FILE COPY. Document of The World Bank FOR OFFICIAL USE ONLY. Public Disclosure Authorized. Report No. P PA. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMIENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR AN INDUSTRIAL CREDIT AND REGIONAL DEVELOPMENT PROJECT May 16, 1980 FILE COPY Report No. P PA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS US$ US$ ,000 US$7.94 1,000,000 US$7,937 GLOSSARY OF PRINCIPAL ABBREVIATIONS USED IN THIS REPORT BNF - National Development Bank COMDESA - Banco de Desarrollo del Paraguay S.A. FED - Special Development Fund KfW - Kreditanstalt fuer Wiederaufbau IDB - Inter-American Development Bank ILO - International Labor Organization SNPP - National Vocational Training Service UNDP - United Nations Development Programme GOVERNMENT OF PARAGUAY FISCAL YEAR January 1 - December 31

3 FOR OFFICIAL USE ONLY PARAGUAY INDUSTRIAL CREDIT AND REGIONAL DEVELOPMENT PROJECT Loan and Project Summary BORROWER BENEFICIARIES AMOUNT TERMS RELENDING TERMS Republic of Paraguay Government would on-lend the Bank Loan proceeds to (a) National Development Bank (BNF); and (b) Central Bank (through its Special Development Fund-FED). Central Bank would relend their part of the Loan proceeds to financial intermediaries--commercial banks and a private development finance company. The ultimate beneficiaries would be productive industrial, agroindustrial, tourism and industrial estate subprojects. US$31.0 million equivalent. Repayable in 17 years, including four years of grace, at 8.25% per annum. Government would relend at an annual interest rate of 6 percentage points for BNF and 7 percentage points for FED below the final rate for 17 years including four years of grace. The Central Bank, through commercial banks and a private development finance company, and BNF in turn, would relend the Loan proceeds to sub-borrowers at an effective rate of interest of at least 18% per annum, yielding a final cost to sub-borrowers of 19% and with terms of up to 12 years, including a grace period of up to three years. PROJECT DESCRIPTION: The main objectives of the project would be to promote the efficient and regionally balanced growth of industry in Paraguay, alleviate the scarcity of long-term funds to finance such growth, and improve financial intermediation for industrial investment by: (i) assisting in the development of productive industrial, agroindustrial, industrial estate and tourism subprojects, particularly of small and medium-scale enterprises; (ii) continuing the efforts initiated under the First Industrial Credit Project (Loan 1419-PA) to strengthen BNF and expand financial intermediation in support of industry by lending to the commercial banking system and a privately-owned development finance company through FED; (iii) supporting the Government's attempt to foster the regional growth of industry and tourism development in the eastern part of the country through a more effective role of BNF and FED, and the establisment of an industrial estate in Encarnacion; (iv) providing key extension services to small-scale entrepreneurs through the National Vocational This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 - ii - Training Service (SNPP); and (v) supporting the Government's actions leading to improvements in the interest rate structure and controls of financial intermediaries. BENEFITS RISK The project is expected to have a significant development impact, through industrial growth, regional development, foreign exchange earnings and savings, employment generation and institutional improvements. : The project does not involve any unusual risks. However, because uncertainty does exist about the degree to which BNF can rapidly upgrade its performance; and because some of the institutional arrangements established under the project would be both new and untried, some initial delays in sub-loan processing may occur. To minimize delays in project implementation, Bank supervision of the project would be more intensive during the first year. ESTIMATED COST Components Local Foreign Total US$ Million BNF subprojects FED subprojects Unallocated Technical Assistance to BNF Technical Assistance to SNPP TOTAL FINANCING PLAN Local Foreign Total Bank Project Sponsors BNF FED Banks Unallocated TOTAL ESTIMATED DISBURSEMENT Annual Cumulative ECONOMIC RATE OF RETURN Not applicable. APPRAISAL REPORT Report No. 2888a-PA, May 16, 1980

5 INTERNATIONAIL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR AN INDUSTRIAL CREDIT AND REGIONAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed Loan to the Republic of Paraguay for the equivalent of US$31.0 million to assist in financing the Industrial Credit and Regional Development Project. The Loan would be repaid on the basis of a fixed amortization schedule of equal installments and have a term of 17 years including 4 years of grace, at an annual interest rate of 8.25%. Part of the proceeds of the Loan would be relent to the Central Bank and the National Development Bank (BNF), at an interest rate plus a commission which would fluctuate according to the final rate to the sub-borrowers. The Central Bank (through commercial banks and a private development finance company) and BNF, in turn, would relend the loan proceeds to sub-borrowers at an effective rate of interest of 18% per annum (which, on the basis of advance payments of commissions, taxes and interests, would entail a cost to the final sub-borrower of 19%), and with terms of up to 12 years, including a grace period of up to 3 years. The Central Bank would retain a spread of 2%, the commercial banks and the development finance company 5%, and BNF 6%. The adequacy of the final interest rate to the subborrowers would be reviewed semi-annually in order to ensure that it remains positive during the life of the sub-loans. The remainder of the Loan proceeds would help finance technical assistance to the National Vocational Training Service. The Government would bear the foreign exchange risk and cover the commitment fee. PART I - THE ECONOMY 1/ 2. An economic mission visited Paraguay in October 1978 and the updating economic report, covering short- and medium-term developments, has been distributed to the Executive Directors ("Economic Memorandum on Paraguay" (2461-PA), in May 1979). A summary of Country Basic Data is attached as Annex I. Economic Performance 3. Paraguay is endowed with vast areas of unutilized lands well-suited for agriculture or livestock, and has substantial hydroelectric potential. Despite these natural resources, progress has been held back by weak public institutions in the development area, remoteness from foreign markets, scattered population, and a weak transport network. For many decades, per capita income and employment grew slowly and emigration served as an outlet for unemployed and underemployed manpower. More recently, however, the economy has been growing rapidly and many Paraguayans who had emigrated to neighboring countries have returned, responding to the expanded employment opportunities associated with the construction of the Itaipu dam. Furthermore, 1/ Except for some updating on economic developments in , paragraphs 3-13 are substantially the same as the ones contained in the President's Report for the Second Preinvestment Studies Project (Report P-2612-PA of November 20, 1979).

6 -2- the expansion of the agricultural frontier has encouraged the immigration of farmers from abroad. Nevertheless, the country's population density remains very low in relation to agricultural land (2.8 ha of cultivable land per capita). 4. The economic potential of the country began to be more fully realized during the 1970's. With the rapid expansion of land under cultivation, and the beginning of the exploitation of the enormous hydroelectric potential of the Parana River along the country's border with Brazil and Argentina, Paraguay's economy is now in the midst of a rapid transformation. A rise in external demand and favorable prices were instrumental in accelerating agricultural growth, while exploitation of the country's hydropower potential has been facilitated by treaties signed with Brazil and Argentina to form two binational authorities for the construction and operation of two or more hydroelectric plants aggregating at least 17,000 MW. Construction of the Itaipu dam with Brazil, the largest ever built, is on schedule, and the Yacyreta dam with Argentina, supported by Bank financing, is about to begin. The rapid growth of agriculture continued unabated in in spite of unfavorable weather that affected successively soybeans and cotton production, and, together with the reactivation of agroindustrial activity, has resulted in acceleration of the GDP growth rate to over 9%. in (as compared to 6% in ). These developments have been accompanied by increased foreign capital inflows and a notable expansion of investment. 5. The effective supply response of Paraguayan agriculture has been assisted by improvements in transport and implementation of a comprehensive set of programs designed to increase and diversify agricultural exports. The agricultural growth of recent years has brought about an improvement in the real incomes of the rural population, which comprises about three-fifths of the total. A significant share of production of tobacco, cotton, and soybeans, which account for most of the recent expansion, is grown by small farmers who have received land under Government and privately sponsored colonization programs. Roughly 25% of agricultural workers have benefitted from these land settlemetit efforts. Moreover, recently, rural wages have increased sharply in sume areas where demand for agricultural labor has exceeded supply. Thus, the benefits of agricultural progress have been fairly widely shared. Per capita income grew at 5.3% per annum during compared to the 1.2% averaged during the previous 30 years. Growth in per capita incomes has been accompanied by other improvements in the standard of living, as life expectancy and literacy have increased, and child mortality has declined. Nutritional levels are comparable to those found in countries with higher per capita incomes. Furthermore, in recent years, the Government has started to carry out a series of programs aimed at extending social and other back-up services, financial support, and technical assistance to existing and new land settlements. These programs should help in spreading the benefits of growth even more effectively among the poorer segments of the population.

7 The high level of aggregate demand has affected the relative price stability that long characterized the economy. Since 1976, the rapid increase in the money supply generated by the large capital inflows associated with construction of the Itaipu dam and the buoyant domestic demand had resulted in the inflation rate increasing moderately from 4.6% in 1976 to 10.6% in In 1979, however, inflation accelerated to 35.7%. Contributing to this result were the increases in oil prices, delayed readjustments in some prices such as urban transport tariffs, unfavorable weather that affected food crops, increases in beef prices (which weigh heavily in the price index) and the inflationary situation in neighboring Brazil and Argentina. The acceleration of inflation has occurred in spite of contractionary fiscal policies, whose impact was limited by the relatively small role of the Government in the economy. This year the Central Bank also has intensified its contractionary monetary policies by extending control over previously unregulated financial intermediaries and by reducing distortions in interest rates that were affecting the functioning of the financial system. Although some of the factors that contributed to the results in 1978 are not likely to recur with equal intensity, and thus inflation is expected to slow down, it is unlike!y that it will be reduced to the pre-1978 levels, given the magnitude of the external factors and the economy's greater integration with the rest of the world. In the first quarter of 1980 prices rose by 2.3% over the preceding quarter, as against 8.1% in the first quarter of The buoyant economy and measures introduced to improve the efficiency of tax administration have reversed the declining trend in the ratio of Central Government revenues to GDP during , raising the ratio from 9.0% in 1976 to over 10% in The Government continued to maintain a tight rein on current expenditures, which have remained at about 7% of GDP during the last five years. Thus, Central Government savings increased during 1977/79. Several large projects initiated during were completed so that public sector investment declined from its peak of 6.4% of GDP in 1976 to about 5% in Net external financing exceeded the reduced total financing requirements allowing the Government to reduce its debt outstanding to the monetary authorities. 8. High rates of economic growth in Paraguay have resulted in registered imports in current prices increasing at an average annual rate of 25% between 1975 and Thus despite exports growing at an average annual rate of 16.8% during , the current account deficit has tended to widen. Although trading partner data suggest that these registered figures may be underestimated on the average by as much as 50%, there is no question that increased public and private capital inflows, mainly associated with the construction of the hydroelectric project, have more than offset the current account deficit. Foreign exchange reserves have thus increased from US$163 million at the end of 1976 to about US$605 million by December Economic Prospects 9. Given the availability of still abundant land resources, a favorable investment climate, a relatively favorable price outlook for major agricultural exports and the construction of the hydroelectric projects, Paraguay's prospects as regards the balance of payments and growth over the foreseeable future are good.

