lpez-Clix, Maria
Luisa Masutti, Milagros Mosteirin, Javier Pereira,Susana Prez, Raael Roman, Felipe Saez, Eduardo
Urdapilleta, and Eduardo Wallentin, who, together
with the Country Director, Country Representative
and CPS TTL, comprised the Core Team. In
addition, Yanina Budkin, Francisco Carneiro,
Michael Carroll, Diego Cerdeiro, Bruce Courtney,
Ivanna Echegoyen, Hermann von Gersdor, B.
Koshie Michel, Barbara Mierau-Klein, Juan Martin
Moreno, Reynaldo Pastor, Luis Prez, Andrs
Pizarro, Tatiana Proskuryakova, Ana Carolina Saizar
Renart, Vernica Salatino, Alejandro Solanot, and
David Yuravlivker provided valuable inputs.
Acknowledgements
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EXECUTIVE SUMMARY 9
I. INTRODUCTION 13
II. COUNTRY CONTEXT 17A. Political Developments 17B. Economic Perormance 18C. Poverty 19
III. DEVELOPMENT CHALLENGES & GOVERNMENTS VISION 21A. Strengthening the Business Climate and Competitiveness 22B. Improving Social Inclusion & Equity 24C. Consolidating Agricultural Sector Growth and Bringing its Benets to Family Farms 27D. Protecting the Environment and Mitigating the Eects o Climate Change 27E. Reorming the Public Sector 28
IV. URUGUAY WORLD BANK PARTNERSHIP 31A. Perormance under the 2005-2010 Country Assistance Strategy (CAS)
and Evolution o the Partnership 31B. The Ongoing Portolio 33C. The WBGs Indicative Program (2010-2015) 34
Strategic Approach & CPS Pillars 34Fiduciary Products 41IFC Activities 43
D. Development Partners 43
V. RISKS
TABLESTable 1: Access to Public Services 23Table 2: Indicative lending program or 2010-2015 35Table 3: AAA program or FY11 and FY12 37Table 4: CPS Program Objectives and Select Activities 42
91317
21
31
44
Table o Contents
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BOXESBox 1: Uruguays PLAN CEIBAL One Laptop per Child 26Box 2: CPS Consultations 32Box 3: The First Programmatic Public Sector Competitiveness and Social InclusionDevelopment Policy Loan (DPL) 38
FIGURESFigure 1: Long Term Poverty Trends 19Figure 2: Uruguay Investment Portolio Diversication 34
ANNEXESAnnex A: CPS Results Framework 49Annex B: CAS Completion Report 55Annex C: Macroeconomic Framework 82Annex D: Debt Sustainability Analysis 88Annex E: Banking Sector Update 93Annex F: IBRD and GEF Program Summary 103Annex G: IFC Program Summary 113Annex H: Proposed GEF Program 115Annex I: CPS Consultations 117
STANDARD CPS ANNEXES:Annex A2: Uruguay at a Glance 120Annex B2: Selected Indicators o Bank Portolio Perormance and Management 126Annex B3: IBRD Program Summary 127
IFC Investment Portolio Operations Program 128Annex B4: Summary o Non-lending Services 129Annex B5: Key Social Indicators 130Annex B6: Key Economic Indicators 132Annex B7: Key Exposure Indicators 135Annex B8: IFC Committed & Disbursed Outstanding Investment Portolio 136
Operations Portolio (IBRD/IDA and Grants) 137
49
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Executive Summar [ 9 ]
rugua as a strog istor o broad-
based socia weare ad soid democratic
istitutios buidig o a deep igraied
preerece or euait ad poitica cosesus.
The country enjoyed the highest human developmentstandards in the region during the last century, and
Uruguays society is still among the most equitable inthe region in terms o income distribution and social
indicators. Like many o its neighbors, recent decades
were marked by successive domestic economic crises,the most recent accompanying the Argentina crisis o
2001-2002. In 2004, in the atermath o the crisis,the Uruguayan electorate brought orth an important
shit in the political landscape by voting into power a
center let coalition (theFrente Amplio -FA).
Eorts to decrease te ecooms vuerabiit
ater te 2001-2002 crisis resuted i it provig
more resiiet to te recet goba recessio ta
ma oter emergig maret ecoomies. This wasdue to a generally solid macroeconomic ramework,
greater exchange rate fexibility, rising international
reserves, and improvements in the banking system.
Te rst FA admiistratio ed b ormer Presidet
Vzuez successu cosoidated te restoratio
o macroecoomic stabiit, icreased itegratio
ito iteratioa marets, ad improved te
ivestmet cimate. These eorts paid o with anunprecedented economic growth rate (6.6 percent on
average rom 2004 to 2008). The ocus on promoting
economic growth was accompanied by a desire toensure that all Uruguayans shared in the countrys
success. Thus, expanding social protection programs,
as well as health and education services, was centralto the policies o the Vasquez Administration. These
combined eorts resulted in poverty declining bynearly 35 percent; and extreme poverty by 50 percent,
between 2003 and 2008, with unemployment alling
rom 16.9 to 7.9 percent.
Te secod FA Govermet too power i Marc
2010, ad te ew Presidet, Jos Mujica, decared
tat e woud cosoidate te positive ecoomic
ad socia outcomes acieved b is predecessor.The new Government recognizes the importance or
Uruguay to look beyond the region when setting its
Executive Summary
U
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reorm agenda or the next years. The country indeedhas a unique opportunity to reach, in the medium
term, living standards and quality o institutions thatare comparable to those enjoyed by advanced OECD
economies.
Te impemetatio o te 2005-2010 Coutr
Assistace Strateg (CAS) was arge successu,
ad Ba-aced activities cotributed sigicat
to te Govermets deveopmet objectives,
with Bank support structured in three pillars: (i)reducing vulnerability; (ii) sustaining growth; and (iii)
improving living standards. This period witnessed a
marked strengthening o the Banks partnership withthe Government o Uruguay (GoU). The Bank opened
an oce in Montevideo in 2005, which strengthened
relations with the Government and acilitatedsuccessul CAS implementation. Further, the Bank
was able to customize its nancing innovatively inorder to disburse a Development Policy Loan (DPL)
in local currency. Finally, the Bank demonstrated an
ability to shit the ocus o its collaboration to areas inwhich the Government was prioritizing critical reorms
and initiatives which required important knowledgetranser to move orward with innovative approaches.
Tis Coutr Partersip Strateg (CPS) aims to
ep Urugua tae te ext steps i cosoidatigecoomic reorms, ad eacig socia outcomes,
tereb more cose aigig wit OECD stadards.
It will build on the positive experience o the previous
CAS period, when the Banks nancial assistancewas signicantly increased and the policy dialogue
extended to a wide array o critical components o
the countrys development strategy. This positiveexperience entailed a fexible and responsive stance
by the Bank characterized by nimble and eective
responses to evolving needs. This enabled the Bank to
expand its support to the Government into new areas like promotion o innovation, public sector reormand health reorm and thus support emerging key
government priorities.
Te proposed CPS icudes a Ba edig program
o approximate US$700 miio, togeter wit
a active Iteratioa Fiace Corporatio (IFC)
program ad a strategic joit Govermet-Ba
program o Aatica ad Advisor Services
(AAA), structured aroud te oowig our
piars: (i) Reducig Macroecoomic Vuerabiit
& Stregteig Pubic Sector Admiistratio; (ii)
Competitiveess & Irastructure; (iii) Agricuture,Cimate Cage, ad Eviromet; ad (iv)
Icreasig Socia Icusio & Euit. Refecting thelessons o the CAS Completion Report, the strategy
will be fexible to accommodate the Governments
potential need to adjust course in the event ounoreseen domestic or external developments,
and it will buttress the administrations eorts toachieve consensus on its ambitious reorm agenda.
Indicative support or this strategy is proposed to
include a series o two DPLs totaling US$200 million
(late 2010 and late 2011), investment lending totalingapproximately US$500 million, and a well-ocused
and demand-driven AAA program. The proposedstrategy places a heightened emphasis on supporting
Uruguay in accessing international expertise and bestpractices, as well as sharing its own experiences with
other countries through South-South exchanges.
