Document of The World Bank FOR OFFICIAL USE ONLY Report No.25125-VE MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON AN INTERIM COUNTRY ASSISTANCE STRATEGY FOR THE BOLIVARIAN REPUBLIC OF VENEZUELA November 18, 2002 Colombia-Mexico-Venezuela Country Management Unit Latin America and the Caribbean Region 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. BOLIVARIAN REPUBLIC OF VENEZUELA-FISCAL YEAR January I - December 31 CURRENCY EQUIVALENTS (as of November 18, 2002) Currency Unit = Bolivar (Bs) US$ = 1367 Bs WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AML Anti-Money Laundering CFT Combating Financing of Terrorism CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPPR Country Portfolio Performance Review FSAP Financial Sector Assessment Program GDP Gross Domestic Product GEF Global Environment Facility IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IFI International Financial Institution IMF International Monetary Fund INPARQUES Instituto Nacional de Parques MIGA Multilateral Investment Guarantee Agency ODS Montreal Protocol on Ozone Depleting Substances PDVSA Petr6leos de V'enezuela, S.A. VAT Value Added Tax WBG World Bank Group WBI World Bank Institute IBRD Vice President David de Ferranti Chief Economist Guillermo Perry Country Director Olivier Lafourcade Sector Leader Marcelo Giugale Task Managers Connie Luff and Vicente Fretes-Cibils Research Analyst Mario Cuevas INTERIM COUNTRY ASSISTANCE STRATEGY FOR THE BOLIVARIAN REPUBLIC OF VENEZUELA TABLE OF CONTENTS I. Introduction and Main Messages ................................................................ I 11. The Country Context ................................................................ 3 Political Context ................................................................ 3 Economic Context ................................................................ 5 The External Environment ................................................................ 7 Poverty, Inequality, and Development Goals ........................................................... 7 Ill. Main Development Challenges ................................................................ 10 IV. The Government's Development Plan and Policies-An Effort to Build Consensus ...... 13 V. WBG'S Development Partnership with Venezuela ................................................ 15 The Lessons of the Previous CAS-What Worked and What Did Not Work.15 WBG's Portfolio Experiences ................................................................ 16 Procurement and Financial Management in Venezuela's Portfolio ................................. 17 VI. Interim WBG Assistance Strategy- Seizing Opportunities To Reduce Poverty In An Uncertain Environment .............................................................. 18 Restoring Macroeconomic Stability .............................................................. 19 Attaining Economic Diversification and Competitiveness ........................................... 20 Building Efficient, Accountable and Transparent Governance ...................................... 21 Promoting Environmentally and Socially Sustainable Development .............................. 22 Exposure, Financial Risk and Public Debt Sustainability Under the Proposed Strategy ........ 25 VII. Coordination with other Partners .............................................................. 25 VIII. Risks of the Proposed Strategy .26 IX. Concluding Remarks .27 Figure 1. Venezuela. Macroeconomic Cycles ..4 Table 1. Venezuela. Key Macroeconomic Indicators .....................................7 Table 2. Poverty in Venezuela.. 9 Table 3. Inequality in Venezuela ................................ . 9 Table 4. Millenniumn Development Goals.. 9 Table 5. Bank Lending Program for FY03-05 ..23 Table 6. Venezuela-Bank Knowledge Based Program for FY03-05 ..24 Table 7. Partnerships in Venezuela's Development Programs ..26 Box 1. Who Are the Poor in Venezuela? .. ANNEXES A. Venezuela, RB at a Glance B2. Selected Indicators of Bank Portfolio Performance and Management B3. IBRD Program Summary 5 B3. IFC & MIGA Program, FY 2000-2003 B4. Summary of Nonlending Services B5. Social Indicators B6. Key Economic Indicators B7. Key Exposure Indicators B8. Status of Bank Group Operations in Venezuela Operations Portfolio B8. Statement of IFC's Held and Disbursed Portfolio B9. CAS Matrix FY03-05-Base Case MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON AN INTERIM COUNTRY ASSISTANCE STRATEGY FOR THE BOLIVARIAN REPUBLIC OF VENEZUELA I. INTRODUCTION AND MAIN MESSAGES 1. The World Bank Group (WBG)'s last Country Assistance Strategy (CAS) for Venezuela was discussed by the Board of Executive Directors on May 19, 1997 (Report No. 16471-VE). It was prepared to cover the second half of the Caldera government and to provide the basis for the Bank's strategic intervention during the first year of the subsequent administration. That strategy focused appropriately on enhancing sustainable growth, promoting social development and modernizing the public sector-objectives that were not achieved. Weak governance, inefficient public sector expenditures and general economic mismanagement (fed by high dependency on volatile oil revenues) caused dismal economic performance and growing poverty, making it impossible to implement an effective development agenda that could realize the country's enormous potential. This vicious circle was not new to the Caldera administration and has been faced by all governments for the last 30 years-a legacy that propelled Mr. Hugo Chavez's election in December 1998 and his re-election under the new constitution two years later. 2. The election of President Chavez represented a national mandate to break with past policies and, in effect, made the framework of the last CAS no longer relevant. Mr. Chavez moved quickly to introduce profound institutional, political, social and economic reforms. However, these reforms have created turbulence, exacerbated by: (a) difficult fiscal conditions caused by extremely low oil prices during the last half of 1998 and the first half of 1999; (b) a real overvaluation of the exchange rate (resulting from a policy initiated in 1997) that led to unsustainable erosion of competitiveness, increased imports and capital flight; (c) excessive use of a state-led growth model; (d) a large share of short-term debt (although a relatively low stock of public debt) that heightened fiscal instability; and (e) a restricted access to capital markets due to low credit ratings. All of this was worsened by a politically agitated environment that deepened the country's political polarization and uncertainty, and finally triggered a coup d'etat attempt on April 12, 2002. 3. Today, Venezuela is at a critical juncture. Poverty has continued to increase and social development has further deteriorated, exacerbated by policy decisions that have negatively impacted the investment climate for private sector participation, deepened the country's political polarization and increased uncertainty. The list of outstanding reforms, many of which are urgent, continues to expand. However, the events of April 2002 prompted the government to change direction. It has responded by appointing a new economic cabinet which has moved forcefully to implement several sound macroeconomic policies (such as implementing a flexible foreign exchange system, together with some adjustments in the fiscal program); partially revised decisions such as some aspects of the land reform initiative; and developed the Plan de Consenso Nacional, which includes promoting private sector participation in the revival of the economy. It is still unclear whether all actors in the country will reach a common ground for reform over the next few years and Venezuela will finally start to realize its potential, or whether the country will spiral down into further poverty and instability. 4. On the economic and social front, the Bank fully shares the general objectives of the government to accelerate growth, reduce poverty and achieve greater equality. However, the Bank and the government had difficulties agreeing on the means to achieve them during the first years of the administration, which resulted in the Bank's scaling back its financial and analytical involvement, severely depleting its country knowledge. This retrenchment has not served either Venezuela or the Bank. 5. This Interim CAS seeks to guide the WBG during the upcoming period of heightened uncertainty. It proposes a re-engagement with Venezuela through a broad policy and operational dialogue meant to contribute to the country's own search for consensus around a common development agenda. Mindful that country circumstances will call for maximum program flexibility, the WBG will search for and seize opportunities to foster consensus-building interventions in the four areas of reform that are the most critical for poverty reduction: macroeconomic stability, sustainable economic diversification and competitiveness, environmentally and socially sustainable development, and good governance. 6. The tools to deliver this program would be an enhanced package of analytical work, to underpin the policy dialogue and rebuild the Bank's much depleted country knowledge. This would be complemented by an investment lending program of about US$300 million for FY03-05, composed of selected operations that: (a) have the most tangible impact on poverty alleviation; (b) help Venezuela meet the Millennium Development Goals by 2015; (c) reinforce conducive sector policy; and (d) incorporate the lessons learned from the recently completed portfolio review. If the recently achieved improvement in portfolio quality were not maintained or if the reform program were reversed, IBRD would make no further new lending until adequate corrective actions are taken. In tandem with IBRD, IFC will focus on supporting core private sector activities through the management of its existing investment portfolio and selective new investments in key sectors of the economy (including hydrocarbons). The actual scope for new IFC investment will depend on the pace and extent of future reform. 7. If the new economic team implements the necessary structural reforms, achieves growing national consensus, and puts into place an adequate macroeconomic framework that evidences the possibility of returning to the financial markets in relative competitive terms, the IBRD will respond by presenting a CAS to the Board of Directors. Under these circumstances, it is expected that the lending program could be expanded to include policy-based loans in support of critical policy areas, such as fiscal sustainability, the financial sector, and public sector effectiveness and efficiency. In such a case, the overall envelope could reach US$400-500 million per year depending on evolving circumstances (including country creditworthiness and other factors), as well as the depth of the reform program adopted. In this context, the IMF will play a pivotal role in assessing the appropriateness of the macroeconomic framework. 