8 The country's development strategy aims at sustaining the growth momentum of agriculture and agroindustry, giving high priority to land settlement and to the provision of transport infrastructure to facilitate the flow of goods to domestic and foreign markets. The Government is carrying out a program to assist farm settlers in increasing their productivity, and is expanding credit for agriculture and agroindustries. In the case of small farmers, the emphasis is on the consolidation of existing colonization schemes and the establishment of additional ones. Through foreign private investment and credit programs, the Government hopes to encourage the concurrent development of industries, particularly those with high value-added based on domestic primary production. 11. The authorities are aware that the on-going boom in private investment and the prospect of continued high rates of GDP growth will call for greater public investment in supporting infrastructure as well as increased expenditure for education, health, rural development and other developmentrelated services. The needed acceleration of public capital formation will require new tax measures, pending substantial transfers from power export earnings to the Central Government, to ensure the generation of the necessary additional internal resources. At the same time, higher current expenditures in the public sector will be required to improve effectiveness and broaden the scope of public action in the social sectors. 12. The level and pattern of public investment that could be achieved during the next five years will also depend on the technical and administrative capacity of the public sector to prepare and implement projects. Although improvements have been made in the planning mechanism in recent years, a bigger public sector investment program would require a large number of well-prepared projects. There is a need, therefore, for upgrading the technical aspects of project identification and preparation, and for devotinag increased attention to enhancing the administrative capacity of public sector institutions. A broader investment effort will require streamlining and decentralizing the decision-making process. Moreover, salaries of scarce professional staff need to be adjusted upwards to compete effectively with the increased demands of the private sector and the binational power companies for their services. Given the institutional difficulties and the urgent need for greater public investment to support higher levels of private economic activity, substantial external technical assistance will be needed to bolster the institution-building process. 13. With the expected expansion of agricultural acreage and continued construction of the hydroelectric projects, the economy could grow at an average annual rate of about 8% during This rate is lower than the average 10% of and is justified by the decline of construction activity on Itaipu after 1981, restrictive policies to avoid acceleration of inflation and the higher costs of imports. Because of agricultural growth and favorable international prospects for cotton and soybeans, real exports are projected to grow at 11% a year during this period. Imports are projected to grow at a slower rate than in the past. The above trade projections combined with steadily increasing net factor payments on public and private account would

9 - 5 - result in a widening of the current account deficit from an average of US$300 million during to an annual average of US$430 million in Private sector borrowing and capital inflow related to construction of the hydroelectric projects are expected to provide a substantial part of the gross capital requirements and the rest would be borrowed by the public sector. Bilateral and multilateral agencies are projected to supply a smaller share of external capital requirements than they have historically. Private financial institutions and suppliers' credits can be expected to provide the rest. As Itaipu related capital inflows decrease, public sector borrowing is projected to rise from an average of US$100 million during to US$200 million in Given the projected export performance, Paraguay is expected to maintain its current low debt service ratio and its creditworthiness for the amounts of external capital required to achieve the projected output growth rates. PART II - BANK GROUP OPERATIONS IN PARAGUAY 14. Paraguay has received US$248.1 million (net of cancellations) of Bank loans and IDA credits. Of this amount, US$198.3 million has been in the form of 17 Bank loans, anid US$49.8 million for eight IDA credits. As of February 29, 1980, the Bank and IDA held US$236.7 million, including US$139.7 million undisbursed. The amount held by the Bank and IDA as of February 29, 1980, was equivalent to about 20% of Paraguay's external debt, with a blend of about 24% IDA and 76% IBRD. The service on this debt amounted to 12.6% of total debt service in 1978 or about 1.2% of exports of goods and non-factor services. On a sectoral basis, Bank and IDA assistance to Paraguay has been 42% for transportation, 39% for agriculture, 9% for education, 4% for industry, 3% for water supply, and 3% for preinvestment studies in various sectors. Execution of these projects has, on the whole, been satisfactory. 15. IFC has had one operation in Paraguay. In 1974, it financed a wood processing project. Its participation, a US$5.4 million operation with FINAP, S.A., consisted of a US$4.0 million loan, an equity participation of US$1.0 million, and a contingent loan for the financing of cost overruns of US$0.4 million. The project has experienced critical financial and managerial problems, and efforts to restructure it have not succeeded. IFC is in the process of divesting itself from FINAP. Legal proceedings have been initiated against FINAP by the National Development Bank. Annex II contains a summary of Bank loans, IDA credits and the IFC investment as of February 29, 1980, and notes on the execution of ongoing projects. 16. Bank Group lending to Paraguay in FY80 consisted of the US$5.0 million loan for a Second Preinvestment Studies Project. The proposed project is the last operation envisioned for this fiscal year. Preparation work is underway on projects in: ports and inland waterways, rural development, area development (including watershed protection and rural development), highways, and rural primary and vocational education. 17. In lending to Paraguay, the Bank Group tries to assist the Government in achieving four major objectives, which are interdependent and complementary. One objective is to spread the benefits of growth more widely

10 - 6 - than before and, more particularly, to attack directly the problem of rural poverty. A second goal is to help Paraguay expand output, including exports, by supporting projects that directly or indirectly make large contributions to production and employment. A third objective is to support programs that will bring about improvements in the management of the economy and, particularly, that will help to strengthen public institutions and financial intermediaries. A fourth goal is to help the public sector to increase its investments in support to the productive sectors and to expand perceptibly into the social sectors. 18. While the last objective primarily influences the magnitude of the Bank Group's program in Paraguay, the other three jointly determine its composition. Naturally, many operations serve more than one of the ends listed and may, moreover, support more specific Government objectives. Thus, Bank Group assistance for education, rural development and rural water supply is designed to help ease the rural poverty problem and to improve the living standards of the lowest 40% of the income distribution scale. Similarly, Bank Group lending for industry, agricultural development and livestock is aimed at increasing value added and exports of agricultural products, and at expanding marketing outlets, particularly for small farmers. Lastly, loans in the transport sector are designed to help improve institutional structures and policies of the sector, which play a vital role In supporting the production activities of the agricultural and industrial sectors. As agriculture constitutes the backbone of the Paraguayan economy, these operations are designed to support either directly or indirectly the development of that sector, by underpinning in particular the Government's efforts aimed at extending social and other backup services, financial support and technical assistance to existing and new agricultural settlements. Furthermore, in view of the increasing development potential of the eastern region (as a result of the expanding agricultural frontier and the impact of the construction of the large hydroelectric projects)--and the need to assure maximum possible results, the Bank lending program for Paraguay is to place increased emphasis on projects in that region. Preinvestment projects are aimed at supporting programs that help overcome institutional constraints, in particular in planning, economic management, and project preparation and execution. The proposed project, aside from providing financing for industry, agro-industry, and tourism; fits the Bank's special emphasis on strengthening public institutions and financial intermediaries such as BNF and the FED and in the development efforts in the eastern region of the country referred to above. PART III - THE INDUSTRIAL SECTOR AND FINANCIAL SYSTEM Recent Trends and Prospects 19. The industrial sector accounts for about 16% of GDP and employs 14% of the labor force. The sector is marked by the predominance of small enterprises, most of which employ less than ten workers. Between industrial value added grew at an average annual rate of 7.7%, initially due to production oriented towards the external markets, and later to the construction of

11 -7 - the Itaipu dam and the growth of local demand resulting from increased disposable income. However, industrial exports (mainly processed beef, wood products and vegetable oils), which had accounted for three fourths of the total value of exports at the beginning of the decade dropped to about to a third in 1978, due to a virtual tenfold increase in agricultural exports, and the closure of the EEC market to processed beef exports and of the Argentine market to sawn wood exports. The emergence of processing activities for crops whose production has grown responding to rapidly increasing external prices (i.e. soybeans and cotton) has counteracted part of the fall in the traditional industrial exports. 20. In line with recent trends, the subsectors with the greatest prospects for future expansion are those that are linked to (i) large-scale development projects within Paraguay associated with construction activities; (ii) rising consumer demand resulting from larger disposable income, such as beverages and textiles; and (iii) processing of products associated with the rapid expansion of agricultural production (vegetable oil and cake) and growing export demand. Industrial Policy 21. The Government's Development Plan establishes as the sector's central objectives: (i) the acceleration of industrial output and employment growth; (ii) increasing the productivity of industry; (iii) improving the regional distribution of enterprises; (iv) promotion of export-oriented industry, particularly of agroindustry; and (v) development of new industries based on utilization of local raw materials. The Government aims at achieving these objectives largely through the granting of fiscal incentives, credit, and the provision of infrastructure and public services. Special Industrial Promotion Laws enacted in 1970 and 1976 established the means to provide fiscal incentives to industries that export or are based on local raw materials, and those that substitute for imports. These criteria have been applied in such a manner that most investments have qualified for some benefits under the law. Accordingly, following the enactment of the 1970 Industrial Promotion Law, the investment climate for private investors showed a marked improvement. This resulted in an annual average increase in fixed industrial investment of about 15% in real terms during , compared to the 4% during Although Paraguay's nominal tariffs appear high, actual protection is low for most products, in particular consumer items, since there is substantial nonregistered trade across Paraguay's long borders. Effective protection may be negative for many Paraguayan industries, which have to pay duties on imported inputs, without enjoying any effective tariff protection on their finished products. This de facto openness has discouraged the creation of inefficient import-substitution industries, favoring the establishment of relatively efficient industries based on the country's comparative advantages.