Te IFC strateg i Urugua or te CPS period
compemets te Bas strateg b ocusig
o te oowig our mai areas: (i) acia
services, (ii) agribusiess, (iii) competiveess,ad (iv) educatio. In the nancial sector, IFC aimsto support banks and non-banks that ocus on the
mid-market corporate and low-income retail banking
segments. In agribusiness, the ocus is likely to remainon export-oriented enterprises with deep linkages to
small- and medium-sized arms. All three o IFCsactive investment projects in Uruguay are in export-
oriented agribusiness companies. The Corporation
also aims to reinorce the countrys competitivenessby nancing inrastructure projects, especially those
in the renewable energy, logistics, and water sectorsonce appropriate regulations are in place. Finally, IFChopes to support private sector education institutions,
particularly those that oer technical and vocationalcourses or low income students.
Wie Uruguas resiiece i te ace o te recet
goba ecoomic crisis demostrates tat it is muc
[ 10 ] Executive Summar
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Executive Summar [ 11 ]
more strog positioed ta it was 10 ears ago,
sigicat riss remai. Despite declining as a
source o risk since 2005, debt sustainability remainsthe main economic risk, ollowed dollarization and
exposure to global and regional shocks. Political risk
is low, though signicant social risk arises rom thetensions between pressure to expand government
programs and the need or a prudent scal stance in
order to urther reduce macroeconomic vulnerabilities.Finally, natural disasters and climate change have
already had a major impact on rural income, as wellas important scal implications, in recent years.
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I. Itroductio [ 13 ]
1. Urugua as a strog istor o broad-based
socia weare ad soid democratic istitutios
buidig o a deep igraied preerece or
euait ad poitica cosesus, wic is sti ver
preset toda. The country enjoyed the highesthuman development standards in the region during
the last century. While the country has aced adversedevelopments in recent decades, these standards
remain high, and Uruguays society is still among
the most equitable in the region in terms o incomedistribution and social indicators.
2. Tis coutr o 3.3 miio peope as set its
ow distict deveopmet pat i a cotext o a
deep ecoomic iter-coectio wit its arge
eigbors, Brazi ad Argetia. In Uruguay, thestate is widely recognized as trustworthy and eectivein the delivery o public goods, and the society has
explicitly voiced its preerence or having the state play
an active and expanded role in most public servicesectors. This trust is a refection o the countrys
tradition or consensus-based policies and o the
strong perormance o the public sector in ensuring
nearly universal coverage and adequate quality andtransparency in the provision o services.
3. Uruguas traditioa deveopmet mode
combies a damic primar export base ad a
weare state resposibe or te distributio o
ecoomic beets. This model came under serious
pressure in the latter part o the twentieth century, dueto unavorable commodity price developments and a
weaker perormance in public sector management.
This triggered a gradual social and economic decline,leading to high unemployment rates and chronic
scal and balance o payments imbalances, and
compromised opportunities or economic expansion.
4. I te ear ieties, te coutr embaredo a ecoomic turaroud based o ecoomic
opportuities oered b expadig is wit
regioa parters, aciitated b ecoomic
Introduction
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[ 14 ] I. Itroductio
itegratio troug te Mercado Comn del
Sur (Mercosur) ad wit a te beets ad
vuerabiities tus impied. This strategy producedencouraging early results, with high growth rates,
progress on economic diversication, and substantial
poverty reduction. However, the increased reliance onregional economic relations made Uruguays economy
highly vulnerable to the perormance o its neighbors,
as was dramatically demonstrated when Argentinassevere political and economic crisis broke out in
2001. This had a devastating eect on all dimensionso Uruguays economy and society. Unemployment
and poverty rates rapidly increased to 20 percent and
over 30 percent, respectively. Real wages plummetedas the Peso was devalued and the economy went into
a deep recession. The Government aced a mounting
scal decit and an exploding external debt, placingthe country on the verge o insolvency.
5. Urugua maaged te crisis ver we, witout
deautig o its debt. The Government rapidly put
together a comprehensive recovery program basedon respecting contracts and commitments, while
mitigating the adverse social consequences o thecrisis. In particular, the authorities reused to deault
on the debt, and worked hard to reach agreement
with creditors on a debt restructuring plan consistent
both with the repayment capability o the country andwith the rules o the game. This recovery program
enjoyed broad political and social consensus, andthe authorities managed to mobilize the international
community to help saeguard scal solvency andaddress structural issues that were critical or return
to high growth levels. Eventually, as the economy
recovered much aster than expected, Uruguay wasable to repay the multilaterals emergency loans well
ahead o schedule.
6. I 2004, i te atermat o te crisis, teUruguaa eectorate brougt ort a importat
sit i te poitica adscape b votig ito power
a ceter-et coaitio (te Frente Amplio -FA). In
a refection o the stability o Uruguays consensus-oriented democracy, the loss o the executive branch
by the two parties that had dominated the politicalscene or 170 years did not generate signicant
disruptions in the post-crisis recovery agenda. The
FA ensured remarkable institutional continuity while
gradually consolidating a reorm agenda around whichit shaped an unprecedented political consensus.
7. Te rst FA admiistratio, ed b ormerPresidet Vzuez, successu cosoidated
te restoratio o macroecoomic stabiit
ad udertoo determied eorts to icrease
Uruguas itegratio ito iteratioa marets
ad improve te ivestmet cimate. These eortspaid o with unprecedented economic growth (6.6
percent on average rom 2004 to 2008). Basedon its conviction that sustained and broad-based
economic growth require policies that go beyond
stable macroeconomic conditions, the Vzquez
administration took a proactive stance on promotinginnovation, inrastructure development and
institutional reorms or increased competition andconducive conditions or private sector development.
8. Pairig tese eorts i promotig ecoomic
growt wit expadig socia protectio programs,
as we as eat ad educatio services was cetra
to te poicies o te Vzuez Admiistratio. The
Government ocused on promoting universal accessto key benets and services by vulnerable groups.
This included the expansion o the amily allowanceprogram, the introduction o a pioneering programto provide every primary school student a personal
computer (Plan Ceibal), and the launch o a major
health reorm aimed at gradually increasing coverageto ultimately reach the totality o the population.
These combined eorts in the economic and socialronts generated positive outcomes that went beyond
recovering ground lost in the 2002 crisis. Between
2003 and 2008, poverty declined by nearly 35 percent;and extreme poverty, by 50 percent. Unemployment
ell rom 16.9 to 7.9 percent.
9. Te secod FA Govermet too oce i
Marc 2010, wit Presidet Jos Mujica promisig
to cotiue te soud poicies impemeted i
recet ears, wit a view toward cosoidatig
te positive ecoomic ad socia outcomes. Hecommitted his administration to urther increase
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I. Itroductio [ 15 ]
the eectiveness o public policies such as urtherexpanding social sector programs with an increased
emphasis on enhancing their impact. The newGovernment has committed itsel to studying global
best practices in setting its reorm agenda or the
coming years. In the medium-term, the country hasa unique opportunity to achieve living standards and
quality o institutions comparable to those enjoyed by
advanced OECD economies.
10. Tis proposed Coutr Partersip Strateg(CPS) covers te ears 2010-15 ad is aiged wit
te coutrs deveopmet visio. It proposes
a Bank lending program o approximately US$700million, together with an active International Finance
Corporation (IFC) program and a strategic joint
Government-Bank program o Analytical and AdvisoryServices (AAA). The CPS will provide or fexibility to
enable the program to respond to emerging needs.Rather than providing a detailed blueprint o the
terms and scope o the partnership between the
Government and Bank, the CPS aims at laying out theguiding principles or shaping this partnership. While
it species the programs identied or the initial yearso the partnership, sucient fexibility is built into the
CPS to allow or responding to evolving government
priorities and needs.
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A. POlITICAl DEVElOPMEnTS
11. Wit te eectio o Mr. Jos Mujica b a
ampe margi ad te FAs cocurret acievemet
o a majorit i bot ouses o Pariamet, te
Uruguaa eectorate as edorsed te poic
ramewor iaugurated i 2005. There seems tobe a growing consensus in the country that, ater
overcoming the challenges resulting rom the 2002-
03 crisis, the country now needs to develop a broadnational consensus on a development agenda that
will put the country on a path o sustained growth
and high standards o human development.
12. Presidet Mujica as cosistet expressedte eed to articuate state poicies tat wi
stad above te da-to-da poitica debate.
From his rst days in oce he has reached out toopposition parties in seeking consensus in critical
areas such as education, inrastructure, environment,security and public sector reorm. In successul intra-
party negotiations, Mr. Mujica approved having non-
members o the ruling coalition invited to the board
o directors o some o the government-controlledinstitutions and corporations, a strong departure rom
past political practices. He is currently benetting romstrong approval ratings, leaving him well-positioned to
pursue his political initiatives and legislative agenda.