8. This Interim CAS faces serious risks of-deepening political turmoil and civil unrest, policy stances that continue to swing along with oil prices, and declining investor confidence. Moreover, in the integrated economic world of today, the possibility of negative external developments in the oil market and contagion from another emerging market cannot be ruled out. 2 These risks are worth taking, however, given the rewards of increasing the Bank's engagement in Venezuela, supporting the new economic team, and contributing to poverty reduction, enhancing equality and promoting sustainable development. In implementing its strategy, WBG will continue its close collaboration with other stakeholders, especially the IMF, IDB and CAF. Finally, financially, IBPD faces no major exposure issue with Venezuela-a reflection of the de- facto disengagement of recent years, during which time the country has continued to service its IFI debt on schedule. II. THE COUNTRY CONTEXT Political Context 9. Venezuela's development challenges are not new. A resource-rich country, with some of the largest petroleum and mineral deposits in the Western Hemisphere, Venezuela has great potential for achieving sustained social and economic prosperity. Yet, the country has suffered a long history of missed opportunities. A large percentage of the population has not benefited from these resources and the country is characterized by uneven social development and pervasive poverty. Economic policymaking has been unable to cope with the boom and bust cycles generated by the oil sector, resulting in periodic bursts of inflation, recurring recessions, and increasing poverty and inequality. 10. The attempt of the Perez administration (1989-93) to redefine the private and public sector roles and to reorient the economy toward market-led growth stalled in 1992 due to the lack of fiscal and financial reforms, and because of inconsistent macroeconomic policies that contributed to economic contraction and social instability. The interim administration that followed govemed without defined objectives and lacked coherent economic programs. In 1994, President Caldera took office immediately after the collapse of the country's second-largest bank that led to a deep systemic financial crisis. Partly in response to this crisis, unorthodox economic policies were adopted, including a wide range of price and exchange controls. These measures, together with the financial crisis, brought the economy to the brink of collapse by the end of 1995. Reversing the experiment with economic interventionism, President Caldera announced more market-oriented policies, including abandoning price and exchange controls and opening the oil sector to private investment. The government's program brought Venezuela's rampant inflation and currency decline under control. However, the program became unsustainable when the bloated public sector resisted further reforms and the government reversed previous wage policies. 11. Against this background, Venezuelans expressed their dissatisfaction with the failure of past governments by electing Hugo Chavez in December 1998 with the largest margin in 40 years. The sweeping electoral victory gave President Chavez a mandate to radically change from past policies and to focus his administration on political, social, institutional and economic reforms that had not been previously considered. This fundamental break with the policies of past governments has led to a situation of great uncertainty and political polarization. 3 12. Mr. Chavez used the initial stages of his administration to make deep institutional changes. These have included adopting a new Constitution and within this new framework, changing more than one hundred laws. By mid-2000, a new Constitution had been put in place and the long process to define the new legal framework had started, including the re-election of all officials and Mr. Chavez for a six-year term. At that point, in response to social pressures and high levels of unemployment, the President increased the focus of his administration on socioeconomic reforms. The social and economic objectives of the Chavez government are laudable as they largely focus on the reduction of poverty and inequality, as well as the provision of education and health services for the poor. However, the government's initial choice of which instruments would most efficiently achieve these objectives was questionable. During the first years of the administration, the authorities promoted a state-led growth model with strong public sector intervention in the provision of goods and services, including the development of government-sponsored communities that called for the relocation of the poor from urban slums. In addition, it expanded the role of the state at the expense of the private sector and strengthened the discretionary powers of the central government. In early November 2001, the administration issued 48 decrees under the Enabling Law, which included legislation on land tenure, finance, and hydrocarbons. Some of the content and the process of approval of these decrees have been behind the emergence of opposition movements that includes many of the government's former supporters, business leaders, labor unions, and some members of the Catholic Church. Opposition to different aspects of this model, aggravated by strikes in Petr6leos de Venezuela S.A. (PDVSA), generated a conflict that escalated into an attempt to take over the government on April 12, 2002. 13. The administration regained control and appointed a new economic team which has implemented several sound macroeconomic policies (such as implementing a flexible foreign exchange system, together with some adjustments in the fiscal accounts); partially revised decisions such as some aspects of the land reform initiative; and developed the Plan de Consenso Nacional, which includes promoting private sector participation in the revival of the economy. Venezuela is now at a critical crossroads. The country has another chance to introduce the structural changes needed to overcome poverty, inequality, and poor governance, or, as in the past, to continue on a path that is unsustainable from a fiscal, institutional, and social point of view. Figure 1. Venezuela. Macroeconomic Cycles 15% Od-(DP Gmwd,h Unemnipoymnrt Rate 10% 1 - 0/I 1, I ' i ' ' I / x oo 0 0 0 a, o In '0 r- 0 0' Oy 0 - V. o o 0 000 0 00 0 0w a, a, 0l a, a, a, a, a, 0 0D 0D,0 0 0 0' 0'0' 0 0'0 '0'0 '' z 0'1 0~ 0' 0' 0 000 04 0 Note 2002-2005 are projections 4 Economic Context 14. The performance of the Venezuelan economy over the long-term, including the last decade, has been dismal, largely due to unproductive public sector investments, poor macroeconomic management and the inability of economic policymakers to cope with oil cycles. First, much public sector investment in human and physical capital has been unproductive and, in the process, has destroyed wealth. Real GDP per capita growth averaged -1.2 percent per year, and real non-oil GDP per capita growth averaged about -2 percent per year over the last decade, largely explained by declining productivity. Second, inadequate and inconsistent fiscal, exchange rate and monetary policies have not been able to neutralize the impact of external oil shocks on macroeconomic stability and the economy. While oil income fluctuations significantly affect Venezuela's fiscal stance, they are not the only culprit. In 2001, despite a relatively high oil price (above US$20 per barrel on average), the consolidated non-financial public sector registered a deficit of about 6.4 percent of GDP-slightly above the one in 1998 when the average oil price was about US$10 per barrel. The 2001 fiscal deficit was mainly caused by an expansionary fiscal policy (i.e., a large acceleration of public expenditures and as a result the non-oil public sector deficit increased to about 14 percent of GDP). 15. Lack of a consistent exchange rate policy has also contributed to fiscal instability, given that over half of fiscal resources depends on oil revenues which in turn depend on oil prices and the exchange rate. Moreover, the de-facto fixed exchange rate for most of the last decade caused the demand for money to play a crucial role behind foreign exchange losses and changes in international reserves. Finally, by February 2002 the excess demand for foreign currency had increased significantly (largely due to capital flight) and after unsustainable losses in international reserves, the government replaced the exchange rate band system by a floating exchange rate regime. Following a significant depreciation of the exchange rate (about 40 percent) and to avoid rising inflation and further depreciation of the exchange rate, the authorities increased interest rates through a tighter monetary policy. The resulting large reduction in the rate of change of the monetary base triggered a substantial increase in real interest rates, negatively affecting economic growth (i.e., real GDP contracted by about 7 percent in the first semester of 2002) which compounded the negative impact of weakening private sector confidence and cuts in oil production. 16. As a result of high price of oil and the change in the exchange rate policy, net international reserves have recovered to a level of about US$11.5 billion by end-September- representing about 160 percent of short term external debt on the remaining maturity basis, and excluding about US$3.5 billion remaining in the macroeconomic stabilization fund. The demonetization of the economy and the severe economic recession of 2002 have negatively impacted the banking portfolio (which had never fully recovered from the mid-1990s financial crisis), making the entire financial sector fragile. On the fiscal side, the overall public sector deficit would likely narrow to about 2 percent of GDP in 2002 (this deficit incorporates some revenue measures already approved by Congress and pending reductions in expenditures). Covering the public sector deficit has required transfers from the Central Bank, the use of resources accumulated in the oil-based macroeconomic stabilization fund (on a discretionary basis), and an accumulation of domestic arrears. 5 17. From its very beginning the Chavez administration gave priority to political reforms, including the introduction of a new Constitution and legal framework. This, and the lack of a fully implemented and comprehensive economic program, increased uncertainty, affecting the investment climate and reinforcing domestic private sector disinvestment (that had been impacting the country for several years). Real private investment declined by 15 percent annually on average during 1999-2001 compared with 1998, which deepened the economic recession in 1999 (the worst in the last decade) and hampered the economic recovery in 2000 and 2001. As the result of poor economic performance, unemployment increased from 11 percent in 1998 to about 13 percent by the end of 2001. The worsening political and economic conditions caused a significant increase in country risk, reflected in sovereign bond index spreads of over 1,000 basis points and in persistent large outflows of private capital. In 2002, Venezuela's economic vulnerability has increased considerably, with the government facing difficulties in rolling over maturing domestic debt and accessing international credit markets. 