12 -8- Regional Development Policy 23. In Eastern Paraguay, the emergence of substantial economic opportunities--due to the rapid expansion of the agricultural frontier and the construction of the large Itaipu and Yacyreta hydroelectric projects on the Parana River--has intensified previously existing flows of internal and external migration, broadened the regional economy's resource base, and brought about a closer integration of the area with the rest of Paraguay, as well as with neighboring Brazil and Argentina. The Government is attempting, with Bank assistance, to establish a development strategy for the region, which calls for an integrated approach through investments that are complementary in nature. Bank assistance to the area involves rural development projects, education and training projects, a major highway project linking the two main towns, Encarnacion and Ciudad Presidente Stroessner, and providing a comprehensive network of feeder roads to the area. 24. The comparative advantage for each of the above-mentioned towns is quite different. In Ciudad Presidente Stroessner substantial industrial investment has already taken place, in part in connection with the Itaipu construction activities. Although investments associated with the hydroelectric project are expected to decline, since the construction phase is now well advanced, other industries are likely to take advantage of the strategic location of the city near the Brazilian market, the fertile agricultural hinterland in Paraguay, the relatively ample infrastructure and the growing market in the town itself. No major physical constraints are apparent to prevent further expansion of the industrial base in Ciudad Presidente Stroessner. In contrast, Encarnacion is located in the crossroads between the sites of two major dams to be developed in the future: Yacyreta whose construction is now starting, and the proposed Corpus hydroelectric project. In addition to industrial activity associated with these works, industrial investment in this area is expected to take place as a consequence of the development of the city as a major port, once the Yacyreta dam is erected. Furthermore, because part of the city will be flooded, 68 industrial plants will have to be relocated in an industrial zone, in which an industrial estate is planned. Industrialists whose sites are being flooded have the choice either to be relocated free of charge or to obtain compensation for their present assets. Feasibility studies are being carried out with a view to establish sound planning, building and management for the estate. If project financing is also offered, many firms should find the estate more attractive and economical than alternate locations. Additional demand will assuredly appear as existing enterprises expand or new enterprises decide to locate there. 25. Both cities are located at important points of contact with neighboring countries, where there is, or will be, easy access across international frontiers, and where considerable potential for the development of tourism industry exists. Iguazu Falls is an important international tourism destination, and with the completion of construction of the Itaipu dam, the tourism potential of this area will increase considerably. In addition, much regional tourism involves purchases of Paraguayan consumer goods (such as textiles, clothing, shoes, leather goods, and artisan wood products), and therefore the development of local tourism is linked with local production of consumer goods--much of it in small-scale enterprises--in Ciudad Presidente Stroessner and Encarnacion.

13 - 9- The Industrial Financial System 26. A number of institutions provide financing to industry in Paraguay. The Central Bank, through a two-tier system involving the Special Development Fund (FED) and the commercial banking system as financial intermediaries, has executed two USAID-supported programs (involving loan rediscount and guarantee facilities, respectively), which together cover the provision of credit and technical assistance for rural and small-scale productive enterprises. There are 17 privately owned commercial banks (mostly foreign owned); their credit operations are financed mainly from deposits from the public and to some extent by rediscounting with the Central Bank. As of December 31, 1979, they accounted for one-half of total industrial lending. The National Development Bank (BNF), a state-owned development bank established in 1961, consists of three operating departments--agricultural, Development, and Commercial--each with independent sources of funds and specific operating guidelines, and an extensive branch network. BNF is the single largest financial intermediary in Paraguay, holding one-fourth of total industrial lending. There is, in addition, COMDESA, a small private development finance company, whose impact has been limited. 27. Industrial investment in the 1970s was financed by equity and retained earnings (55%) and credit (45%). Suppliers' credits account for a growing portion of the latter, reaching almost one-fourth of total industrial credit in recent years as commercial banks' liquidity tightened. Until , when the Bank's First Industrial Credit Project was approved and the FED was established, long-term financing for industry in Plaraguay had been provided only by IDB and KfW, through BNF. 28. Interest rates and commissions for savers and borrowers are regulated by the Government. Commercial banks have been required to allocate 50% of their loan portfolio to productive purposes (i.e. industrial and agricultural ventures), for which ceilings on interest rates and commissions were set. The remaining half of the commercial banks' portfolio may be lent to sectors and at effective rates reflecting market conditions. Up until late 1978, the country's interest rate structure was, by and large, consistent with efficient resource allocation. Interest rates to savers have kept up with inflation, and effective rates to borrowers have been positive in real terms. As a result, banking system liabilities to the private sector increased from a level of 19% of GDP in 1970 to 25% in The situation changed markedly as a result of the rapid surge of inflation in late 1978 and throughout Savings started to shift to unregulated financial intermediaries, savings and loan associations and small, general purpose, financing entities. Participation of finance companies and savings and loan associations in credit to the private sector increased from 12% of total credit in 1976 to 18% in As a result, commercial banks have been unable to tap additional savings and a growing portion of lending has gone to consumer durables and residential construction for medium- and high-income earners. To overcome the problem, the Central Bank issued new directives in late March 1980 to raise interest rates on deposits by 4 points to 11% and rates to borrowers for productive purposes that imply an effective

14 cost between 18.9 and 20% to borrowers (including advanced collection of interest, commission and taxes). In addition, the Central Bank has extended its control towards the hitherto unregulated financial intermediaries through marginal reserve requirements. The adequacy of the new measures will be monitored through targets of savings mobilization of the Central Bank's monetary program. Assurances have been obtained that interest rates and other charges for productive purposes will be in line with rates charged under the proposed project (Section 4.02 of the Loan Agreement). Investment and Financing Requirements 30. Based upon evidence of strong demand for long-term industrial financing from firms and commercial banks, it is expected that the industrial sector will grow by at least 8% per year over , and that the demand for industrial investment could well range above US$100 million annually. About one-fourth of these investments would involve large-scale projects that would be individually financed and would involve foreign investors, in particular from Brazil or Argentina. Consequently, of a total of US$400 million in investment financing required during , about US$300 million would represent the total cost of projects which would need to be partially financed through lines of credit. It is expected that about one half of this amount would be financed by investors' own funds, and that loan financing would be sought for the balance. On this basis, it seems reasonable to expect that additional resources of, say, US$140 million for industrial investment will be required during To finance this level of investment, however, it will be necessary to mobilize a larger flow of internal and external resources, a difficult task in a country where the capital market is not yet well developed and where the main source of development credit, the BNF, still faces operational constraints. Meeting this need would thus require strong support from external lenders, such as the Bank, IDB (a US$10 million IDB loan to BNF is expected to become effective by mid-1980) and KfW, and the strengthening of the system for financial intermediation. The proposed Bank loan would, over the disbursement period, finance about 20% of sector's investment requirements. The remainder would be financed through medium- and long-term foreign loans (provided by agencies such as IDB and KfW), and by renewal of short- and medium-term loan made by commercial banks and suppliers' credits. The First Industrial Credit Project 31. The First Industrial Credit Project (Loan 1419-PA, 1977), had a twofold purpose: (i) supporting industrial growth by providing industrial financing for investment purposes; and (ii) pursuing an institutional rehabilitation strategy for BNF. To date of the US$10 million loan, US$5.5 million have been disbursed and US$8.5 million committed. The remaining US$1.5 million are expected to be committed prior to the effectiveness of the proposed loan. The institutional rehabilitation strategy for BNF had two overlapping phases: the first one consisted of ensuring the financial viability of BNF through improving its decision-making and financial structure. This involved creation of a new financial department, establishment of a committee to oversee portfolio quality, setting up a loan collection office and the establishing of performance criteria that BNF had to meet to improve its equity base, arrears, financial spread, administrative costs, and liquidity. The second phase,

15 which is still underway, is focusing on improvements of BNF's data base and its planning and decision-making processes. Major components of this program include upgrading accounting procedures and electronic data processing systems, setting up a telecommunications network linking the branch system, establishing a planning and budgeting capability and reviewing staffing and personnel management policies. 32. Under the first project, BNF was successful in substantially improving its financial condition, systematizing its procedures for loan supervision and collection, particularly of loans in arrears, and upgrading its institutional capability to handle the many programs for which it is responsible. By reducing staff by almost about 20%, increasing share capital by 50%, and by revising its lending rates in accordance with policies agreed upon under the project, BNF was able to cut costs significantly, reduce its extremely high debt/equity ratio and thus improve its leverage, its liquidity, its profitability (recording a profit in 1977 after 12 consecutive years of losses) and reduce its operating costs from 6.4% in 1976 to 5.5% of its outstanding portfolio in 1978, which was in line with the target set under the project. 33. Nevertheless, BNF was not able to sustain collection efforts to maintain arrears below the 22% of total portfolio achieved in 1976, as against a target of 10% agreed for 1979 onwards. These figures, however, do not adequately reflect what was achieved under the first loan since: (i) the effect of actual reductions in arrears was largely cancelled by improved reporting, which resulted in increased arrears being listed in BNF's accounts; (ii) agricultural arrears are closely tied to the effect of changes in environmental factors on crop production, thus exposing the institution to the effects of recent crop failures due to recent unfavorable climatic conditions; (iii) the new system for debt collection adopted by BNF under the first operation is not yet fully implemented; and (iv) further work is required to better understand and manage agricultural arrears. 34. In all, the industrial development objectives have largely been met although the institution-building goals have been only partially successful to date. Improvements are still needed in the quality of BNF's portfolio, staff quality, the large and costly branch network, and the difficulty it continues to experience in carrying out its multiple roles in financing agriculture, livestock, industry, tourism and commerce. These problems are dealt with under the proposed project. PART IV - THE PROJECT 35. A report entitled: "Staff Appraisal Report for an Industrial Credit and Regional Development Project" (No. 2888a-PA, May 16, 1980) is being distributed separately. A Loan and Project Summary is placed at the front of this report, and a Supplementary Project Data Sheet is appended as Annex III. The project was prepared between August and September, 1979, and was appraised in November Negotiations were held in Washington in May, 1980; the Paraguayan delegation was led by Dr. Cesar Romeo Acosta, President of the Central Bank of Paraguay.

16 Project Objectives and General Description 36. The main objectives of the proposed project would be to promote the efficient and regionally balanced growth of industry in Paraguay, alleviate the scarcity of suitable financing for such growth, and improve financial intermediation for industrial investment. These objectives would be achieved by: (i) assisting in the development of productive industrial, agroindustrial and industrial estate and tourism subprojects, particularly of small and mediumscale enterprises; (ii) continuing to strengthen BNF and expanding financial intermediation in support of industry by lending through the comnercial banking system and a privately-owned development finance company, as well as supporting the Government's actions leading to improve the interest rate structure and controls of financial intermediaries; (iii) supporting the Government's attempt to foster the growth of industry and tourism development in the eastern area of the country through specific programs in BNF and FED, and the establishment of an industrial estate in Encarnacion; and (iv) providing key technical assistance to small scale entrepreneurs through the expansion of the activities of the Government's National Vocational Training Service (SNPP). To this end, the proposed project would consist of: (a) an industrial credit component to help finance small and medium-sized industrial, agroindustrial and tourism subprojects; and (b) technical assistance to help BNF to continue implement a comprehensive rehabilitation program and SNPP's industrial development program. 37. BNF. BNF would receive a US$15 million initial allocation, of which US$10 million for industrial projects in general, and US$5 million for subprojects which would be located in the Ciudad Presidente Stroessner-Encarnacion zone. BNF would include in its budget a specific allocation for US$2 million equivalent per year during to complement the sub-borrowers' own contribution to cover costs related to subprojects financed by the Bank (Section 2.01(b) of the Project Agreement with BNF). Individual sub-loans would be limited to US$1,000,000 or less. The same limit would apply to the private development finance company, if it were found eligible for full participation by the Bank (paragraph 48). 38. FED. US$10 million would be allocated to the FED for the financing of medium- and small-scale enterprises (i.e. enterprises whose total assets, excluding land and buildings, are less than US$500,000 equivalent and US$100,000 equivalent, respectively), of which US$2 million would be reserved for subprojects located in the Ciudad Presidente Stroessner-Encarnacion zone. The FED would act as a second-tier intermediary by rediscounting loans and providing a guarantee fund (with its own resources) to participating financial intermediaries which meet the FED's conditions for participation. The Central Bank would contribute US$2 million (US$1 million from new resources and US$1 million from existing FED resources) equivalent of its own funds to an account to be set up within the FED. The first contribution of US$1 million from the Central Bank would be paid in as a condition of disbursement for the FED component in order to ensure adequate funds for initial disbursements (Section 2.02(b) (v)(c) of the Loan Agreement), and the remainder would be paid-in within 12 months from the date of the Loan Agreement (Section 2.02 of the Project Agreement with Central Bank). The participating intermediaries would provide an estimated additional US$4 million equivalent to cover short-term