Maintaining this support will depend on his capacityto translate the populaces strong expectations into
a concrete development agenda that will eectively
improve living conditions.
13. I its rst mots, te Govermet aouceda umber o importat ew reorm iitiatives, most
notably a renewed commitment to customs reorm,
the introduction o a public-private partnershipramework or investment in the inrastructure sector
and, urther consolidation o social protection transerprograms. It also managed to complete some reorm
eorts initiated under its predecessor government,
such as the May 2010, launch o the Empresa en
II. Te Coutr Cotext [ 17 ]
The Country Context
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[ 18 ] II. Te Coutr Cotext
el Da initiative, a one-stop-shop or rm creationwhich constitutes a signicant improvement in
Uruguays business environment. The Governmentalso changed the presentation o its budget rom an
administrative to a program-based ormat, which will
enable preparing the new 5-year budget in way thatbetter refects policy objectives.
B. ECOnOMIC PERFORMAnCE
14. Eorts to decrease te Uruguaa ecooms
vuerabiit ater its 2001-2002 crisis resuted i it
provig more resiiet to te recet goba recessio
ta most oter emergig maret ecoomies. This
refects a generally solid macroeconomic ramework,
greater exchange rate fexibility, rising internationalreserves, improvements in the banking system, and
an improved investment climate that lessened theimpact o the crisis and positioned the country well to
benet rom a recovery.
15. Prior to te goba recessio, Urugua ad
ejoed severa ears o impressive ecoomic
perormace. Real GDP growth averaged 6.6 percent
rom 2004 through 2008 and largely resulted roma rebound in both domestic demand and exports.
Growth reached 8.5 percent in 2008, the highest levelin the last 20 years, despite a slowdown in the lastquarter o the year due to the crisis. International
trade expanded signicantly, though Uruguays
trade structure remains highly concentrated, bothby product and geography. Export growth averaged
13 percent per year in 2004-2008. Unemploymentdeclined to its lowest level in over a decade, alling
rom 13.1 percent in 2004 to 7.9 percent in 2008.
Although economic activity slowed with the crisisand the economy contracted in the rst quarter o
2009 (-2.9 percent), growth resumed in the secondquarter and reached 2.9 percent or the year. Currentprojections anticipate an increase to 5.5 percent in
2010, and -- in subsequent years -- revert back tolong-run growth o 4 percent. Annexes C and D
contain more detail on the economic context and
debt sustainability, respectively.
16. Pubic debt maagemet as acieved
cosiderabe success i terms o reducig debt
ad improvig its compositio. Gross public debtdeclined rom 79.3 percent o GDP in 2005 to 60percent in 2009. With the increase in oreign reserves,
net public debt declined about 20 percentage points
o GDP over the same period.1 In terms o debt
composition, 78.9 percent o total public debt isheld by private creditors, compared to 55.7 percent
by end-2004, refecting restored access to market
nancing. The oreign currency share o total publicnon-nancial sector debt ell rom 76.6 percent in
2004 to 56.7 percent by December 31, 2009. Debt
sustainability continues to pose a risk, albeit one thathas been greatly reduced. Medium-term government
borrowing requirements are manageable, despite aconcentration o maturities in 20112. A conservative
estimate o the gross borrowing requirements or2011 amounts to US$2.9 billion or 6.5 percent o GDP.
With less than a third o this amount expected rom
International Financial Institutions (IFIs) (see SectionIV), Uruguay will likely need to seek substantial
additional unding rom capital markets.
17. Te baig sstem cosoidatio processtat occurred i te atermat o te 2002
crisis ad proactive Cetra Ba itervetio
ad supervisio ave cotributed to greater
acia sstem stabiit. Since the outbreak o
the international nancial crisis, the nancial system
has managed to navigate the storm without majordiculties. Prudential requirements have been
improved and banking regulation and supervision
has been strengthened. The accumulation o oreignreserves by the central bank contributed urther to
the condence in Uruguays currency, which has beenfoating since mid-2002.
18. Despite a sigicat decrease over recet ears, te degree o doarizatio remais ig.
1. Public debt-to-GPD ratio is calculated using end-o-the-period exchange rate2. A large share o the maturities are owed to local markets and are denominated in indexed local currency units
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II. Te Coutr Cotext [ 19 ]
Since the 2002 crisis the level o dollarization in
the nancial system has allen rom 83 percent to
55 percent or credits, and rom 92 percent to 77percent or deposits. However, it remains high,implying a substantial exposure o the banking sector
to oreign currency risk rom corporate balance sheet
mismatches.
C. POVERTy
19. Uruguas og-stadig ocus o sociaeuit maes advaces i te reductio o povert
ad ieuait a cetra poic priorit. However,successive economic crises at the end o the last
century weakened the social model, and today poverty,
extreme poverty and inequality levels remain relativelyhigh despite recent improvements. Exacerbated
by the 2001-2002 crisis, both poverty and extreme
poverty began a downward trend in 2004, and in2008 both neared the lows o the previous decade
(20.9 percent or poverty, 1.5 percent or extremepoverty). Uruguay has not suered the degree o
impact experienced by some o its neighbors that o
having a longer-term trend o increasing poverty as aresult o successive crises.
20. Improvemets i euait were more modest.The Gini coecient declined rom its highest level o
0.44 in 2004 to 0.42 in 2008, a slight improvementrom its pre-crisis level (0.43 in 2000). Uruguay ranks
high among Latin American and Caribbean Region
(LCR) countries in the provision o basic opportunities
or children according to an equality o opportunity
principle across ve very basic goods and services orwhich there were comparable data across countries
circa 1998 and 2008 (access to water, sanitation,electricity, completing sixth grade on time, and school
attendance or children 10-14). As detailed later,
implementation o the National Plan or Social Equity,as well as health and education reorms, is hoped to
urther improve equity in these areas.
Figure 1: Long Term Poverty Trends in Uruguay
50
45
40
35
30
25
20
15
10
5
0
1985 1987
Argentina Crisis
Mexican Crisis Argentinaand Brazil Crisis
Domestic Crisis
1989
PovertyRate%
1991 1993 1995 1997 20011999 2003 2005 2007
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21. I its rst mots i oce, te Govermet
as coducted itesive itera ad extera
cosutatios or deig its oger-term
govermet program. This consultative process
centered on the preparation o a new ve-year budget,which will cover the period up to the end o the
Governments mandate (2010-2015), and is expected tobe presented to parliament at the end o August 2010.
In parallel, the authorities are preparing partnership
programs with their main development partners, mosto which coincide with the ve-year budget period.
22. Wie o orma Govermet program as
bee issued, te autorities ave aid out at
dieret occasios teir poic priorities. These
priorities, which are still in process o being netuned and translated into concrete legal and policyinitiatives, are as ollows:
Theauthoritieshavecommittedtoadheretothe
prudent scal and economic policies o the last
administration and continue expanding coverage
o social program and basic services.
They have identied the followingkey priorities
to deepen reorm achievements: (i) strengtheningcompetitiveness through increased coverage
and better quality o inrastructure and a moreconducive business environment; (ii) expanding
and improving the impact o social service delivery,
with an emphasis on education; iii) enhancingproductivity and income and job generation in
the agriculture and ood sector; (iv) protecting
the environment and mitigating and adapting tothe eects o climate change; and v) improving
security o citizens.
Theyexpressed a keen interest in gettingmore
value or money in public programs; and theGovernment has launched a number o important
cross-cutting reorm initiatives. Most notable
in this regard are the introduction o a policy
III. Deveopmet Caeges & Govermets Visio [ 21 ]
Development Challenges& Governments Vision
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[ 22 ] III. Deveopmet Caeges & Govermets Visio
ramework or public-private partnerships ininrastructure investments, and a renewed eort
on public sector reorm.
23. Te proposed CPS as bee desiged to
support impemetatio o tis ageda. In intensiveconsultations with authorities, strong expectations
emerged towards Bank support in acilitating transero knowledge and experience in specic reorm areas.
As the country enters this new development phase,
there will be a need or fexibility and innovation inthe denition o the specic lending and non-lending
support rom the Bank.