18. In April 2002, the new economic team inherited an economy heavily dependent on the oil sector with major macroeconomic and structural imbalances, including a growing fiscal deficit and high unemployment (see Table 1). The scale of the crisis made it necessary to act quickly, and the govemment announced a set of emergency economic policies, including the intention to: (a) reduce public expenditures by limiting public sector wages and by cutting investment outlays of the government and PDVSA; and (b) increase public sector revenues by introducing a tax on bank debits for one year and by increasing the VAT rate from 14.5 percent to 16 percent and reducing VAT exemptions. These measures were in the right direction, and the government has worked on developing an economic plan. They have started to reverse the macroeconomic imbalances and deep recession-GDP is now projected to decline by about 5-6 percent for the whole year. Nevertheless, the economic recession poses a risk to the health of a number of already weak financial institutions. Moreover, major structural reforms still need to be implemented, including in the public sector, pension systems, taxation, decentralization, public debt management, and social safety-net programs. In summary, economic and political uncertainties continue to undermine private sector confidence, affecting the recovery of investment and preventing the reversal of private capital outflows. The underlying fiscal position remains on an unsustainable path, unless additional measures are taken. Furthermore, its financing is further complicated because of the structure of the public sector debt which has short-term debt that is maturing. 6 Table 1. Venezuela. Key Macroeconomic Indicators Project,ons 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 GDP Growth (%) -0 2 64 02 -6 1 3 2 27 -6 1 2 5 20 2 0 Nonoil GDP Growh (%) -2 5 4 2 -0 9 -5 4 3 0 3 8 -4 8 05 1 0 1 0 UnermployrmentRate 1175 1135 113 145 132 128 143 135 131 128 Investrent/G)P 166 210 219 181 172 187 170 170 170 170 Pnvatelnvestment/GDP 70 94 107 88 81 94 109 108 108 107 Fiscal Balance/GDP 73 1 8 -58 I 1 3 2 -6 4 -2 0 -3 5 -3 0 -3 0 Nonol Budget DeflcitGDP -6 7 -8 3 -6 7 -5 7 -to 0 -13 9 -11 8 -11 0 -9 5 -9 5 Current Account/GDP 12 6 3 9 -3 4 3 6 10 8 3 5 5 8 5 0 2 4 2 3 Real Eff E.ch RateIndex C87-I100) 117 131 161 181 192 205 144 144 144 144 Lending Interest Rate 39 24 46 32 25 25 40 38 28 22 Inflation 100 50 36 24 16 12 27 32 22 16 GDPperCapita(USS) 3110 3520 3540 3730 4310. 4760 3351 3488 3574 3633 'An increase denotes a real appreciation The External Environment 19. Venezuela's integration into international trade and capital markets has brought some benefits, such as the potential to exploit wider export markets, greater exposure to technological innovations, and increased access to foreign capital (but has also caused hardship to previously protected industries that have had to adjust). However, exposure to external shocks- particularly developments in the international oil market and foreign capital flows-continues to be significant. Oil contributes about 25 percent of GDP (in real terms), about 80 percent of exports, and about 50 percent of fiscal revenues. While oil prices are projected to stabilize with a slight downward trend in the longer term, experience has demonstrated their high volatility. In this context, market perceptions of country risk have risen steadily largely, due to increased domestic political instability and uncertainty-the spreads on Venezuelan sovereign bonds averaged just over 1,000 basis points in 1998, about 1,200 in 1999 and 2000, and 1,350 in 2001. This trend has, however, reversed during the last few months due to the high price of oil and the govemment's more prudent policies, including the implementation of a more flexible exchange rate regime-spreads decreased to about 1,200 through November 2002. Nevertheless, at their current levels, spreads on Venezuelan bonds remain high, and for all practical purposes, access to international markets is closed to Venezuela. Poverty, Inequality, and Development Goals 20. Over the last decade, poverty has increased, largely as a result of the decline in economic growth, with a resulting negative impact on real per capita income and employment. This has been magnified by Venezuela's dependence on the capital-intensive oil sector and lack of export diversification-the share of non-oil exports to total exports has remained, on average, below 25 percent. At the same time, real wages have fallen significantly and unemployment has risen- between 1990 and 2002, average real wages fell by about 25 percent and unemployment increased by about 4 percentage points, and would have been higher had it not been for the growth in the informal market. Low average real wages and unemployment affected all sectors of the labor market. However, the impact has been more severe on those individuals that 7 participate in the non-oil labor market and that: (a) had relatively little human capital, (b) were young and female, and (c) were urban residents and/or recent migrants. In addition, labor productivity has decreased bY an average annual rate of about I percent. Box 1. Who Are the Poor in Venezuela? A poor person in Venezuela is most likely to live in urban areas, be female, old and living alone, or young, uneducated, unemployed or employed in the infornal sector, with many children. Location. The vast majority of the poor live in urban areas. However, the intensity of poverty is greater in rural areas. Gender. Households headed by women are more likely to be poor. Age Households headed by individuals older than 50 years are poorer than those headed by individuals in the 30-50 year-old range-this is expected because 30-50 years of age approximates the prime income-generating years. Children. Households in the lowest income deciles have, on average, twice as many children as households in the middle income deciles. Education. Schooling is positively and significantly associated with income-lower income groups have lower education. Employment status and sector. Households in which the head is not in the labor force or is unemployed are likely to be poor. Those employed in the private informal sector are poorer than those employed in the formal private sector or public sector. Family size Households with family members of 5 and people living alone are highly represented in households in the lowest incomes deciles. Ethnicity. Venezuelans of Afiican or Amerindian descent (about I I percent of the total population) are also more likely to be poorer than the rest of the population. Source: Encuesta de Hogares por Muestreo, OCEI. 21. While there is no consensus on the absolute level of poverty, its level is unambiguously higher now than in the early 1990s (See Table 2). Poverty is a multi-dimensional phenomenon, as reflected in the characteristics of the households that are poor (See Box 1). In addition to increased poverty, inequality has also increased-the Gini Coefficient increased from about 0.47 in the mid-1990s to about 0.50 in the late 1990s (see Table 3). Indeed, based on data from household surveys, Venezuela income distribution is highly skewed-i.e., in 2000, the top 20 percent of all households received about 55 percent of total income while the bottom 20 percent obtained 3 percent. 22. Although some of Venezuela's current Millennium Development Indicators are not too distant from the goals for 2015 (see Table 4), Venezuela will need to successfully implement a comprehensive economic and social development strategy if it is to achieve all of the Millennium Development Goals by 2015. For more detail on the government's program, refer to Section IV. Annex B5 provides additional information on Venezuela's social indicators. 8 Table 2. Poverty in Venezuela Percent of Total Population 1991 1996 1997 1998 2000 Pop Below US a day 11 8 14 7 187 23.0 23 5 Poverty Gap at US$I a day 3 1 5 6 6 5 10.8 11 5 Pop Below US$2 a day 32.2 36.4 44 6 47 0 48 5 Poverty Gap at USS2 a day 12 2 15.7 19 0 23 0 23.8 Source World Developmenr 1ndicatorv, World Bank 2000 is an estimate Table 3. Inequality in Venezuela 1990 1995 1996 1997 1998 2000 Gini Coefficient 0.54 0 47 0 49 0.49 0 50 0 50 Share of Income of Highest 20% of Households 58.4 51 8 53.1 53 7 53 2 55.0 Share of Income of Lowest 20% of Households 3 6 43 3.7 4 1 3.0 30 Source World Development Indicators, World Bank 2000is an estimate. Table 4. Millennium Development Goals Targets Position of the World Current Position of Venezuela 1. Between 1990 and 2015, 20% of the world population live on In 1998, 23% of Venezuela's population lived on reduce by half the proportion of less than US$1 a day (WBG less than US$1 a day. The prevalence of people living in extreme poverty estimate for 2000). malnutrition among children under age 5 decreased and suffering from hunger. from 7.7% in 1990 to 4.4% in 2000. 2. Achieve universal completion 90% of the world's elementary Net overall primary enrollment ratio in Venezuela in of primary education by 2015 for school-age children (6-14) are 1996 was 83.80%, 84.8% for girls and 82.8% for both boys and girls. enrolled (WBG estimate for 1997). boys. 3. Eliminate gender disparities Worldwide, there is a gender gap of The ratio of female to male enrollment in primary in primary and secondary 7 6% in the primary education Gross and secondary schools is 101%. education by 2005, and for all Enrollment Ratio (WBG estimate levels by 2015. for 1996). 4. Reduce infant mortality rates Worldwide, the under-5 mortality The under-5 mortality rate in Venezuela decreased by two thirds between 1990 and rate was 78 per 1,000 (WBG from 27 per 1,000 in 1990, to 24 per 1,000 in 2000. 2015. estimate for 200. 5. Reduce matemal mortality Worldwide, there are 400 matemal In Venezuela, matemal mortality rate was 43 (per rate by three quarters between deaths per 100,000 live births. 100,000 live births) in 1995. 1990 and 2015. 6. By 2015, halt and reverse the In 1999, the worldwide prevalence In 1999, the prevalence rate of HIV/AIDS among spread of HIV/AIDS, malaria, rate of HIV/AIDS among adults population aged 15-49 was 0.49%. It was 0.15% and other diseases. aged 15-49 was 1.07% (WHO data). among women aged 15-24. 7. Ensure environmental Worldwide, in 2000, approximately In 2000, 81% of Venezuela's population had access sustainability. One indicator is 80% of the population had access to to an improved water source; in rural areas, access to access to an improved water water. Likewise, in South America, safe water is 58%. Likewise, in Venezuela, percent source. A second indicator is percent of land area in protected of land area in protected areas totaled 35.4% in 1999. ratio of land protected to areas averaged 7.4% in 1999. maintain biological diversity to surface area. 8. Develop further an open, rule- Developing countries have For poverty related goals please see Development based, predictable and non- embraced this goal and committed Goal I. Venezuela ranks 84 in Transparency discriminatory trading and to reducing poverty and improving International's Corruption Perceptions Index (102 financial system. governance. countries ranked in 2002). Venezuela scored 2.5 from a possible score of 10 (with I representing most Icorrupt and 10 representing least corrupt countries). Source: World Development Indicators, World Bank. Corruption Perceptions Index supplied by Transparency International. 