17 working capital under this component. It is expected that most if not all of Paraguay's 17 commercial banks, as well as the private development finance company will participate. These financial intermediaries would be required to contribute at least 10% of the total cost of each subproject from their own funds (such costs would include working capital needs of the enterprise to be financed). With the possible exception of the private development finance company, no single intermediary would be allowed to commit more than US$2 million under this initial allocation. Individual sub-loans would be limited to US$500,000 or less, to medium-scale firms with total assets (excluding land and buildings) of US$500,000 or less prior to receiving subloans; however, these limits would not apply for sub-loans to enterprises located in the Ciudad Presidente Stroessner-Encarnacion zone, in line with the Government's priority for the area, and since the investments are expected to entail primarily new plants with related infrastructure, rather than expansion of existing capacity of plants. 39. Technical Assistance. The aim of this component would be to assist BNF in upgrading its capabilities: in project promotion, appraisal and supervision; industrial marketing; industrial engineering (particularly agroindustry); commercial banking services; accounting procedures, organization and methods, and in providing effective banking activities in the Encarnacion and Ciudad Presidente Stroessner branches. This component would complement the UNDP-financed technical assistance provided in the context of the first project, and entails 60 man-months of technical assistance (US$360,000). In addition, Paraguay's National Vocational Training Service (SNPP) would be the recipient under the project of a technical assistance program which would aim at assisting small-scale enterprises to prepare subprojects, and organize an extension service for small-scale entrepreneurs. This component would require 96 man-months of consulting services and 20 man-months of fellowships with a total cost of US$640,000. The ILO would be the executing agency, following similar arrangements under the Bank's Vocational Training Project (Loan 1252-PA, 1976); this proposed component would be the continuation of this assistance to SNPP. As a condition of disbursement for the SNPP component a Project Document for this assistance would be signed by the Government and ILO (Section 2.02(b)(vii) of the Loan Agreement). Project Organization and Execution 40. The proposed loan would be made to the Government for: (i) onlending for industrial development through BNF and FED. FED would act as a second-tier financial institution and onlend to qualifying commercial banks and a private development finance company; and (ii) providing technical assistance on a non-reimbursable basis to BNF and SNPP. The proposed loan of US$31 million, in addition to an allocation of US$1 million for technical assistance, would include specific allocations of US$15 million for BNF and US$10 million for FED; US$5.0 million would remain unallocated. The adequacy of these allocations would be reviewed by the Bank not later than March 1, 1982 (Section 3.02(b) of the Loan Agreement) in the light of: (i) the record of commitment of a recent IDB loan to BNF and the proposed Bank loan; (ii) the experience of the new system for the channelling of Bank funds under the FED component; (iii) the progress of BNF in upgrading its performance; (iv) the extent of participation of the private development finance company; and (v) the actual amount of financing required for industrial estate and tourism development. The

18 US$5.0 million unallocated portion would allow a flexible use by participating institutions that have exhausted their respective allocations and have met their performance targets prior to that date, and should also act as an incentive to both BNF, to make greater efforts to improve its overall performance and its capability to channel increasing amounts of Bank financing for productive projects, and to commercial banks and the private development finance company to demonstrate their interest in participating in a program aimed principally at assisting medium- and small-scale enterprises. Subsidiary Loan Agreements between the Government and BNF (for the BNF component) and between the Government and the Central Bank (for the FED component) would be signed as conditions of effectiveness for the proposed loan (Sections 6.01(a) and (b) of the Loan Agreement). 41. BNF. This project component would be executed by BNF's Development Department which is responsible for industrial, agro-industrial and tourism development banking functions. Prior to July 31, 1980, BNF would adopt revised procedures acceptable to the Bank for collecting loans with arrears over 2 million (Section 2.08 of the Project Agreement with BNF). The US$10 million allocation would be made available in two portions of US$5 million each, and prior to obtaining access to the first US$5 million portion, BNF would need to: (i) reduce by one-third the total amount ( 2.2 billion) of all loans with arrears over 02 million as of October 31, 1979, excluding the FINAP operation (paragraph 42) (Section 2.02(b) (iii)(a) of the Loan Agreement); and (ii) agree with the Bank on the content of a second debt recovery program which would include specific performance targets for (a) reducing existing arrears; (b) improving ollection procedures; (c) closer monitoring and supervision of portfolio to -,revent new arrears from occurring; and (d) sending of quarterly reports to the Bank, audited by auditors acceptable to the Bank on the status of debt recovery under (i) and (ii) above and compliance with the new procedures (Section 2.02(b)(iii)(B) of the Loan Agreement and Section 2.06 of the Project Agreement with BNF). 375 million would be recovered in three equal quarterly installments between March 31, 1981 and September 30, 1981 (Section 3.13 of the Loan Agreement). BNF would be eligible to utilize the second portion of US$5 million after it has put the debt recovery program into effect and has met the targets, for the time when the second portion is released, to be established under that program (Section 2.04 of the Loan Agreement). The debt recovery program would focus on recovery of agricultural arrears, based on the recommendations of a study sponsored by the Bank, of the agricultural arrears problem (particularly as they relate to small-scale farmers). 42. The quality of BNF's portfolio is significantly affected by a large operation in support of FINAP, a wood-processing firm (paragraph 15), which had loans (capital and interest) overdue more than 90 days to BNF of million as of February 15, 1980 and total obligations with BNF (including guarantees and accrued interest) as of that date of 1,581.0 million. Currently, legal proceedings to solve the FINAP case in the courts have been initiated. As part of an undertaking under Loan 1419-PA by the Government to reimburse BNF all amounts (capital plus interest) overdue for more than 90 days, from any loans that exceeded (loans plus guarantees) 30% of BNF's unimpaired equity at the time of their granting by BNF, the Government would capitalize into BNF a portion of Loan 1419-PA equivalent to BNF's total exposure with FINAP, less

19 the 30% of BNF's equity at the end of 1975 (Section 3.04 of the Loan Agreement). Such capitalization would be additional to on-going capitalizations into BNF of recent IDB and IFAD loans and of funds provided on a yearly basis by the Ministry of Finance to BNF. 43. Traditionally, BNF has found it difficult to maintain adequate liquidity throughout each operating year as a result of its agricultural lending which is seasonal in nature: from September through March, during the main planting season, the Agricultural Department faces a large outflow of its short-term resources, and from April to August, during the main harvest time, BNF experiences a reversal in the flow of such funds. The result of this situation is that BNF has found itself with idle cash in hand during the periods of greatest inflows and strained for resources during the planting season. The Central Bank has been providing BNF with short-term lending on an ad hoc basis but there is a need to establish a permanent and predictable arrangement for such financing. Thus there is a need for the Central Bank to establish a short-term, self-liquidating, rediscount facility or line of credit of at least US$8 million equivalent to enable BNF to resort to Central Bank financing during the period of peak demand. This flexibility would be designed to complement resources which the Government is required to provide under the Livestock and Agricultural Development Project (Loan 1674-PA, 1979), and would enable BNF to utilize part of its large cash balances for long-term production lending. The establishment of this facility would be a condition of effectiveness (Section 6.01(d) of the Loan Agreement and Section 3.05(a) of the Project Agreement with the Central Bank). 44. BNF has also undertaken to keep its administrative costs within well-defined boundaries. The target of 5.5% of the outstanding portfolio (paragraph 32) for BNF's operating costs has been important for establishing cost discipline in BNF. If BNF is to continue to grow, new costs levels must be established taking into account the rising structure of costs and the difficulty of increasing income from operations at the same rate over the medium term. Based upon an analysis of projected increases in operating costs and outstanding portfolio, maximum targets of 7.1% in 1980, and 6.7% in 1981 have been set, but thereafter BNF would be expected to maintain costs at or below the 6.5% level (Section 2.07 of the Project Agreement with BNF). In this context, BNF has undertaken to implement the recommendations of a personnel management study currently underway within the framework of the first Loan (Section 3.12 of the Project Agreement with BNF). 45. FED. The FED is part of a department of the Central Bank whose director reports directly to the President of the Central Bank. Coordination on policy issues between the FED and private banks is usually handled through the Association of Private Banks, although a coordinating committee for FED activities, composed of representatives of various ministries and the private sector, is formally responsible for its function. The FED has a core of seven professional staff members specialized in economics, finance and accounting and relies on a pool of outside consultants for technical advice. FED's overall organization and structure are appropriate to execute the program; there is, however, a need to add an industrial engineer to FED's staff; this would be done prior to Loan disbursement for the FED component (Section 2.02(b)(v)(a) of the Loan Agreement). The Central Bank has agreed to design a training seminar satisfactory to the Bank for commercial bank staff concerned with the