A. STREnGThEnInG ThE BUSInESS
ClIMATE AnD COMPETITIVEnESS
24. As Uruguas macroecoomic growtrecovered, te autorities recogized te
importace o improvig te eviromet or
private sector deveopmet or embarig o a
sustaied pat o ig growt. In particular, they
have stressed the need to upgrade inrastructureservices -- critical or both enhancing economic
productivity and meeting social policy objectives. Theauthorities have also stated their intent to improve
other aspects o the business environment andinvestment climate, such as regulation, tax policy,licensing and other procedures.3 The Government
hopes to build on substantial progress already made,including the eective implementation o a new
Bankruptcy Law in 2008 which eases the process
and reduces the costs o closing a business, and theintroduction o a one-stop-shop or rm creation in
May 2010 that simplied procedures or starting abusiness. In this context, the new Administration has
made enhancing the acilitation o logistics one o the
top priorities o its reorm agenda. Finally, there is astrong emphasis on supporting the deepening and
extension o capital markets, so as to enhance access
to nance by private sector rms.
25. Coverage ad uait o irastructure services
i Urugua is ig compared to te regio ad
oter midde icome coutries (MICs); owever,
to maitai tese stadards, urter improve
eciec ad uait, ad exted coverage, tere
is a eed or more ivestmet, better reguatioad eaced corporate goverace. Uruguayhas achieved an impressive degree o access to basic
inrastructure (Table 1), and good overall qualityand coverage o its inrastructure. However, one
weak link is the railway system, with nearly hal o
the 3,000 km national rail network abandoned andcargo volumes on the remainder that are a raction o
regional standards. The railway system, as in many
other countries, has suered over the last thirty yearsdue to competition rom road reight transport and
lack o investment, as well as several fawed reormattempts which urther delayed key investments. The
non-unctioning rail system threatens to lead to rapid
degradation o the road network (especially givenincreasing transport o heavy orestry products) and
hence high maintenance and rehabilitation costs.
26. Growig eerg caeges are aso uodig
as domestic demad is expadig rapid. TheGovernments energy sector strategy includes: (i)
diversiying energy sources to reduce costs and
emissions, as well as increase energy security; (ii)increasing private participation in new renewable
power generation; (iii) increasing regional energytrade; and (vi) acilitating availability and acquisition
o energy ecient goods and services, including
eorts to raise public awareness regarding demandside management interventions. Despite eorts to
increase energy eciency, demand has increased
by over 4 percent per year since 2002. In addition,there have been repeated instances o drought (2006
and 2008 in particular), insucient thermal back-up
capacity, and diculties in importing electricity romneighboring countries. This has led to high supply
costs and scal pressure as the Government sought toavoid passing on cost increases to end users. Supply
challenges are compounded by weaknesses in several
3. According to the Global Competitiveness Report 2009-2010, the ve most problematic actors or doing business are 1) restrictive laborregulations, 2) inecient government bureaucracy, 3) tax rates, 4) access to nancing, and 5) inadequate supply o inrastructure.
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sections o the transmission and distribution network.
The Government recognizes these challenges and hasrearmed its commitment to (i) establishing a new
500 MW interconnection with Brazil and upgradingthe existing transmission and distribution systems;
(ii) increasing energy eciency; and (iii) creating a
larger role or non-traditional renewable energies(wind, biomass and small-scale hydro in particular) in
Uruguays energy matrix.
27. Te Govermet o Urugua (GoU) as set a
target o combied pubic ad private ivestmet
o 3-5 percet o GDP or te irastructure sector,
up rom less than 2 percent or public investment over
the past years. It was thereby clearly stated that giventhe limited scal space available, this would require
mobilizing signicant levels o additional resourcesor inrastructure investments outside the budget. In
particular, there is a need to promote private sector
investment in inrastructure, which is currently very lowin regional comparison. The Global Competitiveness
Report (GCR) 2009-2010 or Latin America and the
Caribbean identied Uruguay as the most dynamiccountry during 2009, with signicant progress
achieved in inrastructure, macroeconomic stability,
higher education and training and technological
readiness.
28. Give te eed or icreased privateivestmet, te Govermet is exporig ew
orms o pubic-private partersips (PPP) ad
is preparig a ew PPP ramewor aw. PPP
opportunities are being explored in areas such asreight rail transport, additional port terminals and
access channel dredging, as well as in social sectorinrastructure provision.
29. Te ew Govermet as sow a strog
commitmet to compete te busiess eviromet
reorm ageda iitiated b its predecessor. Thisar-reaching reorm program (National System
or Registering Companies, SINARE) was initiatedseveral months ago to streamline and centralize all
public procedures related to the lie cycle o a privatecompany and create a single registry or businesses.The ocial launch in May 2010 o the initiative,
Empresa en el Da, a key dimension o this reorm
program, was one o the rst reorm breakthroughs
4. Data rom World Development Report (2009), WHO/UNICEF Joint Monitoring Program 2006 and International TelecommunicationUnion data, 2008.
Tabe 1: Access to Pubic Services4
Country Percent o population
withsewerageservice(2006)
Percent opopulationwith in-
house accessto potable
water (2006)
Electricity(percent opopulation
withaccess
in 2009)
Fixedtelephone
linesper 100people(2008)
Mobiletelephone
subscribersper 100people(2008)
Internetusers
per 100people(2008)
Roaddensity
(kmper 100km2 in2009)
GDPper
capita,PPP,
in 2008
Argentina 44 79 95 24 117 28 15 14,333
Brazil 45 79 97 21 78 35 21 10,296
Chile 78 91 99 21 88 33 11 14,465
Colombia 74 86 87 15 89 37 n/a 8,885
Mexico 64 90 97 19 70 22 18 14,495
Uruguay 53 98 100 29 105 40 34 12,734
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[ 24 ] III. Deveopmet Caeges & Govermets Visio
accomplished by the new Government. It establisheda web-based, one-stop-shop or rm creation that
signicantly reduces the number o steps, time andcosts to start a business.5
30. Te Govermet as recogized te ogisticssector as a promisig source o growt i itse as
we as a importat dimesio o te coutrs
competitiveess. Over the last two decades, due to
its central location, ecient port services and modern
nancial system, Uruguay has emerged as a regionalhub or services and logistics. In 2008, exports o
services in this sector have reached US$1 billion. To
urther exploit this potential, the new Governmenthas highlighted the importance o reviving the
comprehensive customs reorm, which has made
only limited progress during the last administration,and indicated a shit in emphasis o the reorm to
enhancing the trade acilitation unction o customsand moving to a risk-based control system.
31. Access to iacig b Uruguaa irms is asoa e costrait to private sector deveopmet,
and increasing the sophistication, transparencyand stability o the Uruguayan inancial market is
a key Government objective.6 Pension unds haveaccumulated sizeable assets, yet these are largely
channeled to investments in government securities.The authorities have taken important steps inrecent years to strengthen local inancial and capital
markets, such as the adoption o a new capitalmarket legal and regulatory ramework in 2009, the
2008 bankruptcy law, the 2009 law on payments
system and securities settlement, and the 2008establishment o a deposit insurance institution.
The challenge ahead now is to build capacity and
promote market development to acilitate access toinancing or the private sector.
B. IMPROVInG SOCIAl InClUSIOn &EqUITy
32. Te Govermet is committed to cosoidatigte progress acieved o socia protectio ad to
urter improvig pubic eat care ad educatiooutcomes, wit a specia empasis o providig
or te basic eeds tose ivig i extreme povert
ad urter eacig socia icusio. In 2000,the Government introduced amily allowances or
poor amilies and has modied the program in theyears since to expand coverage, increase benets and
provide an incentive structure or secondary school
students. By 2009, over 500,000 children werereceiving benets rom the expanded program. These
eorts eectively included the poorest households
into the social protection systemthe percentage ohouseholds in the poorest quintile not receiving any
income transer declined rom 50 percent in 2003 toabout 20 percent three years later, and more than
85 percent o children living in poverty reside in
households that received amily transers in 2008.
33. Te GoU as committed to cotiue socia
protectio iitiatives wie seeig to icrease
teir impact, placing special emphasis on non-
contributive schemes. The authorities have declared
their intention to reach the remaining non-coveredamilies and enhancing the eectiveness o the amily
allowances system. They consider the ollowing to bethe principal challenges in this regard: (i) to better
identiy and incorporate potential beneciaries not
yet covered; (ii) to more eectively use the transerprograms to advance social policy objectives, such as by
identiying adolescents at risk and providing incentivesor them to complete secondary education; and (iii) to
improving the capacity or monitoring and evaluation
o transer programs, such as by institutionalizing andbroadening the scope the centralized beneciaries
registry ( Sistema de Inormacion Integrada para el
Area Social).