9 III. MAIN DEVELOPMENT CHALLENGES 23. Although Venezuela is blessed with great natural wealth, poverty is pervasive and social conditions are deteriorating. Poverty has increased largely as a result of the decline in economic growth. Poor macroeconomic management, constraints to private sector participation, and political uncertainties have increased business and country risks, negatively affecting investor sentiment and contributing to high interest rates, in turn thwarting growth and diversification. This outcome performance has been exacerbated by the weaknesses in the broader institutional and legal framework, an inefficient public sector culture (including low administrative capacity), and rent-seeking activities. Moreover, the large and inefficient public bureaucracy has been unable to design and implement programs to reduce poverty, provide for steady economic growth, improve the quality and coverage of education and health, and protect the vulnerable. Social sector institutions have lacked the capacity to formulate, coordinate, and implement policies with clear objectives and responsibilities. As a result, a large number of social funds have emerged, but have only made the overall institutional infrastructure more complex. The private sector has not been given the enabling environment to act as the engine for growth, while deficient physical infrastructure has limited the competitiveness of the economy. These problems have existed for decades and have been common to all recent administrations. 24. If the government is to break with this past and bring improved living standards, reduced poverty and greater equality to Venezuela, the key challenges will rest in five strategic areas: (a) restoring macroeconomic stability and growth; (b) diversifying the economic structure; (c) improving governance and public sector institutions; (d) promoting social development; and, (e) supporting sustainable development. These are the perennial challenges of Venezuela. 25. Restoring Macroeconomic Stability and Growth. If Venezuela does not achieve macroeconomic stability and then find the way to successfully maintain it, the country will face a severe economic deterioration that could send millions more of its citizens into acute poverty. The challenge to prevent this crisis and restore growth will depend upon: (a) correcting fiscal imbalances and moving toward a sustainable medium-term fiscal position; (b) addressing weaknesses in the financial sector; and (c) removing regulatory and legal barriers to private sector investment in the oil and non-oil sectors. To achieve this requires the implementation of policies in several areas such as reforming the taxation system, strengthening tax administration, establishing budget rules to stabilize revenues, reducing oil dependency, avoiding pro-cyclical fiscal policies, and improving debt portfolio management (including a reduced dependency on short-term debt). 26. The Venezuelan banking system is experiencing liquidity pressure due to the loss of deposits, depreciation of the Bolivar and continuous capital flight. Reported bank solvency has continued to deteriorate, however profitability has recently improved. The banking system has been consolidating during the last four years, but the system is still very fragmented. Overall indicators of financial penetration remain the lowest in the region, with high spreads, underdeveloped risk management practices, and growing official intervention influencing the banks' credit allocation process. The government must assess the condition and vulnerabilities of banks and major segments of borrowers, strengthen the level of institutional preparedness to mitigate and manage any risk of a systemic crisis, and strengthen the operational capacity of the Superintendency to resolve failures. These actions should be complemented by legal reform in 10 the area of banking resolution, bankruptcy, and secured lending legislation, among others. If the govemment were successful in implementing such an economic program and reforming the financial sector, it would help investor confidence to improve, real interest rates to decline, and hence private sector investment to recover. Moreover, a healthy development of the financial system will require strengthening the legal and regulatory framework for the banking system, including the anti-money laundering and combating the financing of terrorism (AML/CFT) component, and related infrastructure (e.g., payment systems), complemented by enhancing the business environment. 27. Attaining Economic Diversification and Competitiveness. In the past, Venezuelan governments sought to foster growth by bolstering aggregate domestic demand through accelerating public expenditure which resulted in short-lived growth that was halted when oil prices declined. In today's global economy, Venezuela's long-term growth acceleration will only be sustainable by enhancing competitiveness, diversifying the non-oil tradable sector, improving the private sector investment climate and enlarging the growth base of the economy. This would require that the government: (a) maintain a flexible exchange rate system; (b) deepen international trade liberalization; (c) advance "behind the border" reform policies (e.g., reforms in customs, transportations, and trade standards); (d) promote private sector participation in the non-oil sector (including in the electricity and aluminum sectors) via privatizations, joint ventures, concessions and small and medium enterprise development; (e) improve infrastructure in areas such as transport and water systems; and (f) reduce high business transaction costs by eliminating complex and uncertain legislation and combating crime and violence. 28. Strengthening Public Sector Institutions and Improving Governance. To bring the country's economy to a sustainable, poverty-reducing growth path would overwhelm the already weak administrative capacity of the government if it does not reform. Therefore, public sector institutions and human capital development will need to be strengthened, which will require focusing on those critical areas that will have the greatest impact on bettering governance and which will enable them to provide efficient and transparent public services. These areas include rationalizing the administrative structure; enhancing the efficiency of the civil service; deepening the decentralization process; expanding access to justice; and combating corruption. Rationalizing the state through downsizing and simplifying central functions will improve the quality of government, as it will make the central government leaner and more effective, and focuses only on providing essential basic national services. Additionally, enhancing government efficiency will require a more professional and better trained civil service. 29. To restore public confidence, stability, and promote access to justice, a strong and highly professional judiciary is required. This objective, that should be central in the strategy design, should be accomplished with measures geared towards producing judicial decisions that can be perceived as fair and functional for, and by, the public. For this, judicial training is needed as well as the implementation of a judicial career, including systems for the assessment of judicial performance. Disciplinary mechanisms must be combined with a strategy to fight corruption in the judiciary while at the same time promoting independence and transparency. The training of lawyers and the ethical standards of their practice have to be substantially improved because the quality of justice relies on their performance. Since the Judicial Council was suppressed by Constitutional reform, the technical capacity of the Supreme Court to handle the responsibilities of the previous Council has to be improved. These responsibilities include: the judicial branch governance, the design and management of an accurate and efficient administrative system, as well as a case management system. Efforts to enhance and preserve judicial independence are critical especially for the selection and promotion of judges as well as in all aspects of their performance. Finally, serious efforts have to be made in order to improve access to justice by the poor and by the vulnerable segments of the society, and to promote their participation in the justice administration. Justices of the peace, oral procedures and legal information programs can help in accomplishing this goal, but it is also necessary to develop a strong system of legal aid clinics, public defense, disseminate the use of altemative dispute resolution mechanisms and address gender and indigenous peoples issues linked within the content and use of the legal system. 30. Deepening the decentralization process will also facilitate the effectiveness of the state and improve the provision of public services by bringing policy makers and beneficiaries closer together and by redefining the role of the central government so that it is no longer seen as being the exclusive provider of services. For decades, Venezuela has been a federal country, but the role and finances of the states have been reduced to a minimum. All this began to change with the Law of Decentralization of 1988 which authorized transfer of responsibilities and effectively transferred a few excise taxes to the states. Some of states, have made the most out of authorized excises and tolls and have been able to partially finance infrastructure and social services with their own revenues. However, most states are still completely dependent on the general revenue sharing. Transfer of responsibilities have been incomplete and unclear; leading to little accountability at the state level, and expenditures associated with the revenue sharing scheme have created unnecessary fiscal rigidities. Beginning in 1994 the federal government created a special fund-FIDES-to finance decentralization via project competition among states. Although not as important as general revenue sharing, the FIDES has become a significant supplementary transfer targeted to priorities that are negotiated between the state and the federal government. Regarding municipalities, they raise their own taxes (primarily the property tax and the patente de industria y comercio, an obsolete colonial tax that is being transformed into a *rough form of gross sales tax). They also receive general revenue sharing equal to about 20 percent of current national revenues. 31. Promoting Social Development. To tackle poverty and inequality on a sustainable basis requires investment in human capital development rather than discretionary transfers and subsidies. This encompasses reforms in education, health and social protection systems. Given fiscal limitations, the government needs to improve the quality and coverage of education by focusing on increasing the efficient and equitable use of the resources allocated to the sector. Second, the quality and coverage of health services needs to be strengthened by ensuring sustainable and efficient institutions, financing and management. The reform should entail a new market structure for the provision of health services to reduce costs and increase private sector participation. Finally, the effectiveness and efficiency of the social safety net programs should be improved by developing better targeting mechanisms, advancing administrative efficiency, identifying and increasing support for high-impact programs, and eliminating economic distortions caused by food-related programs. 