20 FED program. The FED would offer such seminars at least annually to train new analysts and improve existing skills (Section 2.01(b)(vi) of the Project Agreement with the Central Bank). 46. In order to encourage lending to smaller enterprises, the FED would offer partial guarantees which would cover up to 75% of the amount loaned by the commercial bank, to a maximum guarantee of US$40,000 per enterprise, for a one-time charge to the entrepreneur of 5% of the amount of the subloan guaranteed by the scheme. As is the case in the existing program, the FED, using its own funds, would also finance the guarantee fee, thus spreading its cost to the entrepreneur over the life of the loan. The proposed scheme would permit banks to lower their loan coverage by real guarantees from the typical % of loan amount to about 100%, thus opening bank lending to a wider variety of smaller firms that would not otherwise have had access to the banking system. Any FED losses under the program would be covered first by the 5% guarantee fee and, in the unlikely case that the amount should prove insufficient, by the Central Bank. This guarantee scheme would be established not later than July 31, 1980 (Section 2.01(b)(iii) of the Project Agreement with the Central Bank) 47. To properly take into account the requirements of the new FED program, the Central Bank would approve, prior to Loan effectiveness a new Policy Statement (Section 6.01(c) of the Loan Agreement). A new Credit Manual would also be approved as a condition of disbursement of the FED component (Section 2.02(b)(v)(b) of the Loan Agreement). The signing of a participation agreement between the FED and a commercial bank or a development finance company would be a precondition for disbursing against any specific FED subproject; a minimum of five such participation agreements would be required prior to starting disbursements for the FED component (Section 2.02(b)(v)(d) of the Loan Agreement). However, since the FED has practically completed a first stage in its operations--through the execution of the first two USAIDsupported programs--the Central Bank will undertake by not later than September 30, 1981, an evaluation of the past FED programs which may lead to organizational and administrative changes in the FED component. These changes would be agreed with the Bank (Section 2.01(c) of the Project Agreement with the Central Bank). The expectation is that the FED would be granted greater autonomy. 48. A feasibility study is expected to be completed shortly regarding the restructuring of an existing (COMDESA) or establishing a new development finance company. The potential shareholders of the new company are expected to be COMDESA, Banco Union (a locally-owned commercial bank), members of the the industrialist association and possibly IFC. The study would subsequently be evaluated and form an important input for a decision to be taken as to whether IFC would pursue the possibility of investing in the company. COMDESA in its present form or the new development finance company would be eligible to participate under the FED component like any other participating intermediary. However, as a restructured or new company specializing in development credit, it would have the same limits as BNF and thus would not be subject to the US$2 million limitation on the use of Bank funds, or to the US$500,000 limit on sub-loan amounts and on asset size of clients. For the new development finance company or any financial intermediary to be eligible for these exceptions, the

21 Bank would have to be satisfied that during the loan commitment period it had met the following criteria: (i) good management; (ii) capacity to appraise and supervise projects; (iii) sound financial condition; (iv) capability of handling procurement and disbursement under a bank Loan; and (v) predominant orientation towards development banking activities. Relending Terms and Conditions 49. Sub-loans to final borrowers would initially carry an effective annual interest rate of 18%, which on the basis of advance payments of commissions, taxes and interests, would entail a cost to the final sub-borrower of 19%. During the twelve-month period ending in December 1979, prices increased by 35.7%. Of this amount, close to half took place between June and August, largely as a result of domestic retail price increases of petroleum derivatives, which had remained fixed since January 1974, and meat products (which weigh heavily in the consumer price index), due to a sharp increase in cattle sales to Brazil. During the following six months, inflation dropped to 9%, largely reflecting the non-recurring character of the above factors. The Government expects to reduce inflation substantially during the commitment period of the Bank loan. Nevertheless, as estimates of future inflation are inevitably conjectural, and in line with BNF's policy statement calling for loans being made at positive rates, agreement has been reached to maintain interest rates on this type of sub-loan under review throughout the commitment period of the loan. This review would be undertaken twice a year by the Central Bank, in consultation with the Government and the Bank. Should these consultations fail to produce an agreement within the following sixty days, the Bank would be entitled to stop approving or authorizing investment subprojects submitted until such agreement is reached (Section 3.05 of Loan Agreement). To assist in such consultation process, the Government and the Bank have established the inflation targets during the commitment period of the Loan that would justify maintaining the agreed 18% rate (see supplemental letter). As noted above (paragraph 6), inflation in the first quarter of 1980 was well below the agreed targets on an annual basis. 50. As BNF would be responsible for appraising and supervising its subprojects, it would receive a spread of 6%, as would the development finance company, if it were to participate on the same basis. Commercial banks, which would share part of these functions with the FED, would receive a spread of 5% and the FED a fee of 2%. The Government would assume the foreign exchange risk and cover the commitment fee for a charge representing the difference between the Bank's lending rate and the Government's relending rate. Sub-loans would be granted for up to 12 years with up to 3 years of grace. Repayments, over 17 years with 4 years of grace, would be made according to a fixed amortization schedule in view of the expected large amount of sub-loans and financial intermediaries involved. 51. Based on the intensive technical assistance which BNF is to receive under the proposed project, BNF's free-limit of US$150,000 under the first project would be raised to US$250,000 and as a result the FED's good performance under its existing program the same limit would be applied to its sub-loans. This is expected to result in a review by the Bank of a sample of some sub-loans covering about two-thirds of the loan amount. The economic rate of return would be calculated for all subprojects requiring financing of US$250,000 or more.

22 Project Cost and Financing 52. Total project cost is estimated at US$57.6 million (including taxes and duties), with a foreign exchange component of US$40.5 million. The BNF subproject component represents 49% of total cost, the FED subproject component 33%, the unallocated portion 16%, and the technical assistance 2% of total costs. The Bank loan would finance 54% of total cost (or 77% of foreign exchange cost), BNF 10%, commercial banks 7%, FED 3%, and project sponsors 22%; with 4% remaining unallocated. Procurement and Disbursement 53. The loan funds would finance foreign exchange costs of imported and locally procured equipment, materials, including part of the foreign exchange component of construction contracts. Consulting services for technical assistance to BNF and SNPP would be fully financed by the loan and would be open to international recruitment. Participating intermediaries would satisfy themselves that procurement items were suitable for the respective investment projects and reasonably priced, and that the beneficiaries had canvassed the main sources of supply and were purchasing from the most advantageous source. Whenever justified, items would be procured on the basis of several quotations, in accordance with standard practice for IDF-type projects. The final date for the submission of subproject proposals would be December 31, 1983 and the closing date for disbursement December 31, 1985 Bank funds would be disbursed on the following basis: (i) 100% of foreign expenditures for imported inputs, machinery and equipment; (ii) 70% of local expenditures for imported machinery and equipment purchased locally where the foreign exchange cost cannot be determined; (iii) 35% of construction expenditures for industrial buildings and related civil works, and 45% of civil works expenditures for hotel projects; and (iv) 100% of total expenditures for consulting services. Project Benefits and Risks 54. The project is expected to have a significant development impact. Institutional improvements would be particularly important, since in addition to what was achieved under the first project, the proposed project would (i) devote a great deal of effort to strengthening further BNF's financial condition, project appraisal and supervision capability, its promotional efforts and its operational systems; (ii) support and greatly expand the activities and scope of the FED; and (iii) establish a system which would substantially improve the capacity of commercial banks to base their lending activities upon detailed project preparation and evaluation as well as introducing economic appraisal into the project appraisal cycle. 55. The proposed loan would contribute to filling a major gap in term financing of industrial projects in Paraguay and is expected to help finance, through BNF and the FED, about 170 subprojects with a total cost of US$57.6 million equivalent. This number of subprojects is substantially more than under the first loan (46 approvals of present) and would represent the result of a wider distribution of Bank funds through increased intermediation to a greater number of end-users. Total financing under the industrial credit

23 project, Including the Bank loan, the contributions of the Central Bank, and the mandatory financing by participating institutions, would provide about 80% of the financing required by subprojects financed under the project during , and thus would make an important contribution to the growth of industry, and support a concerted effort to develop the country's development potential on the eastern region. Also, Bank financing would support mainly small and medium-scale enterprises, whose lack of long-term investment credit has hindered their development. The direct employment generation related to the project is expected to exceed 2,750 jobs with the average investment per job like)y to be US$20,000 (in 1979 prices). In addition, a substantial indirect employment effect is expected from the project due to backward linkages in the agricultural and forestry sectors, since about half of the proposed loanr would finance agroindustrial projects. The impact of subprojects on Paraguay's balance of payments should be substantial. About 60% of the loan proceeds is expected to finance industrial export enterprises, and the remainder import-substitution and tourism industries. 56. The proposed project, as conceived, does not involve any unusual risks. However, because uncertainly does exist about the degree to which BNF can rapidly upgrade its performance; and because some of the institutional arrangements established under the project would be both new and untried, some initial delays in subloan processing may occur. To minimize delays in project implementation, Bank supervision of, and assistance to the project would be more intensive during the first year. PART V - LEGAL INSTRUMENTS AND AUTHORITY 57. The draft Loan Agreement between the Republic of Paraguay and the Bank, draft Projects Agreements between the Bank and the Central Bank (for FED) and between the Bank and BNF respectively, and the Report and Recommendations of the Committee provided for in Article III, Section IV (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 58. Special conditions of the Loan are listed in Section III of Annex III. The following are the special conditions of effectiveness: (i) signing of subsidiary loan agreements between the Government and the Central Bank and with BNF, respectively; (ii) establishing a short-term rediscount facility or line of credit of at least US$8 million equivalent in the Central Bank for BNF, to finance BNF's cyclical shortages of funds for agricultural lending; (iii) approval by the Central Bank of a new FED Policy Statment. In addition, there would be the following conditions of disbursement; (i) for the BNF component: (a) BNF would collect loans in arrears over 02 million totalling 725 million, and (b) BNF would agree with the Bank on the content of a debt recovery program; (ii) for the FED component: (a) the Central Bank would contribute US$1 million to the FED component, (b) the Central Bank would issue a new FED Credit Manual, (c) Participatory agreements would be signed between the FED and at least five commercial banks, and (d) FED would hire an industrial engineer; and (iii) for the SNPP component; a Project Document for this assistance would be signed between the Government and ILO. BNF would be eligible to utilize the second portion of US$5 million once the initial stages of the debt recovery program have been satisfactorily implemented.