5. Uruguay ranks 114 o 183 countries in the 2010Doing Business Report, and 132 in the starting a business category.6. The World Bank Investment Climate Survey(2008) indicates that, on average, enterprises retained earnings account or 82% oxed assets and 73% o working capital nancing, respectively. The report highlights the low use o bank credit by Uruguayan rms -- itaccounts or only 6% o working capital and even less o asset nancing.
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34. Presidet Mujica as aso igigted teimited decet ousig opportuities or ow-
icome amiies as a critica socia caege. Inresponse the Government has launched a housing
initiative (Plan Juntos) to expand such opportunities
by acilitating access to housing nance and promotingsel-help initiatives or housing construction and
rehabilitation.
35. Educatio is a strategic priorit as part o te
GoUs objectives o raisig ivig stadards ad
better itegratig ito te word ecoom. Uruguay
has been implementing reorms in recent years to
improve the equity and quality o the educationsystem. Uruguay has achieved universal access to
early education or 5-year olds, universal primary
education (grades 1-6) and early secondary. However,these enrollment rates hide important dierences in
the quality o education among students o dierentsocio-economic backgrounds. At the secondary level,
there remain challenges in terms o coverage --net
enrollment rates or the lowest quintile o the studentpopulation is 37 percentage points below that or the
highest quintile. In addition to the gaps in coverage atthe secondary level, a key challenge or Uruguay is to
address the learning decits o its students, particularly
in terms o cognitive abilities.7 Bank support to the
sector has been ocused on the expansion o theull-time school program, the main initiative o the
Government or improving the quality o education or
lower-income primary students. Thus, they propose tocontinue expanding early childhood education and ull
time schools, and enhancing the educational impact
oPlan Ceibal(Box 1) at the pre-school and primaryschool levels. With regard to education quality at
the secondary level, the Government will ocus onstrengthening technical education and its linkage to
labor market demands, and expanding thePlan Ceibal
to secondary school students.
36. A compreesive eat sector reorm
program was approved b Pariamet i 2007
te competio ad impemetatio o tese
reorms is a importat egac o te previous
admiistratio. While it remains among the top-
ranked LCR countries on health indicators, Uruguaysrelative position has slipped in recent years.8 Fity-
two percent o urban Uruguayans report havingcontributory health insurance, and 97 percent report
having either some type o insurance or a regular
source o care. The prevalence o inectious diseasesis low; importantly, Uruguay has experienced a
transition in its demographic structure over the lastdecades, and its epidemiological prole has changed
to one o a high prevalence o Non-Communicable
Diseases (NCD). The ambitious reorm programaims to provide universal health insurance coverage
and to shit the prevailing heath care model rom high
cost treatment o acute illnesses to preventive care orNCDs. As nine percent o GDP is devoted to the health
sector, a key concern or the new administration is tocontain the increasing cost o the health system while
putting available resources to more ecient use.
37. Tese reorms ejo a ig eve o positive
socia acceptace, ad to date isurace coverage
as bee expaded to reac ear o 300,000
iabitats, mai cidre o poor ouseods.
The reorms range rom regulation and policy
stewardship to health promotion and the improvemento health care, and rom eective prevention policies
to epidemiological surveillance and monitoring.
38. Uruguas societa orietatio toward icusio
ad euit is refected i a arge positive picture
o geder issues. Education standards are amongthe highest in the region. Female participation in
labor markets is high: the ratio o emale to malelabor orce participation (0.75) is higher than the
average or upper middle income countries (0.69)and the LCR countries (0.66) or year 2008. InUruguay 82.5 percent o women are employed by
the services sector, exceeding the norm or upper
7. In the 2006 Program or International Student Assessment (PISA) in language, mathematics and science or 15 year-old students,Uruguay outperormed other LCR countries (excl. Chile), but was below the OECD countries8. In Uruguay today, lie expectancy at birth is 75 years, the inant mortality rate is 10.5 per 1,000 live births, and 99 percent o births aredelivered in a hospital or clinic.
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Created by Presidential decree in April 2007, Plan Ceibalprovides all students and teachers in public primaryschools with a laptop computer and internet connectivity through the schools ree o charge. The main objectivewas to reduce the digital gap, not only with respect to other countries but also within the Uruguayan society to
oster equitable access to education, inormation and culture. The Plan is based in three pillars: (i) equity o access
to computers, (ii) learning, and (iii) connectivity. The combination o these elements is intended to promote equalopportunities; enhance the development o new tools or learning and teaching; and encourage new relationships
in an interconnected society. Policies and strategy or the program are decided, in close collaboration with the
Education Committee, by a dedicated committee comprised o representatives o relevant government agencies.The Technological Laboratory o Uruguay (LATU) is in charge o the implementation o the program.
This Plan was accompanied with connectivity inrastructure to primary schools (80 percent o schools now have
at least one access point, covering 95 percent o public primary school students). Equally impressive is theocus on the non-equipment aspects o the program. These are covered in detail on the Plans webpage (www.
ceibal.edu.uy), which includes educational materials or teachers and students and the Ceibal Channel, which
connects classrooms to a TV studio that showcases student-teacher interaction across the country to acilitatepeer learning or teachers. There is also a virtual Campus Ceibal where teachers can access training on didactic
topics and take virtual classes. Finally, the Plan includes an online ormative evaluation mechanism that enables
simultaneous evaluations with immediate eedback on student results.
By 2009 all 380,000 students and teachers in public primary schools had received their computers. The Planinitially aced resistance rom teachers. However, there are recent indicators that this resistance has been reduced
and that the Plan is now widely accepted. The teachers received training and machines beore the deploymentto students. Students bring the laptops to class and use the machine during classes; parents are requesting to
be e-trained; and in many localities the schools have become the center o the community activities. The Plangenerated an interesting interaction between teachers, children and parents with plenty o potential or studentlearning; however, there has not yet been an evaluation o the Plans impact on student learning or household
welare. Such studies are now underway, and the Bank has been asked to support the development o an
evaluation o the preliminary educational and other social welare impacts.
GoU aims to expand the Plan as ollows: (i) complement connectivity with digital training or education personnel;(ii) gradual expansion to public secondary schools; and (iii) using connectivity to increase the scope and quality
o other social services (e.g. remote medical consultations and nutrition checks).
Box 1: Uruguas PlAn CEIBAl Oe laptop per Cid
[ 26 ] III. Deveopmet Caeges & Govermets Visio
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MICs (71.7 percent) and or the LCR region (74.6percent). Women occupy 12.1 percent o seats in the
parliament (2008), below the average or both uppermiddle income countries (19 percent) and the region
(22 percent). In the context o an otherwise positive
reproductive health context with 99.3 percent oall births being attended by skilled health sta and a
contraceptive rate above the norm or upper MICs
Uruguays adolescent ertility rate is an outlier. Whileit has shown a steady decline rom 66.9 births per
1,000 women ages 15-19 in 1998, it is still higher (at60.9 in 2008) than the average or upper middle
income countries (51.5), but lower than the average
or LCR countries (72.2).
39. Te Govermet as recet ocused eve
more attetio o geder euit. In its economicdimension, this would mean to increase emale labor
orce participation in non-traditional sectors, reducethe high concentration o women in inormal and
domestic jobs, and decrease gender wage gaps. In its
social dimension, key challenges are recognized as thereduction o gender-based violence and prevention
o adolescent pregnancies.
C. COnSOlIDATInG AGRICUlTURAl
SECTOR GROWTh AnD BRInGInG ITSBEnEFITS TO FAMIly FARMS
40. Te ew Admiistratio as stressed teimportat potetia o te agricutura ad ood
sector, as a source or growth, in general, and or
increasing income and job opportunities in rural areas.This sector continues to be an important and dynamic
part o the national economy, having grown at almosttwice the rate o the overall national economy since
2001 and now representing almost 10 percent o total
GDP9.
41. Te Govermet as recogized as aparticuar caege te act tat ami arms are
aggig beid te productivit ad prosperit
gais associated wit arge-scae armig. These
amily arms are much more limited in exploitingopportunities oered by markets and remain strongly
exposed to external price or climate shocks10. For
President Mujica, reversing this trend is critical toretaining more o Uruguays younger population in
rural areas, as there has been a trend o young people
moving away rom amily arming.