32. Supporting Sustainable Development. Venezuela has the third highest ratio of urban to rural populations in Latin America (behind only Uruguay and Argentina), with an estimated 87 percent of the population located in urban areas. Nevertheless, in rural areas, the impact of 12 agricultural colonization and rural-to-rural migration has led to annual forest loss rates which are more than double the average in the region. In rural areas, the poor deplete natural resources to survive, given the lack of access to land, markets, education, health, clean water, transport and other public services. To overcome this vicious circle, rural poverty will need to be reduced while mainstreaming environmental considerations with sectoral decision making, both in rural areas as well as urban areas. This will require: (a) increasing the productivity of small-scale agriculture by strengthening sustainable production systems as well as increasing the competitiveness of the sector; (b) expanding institutional capacity developed in recent years to ensure effective enforcement of environmental regulations as well as application of market-based instruments for environmental management; and (c) ensuring transparent, participatory processes in designing and implementing regional planning to address concerns of indigenous peoples and other marginalized communities. IV. THE GOVERNMENT'S DEVELOPMENT PLAN AND POLICIES-AN EFFORT TO BUILD CONSENSUS 33. Venezuela's initial development plan for 2001-2007 provided a general framework for social and economic change. While the Bank shared the general objectives of the government to accelerate growth, reduce poverty and achieve greater equality, we could not agree on the set of policies proposed to achieve these goals. There are concerns that the proposal calling for expansion of the role of the state was in conflict with the empirically proven development model of private-sector led economic growth, complemented by an efficient public sector that protects the vulnerable and provides key public services. Furthermore, there was a contradiction between expanding the role of the state in Venezuela and the continuous erosion in the state's policy formulation and administrative capacity, including the prevalence of rent-seeking practices which distort income distribution. Finally, there were concerns that the plan might not adequately protect individual property rights, particularly because the issuance by Presidential Decree of the Land and Agrarian Development Law (Ley de Tierras y Desarrollo Agrario) called some of these rights into question and generated an intense discussion within the country. 34. The new economic team strengthened the original plan, departed from the initially proposed policies to implement the plan and broadened consultation with different groups and representatives of Venezuelan society. The authorities are making efforts to build national consensus around this revised plan (Plan de Consenso Nacional) and have made it public through its web-site (www.foronacional.gov.ve). The revised strategy includes: (a) restoring stability and promoting economic growth by transforming the structure of production into one that is more competitive and diversified, and capable of generating employment opportunities for all Venezuelans; (b) good governance and building institutions by enhancing the efficiency of the civil service, deepening the decentralization process, expanding access to justice, and fighting corruption; (c) establishing an effective system of social protection; and, (d) ensuring environmental protection. The short-term measures outlined in the plan may not be deep enough to achieve macroeconomic stability and the long-term measures may not be sufficient to promote sustainable development. However, the Bank's dialogue with Venezuela on these issues has greatly improved under the new economic team, and the Interim strategy is intended to further strengthen the dialogue. 13 35. The new team's revised plan includes measures that aim to restore economic stability and growth by improving confidence in the Venezuelan economy, facilitating a decline in real interest rates, and fostering a recovery of investment. Key components of the economic program include correcting fiscal imbalances and achieving a sustainable medium-term fiscal position. In order to achieve this, the government has increased: (a) the rate of VAT to 16 percent from 14.5 percent, as well as reduced tax exemptions; and (b) the rate of the bank debit tax to I percent (on a temporary basis). In addition, the government intends to: (a) increase the rate of duties on some consumption goods; (b) improve tax administration and customs procedures; (c) restrain the growth of public sector outlays; (d) reform the Macroeconomic Stabilization Fund (through introducing more transparent and automatic rules for the accumulation and use of funds); and (e) improve the efficiency of Treasury operations and debt portfolio management (including a reduced dependency on short-term debt). 36. To diversify economic growth, Venezuelan officials intend to focus on: (a) maintaining a flexible exchange rate system; (b) promoting private sector participation in the non-oil sector through an overhaul of public procurement, strengthening export promotion programs, supporting the development of small enterprises, and transferring assets in selected industries to the private sector (e.g., including in the tourism sector through the liquidation of Corpoturismo); (c) increasing private sector investment in the hydrocarbons sector; (d) implementing a program of legislative reforms aimed at improving the legal and regulatory framework for the banking system and capital markets; and (e) enhancing the business environment by reducing high transaction costs, protecting property rights, and clarifying uncertain business regulations. 37. The authorities seek to improve governance and the quality of public sector institutions. Key components of the program include: (a) deepening the decentralization process through the implementation of a program of legislative action that would include reforms to strengthen state and municipal finances, citizen participation, and the allocation of responsibilities between federal and subnational officials; and (b) enhancing the efficiency of the civil service through institutional restructuring, strengthening training programs, and mainstreaming modern technology in the public sector. 38. The authorities aim to improve social protection and the sustainability of the development process in Venezuela through increasing efficiency and equity in the use of education resources. The government plans to increase coverage of pre-school and early education, including tripling the number of children served by day-care centers and increasing the number of classrooms for early education nationwide. Improvements in the quality of education services will be supplemented by an increase in coverage of basic food and nutrition programs. The quality and coverage of health services will be improved by addressing the sustainability of health care financing, bettering health care management, focusing on increasing access to public health services, and creating mechanisms to increase citizen participation in the management and delivery of health services. Special programs will be developed to serve the needs of indigenous communities, women, children and to assist people suffering from diseases such as tuberculosis, malaria, and HIV/AIDS. The social safety net will be overhauled by introducing better targeting mechanisms, promoting administrative efficiency, identifying and increasing support for high- impact programs, and eliminating economic distortions caused by food-related programs. 14 39. Since early 1999, rural development has been an important part of the government's discourse. The main challenge for the agriculture and rural sector is to promote equitable growth through market friendly policies which would result in a more equitable allocation of resources. Government programs aimed at reducing rural poverty will be implemented, enhancing the productivity of small-scale agriculture, expanding the institutional capacity to ensure effective enforcement of environmental regulations; and ensuring transparent, participatory processes in the design and implementation of regional planning to address the concerns of indigenous peoples and other communities. V. WBG'S DEVELOPMENT PARTNERSHIP WITH VENEZUELA The Lessons of the Previous CAS-What Worked and What Did Not Work 40. The previous CAS was prepared in 1997 to cover the second half of the Caldera administration and provide the basis for the first years of the new administration. It focused on the perennial problems of Venezuela, namely, enhancing sustainable growth while promoting social development and modernizing the public sector. Improvement in the performance of the IBRD portfolio was a prerequisite for all future lending to the country. The authorities developed, with assistance from the Bank, a Portfolio Improvement Plan that contained a strategy for improving portfolio management, targets and an action plan for monitoring portfolio performance. The Bank's primary support was through a low-case lending program of about two operations per year for an annual average of $55 million that could have been expanded if there had been significant improvement in portfolio performance and strong government commitment to policy reform. This program was to be complemented by key non-lending services such as: (a) case studies of international experience on managing oil booms and busts; (b) assistance in establishing the regulatory framework for concessions and privatization public enterprises in key sectors; (c) a poverty assessment; and (d) a labor market analysis. 41. WBG-financed programs have had both successes and failures. For example, the emphasis in the CAS on improving the quality of the portfolio worked well, and by the end of fiscal 1999 there were no problem projects in the portfolio. However, this improvement was not sustained and by fiscal 2001 portfolio performance had once again deteriorated, with about 30 percent of the projects rated as unsatisfactory. WBG's contribution to Venezuela as a knowledge institution, although limited, also worked well. For instance, recommendations regarding how to make the labor market more flexible and a study of international experience in managing oil revenues were well received by high levels of the administration, including President Caldera. Initially there was not an agreement on the focus that the Bank's knowledge-based services should take; however, the new economic team has expressed keen interest in this work. Finally, even though there was no agreement on an overall economic reform program, appropriately designed and targeted operations in sectors where there was good dialogue have worked well, such as Judicial Reform, Agricultural Services, and Caracas Slum Upgrading. 42. However, the objective of reducing poverty by implementing a program of structural reforms to move the economy onto a higher sustainable growth path was not achieved. This was due to the inability of the Caldera administration to maintain support for the reform program 15 prior to the elections, and to the decision of the Chavez government to focus primarily on political and institutional reforms and on an economic model that was not conducive to rapid growth. 