24 PART VI - RECOMMENDATION 59. I recommend that the Executive Directors approve the proposed Loan. May 16, 1980 Attachments Robert S. McNamara President

25 - 21- ANNEX I Page 1 PA UAY - SOCIAL INDICATORS DATA SHEET REEttENCE CROUPS ( IUSD AnRACES LAID AREA (STOUSAhN SO. W.) PARAGUAY - NDST RENT ESTlMATE) - TOTAL SAME SAME 9EXT KICHER 80RICULTUL DS.T RECENT GEOGRAPHIC INCONE INCOME 1960 /b 1970 /b ESTIMATE /b REGION 7c GROUP /4 GCOU? /i CGP PER CAPITA (US$) ENERGY CONSUxPTION PER CAPITA (RILD hs OF CD0AL QUlVALff) S POrPLATION AND VITAL STATISTICS POPULATION. TLEAR (MILLIONS) UN POPULATION (PERCENT OF TOTAL) POPJUATION PUOJECTIONS POPlATION IN TM 2000 (MIUIONS) 5.0 STATIONARY POPLATION (MXLLIONS) 9.0 TE STATIONARY POPULATION IS EACED 2070 POPULATION DENSITY PEl SQ. 1N PEX SQ. EN. AUCULTURAL LAND O0.5 POPULATION ACG STUCTURE (PERCENT) 0-14 YnS " YES YES. AltD ao POPULATION GROITI RATI (PERCENT) TOTAL 2.6 /h 2.6 /b BAN CRUDE It= RATE (PER THOUSAND) CRUDE DEATH RATE (PtR THOUSAND) GROSS REPRODUCTION RATI FAMILY PLANNING ACCEPTORS, ANNUAL (TROUSANDS) USERS (PERCENT OF HAIED WOMEN) FOOD AND NUTRITION INDEX OF Fo0D PRODUCTION PER CAPITA ( ) PER CAPITA suppty of CALORIES (PERCENT OF EQUIRMNTS) PROTEtNS (CGAMS PER DAY) A of WHlCS ANImAl AND PULS 40.0 / CRnI.0 (ACES 1-4) HORTALITY EATE WEALTH IFE EXPECTANCY Ar SIRH (EARS) INFANT NORTALITY RATE (PER THOUSAND) ACCESS TO SAJt WATER (PERCENT OF POPULATIONI TOTAL URBAN S WURAL ACCESS TO EXCIETA DISPOSAL (PtRCNT Or POPULATION) TOTAL URBAN RURAL POPULATION PE'R PHYSICIAN (L POPULATION PER UI1SING PERSON POPULATION PER HOSPITAL RED TOTAL URBN tuiirl ADMISSIONS PER HOSPITAL RED ' [OUS IYC AVERACE SIZE Of ROUSEHOLD WTAL 5.5/f.. 5.5j/ URBAN.37f RUtAL AVERACE IMMER OF P'RSONS PER ROOM TOTAL 2.6/f t URBAN i StUAL ACCESS TO _L_C`RICTTY 'PEtCZSNT Of DWELLINCS) TOTAL 13.0/ /i URJBAN * a 1 RUSAS... i.t t4.2 L.ZTT 17.3

26 22 - ANNEX I Page 2 E'ARAGUAY- SOCIAL INDICA-ORS OATA SHEET PARAGUAY REFERENC GROUPS (ADJUSTED A ELGES - MOST RECENT FSTILATE) -a SAFI SAKE NEXT HIGOER MtOST RECENT GEOGRAPHIC incohe INCOME 1960 /b )I70 /b ESTIMATE /b REGION /c GROUP /d GROUP /e EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL MAALE FEMALE SECONDARY: TOTAL C MALE IEMALE VOCATIONAL EIROL. (I OF SQCONDARY) PUPtL-TEACUER RATIO PRDIARY SECONDARY ADULT LITERACY RATE (PERCENT) 75.0/f CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION RAD1O RECEIVERS PER THOUSAND POPULATION TV RECEIVERS PER THOUSAND POPULATION NEWSPAPER ("DAILY GCNENAL INTEREST") CIRCULATIO1 PER THOUSAND POPULATION CINEMA ANNUAL ATTENDANCE PER CAPITA LABOR FORCE TOTAL LABOR FORCE (TEOUSANDS) FEMALE (PERCENT) AGRICULTUJRE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEMALE ECONcMIC DEPENDENCY RATIO INCOME DISTRIBUTION PERCENT OF PRIMATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS * 'HIGHEST 20 PERCNT OF HOUSEHOLDS LOWEST 20 PERCENT OF HOUSEHOLDS * LOWEST 40 PERCENT OF HOUSEHOLDS POVERTY TARGET =GOUPS ESTIMATED ABSOLUTE POVFRTY INCOME LEVEL (USS PER CAPITA) URBAN RURAL ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN RURAL ESTIIIATED POPULATION BgLOW ABSOLUTE POVERTY INCOME LSVEL (PERCENT) UR3AS RURAL Not available Noc applicable. NOTES /a The adjusted group averages for each indicator are population-weighted geometric mcane, excluding the extreme *alues of che indicator and the most populated councry in esch group. Coverage of countries among the indicators depends on availability of data and is noo voiform. 'b Unless ocher,,ise noted, data for 1960 :efer to any gear between 1959 and 1961; for 1970, between n :971; and for Yost Recent Istimace, betveen 1974 and 'c Latin America & Caribbean; /d Intermediate Mliddle Income ( per capita, 1976); 'e Upper.I'-Udie;ncoce ($ per capita, 1976); If 1962; /S 1972; /h Due to emigraclon of Paragua)ans to neighboring -ountries (Argentina and Brazil), population growth rate is lower chan rate of nacural inicrease; ' ; /i Coverage of data unknown. Mosc Recent Estimate of GDV per capica Is *or August, 1979