42. Tere is a ee iterest i deveopig amoder ad we targeted agricutura ad rura
deveopmet poic. President Mujica used the term
agro-inteligencia to describe his vision on this. Sucha policy aims at consolidating the integrated approach
practiced in recent years, which promoted sustainable
use o natural resources while ostering comparativeadvantages o the agricultural and ood sector. For
example, Uruguay distinguished itsel as a reliableexporter o bee to standard-sensitive markets and
as the only country in the region to achieve 100%
traceability o cattle. Such policies are critical orremaining highly responsive to increasingly rigorous
international ood saety and quality standardsand thereby maintaining competitiveness. In this
context, the Government is interested in expanding
the innovative tracking system, which now enables
tracking all cattle in the country, to other livestock.
D. PROTECTInG ThE EnVIROnMEnTAnD MITIGATInG ThE EFFECTS OFClIMATE ChAnGE
43. Te ew Admiistratio as expressed its
commitmet to urter stregteig atura
resource maagemet ad sustaiabe use
o soi ad water at te arm eve, as we as
maistreamig biodiversit coservatio i
productio. This is in response to rising concerns on
environmental degradation caused by expansion oagriculture and intensication o livestock production.
9. Agriculture and orestry account or 12% o national employment, given the prevalence o labor-intensive SMEs.10. There are about 19,400 larger and medium-sized armers (~715 ha in size on average) that arm about 85 percent o Uruguays land.Production in these arms is strong linked to export markets and has proven relatively resilient to shocks (i.e. drought, input prices, marketfuctuations). The about 32,700 amily arms (~77 ha in size on average) have been less capable o seizing market opportunities and havebeen more strongly exposed to these shocks.
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[ 28 ] III. Deveopmet Caeges & Govermets Visio
More sustainable production is also necessary toprotect the countrys reputation as a green producer
(Uruguay Natural), a eature valued highly by tradingpartners.
44. I additio, Urugua as recet setcear targets o Cimate Cage ad Poutio
Maagemet issues. Uruguay has been seriouslyaected by climate change, most notably through a
higher climate variability observed in recent years.11
Repeated and severe inundations and droughts havehad a strong negative impact on rural livelihoods
and production. Thus, in 2010, GoU prepared and
launched a National Response to Climate ChangePlan that includes strategic guidelines on climate
change adaptation and mitigation. Regarding cleaner
production in the industry sector, the GoU has alsopresented aNational Action Plan on Production and
Sustainable Consumption . This plan seeks to identiy,coordinate, integrate and potentiate a set o actions,
programs and projects targeted to prevent andminimize environmental impacts rom production
and consumption. Both plans oer partnership
opportunities to identiy and prepare projects notonly with IBRD resources but also with trust unds.
45. Te Govermet is ee to reduce Uruguas
et emissios o gree ouse gases (GhGs), wicto a arge extet is te resut o emissios caused b
agricuture ad ivestoc productio. Through the
new strategy, the Government intends to put in place
an integrated approach to mitigation and adaptation.
46. Tere is aso a great eed to improve
evirometa compiace i Uruguas idustria
sector. The GoU recently launched a Sustainable
Industrial Development program to help smalland medium enterprises improve compliance with
environmental regulations through investments incleaner production processes. As in many othercountries, Small and Micro Enterprises (SMEs) in
Uruguay are typically more polluting than larger
companies as they lack resources, knowledge orincentives to adopt newer, cleaner technologies.
47. Water resources maagemet i te cotext o
a cagig cimate is a cear caege i Urugua.This is a key issue in that this resource is aectedby climate variability and change, and it relates to
hydropower generation (hence impact on energy
or industrial and other activities). The country hasa new water law which promotes the creation o a
water council (in the Direccin Nacional de Medio
Ambiente - DINAMA) and promotes integrated waterresources management and basin planning. Since the
end o the last century, rainall in Uruguay has shownan increase, together with temperature and sea level.
Current projections conrm this increasing tendency.Finally, the occurrence and severity o foods has beenincreasing, with large events occurring annually.
E. REFORMInG ThE PUBlIC SECTOR
48. I is iauguratio speec, Presidet Mujicaaouced tat is Govermet woud udertae
a ar-reacig pubic sector reorm ( Reorma delEstado). The new Government has advanced switly
on several ongoing reorm processes in the publicsector, such as deepening the e-government agenda,strengthening tax administration, and improving
targeting and eectiveness o social protectionprograms. At the same time, consultations are beginning
on how best to tackle those reorm aspects that have
not yet progressed, such as enhancing customsadministration, modernizing public procurement to
improve quality and reduce costs while strengthening
transparency and competition12; and making the
national statistical system more user-riendly.
49. Te exact scope, cotet, ocus ad
seuece o pubic sector reorm uder te ew
11. Climate change models or Uruguay point to a moderate increase in temperatures combined with greater volumes, intensity andvariability o rainall over the next several decades.12. Uruguay is unique in the Latin American and Caribbean region or its absence o an agency responsible or public sector procurementthat can issue executive norms, promote automation, monitor eciency, train public ocials in charge o procurement, overseecompliance, handle disputes and, in general, act as the lead government agency.
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admiistratio is et to be aid out i detai. Therewas an initial announcement that this reorm will
contain our pillars: human resource management,administrative restructuring, improved management
o public resources and enhanced use o technology
in public sector management. In any case, two keyobjectives have clearly emerged:
Asimprovingqualityandimpactofpublicspending
is at the heart o the Governments priorities,
there is a strong emphasis on enhancing capacityon budget ormulation and evaluation o results o
public programs and budgetary spending. For the
new 5-year budget, the Government has movedrom an administrative to a program-based budget
presentation, which sets the basis or linking
output indicators to budgetary allocations. Thisshould acilitate evaluation o public programs
and allow or better inormed budget decisions.
The Government recently tabled for discussion
sweeping changes to the civil service legislationdesigned to proessionalize and streamline the
civil service by harmonizing civil service careersacross dierent government units, simpliying
and uniying the process o attaining positions,
clariying labor relations between civil servants and
the State, and modiying the legal status o publicservants and political appointees.13 Preliminary
reactions indicate that the political opposition is
in avor o the announced changes, but the publicsector unions are strongly opposed.
13. Proposals are detailed inLos Ejes e Instrumentos de Fortalecimiento Institucional del Estado discussed and approved at the Consejode Ministros on July 16, 2010.
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A. PERFORMAnCE UnDER ThE 2005-2010COUnTRy ASSISTAnCE STRATEGy (CAS,REPORT nO. 31804-Uy) AnD EVOlUTIOnOF ThE PARTnERShIP
50. Te Vzuez Admiistratio came to power
wit a ucertai opiio o te Ba et eded
up ormig a cose ad productive partersip
wit te Ba i a umber o e areas. The
preparation o 2005-2010 CAS through extensiveconsultations and in response to demands rom the
authorities laid the ground or this partnership. Therewere several other key actors that helped strengthen
relations between the Bank and the Government
and acilitated successul CAS implementation. First,the opening o a Bank oce in Montevideo in 2005
enabled a more swit and eective response to local
needs and a more eective engagement with the mainsegments o Uruguays society. Second, the Bank was
able to customize its nancing to specic needs o theGovernmentthe disbursement o a Development
Policy Loan (DPL) in local currency stood out in this
regard, as described below. Third, the Bank showed
fexibility in adapting its lending and non-lending
program to align it with the Governments emerging
prioritization o critical reorms and initiatives, andprovided timely and eective knowledge transer in
this regard.
51. Tis positive evoutio o te reatiosip
i recet ears provides a great opportuit or
te Word Ba Group (WBG) to cotribute to
Uruguas ambitio to tae te coutr to te ext
eve o deveopmet. It will thereby be critical tocontinue to respond timely and eectively to the
countrys needs. The new Governments keen interestin urther enhancing its partnership with the Bank has
emerged consistently during CPS consultation process
(Box 2).
52. Te 2005-2010 CAS was structured aroud
te oowig piars: (i) reducig vuerabiit;
(ii) sustaiig growt; ad (iii) improvig ivig
stadards. The March 2007 CAS Progress Report(Report No. 42789-UY) conrmed the general thrust
o the 2005 CAS and concluded that the Bank program
IV. Urugua - Word Ba Partersip [ 31 ]
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The consultations on the CPS (as summarized in Annex I) commenced in February 2010, beore the inauguration
o the new administration, when discussions were held on a set o Policy Notes between the Bank and thenewly elected authorities. These discussions were ollowed by presentations to the main opposition parties.