43. There are several lessons of the implementation of the previous CAS. First, the Bank's relationship with Venezuela has been uneven, with the government's interest in WBG assistance positively correlated to low oil revenues. Under these conditions, it is imperative that the Bank be responsive to client priorities (i.e., clients especially appreciated the Bank's knowledge-based services such as the work on managing oil revenues and the labor market analysis), take advantage of windows of opportunity to promote policy dialogue and reforms in key sectors, and support projects with strong government ownership. Second, although the efforts proposed in the CAS to improve portfolio performance were initially successful, by FY01 performance had once again deteriorated. It is therefore necessary that the government and the Bank agree to maintain a strong focus on portfolio performance. Finally, where there is not a strong government commitment to implement reforms, IBRD can still have a positive impact by focusing on highly selective operations in key areas such as social sector development and targeted poverty-reduction operations. WBG's Portfolio Experiences 44. IBRD Experiences. The IBRD's portfolio in Venezuela currently contains 9 projects with commitments of about US$396 million and US$169.1 million undisbursed. Two projects are currently rated unsatisfactory. The IBRD's portfolio in Venezuela has historically been of poor overall quality and has had generally unsatisfactory outcomes. In the last five years, OED has evaluated seven projects and found that almost half were found to have had unsatisfactory results. 45. In 2001, a significant overhaul of the portfolio was carried out and as a result the number of operations was reduced, performance indicators improved and the closing dates were extended for projects likely to achieve their development outcomes. The portfolio improvement program has recorded significant results in terms of implementation performance and disbursements. Problems with a new procurement law that was in conflict with the IBRD's guidelines were resolved. Chronic flow-of-funds problems were addressed and disbursements have picked up significantly in the past several months. Project-specific issues have been dealt with and several project ratings have been upgraded. Maintenance of this improvement in the performance of the portfolio is a prerequisite for all future lending to Venezuela. 46. Based on the recommendations of the Venezuela portfolio review conducted by the Regional Quality Enhancement Team, the IBRD will increase its focus on portfolio management to ensure effective project implementation and to prevent recurring problems by: i. Being more responsive to client priorities, including avoiding projects without strong government ownership; ii. Simplifying ongoing and new operations; iii. Maintaining intensive supervision of projects; 16 iv. Extending project closing dates only if the project is rated satisfactory and monitorable targets have been met; v. Making more effective use of portfolio management tools (for example, CPPRs, project- specific action plans, and project implementation benchmarks); vi. Increasing training aimed at improving procurement, audit, and project management skills of staff in executing agencies, both at the national and subnational levels. 47. IFC Experiences. Given Venezuela's reliance on oil and low level of private investment, IFC in the last CAS focused on facilitating private sector activity in the non-oil sector and diversifying the economy away from the oil sector. In the early part of the CAS period, IFC was able to implement this strategy. From FY98 to FY02, IFC approved a total of $408 million (including syndications) in 13 projects (10 of which were in sectors such as telecommunications, power, forestry, aquaculture, ports, and general manufacturing). However, most of these were approved during FY98 to FY00. As country conditions began to deteriorate, investor confidence declined and there were fewer new investment activities in the private sector. The perceived unsustainable fiscal position, the past real appreciation of the exchange rate, and the prolonged absence of political consensus over a coherent economic plan, has led investors to curtail, or postpone, essential investments in key sectors of the economy and in turn to focus on the maintenance of their existing investments at risk, particularly the ones oriented towards domestic markets and thus generate primarily domestic currency-denominated revenues. Under these circumstances, IFC has seen fewer opportunities to support economic diversification, while it has been faced with limited but important demand to help sustain core private sector activities in Venezuela (including the hydrocarbons sector). Procurement and Financial Management in Venezuela's Portfolio 48. Based on preliminary assessments and the experience of IBRD projects, current government systems do not provide useful and timely information for financial management, nor adequate checks and balances between different government levels and between entities at each level. These deficiencies should be corrected within an overall program of anticorruption and governance strengthening. IBRD will help the government resolve*these problems by preparing a Country Financial Accountability Assessment (CFAA) scheduled to begin in early FY04. It would include the following aspects of financial accountability: (a) budgetary processes; (b) accounting, financial reporting, and internal control systems; (c) auditing; (d) legislative and public oversight; (e) review of internal control practices within government; (f) accountability framework to support transparency under future governments; and (g) financial accountability of public sector enterprises and agencies, including customs. Based on the findings and recommendations of the CFAA, an action plan for strengthening financial accountability in Venezuela would be agreed with the government, including a possible new accounting model meeting the requirements of an Integrated Financial Management System. 49. Furthermore, the IBRD portfolio in Venezuela has been adversely affected by weaknesses related to project financial management and auditing. To improve this situation, IBRD will: (a) more strictly enforce the timeliness policy of audit compliance; (b) encourage borrowers to contract private auditing firmns to conduct audits with financing from loan proceeds; 17 (c) assist the government in setting up a system to monitor the timeliness and quality of the audit reports and provide feedback; (d) initiate a thorough review of project financial management systems, and their adequacy in producing reliable and transparent information, and provide the necessary support for their upgrading; and (e) encourage timely counterpart contribution to project financing. 50. The government and the IBRD will complete a Country Procurement Assessment Report (CPAR) in FY04. The CPAR would assess the capacity of government to carry out procurement according to international standards and with regard to Bank guidelines. An action plan would be developed in agreement with the government to assist project implementation units by developing bidding documents and training programs for procurement staff. In addition, the CPAR could assist the government by making recommendations to update present laws and reduce conflicts imposed by existing legislation. Finally, its recommendations could lead to the introduction of an electronic procurement system. VI. INTERIM WBG ASSISTANCE STRATEGY-SEIZING OPPORTUNITIES TO REDUCE POVERTY IN AN UNCERTAIN ENVIRONMENT 51. Given the political and economic uncertainties facing Venezuela, WBG will support the authorities efforts in broadening dialogue for consensus building and seize opportunities for analytical work and investment that are the most critical for poverty reduction. In this context, WBG will support the key areas of macroeconomic stability, sustainable economic diversification and competitiveness, environmentally and socially sustainable development, and governance. Given the level of political instability and polarization in Venezuela, as well as the nature of an Interim CAS, IBRD has not carried out extensive consultation with civil society and the private sector. However, the strategy has been fully discussed with the government. 52. If the administration is willing to engage in a sustained and constructive policy dialogue, the IBRD would support Venezuela by implementing a large program of analytical and advisory services to help construct a common ground for reform and rebuild the Bank's depleted country knowledge. This program would be implemented with the active participation of government and other interested national stakeholders in order to strengthen dialogue and build much needed consensus. Increased emphasis would also be placed on responding quickly to demand-driven informal economic work and advice to specific immediate needs of policymakers. The impact of this work would be enhanced through close interaction with policymakers and wider dissemination, including the use of seminars and workshops. 53. The Interim CAS plans a three-year lending program for IBRD that could reach US$300 million for FY03-05, depending on portfolio performance and policy. The program would consist of investment operations focused on opportunities to contribute to the reduction of poverty and to the support of greater equality. The selected investment operations would: (a) have the most tangible impact on poverty alleviation; (b) help Venezuela meet the Millennium Development Goals by 2015; (c) reinforce conducive sector policy; and (d) incorporate the lessons learned from the recently completed portfolio review. 18 54. The level of lending would be dictated by progress in portfolio performance and related policy improvements. Specifically, lending in the first two years of the CAS would only take place if there are no reversals of policies in the macroeconomic framework and respective sector. Lending in the third year of the CAS would only take place if there were meaningful improvement in macroeconomic and the respective sectoral policies. In addition, if the recently achieved improvement in overall portfolio quality were not maintained or if the reform program were reversed, IBRD would make no further new lending until adequate corrective actions are taken. Specifically, (a) an annual disbursement ratio of at least 15 percent will be maintained; (b) the percentage of problem projects and projects at risk by amount (excluding country risk) will be maintained below 35 and 50 percent, respectively; (c) there will be satisfactory ratings (Development Objectives and Implementation Progress) for projects in the sector; and, (d) there would be no reversals in the protection of property rights. 55. If the new economic team implements the necessary structural reforms, achieves growing national consensus, and puts into place an adequate macroeconomic framework that evidences the possibility of returning to the financial markets in relative competitive terms, the IBRD will respond by presenting a CAS to the Board of Directors. Under these circumstances, it is expected that the lending program could be expanded to include policy-based loans in support of critical policy areas,, such as fiscal sustainability, the financial sector, and public sector effectiveness and efficiency. In such a case, the overall envelope could reach US$400-500 million per year depending on evolving circumstances (including country creditworthiness and other factors), as well as the depth of the reform program adopted. In this context, the IMF will play a pivotal role in assessing the appropriateness of the macroeconomic framework. 