27 ANNEX I ppkiim 1 exa MIA Page 3 Note.: Although the data ar dra fr- sore gnrlly judged the act ethorittiee sad reliable, it shoold aa he atsd that they ap st be later.- tionily.coqayable_because of thetlack of at-ndlxdloed defiaition eed concets uced by diffemt cootie in ollstie the data. The data r,cateee usful to descibe order 8.ofsgItde, todiose treds, and hb-steetee eetlan ajor differ-ece beient- ntis it ajute grceavrae,for eah.i odiostor r; ppltboa-eiabted geusetelo -a e-c.udiag tie ear-n -alues of the adicator and the fat pepolated coutrytoachgrop. toe tolc f dta, gru vrges of all indicators for Capitel SuIos Oil ftpoeters end of idioatoes of Acces o Cater and t-crto Iteosl,Orcle, ucrn Distributin and Povety fcr other c-atey g-cps ar pcpolation-ieghted ge-trir -an itbhut e--uson of the otr- -ei.e. and the -at popaited coutry. Sic h ovrg fconre thei isdntesdned o n,bllablto fdi n catcafcr.cuins be eneeised in relating enrage of on Indctrt ete.thes avree trenis nreabso eeee'vle Isfla ha oreingthe Vausoye l-dicator At a tin sang inn oetry an serneseee they daia (thoossd *q.k A-res to KMet linvr i ercn ofpeuain: oa,wnsd riaal -il Tota sufac area crrisig. land ure an inland eaters Noirofpol (oa, ra,sa- aca]sredb nceadspsla A&ricult-ral - Most revet etiate of agriculturl are used terncraily percetages of their repective ppalation. Encrta disposal as tisud etperasectly for crps, pastures, sacht and bitohed gnrd.n or to the _clletion an disposal nub ositbot t-et-et, of hsesa eurte lie fao- aod nets-eaterb. ai-on sctas orhubee. of yit pici-s sads.iaiis bll~~~~~~ IA t i..w~~~~~~~~~totlathoos. GNP c" liu kwhjaw -o-nsio actoto ast orl-d Cub katlas.t (197kT6-78'bhuts); a.lfdf n dical school at univerity 1eve. i960,i1970, and 1978 data. pnlto e NrigPec Popolation dicided by outer of praticig sale EXERGY CdiPSU 5 TI0N PilR CAPITA A-Idca -- olpsuti- of oeriloe-ee an el rdaenre,pratical sore,ad uoictantcuss (coal sad ligoitc, petrelue, atura gao and hydur-, aclar d g. Poltio pe cpit Bd total, urban, end rural - epolnotoc (total. urban, thev-a eleotrl-it ) Ic khigran of coal eqojenicot Pee capita; 1960, and _rra)divided by their repective cuter of hosptal bed availble it 1970, and 1971 lt. public ad pri-nc general ed apeci Ied 'hootpital an ehabi1itati-o -erto- Oo-pital ae esoablitchasnn peraently etaffed by solat I...ee ptyac-is vtoui,atioe AJID VITAL STATISTICS petebliah-eto p-oidice principally custodial cae ar tot inclded ura-l Ttotli'eiaio Ii-er(lli-)o - As of J,1y 1; (960, 1970, and hoopitnls, honecee, ilaode health and edlai cen ters oct peeranetly otnffvd 1977 dnto, by a physician (but by a adi-ca.. asistat, cr,aidnif,, etc,.) such offer Urban ~Phsolaioo l-eot of totnil - Rstio of urac to total popleti-o ic-patient a-sdaiccd proide a licuied rage fai, f aites uifrc etloloo. ofuraaronpaffect cosarbi ity of data Adsiceioos pe Hosoital Bed - Ttota n ul er of adiusloo. to or uloh- eevtin s_ng -- ote:e;16 ip, 1970, sal 1975 data hoyitala divided by the oute of bedo. Ptsliio in Bear 19-Clret populato projetlcc r bued on ifl(pdx i975 total IupLatc by age n- nad their _otnlity and fertility Avrg-oro oshl ercsprhoeoo oa.uba and rura - rae.pojo:opaseee o otality rates copivob hs A hou-hod conist of a groupof-individualls har oigqatr n leo_ nouito fe noecoant_yatbrh Ioa legnu -cutr a their salt nall boarder or lodger say o a o be t iuod the per calp' h nca i1e,adfni ife ecysot-ny tabiliolag at hc-eho1d foe statitical prpose yas TheaateoIeftii 'tp rate al have three levels Aveagm uebro esn e o oa ur,iba, and rual -Arege -uibec ansudiep decli-e i fertiii;acoii to ncslve and put ofperoo pe osi l fnlciobgper--neurba,edralocpdcov,in,dlioo otocoo te esgr n foee -ep-ctiely. Mlurlinge ecclode no-persanet otrutur-.sdotc. pid.a. oboe corilinaties of nrtality nd ferttity trode frp-oleticekoss Al~.toit lebtr1icity (pe-rts of ~de.l.llng io( tlti urba so rural Co onirpuses - veohionn~~i.delig o~ith eletriit ir livigqat oper-etago cc Stat.nary popviatioc - 1o a ett,it--y populcto- th-reieogroeth,itcr theb-irt-h-rte in equal to the -ath rate, and also the age Oca,ura,ad rura d-ellince-pecticsiy. stucur rec c:ieat Thin,s acti-ed niy after fertility e-tee EBXATION5 ccietthe vyoenect l.eie of ocit -rt rrp-rolution rate * hec AdJocted isetiant Ratica ones coenreolocof necec replacs toelfeosotly tiesninr op- Pie oot ca,sl ndfcl ra total, sale and conic -coiinl0ieesvt atdc h ai fteprojected Iharate-isties, na falae ttepiaylvls ucnae f r-pectice priaey ofthe Ppoplnetot in the ye- d000, nod the rate ofdelite of frilt -otl-age pplal -nioraly leietdes oldten agd 6-il ye-r but rte to rei:co ee uutcd for djffertiegbofrcayduao;fr.otrsit cesrttinr poithoia rewchee - The Yea ce stnti-cay pupl.tti- urosi eoucatooenriltt say eaceed,1lou poroect 1reo popil oior hau hero cehe.- ar.c or above the offi-i1 school age,1.oition De...ity Secodar oa,sle -ci. nod feale - Cunuie Icn-c o.or Pee t. in. - Mid-year pepusti- per squ-aro oet-... (ills -t-otc) of cdctio_eie nt leant fou Year of aepocd- riur I trci..0; total area ~~~~~~~~~pr-ildes genieatl -oot-oa,ortahr traiting J-nt-iti-o: focpuoh Psen n arclurlln Coepoted en bcc- for agricultura land usualy of 12 to 17 yearo of age;tcorrespondence -cr-c ar s-nraiy only. e-liudnd. Pop- to o Srcuecreo.-Childen (0.i4 yean,ocho-ago -cticolnrliet( ertraunoooy caotlooictc o 1i-btean) ndrtiredl (h years and ce p:n pecetge f ai-rear icecl idi or ottrp b Iea hopersto i-dcpeod-tly p-ra 'poplatioc; 1960, 1970, and 197) dato. Siprntarta of necnd.ry iunttuttiona. Pon r.tinseeh tate (rcn) total A-ldoa o-th rates of tota1llad- Ppiuctl-hae ratio - Prir. nodseodar -Toa rear populaloon for i9d.hu, i~il-t, and ntudotn reroliod prar n eodr eeeoededy teaerto teaetro,tl,ce Peociltii GIroth Pate (pretd ra oul rehrtso ra p-dieg lecele. poplatiov foe 1950-hO, 19b0-70, sod Adult literacy rate (P-e-t( -literate adilt labtl to rea,d nodvit)a Crue iteth latioe theusad) A- bha lice bitho Per thoueard of ai-- octage of total dadut populetioc -gd 15 year nd- cr yerpplto;10, 1970,Ian 1977 data. Crude Death Sate (pe ihoosand) - bacale Otho -c th-u,an.ii si-yvnr CONiSUMPTION popuintic; loul, i70, ano 977 data. or I_nege e thoonad poaciatit) P- Paorgi-. ca -p-io iror ci bor noveo reyrditi-e p-ic if obeo.porerr-- pe.nct gd- c-ho-l-o opecofoc Frtoli,ty eaten; unua1 foc-pie. torgncdiog ic 1960, baldehcr eethuaocoluo)-all typ- of' r-eol-ro be r.d,. 1970, Idl i975. brono-ts ic general plic per thousadof Ppcioiiio; -oloeocie-e neposobirth-control deci-r ucdee.uep-e of -ation.. IfciiY vfet; ssfor reen yearo.y Ot,be.oP.e,r00r lcuoc Planing progro abolished loecg FeelSy P~l siong-& eo(erntfeariden - Peroetag of srrei.d TV R-eeie- (Pee th-usad poanlt-o) - ftve-n:co- foe br-nd nut C.ne nuoco hild-benin of age lt5-d,yas b n bebcne eie puid pe e thuad popui.sti c; -vwldee uliceoned TV reecrulooe ti-. to eli carried esen o scar ag group. adiyernhecegieteatior of ft'.tet n effect. ellis u.n airrytoog Neespapor irculatboo (Poethousad puo1ati2o) S h..n tie ucerag ci-rotioc mdcc feo erouctio f per apit (1959bt-SIio "it, 9-71 oe o fof"doly e elderoted prisrl.0rcriggorl gcpra intrestteaparr, dfiled e. 10ict enp_r-lio1 eiderd 00 ubli-otioc be "daily anooa pe-d-cti o I alife- iispoution encludes ned and if it appr atil lat. fordtise aeroi. feed and o oncada year banin. Coselodit-,evcr -ooe rsr io.. ssu- ktleodunc pee nptiore loe-bor-ckh ocbr * A. odosrean icecead of sugar) o~h lot ar odblb nod _otnie.otrot clduin thye, icolodo nuioos oc;eiciro nda ct- are -oolded) A.ggrgto prod-ctioo of nebh, to. d-e %..cffee cc conoey. 1 Inb.aed oc natio-n a-rage produce peice -eghte. Percait euel o cecrco(perceot of roqie-n-to) - Conputed fron LABOP FORCEt per,day ha-iable nupp1len ccp-en dorettcpodcin inp-ta ien fre n ur..yibteo.l ghoeaco tdon ecdfct. ro- t, end ohlngeni-iouck. Net -,ppli e-volode anis1 feed, nerds i -croscutrieqoantit1,oouned o.toapareble. ic food proc_coneg, and ion"en disttrbuisoo. nequire- PonF e(eret - el bo oc asieceocane of c.1th labor Corer etooctiated by FAO basd o- pk lystoialnenfc iro i_t, F_- Ishe oce. fring, forcotry, toting nd octircty nod heal.th ci-ider:o oirnet te-pr-tu-, body e-gto, fishing an pecetage of total lobe force. a ad _ no o_tributiorc X. popuict: u, ecd a11ic,n is pe--ro foe Industr ipercen) - inb- oc S iig cictrotii,sonfaturinga sau te at to-nhold iron. orol -- ae sod ga no eprs-tgs of total labr oci Ce cit suply..fprotit eas pe ds) -Proilocnirt. pe Paticipation Itat (perocot) - total, ale In ae-priiaino ap,t1te et upp1plyof, food Per ic.p Ioupl of foou lodeiinod, no ntoyetetnee -puted en total sae and f-1i ihe ocea pernbcoe. Fequococtto for nil -- ttio- r-tahised hyuh reic fo- etagen of total, nle and foesie puplaict ofnloge,nriey nileaiosno ih uras of ot-i Pro tcie per wsp ad 20 gessis-of 1960, 19,70, and 1975 Oats. Thes-e ac Wt aci.pt irtsrfeto anical nd poise roteic, f ohich is g-u should he anial pro.tein, ao-o ntrutur of tho pcpulatio, adloon tine trend. These A lee standarun eaticatv are beer ~than thoor of 75 grnoftotal_ pteit and aefree -ntional sou-c. 25 grass of aniani ~~proooia a - 'eeag Col the acrid, proposed by PAP teoosl PeedorPto nictpplhu ce 1ad1 n 0rt sotiflionedroouoythlar Per cait erteic, fore iv supei ae group froa nie,1 of15-h4 porn. and pul.r - P,cteic supply of food icried anrnan ro ad plae 10geee p ordy. utile DIPTRIWPICiI chiiu Saortaiir (ngec I-u) hate (eor thousnad)- bo-cl deatba per thceand Pecna rvte -o Iaooa (both In cash sad kind) - Re-eiced be riohent on ge ocpil er,c ehlureni lo hisag rop for act de-el- 5p-rai richest 20 pe-c-t, poorest 1 -percet, an pooret hi percen.t op -utroen sta deicd frelfe bro of boue.. ds HEALTH POVERTY TAiRGE GBOUPS Life bopcoancy t Birth(ceara Acerae nnber of year of life Eticated Absolute Pheertc Incose lecel (PBS on caita) -uba aou rura enicin t1 birth; 1I5,1970, an dsts. Absolte p-rerty IsoelvlI. that monhve e lofant Mrtality ciiapiis ete leerthousad) "'Ilrol leat, of infants under ec utr it iodaly adequate dirt Plu essen..tial on-food requi esete isvt pear age of per thousan~d hir births, afodable Aprant,oisfe, Wster (ceret of,oanbtlon totalubn,sn _eestitdrlivpoeyiou rsa cel(bpr at)-ubnadrrl safentee supply (inoledee treated surface ater or ntreated hot percoa moose of the -ootry. rani-oe is dericd fee the rural lec-i uoootnited ea-s -ac ac tht fre p-oteoeut oeolsepdas cith asjust-.t foe higher cost of hens 5 in urban srea andsntar I) asp-eretagec of their repective popolati.s. In anura eatited =onult1i2nhle Are a poblir A* bslulte fonutal Pnh nor soiol(eceiataspot inated net uyrba sad acr thes. cn f ouain(ra adrrl h re"bouepo' t00 -te fec.a house ay be conidered as beig itbike r-aable aceaof that bou.e. Is rura areas reaonble acees wld i.4 ly tha the h--enfe or atera of the household do not have to cpesd a Eisi and ocia1 lain Dicision diceruportio..ate part of the day in fetehirg the fasilyl. satar needs ilconosi Analysis and P-ojetdoen Dpepat-t buenset 19(9

28 CNP Per Capita;: US850.0 (1978; ECONOMIC INDICATORS ANNEX I Page 4 Amount Average Annual Increase (-.) Share of GDP at Market Prices (%) InditEtor (umillion USS currant) (at constant 1978 prices) (at currant frite.) Natiunal Accouuts Acrns domerlt product 2, Agricultre Indusrry S-rvi-rs 1, Cunur-ptio- 2, , Guos s I-uru..c Euports uf gaudu und ITS Itportu of goads and NFS franc uati-al -avings Amount Average Annual -n-reane (T) Coapos-cion of Merch-ndise Trade (7.) (rilllon 0S$ tarrent) (at to_nstot 1978 crite) (at ccurrent prices) t Merahninde Trado M-rchundi-o exports M-rchtndisn irpor-n Food Pet-oleu Machinery -rd eqvipmet ,.6 Oth-r / Priten and Terms af Trade GOP deflatar (1978= Exchange rote (15/us) luot racidon Inport priac idex l Terms of rrade index A, *b of GDP (at aurreoc prices) Flblia Fiaance (Central Adminitration) Current revenu Current enpendituro urpiu_ (+) or drficir (-) Capital oxpenditur Financing (not) other Indicators GNP grouth -ta (5) GNP per capita gro-th rate (51) ,6 5.2 ICOR Ma-ginai tavings rotc Impart ela-ticity e Eutirtte.

29 BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT ANNEX I (million us$ at current prices) Page 5 Population: 2.9 (1978) GNP Per Capita: USS350 (1978) Actual Projected S N BALANCE OF PAYMENTS Net exports of goods and services Exports of goods ,082 1,279 1,789 Inport of goods ,135 1,324 1,545 1,757 2,270 Net transfers Current account balance Direct private investment M&LT loans net Official Private SO Other capital Change in reserves ' IDternational reservea Reserves as months of imports EXTERNAL CAPITAL AND DEBT Gross disbursements Official grants Concessional loan,s DAC OPEC IDA Other N.on-c.ncessional loans Official export credits IBRD Other saltilatecr1 Private External Debt Debt outatanding and disbursed Official Private Usdisbursed debt Debt service Total service payments Itterest Payments as % exports Average interest rate on new loans (7.) Officia Private Average maturity of new loans (years) Official Private As 7, of Debt Outstanding at End of Most Recent Year (1978) Maturity structure of debt outstanding Maturities due within 5 years 61.5 Maturities due within 10 years 96.3 Interest structure of debt outstanding Interest doe within first year 5.0 Estimate.