These discussions were attended throughout by the President-elect, Mr. Jos Mujica, the elected Vice-president,Mr. Danilo Astori, and uture cabinet members. These interactions were appreciated both by the Government
and the opposition, and enabled the Bank to gauge the relatively high degree o consensus that exists today in
Uruguay on the policy agenda and development challenges. A consultation on the CPS with broad stakeholderparticipation was held in August, and the Government is leveraging the opportunity provided by CPS preparation
to plan an extended series o stakeholder consultations that will not end with the nalization o the CPS but
rather continue into implementation.
In April 2010, the dialog on the main priorities or the collaboration between the Bank and Uruguay over thenext ve years was deepened. The Bank Vice President met with President Mujica, Vice-president Astori, the
economic and social cabinet, as well as with representatives rom the legislative branches, private sector andcivil society. These discussions generally conrmed as valid the proposed orientations o the DPL and, more
generally, the orthcoming Country Partnership Strategy. In May 2010, consultations on the DPL, specically, and
the ramework o the strategy, more generally, were held. Another round o more detailed discussions on the
results matrix and the program under the CPS was held July 1, 2010.
Finally, systematic stakeholder consultations were kicked o in early August, 2010, and will continue through the
rst year o CPS implementation. Given the multi-sectoral objectives o both the CPS and the Governmentsown development strategy, this series o consultations is generally organized around the ollowing themes rather
than individual ministries or sectors: (i) Modernization o the Public Sector; (ii) Strengthening Competitiveness
and the Business Climate; (iii) Strengthening the Inrastructure Sector; (iv) Environmental Protection and ClimateChange Adaptation; and (v) Social Protection and Equity. The outcome o the consultations is summarized in
Annex I.
Box 2: Coutr Partersip Strateg Cosutatios
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had achieved substantial success over the previous twoyears. A central ocus o the assistance was provided
through a programmatic series o DPLs supportingthe consolidation o macroeconomic reorms and the
advancement o critical structural reorms. This was
complemented by a comprehensive renovation othe investment project portolio rom 2005-2007. This
resulted in gradual yet marked shit in the investment
lending portolio towards the support o morecomplex and reorm-oriented operations, in areas
like tax reorm, nancial sector and capital marketdevelopment, health and education, innovation,
inrastructure and public services, natural resources
management and state modernization.
53. Te attaced CAS Competio Report (CASCR)
cocudes tat te 2005 CAS was broad successui meetig its targets. For example, the ollowing
achievements illustrate how the Bank was able torespond in timely ashion to specic demands rom
the country:
The First Programmatic Reform Implementation
Development Policy Loan, approved in May 2007and disbursed in local currency, marked the rst
time the World Bank issued a local currency bond
or the purpose o a back-to-back disbursement
o a specic loan. It was also innovative in thatthe Bank became the rst oreign issuer to launch
a public bond in Uruguayan pesos, lowering thecost o nancing and increasing diversication o
public debt and pension unds portolios.
In agriculture, the Bank was instrumental in
supporting GoU eorts to eradicate oot-and-mouthdisease and to introduce individual traceability o
cattle. This led to a major breakthrough in theprevention o animal diseases, and signicantly
enhanced Uruguays image as a regional leaderand reliable exporter o bee products to standard-sensitive markets. Uruguay is the only country in
the region to achieve 100% traceability o cattle.
54. Te CASCR ds tat te fexibe desig o te
CAS ad te programmatic ature o deveopmet
poic edig aowed te Ba to react uic
durig te goba acia crisis ad to adjust its
support to provide Urugua te eeded cotiget
acig. Moreover, the 2008 CAS Progress Report
envisaged a plan or dealing with global nancial
turbulence. By contrast, the 2000 CAS proposed
a more rigid program, strictly linked to countryperormance and, when the Argentine crisis arose
in 2002, the Bank had to resort to Special SALs toprovide short-term relie, at the expense o creating
medium-term payment problems.
55. Aoter importat esso eared was tat
te cosesua ature o Uruguas poic maig
eviromet aects te pace o impemetatio
o e reorms. In Uruguay reorms can take a long
time to mature, but they tend to be sustained once
implemented. The programmatic structure o theprogram under the 2005 CAS, providing support orkey reorms through the DPL series, was in retrospect
the right one, allowing time or reorms to come to
ruition, while ocusing largely on implementationo measures or which the Government had already
obtained approval. The CASCR also highlights the
need or the Bank to mobilize sta with the requisiteskills. In the Institutions Building Technical Assistance
Loan (IBTAL) customs component, which was notimplemented or broader political reasons, the Banks
lack o in-house expertise slowed implementation.
B. ThE OnGOInG PORTFOlIO
56. Te Ba is supportig a diversied portoio o
ie ivestmet projects i Urugua, icudig two
Goba Evirometa Faciit (GEF) grats totaig
US$257.2 miio. Institutional strengthening is across cutting dimension o the investment portolio,
accounting or an average o 30 percent o each
loan. The portolio is supports a number o criticalgovernment reorm initiatives, such as the ollowing:
Strengthening the national innovation system
(Promoting Innovation to Enhance Competitiveness
Project),
Expandingthefulltimeschoolmodeltoincrease
equity in the provision o preschool and primary
IV. Urugua - Word Ba Partersip [ 33 ]
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[ 34 ] IV. Urugua - Word Ba Partersip
education (Third Basic Education QualityImprovement Project),
Strengtheninghealthdeliveryservicesandhealth
policy ramework or non communicable diseases(NCD), including implementation o a pilot
program (Previniendo) to enhance NCDs controland risk actor prevention, (Non Communicable
Diseases Prevention Project),
Promoting the adoption of economically and
environmentally viable, integrated agriculture and
livestock production systems (Integrated Natural
Resource and Biodiversity Management Project),
Facilitating investments inimprovingenergyuse
by creating an enabling policy and regulatoryenvironment (Energy Eciency Project),
57. I geera, portoio perormace remaispositive, bot i terms o acievemet o
deveopmet objectives as we as impemetatio
progress. There are currently no projects at risk in the
portolio. The disbursement ratio or Uruguay in FY10
was a solid 30.2 percent. However, the most recentportolio review reveals that there is some lag in
disbursements which can be attributed to the type o
operations that the portolio is supporting (institutional
strengthening, technical assistance) and the act thatUruguay has not yet explored aster disbursement
instruments and modalities in support o these types
o projects such as Sector-Wide Approaches (SWAPs),
results-based disbursements components. It isexpected that under the Government and the Bank willexplore using such instruments under the new CPS.
C. ThE WORlD BAnk GROUPSInDICATIVE PROGRAM (2010-2015)
Strategic Approac & CPS Piars
58. Te overa objective o te WBGs edig ad
o-edig program or te ew CPS period is toep Urugua cosoidate ecoomic reorms, ad
eace socia outcomes, ad tereb get coser
to OECD stadards. First o all, this means to build
on the positive experience o collaboration betweenthe country and the Bank during the previous CAS
period. But the new CPS will be even more tailored
to the specic needs o this advanced middle-income country, in order to contribute eectively to
implementing Uruguays reorm agenda.
59. I tis sese, te ew Govermet as sowa ee iterest i usig te Bas support i a
strategic wa, sitig to a partersip tat adds
importat vaue to te Govermets ow program
ad tat stresses te roe o owedge ad ow-
ow trasers. In line with this, the government
counterparts expressed a desire to engage in a newprogrammatic DPL series and move to investment
operations that have expanded institutional reorm
content and ocus increasingly on results. It has alsosought a more demand-based system or identiying
and delivering o analytical and technical assistance.
60. Te mai strategic orietatio o te CPS
is aiged wit te Govermets priorities, as
preseted i te previous capter. The 2010-2015
CPS ocuses on the ollowing our pillars: (i) Reducing
Macroeconomic Vulnerability & StrengtheningPublic Sector Administration; (ii) Competitiveness &
Figure 2: Uruguay Investment PortfolioDiversification
EnergyUS$ 6.87M
2%
EducationUS$ 71.9M24%
TransportUS$ 70M24%
Agriculture &EnvironmentUS$ 37M12%
InnovationUS$ 26M9%
InstitutionalStrengtheningUS$ 28.1M (*)9%
WaterUS$ 34M11%
HealthUS$ 25.3M9%
(*) Includes stated modernization under the institutionalStrengthening TAL (US$ 12.1M) and modernization of watercompany under the OSE System Modernization and RehabilitationProject (US$16M)
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Inrastructure; (iii) Agriculture, Climate Change, andEnvironment; and (iv) Increasing Social Inclusion &
Equity.