56. A summary of the main instruments for WBG intervention is provided below, aligned with the strategic objectives they will support and proposed Bank instruments. (see Tables 5 and 6). Restoring Macroeconomic Stability 57. The main objective of the IBRD's strategy in terms of macroeconomic stability is to identify, in close collaboration with the IMF, policies for correcting macroeconomic imbalances and to help reduce the likelihood of an economic crisis. To achieve this, the IBRD is undertaking an in-depth Country Economic Study (CEM-I). This study comprises the following key topics: (a) macroeconomic imbalances and volatility-which includes how to manage volatility coming from oil price/production cycles; (b) external sector; and (c) real economic growth-which includes both the oil and non-oil sectors, and particularly the constraints to diversify the economy and what to do about them. Based on this analysis, policy recommendations would emphasize the requirements for ensuring stability and building an environment conducive to sustained economic growth, greater competitiveness and diversification. To complement this study, the Bank will undertake a public expenditure review (PER), which will focus on analyzing the sources of fiscal instability, the level and quality of the public sector expenditure programs, and the allocation of public sector expenditures, including special program protecting the poor. The PER will include policy recommendations to improve the efficiency and effectiveness of the public sector expenditure program, reduce its volatility and ensure fiscal sustainability. Both the CEM-I and the PER will be carried out in consultation 19 with the government, interested stakeholders and civil society. Upon completion, these studies will be broadly disseminated through seminars and workshops. At the government's request, the Bank could continue and expand its advisory services regarding pension reform and public sector debt management to improve the profile of debt structure. Attaining Economic Diversification and Competitiveness 58. The IBRD would undertake a program of analytical and advisory work in a number of economic and sectoral areas, including the preparation of a comprehensive country economic study in FY04 (CEM-II), which will include the analysis of private sector investment, input factor productivity (including technology) and its impact on economic growth and diversification. The IBRD is finalizing a set of policy notes to support important reforms in areas such as the public sector, taxation, decentralization, public debt management, pension systems and social safety net programs, and in this context would work with the government on a detailed set of policy recommendations. In addition, FIAS recently completed a study of the investment climate and competitiveness in Venezuela, in partnership with the country's investment promotion agency. The Venezuelan authorities have expressed to the Bank and the IMF their interest in participating in an FSAP. The evaluation would benefit the authorities in benchmarking the state of development of Venezuela's financial system. Given its broader scope and focus, the FSAP would need to be complemented with post-FSAP support providing the hands-on advice needed to develop and implement an action plan directed at averting a deeper crisis. Hence, the Bank also intends to step up monitoring of developments in the country's financial system, with a view to enabling the IBRD to provide at relatively short notice comprehensive and detailed policy advice to the authorities. 59. Furthermore, IBRD could support Venezuela's initiatives towards improving the legal and regulatory framework of the financial sector, including strengthening of the AML/CFT regime. The Venezuelan authorities are planning to upgrade their payments and securities settlement systems. This process has been initiated with the launching of a project for an automated clearing house that will automate check clearing and eventually other payment instruments. However, a much more comprehensive approach is required to provide security to the settlement of large value payments in order to mitigate credit, liquidity and systemic risks. A first step will be to assess the legal, operational and regulatory arrangements for the payments and securities settlement systems. The Venezuelan authorities have requested a mission for technical advice on the payment, security and settlement systems. This initiative is led by the Bank, in partnership with the Center for Monetary Studies in Latin America (CEMLA), and has already undertaken this type of studies in 12 countries. 60. IFC and MIGA. As noted earlier, low investor confidence and constrained private sector activities present IFC with fewer opportunities. Given the importance of maintaining the quality of its overall portfolio, IFC would focus on managing its existing portfolio in Venezuela (US$291 million for its own account and US$213 million for syndications, as of June 30, 2002). IFC will also respond to important demands to help sustain core private sector activities under the current difficult investment climate and diminishing private sector role. When opportunities arise, IFC will provide financial support to projects that have positive fiscal and/or foreign exchange earning impacts and remain robust under difficult country circumstances. This could 20 include projects in the hydrocarbon sector, or with domestic top credit rated, non-oil sector enterprises. In the medium-term, IFC would resume its focus on helping diversifying the economy, as and when the investment climate improves and Bank-supported reform presents increased opportunities for the private sector. MIGA continues to receive inquiries from potential investors, but they have not yet materialized into active applications. Building Efficient, Accountable and Transparent Governance 61. Decentralization. Venezuelan policy makers do not have a unified vision of decentralization policies nor a common strategy for implementation of the decentralization process. The Bank would be ready to assist the authorities in the design of the legal, regulatory and institutional framework for intergovernmental relationships. In this context, the Bank would support: (a) basic institutional fiscal and financial tools, including standard accounting, budgeting, planning and reporting routines-probably along the lines of integrated financial management made compatible at all levels of government; and (b) documentation and support of best practices at state and municipal levels. The Bank will need to keep an active policy dialogue with public and private stakeholders if it is to help the government develop a medium to long term strategy for decentralization. The Bank would join efforts with other multilateral (IDB, UNDP) or bilateral organizations (German foundations) that are already supporting the Venezuelan decentralization debate and process. The Bank would assist the government to further the decentralization process by: (a) introducing performance and result indicators and inter-government coordination mechanisms; (b) supporting fiscal sustainability strategies for the more advanced state and local governments, consisting of components such as rationalization of expenditures at subnational levels, better management of floating debt, strengthening tax administration and improved capacity for project preparation and implementation; (c) ensuring cohesiveness between the ongoing legislative agenda and management strengthening actions at subnational levels; and (d) strengthening the capacity of the national level to monitor, evaluate and disseminate decentralization goals and results. 62. Judicial System. The judicial system is the second governance front where the Bank would support the government. Venezuela's judiciary needs to continue to modernize and improve its effectiveness by: (a) promoting transparency and resource utilization through the automation of case management systems nationwide; (b); strengthening judicial professionalism and independence by accelerating the implementation of judicial career and tenure programs, along with judicial training and disciplinary mechanisms; and (c) improving citizen access to justice and confidence in the judicial system through the promotion of justices of the peace, oral procedures and legal information programs, especially for the poor and disadvantaged. Future Bank assistance would include the mainstreaming of the successfully completed pilot court project, along with activities that improve judicial professionalism, resource utilization, access to justice, transparency, and citizen outreach programs that build confidence in the system, especially among the poor. 63. Anticorruption. Building an effective and high-quality public service would involve the strengthening of anticorruption measures. The Bank would assist by providing technical assistance for the design of anticorruption strategies to federal ministries and agencies and carrying out Financial Accountability and Procurement Assessments. Specifically, IBRD would 21 assist in making government more transparent in areas such as designing systems to provide useful and timely information for financial management and adequate checks and balances, as well as developing standardized bidding documents and an electronic procurement system. 64. WBI Program. The World Bank Institute (WBI) held discussions with the Ministry of Planning to explore the possibility of providing support to the government in the areas of institutional capacity building, particularly in policy formulation and administrative capacity in the public sector, including governance and corruption areas where Venezuela is admittedly weak. In the context of the proposed strategy outlined in this Interim CAS, WBI would assist the government in the areas mentioned above. Venezuelan civil servants and private sector individuals have been invited to participate in WBI learning and training programs in a number of sectors. WBI would continue to invite the authorities to send participants to all its learning activities directed to Latin America. Promoting Environmentally and Socially Sustainable Development 65. Supporting the Social Sectors. The main objective of the program for the social sectors is to focus on the protection of the most vulnerable, while contributing to the design of appropriate policies to reduce poverty in the longer term. The IBRD will conduct a Social Sector Assessment and Review to enhance social sector performance. The study will include the analysis of how to: (a) improve the efficiency in the allocation and use of existing resources through a clear definition of social policy objectives; (b) strengthen the social ministries by prioritizing administrative capacity building; and (c) simplify, streamline, and increase the administrative efficiency of the social programs to improve their cost-effectiveness, including merging and simplifying social sector institutions and funds. The IBRD's strategy would: (a) strengthen institutions to formulate better policies, in particular regarding social safety nets, through analytical work, and the provision of technical expertise; and (b) offer lending operations to help improve the coverage and quality of basic education and health services. Specifically in education, any new lending would build on the objectives of past operations such as raising student achievement, reducing repetition and dropout rates, as well as enhancing efficiency, quality and equity in primary and secondary education. The Bank's experience in education from the most recent operation was that an overly ambitious design in terms of objectives and coverage greatly strained the implementation capacity of the public sector. This capacity was further undermined by constant changes in key counterpart positions. A follow up operation would respond to these weakness with greater simplicity in design and with institutional capacity analysis. 