30 ANNEX II Page 1 ST'ATUS OF BANK GROTiP OPERATIONS IN PARAGUAY A. Statement of Bank Loans and IDA Credits (February 29, 1980) - (US$ million) Loan or Amount: (less cancellations) Credit No. Year Borrower Purpose Bank IDA Undisbursed Seven loans and five credits fully disbursed / Paraguay Small Farmer Credit and Rural Development Paraguay Highways IV Paraguay Preinvestment Studies Paraguay Vocational Training Paraguay Rural Education Paraguay Rural Education Paraguay Rural Development II Paraguav Industri4l Credit Paraguay Rural Water Supply Paraguay Highways V Paraguay 1,livestock and Agricultural Development Paraguay Highways VI / 1979 Paraguay Preinvestment Studies II Total (net of cancellations) of which has been repaid Total ] outstanding Amount sold 1.3 of which has been repaid Total no-w held by Bank/IDA Total o.ndisbuirsed / Inciudes exchange adjustment. 2/ Not effective

31 ANNEX II Page 2 B. Statement of IFC Investments - February 29, 1979 Type of (Amount in US$ million) Year Obligor Business Loan Equity Total 1974 FTNAP, S.A. Wood Processing Total gross commitments less cancellations, terminations, repayments and sales Total tndisbursed -

32 ANNEX II Page 3 Credit 509-PA Small Farmer Credit and Rural Development Project, US$11.0 million, September 6, 1974; (Date of Effectiveness: April 14, 1975; Closing Date: June 30, 1980). The project's original three-year implementation period was over in April As of April 30, 1979, BNF had completed lending under the project credit component. It had extended 2,368 medium- and long-term subloans for a total of US$6,411,000 and an amount of US$1,539,000 for working capital financing. Most medium- and long-term financing was for land clearing (31%), storage construction and purchase of agricultural inputs and machinerys (31%), while short-term lending was mainly for labor (75%). With regard to land titling, as of December 31, 1979, 2,180 land titles had been issued representing about 95% of the revised target (2,300), which included 300 more than the original estimate. The project infrastructural components have been completed with the exception of 7 km of all-weather roads, and 16% of culverts and 50% of wooden bridges along the earth roads. So far 278 km of new earth roads, 172 culverts and 140 meters of wooden bridges have been constructed and installed. Loan 1059-PA Fourth Highway Project, US$14.5 million, December 12, 1974; (Date of Effectiveness: March 11, 1975; Closing Date: June 30, 1980). Work on one project road (Mbocayaty-Colonia Independencia) was completed in July 1978 or about ten months behind schedule; progress of works on the other project road (Encarnacion-Pirapo) is about 90% against the scheduled 100%; completion is now scheduled for May The present closing date of June 30, 1980 may have to be further extended. Delays were caused by poor management and insufficient equipment; corrective measures were taken. The consulting firm engaged for assisting in highway maintenance and for preparing a study on maintenance needs has completed its task. The latter study was the basis for the subsequent highway loan (Fifth Highway Project - Loan 1529-PA). 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

33 ANNEX II Page 4 Credit 587-PA Preinvestment Studies Project, US$4.0 million, October 17, 1975; (Date of Effectiveness: April 15, 1976; Closing Date: December 31, 1980). The entire amount of the credit is now committed. Substantial progress on the institution building side has been accomplished on the basis of experience gained under this project, which has led to the preparation of a second operation, recently approved. Loan 1252-T-PA Vocational Training Project, US$4.0 million, May 13, 1976; (Date of Effectiveness: August 26, 1976; Closing Date: June 30, 1980). Project implementation is on schedule. Two vocational training centers (Asunsion and Chore) are finished; three (San Lorenzo, Cnel. Oviedo and Cnel. Bogado) expected to be completed in the next few weeks and one (Hernandarias) should be ready by August. Concerning procurement, about 90% of the goods has been received. Implementation of the technical assistance program (for which ILO is the executing agency for UNDP) is satisfactory; the program should be completed by December Cost estimates are within appraisal estimates. Loan 1346/ Third Education Project, US$4.0 million Credit and US$8.0 Credit 667-PA million Loan, December 22, 1976; (Date of Effectiveness: March 4, 1977; Closing Date: June 30, 1981). Project implementation is about six months behind schedule due to initial lack of counterpart funds. However, under a revised implementation schedule the project is expected to be completed by the present closing date of June 30, About 25 associated rural primary schools, 27 community learning centers, and 2 secondary schools are completed. Construction of 54 new rural primary schools as well as of five secondary schools was scheduled to be completed by December 31, Satisfactory progress has been made in contracting technical assistance specialists and in implementing the textbook production and in-service teacher training programs. Total project cost is expected to be amount 3% lower than originally estimated, due mainly to reduction of rural schools construction specifications. Loan 1418-PA Second Rural Development Project, US$22.0 million, May 18, 1977; (Date of Effectiveness: January 17, 1978; Closing Date: December 31, 1981). As of January 31, 1980, the total number of subloans extended in the project area was 1,590 or about 60% of appraisal estimates, and the amount of lending totaled US$5,660,000, or about 77% of appraisal estimates. Of this, US$1,132,000, or 20% of total lending was short term. Land titling, with 1,166 titles distributed, is 80% of appraisal estimates.

34 ANNEX II Page 5 Loan 1419-PA Industrial Credit Project, US$10.0 million, May 18, 1977; (Date of Effectiveness: January 17, 1978; Closing Date: September 30, 1982). One of the main objectives of the Project was BNF's financial and institutional rehabilitation. Satisfactory progress has been made towards meeting this objective, for the first time since This was achieved in part due to a reduction in operating costs, a higher financial spread, and a capital contribution of 1.3 billion that the Government made under the Loan. BNF's debt recovery efforts, however, have not yet been sufficiently effective in decreasing the level of arrears. To accelerate the institutional improvements, on the other hand, the UNDP-financed technical assistance program has been expanded by incorporating experts in agricultural programming, portfolio management and electronic data processing systems. Regarding the financing of industrial projects under the Loan, BNF has submitted to the Bank over 46 subprojects with small-scale enterprises accounting for most of them. Disbursements, however, were running somewhat behind schedule. Since BNF has already met the conditions for releasing the pending amounts under the Loan's second tranche (US$6.0 million), an additional US$4.0 million has been made available.o finance subprojeclb. Loan 1502-PA Rural Water Supply Project, US$6.0 million, December 16, 1977; (Date of Effectiveness: July 13, 1978; Closing Date: June 30, 1982). Project implementation is now proceeding satisfactorily. A six month delay which had resulted from a late effectiveness may be reduced. Up to date 36 projects for the same number of community (85% of total) have been approved. Out of 36 communities have currently signed contract with SENASA for the implementation of these projects. The first annual purchase program (1979) has been satisfactory carried out. The second (1980) has already been initiated. As of March 28, 1980 loan disbursements amounted to US$1.15 million or 19% of the total loan amount. Loan 1529-PA Fifth Highway Project, US$33.0 million, March 17, 1978; (Date of Effectiveness: December 5, 1978; Closing Date: June 30, 1983). The civil works on the repaving of Route 1 (Paraguari-Encarnacion, 303 km) is 15% behind schedule. Construction and supervision contracts for the Coronel Oviedo-San Estanislao road have been signed and work will be initiated shortly.

35 ANNEX II Page 6 Loan 1674-PA Livestock and Agricultural Development Project, US$25.0 million, April 6, 1979; (Date of Effectiveness: November 20, 1979 Closing Date: June 30, 1984). The Livestock Fund component was about 80% committed as of February 29, There is an increasing involvement of this organization with small, mixed (livestock crop) farms. The small farmer component with the National Development Bank, National Extension Service and Ministry of Public Works is behind schedule, but lending should start in mid 1980 and feeder road construction in late The Asuncion wholesale market is progressing well. Final design plans have been approved by the Bank and construction should begin in June, The Agricultural Census component, for which FAO is the executing agency, is behind schedule and the data collection has been deferred for July 1980 to the same month in Loan 1736-PA Sixth Highway Project, US$39.0 million, July 13, 1979; (Date of Effectiveness: December 5, 1979; Closing Date: June 30, 1985). The Bank has approved a short list of consultants to assist the establishment of Feeder Roads Unit. The Government's Feeder Roads Coordinating Committee is being established by Decree. Procedures for contracting the design of feeder roads are under way. Prequalification of contractors for construction of the first half of Route 6, (Pirapo-Ciudad Presidente Stroessner) has been completed and approved by the Bank. Loan 1780-PA Second Preinvestment Studies Project, US$5.0 million, December 19, 1979; Closing Date: December 31, 1984). This Loan has not yet become effective.

36 PARAGUAY SECOND INDUSTRIAL CREDIT PROJECT Supplementary Project Data Sheet Section I - Timetable of Key Events (a) Time Taken to prepare project: About 9 months. (b) Preparation by: Government and Bank staff (c) First Presentation to the Bank: January 1979 (d) First Bank Mission: January 1979 (e) Appraisal Mission Departure: November 1979 (f) Negotiations: May 1980 (g) Planned Date of Effectiveness: October 1980 Section II - Special Bank Implementing Action Financing of a feasibility study for the Encarnacion Industrial Estate has been provided by KfW. A draft policy statement and credit manual for FED have been approved at negotiations. BNF has prepared revised procedures for collecting loans with arrears over 02 million, which are acceptable to the Bank. A study to review the BNF's agricultural arrears problems has been initiated. A personnel study for BNF has been initiated. Section III - Special Conditions of Bank Loan (a) Special conditions of effectiveness would be: (i) signing of Subsidiary Loan Agreements between the Government and the Central Bank, and with BNF, respectively (para. 40); (ii) establishing a short-term rediscounting facility or line of credit of at least US$8 million equivalent in the Central Bank for BNF to finance BNF's cyclical shortages of funds for agricultural lending (para. 43); and (iii) Approval by the Central Bank of a new FED Policy Statement (para. 47); (b) The following would be conditions of disbursement: (i) for the BNF component: (a) BNF would collect loans with arrears over 02 million totalling 0725 million (para. 41); and (b) BNF would agree with the Bank on the content of a debt recovery program (para. 41).

37 (ii) for the FED component: (a) the Central Bank would contribute US$1 million to the FED component (para. 38); (b) the Central Bank would issue a new FED Credit Manual (para. 47); (c) participatory agreements would be signed between the FED and at least five commercial banks (para. 47); (d) FED would hire an industrial engineer (para. 45). (c) BNF would have access to the second portion of US$5 million once the initial stages of the debt recovery program have been satisfactorily implemented (para. 41). (d) If the rate of inflation warrants it, the Government has undertaken to modify in agreement with the Bank, the interest rate charged to sub-borrowers under the project's BNF and FED credit components (para. 49). (e) In addition to the targets of the Debt Recovery Program, at least 375 million in loan arrears would be recovered by September 30, 1981 (para. 41). (f) The Central Bank would undertake a review of past FED operations which may lead to organizational and administrative changes to the FED component (para. 47).

38

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