61. Refectig te essos o te CASCR, te
strateg wi be fexibe to accommodate teGovermets eed to adjust course i te evet
o uoresee domestic or extera deveopmets.
Indicative support or this strategy is proposed toinclude a series o two DPLs totaling US$200 million
(late 2010 and late 2011), investment lending totalingapproximately US$500 million subject to IBRDs
overall lending capacity, and a well-ocused and
demand-driven AAA program. This lending mix mightbe adjusted to prepare or or respond to domestic or
external shocks. This being said, in the likely event
o a urther strengthening o Uruguays position ininternational nancial markets, and i the Government
maintains its keen interest in a more strategic andsystematic orientation on knowledge services, there
might be a declining emphasis on lending in the
medium-term.
62. Beod te eed or cotiuit i existig areaso support to maitai mometum o reorms,
te Govermets guidig pricipes or seectigew edig activities is iovatio ad ocus
o resuts. The Government intends to use Bank
resources or adding important value to interventionswith strong expected development impact, contributing
best practice technical know-how in the respective
areas and helping build strong institutional capacity,in particular in reorm program design and managing
or results. As a consequence, the Government is
interested in introducing results-based and sector-wide lending instruments or new operations like the
planned transport loan and possibly or a new loan inthe social sectors. This is expected to consolidate the
Banks role in most areas where it is already active,
such as education, health or innovation, and at the
IV. Urugua - Word Ba Partersip [ 35 ]
Tabe 2: Idicative edig program or 2010-2015
Lending (US$ millions) by Calendar Year
Loans 2010 2011 2012-2015Loan amts TBD
Development Policy Lending (DPL) 100 100
Investment Lending 120 380
Improvement o Primary Education 40
Integrated Agricultural Devt. & Natural Resources Management 40
Transport Inrastructure Modernization
Innovation and Competitiveness
Drinking Water Systems (OSE) 40
Health Sector SupportIBTAL (additional nancing)
Output-based Loan or Social Sectors and Human Opportunities
Sustainable Industrial Development
Energy Sector Strengthening
Energy Eciency
TOTAL 100 220 380
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IV. Urugua - Word Ba Partersip [ 37 ]
budget, as well as or the monitoring and evaluationeorts to continually strengthen the budget process.
In addition, the Bank program will support the
adoption o a new computerized system o budget
management and improvements in the statisticalsystem. Since the public sector reorm agenda is stillto be dened in detail and the IADB is also involved in
several reorms, other areas or Bank support will be
dened later, but these may include: strengtheningo controls in tax collection agencies, support or
an agency responsible or regulating public sector
procurement and the reorms to the civil service.
Pillar 2: Improving Competitiveness &Infrastructure
68. Te Govermet sees to stregte
competitiveess troug icreased coverage ad
better uait o irastructure ad estabismet
o a more coducive busiess eviromet.
Beyond the strong demand or Bank expertise inthe area o public-private partnerships, with PPIAF-
nanced activities already launched, sector dialogue
has shaped a proposed inrastructure programunder the CPS to achieve: (i) improvement o the
Tabe 3: AAA program or Fy11 ad Fy12
Activity Description
Reorm o housing policies Consider policy options to increase the supply o social housing (ocusedon creating incentives or sel-initiative)
Strengthening o Plan Ceibal by means o
international best practices
Support exchange o experiences with similar programs in other
countries, and study pending challenges.
Impact assessment o social polices Analyze the impact o social policies, in particular amily transer programs
on social indicators.
Review o public expenditures on the
social sectors
Evaluate the eectiveness and eciency o public expenditure, particularly
in the social sectors and key social programs.
Monitoring social policy results with the
Human Opportunity Index
Develop an internal mechanism to monitor and evaluate the impact o
social policies on human opportunities (NLTA)
Health reorm Complete analytic work and technical assistance (NLTA)Mitigation and adaptation to climate
change eects in the rural sector
Diagnosis o challenges and identication o adaptation and mitigation o
climate change eects in the rural sector
Integration o public policies on risk
management or threats o water origin
Complete technical assistance to support DINASA's institutional and
technical strengthening throughout nancial and technical assistance in a
specic eld.
Further strengthening business and
investment climate
Assessment o reorm priorities or urther strengthening the legal,
regulatory and administrative ramework or business and investment
activities.
South-South exchanges Exchange o experiences and knowledge with other developing countries,
with initial ocus on strengthening institutional capacity on economic,
debt and public nance management.
Note: The exact content o the AAA and details like method o cooperationstudy, knowledge transer or technical assistancewill bedened jointly in a ormal agreement to be signed on this new joint AAA program modality.
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The proposed DPL supports the implementation o reorms which have been identied by the new Government aspriorities or obtaining Bank support. The DPL series supports implementation o the Governments agenda in threemain areas: (i) public sector management, (ii) competitiveness, and (iii) social inclusion. In particular, the maindevelopment objectives o the new loan are to strengthen the eciency o the public administration while promotingmacroeconomic stability, improve competitiveness through measures such as, acilitating trade, strengthening the
business environment and development o nancial markets. It also seeks to improve social inclusion throughmeasures targeted at enhancing the equity and eciency o health, education and social protection systems.
The program is expected to consist o a series o two loans, each amounting to US$100 million. The approach takenby this loan series refects the fexibility requested by the Government to best address evolving challenges. Theproposed loan also targets the consolidation o reorms supported by the Programmatic Reorm ImplementationDevelopment Policy Loan (PRIDPL) series (approved May 2007), and bolsters Government eorts in other areaswere not supported by the PRIDPL series. Specically, the loan recognizes recent achievements in public sectormanagement, business climate and social service delivery (prior actions or DPL-I). The indicative triggers or DPL-I Irefect broad policy areas o support, anchoring the new Governments reorm agenda through 2011.
[ 38 ] IV. Urugua - Word Ba Partersip
Box 3: Te First Programmatic Pubic Sector Competitiveess ad Socia IcusioDeveopmet Poic loa (DPl)
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IV. Urugua - Word Ba Partersip [ 39 ]
condition o key land transport inrastructure; (ii)eciency improvements in Obras Sanitarias del
Estado (OSE) to ree up resources or additionalinvestment; (iii) improvements in the quality o
the electricity supply by expanding, upgrading and
rehabilitating the transmission and distributionnetworks; (iv) energy eciency improvements
to slow the growth o electricity demand; and (v)
improved international trade logistics support.Among the means o support are an ongoing Energy
Eciency GEF Grant, an ongoing OSE Modernizationand Systems Rehabilitation project, a proposed
Transport Inrastructure Modernization Loan, and
possibly an Energy Sector Strengthening Project (seeTable 2). Inrastructure and SME nancing are prime
candidates not only or local currency nancing, but
also or customized nancial solutions conducive toreducing nancial vulnerabilities and providing access
to competitively priced, fexible products with longmaturities. IBRD and IFC have a lengthy track record
in such types o operations globally, which could be
applied to the specic case and needs o Uruguay.
69. Te WBGs cosiderabe experiece i providig
assistace o acia marets ad busiess
cimate-reated caeges trougout te regio
coud prove ver epu i urter stregteig
te busiess cimate i Urugua. The Bank hasalready deployed a series o lending and non-lending
instruments in Uruguay to tackle these ronts andpreliminary eedback rom these activities is promising.
Thus, a range o WBG support is proposed to urtherstrengthen the business climate in the ollowing ways:
(i) promotion o the new one-stop shop or rm
creation; (ii) support GoU actions to acilitate increasedavailability o credit to the private sector; (iii) support
GoU eorts to increase market capitalization, and (iv)
strengthen GoU actions to improve inrastructure. In
addition to the DPLs, the achievement o these outcomeswill be supported through AAA on competitiveness andcapital markets, an investment climate assessment, and
support rom the IFC. Dialogue with the Government
includes the potential or IFC to provide longer-termdollar nancing to the private sector through onlending
acilities channeled through local commercial bank
partners.
Pillar 3: Protecting the Environment,Mitigating the Effects of Climate Change,and