66. Combating Poverty and Protecting the Environment. To improve basic services to the urban poor, the IBRD would support a national urban upgrading and housing project, building on the lessons and experience gained from the successful implementation of the ongoing Caracas Urban Upgrading project. This operation would address the urgent need for upgrading in basic infrastructure services for the urban poor, including water and sanitation, electricity, access roads, and telecommunications within the context of urban land management and low-income housing. The project would build on lessons learned from the current project, including the need for strong community participation in planning processes, focus on integrating physical and social infrastructure and devolving as much responsibility for 22 implementation as possible to the state and local levels. Whereas the current project focuses on integrated upgrading of urban settlements in Caracas, the national project would include a menu of options available to municipalities, depending upon on the needs and reform commitments of the particular municipality. In addition, the project would aim to work with municipalities in developing policies that increase opportunities for access to land and housing by the urban poor, such as relaxing excessively onerous building standards that price the poor out of the local housing market. IBRD would also support a regional and urban transport project oriented towards improving transport access to the poorer and less well served population segments via strengthening of regional highways and secondary networks and medium size urban centers. In the context of a sustainable fiscal framework, the IBRD would conduct a study (CEM-IIl) to improve the efficiency of public sector investments. The study will review the status of access to public services (including infrastructure, water and sanitation), especially in the poorest communities and ways to address deficiencies, including policy and institutional improvements and more effective public-private partnerships. 67. The IBRD would help mainstream sustainable development by combating rural poverty while protecting the environment. The ongoing rural and environment projects have strengthened institutions and updated the regulatory framework. They have also developed basic capacities to identify and promote synergies between economic and social regional development, sustainable livelihoods, and conservation. Follow-up operations would build on these achievements. They would be designed to support the achievement of the Millennium Development Goals specifically by helping to reduce rural poverty and to support the environment goals. In FY04, an IBRD/GEF blended operation would address needed reforms to ensure sustainable development, as well as invest in important parks in the south and eastern parts of the country to preserve their unique biodiversity. To help reduce poverty in rural areas, the project would intend to improve the productivity of sustainable production systems in small scale agriculture and rural enterprises. In addition, the Bank has engaged in a dialogue with government to assist the country in complying with the Montreal Protocol on Ozone Depleting Substances (ODS) to protect the ozone layer. Table 5. Bank Lending Program for FY03-05 I ~ ~ ~ -~ 7 AM.~~~~~ ~ ~ ~ j_y,:yf -Mlji 2003 Education Improvement 50 Judicial Reform 40 Subtotal 90 2004 Health Project 45 Slum Upgrading 45 Rural Poverty, Sustainable Development and 30 GEF-Canaima National Park Subtotal 120 2005 Education Improvement 11 40 Regional and Urban Transport 35 Montreal Protocol-Ozone Depleting Substances 15 Project Subtotal 90 TOTAL 300 23 rable 6. Venez la-Be Knowledge 'g FY ml is.i, IiD iI 2003 Country Economic Study I Economic and Social Policy Notes Financial Sector Assessment Program & Monitoring 2004 Country Economic Study II Public Expenditure Review Social Sector Assessment and Review Country Procurement Assessment Country Financial Accountability Assessment 2005 Country Economic Study III Poverty Assessment 68. Progress Benchmarks. Progress will be reflected in the implementation of more prudent fiscal policies, strengthened financial supervision, an improved investment climate and reduction in the "cost of doing business" in Venezuela. Maintenance of a stable and flexible exchange rate system, as well as sustained recovery of aggregate private investment, would signal that the policy environment remains on track. Key indicators of openness to international trade as well as increased FDI flows (in both the oil and non-oil sectors) would also be positively associated with the degree of success of the government's reform program. The achievements of WBG assistance would be measured by the extent to which analytical and advisory services, as well as lending operations, help the government sustain coherent economic policies, and build consensus in the reform process. 69. Another signal of the success of the government's program would result from the improvement of the institutional capacity of sub-national government and greater coordination across different levels of government. Moreover, streamlined judicial processes and increased access to justice by the poor would also be associated with successful implementation of the government's reform agenda. The success of the government's anticorruption efforts would eventually translate into an improvement of Venezuela's international ranking of transparency. The achievements of WBG will be measured by the extent to which analytical and advisory services, as well as lending operations, help the government implement its agenda for public and judicial sector reform, including fighting corruption. 70. Progress with the implementation of the government's program would be reflected in improved national indicators of efficiency in the educational system and access to basic healthcare. Moreover, there would be an increase in access to basic social services, decreased leakage and phasing out of regressive targeting systems. The achievements of WBG will be measured by the extent to which analytical and advisory services, as well as lending operations, help the government implement its agenda to reform the education, health, and social safety net systems. 71. Finally, implementation of the government's program would result in accelerating rural development, combating rural poverty and ensuring sustainable development. The success of the 24 WBG would depend on the effectiveness of its contribution to the design and implementation of rural and sustainable development policies, and to capacity strengthening measures at the national and state levels. Exposure, Financial Risk and Public Debt Sustainability Under the Proposed Strategy 72. IBRD exposure and financial risk in Venezuela are low. IBRD debt outstanding and disbursed is US$ 799 million and constituted less than 1 percent of the total IBRD portfolio, less than 5 percent of the country's total foreign debt, and less than 20 percent of total preferred- creditor debt. IBRD exposure is also low with respect to Venezuela's debt service capacity as well as other country specific conditions, WBG debt service to exports, less than 1 percent; WBG debt service to public debt service, less than 6 percent; and preferred creditor debt service to public debt service, less than 30 percent. Moreover, President Chavez has repeatedly confirmed the country's commitment to honor its obligations and IBRD has not experienced any delays in payments under this administration. 73. With implementation of a policy scenario without additional fiscal adjustment, the underlying primary balance (after discounting long-term price trends in oil prices) is estimated to be -0.4 percent of GDP. If the current (cyclically adjusted) fiscal position is maintained, it is projected that Venezuela's total public debt ratio would continue rising, reaching an unsustainable 55 percent of GDP by 2012, and continue increasing thereafter. Under the policy reform, and adjustment currently proposed by the authorities, a primary surplus equivalent to less than I percent of GDP will likely be achieved. Additional measures will be necessary to attain an underlying primary surplus of about 1.5 percent of GDP and thereby make the fiscal path sustainable. If the authorities are able to achieve and permanently maintain this primary surplus, a nonexplosive debt path will be reached (consistent with long-term price trends in oil prices). Thus with an underlying primary surplus of 1.5 percent of GDP, total public debt would stabilize at around 35 percent of GDP by the end of this decade. This suggests that the magnitude of the required adjustment is about 2 percentage points of GDP (to bring the underlying primary balance from -0.4 to a sustainable 1.5 percent of GDP). VII. COORDINATION WITH OTHER PARTNERS 74. IMF Program. Venezuela does not have a program with the IMF. The last Article IV consultation was completed by the Executive Board of the IMF on September 11, 2002. IBRD- IMF collaboration would remain strong, including exchanging information for monitoring macroeconomic and financial sector developments, as well as structural reform. 75. IDB Program. The IDB assistance program in Venezuela focuses on four strategic areas: (a) economic development through increasing productivity in the non-oil sector; (b) social development and poverty reduction through investment in human capital; (c) institutional development through strengthening the public sector; and (d) technology development through increasing access to science and technology. The lending program consists of 17 ongoing, mature projects representing about US$1.3 billion as of July 31, 2002. Of this total amount, about US$700 million has been disbursed, and 7 operations are expected to close during the remainder of 2002. In addition, the IDB is planning 4 operations in 2002 for a total of about 25 US$240 million. The Bank and the IDB are closely coordinating the strategic areas of interventions through both lending and nonlending services. 76. CAF Program. The CAF assistance program in Venezuela focuses on four strategic areas: (a) infrastructure for development and integration; (b) strengthening the productive sector, SMEs and improving competitiveness; (c) development of financial and capital markets; and (d) public sector reform and institutional strengthening. The lending portfolio represents about US$1.4 billion as of March 2002. Of this amount, about US$720 million was disbursed in 2001. About 95 percent of the existing portfolio is related to infrastructure projects and investments in the manufacturing sector. In addition, the CAF has approved or is planning to undertake 7 lending operations in 2002 for a total of about US$225 million, mostly for investment in infrastructure. Moreover, 11 technical assistance operations have been approved or are planned for 2002, amounting to about US$1 million. The Bank and the CAF are closely coordinating the strategic areas of interventions through both lending and nonlending services. 77. Table 7 below summarizes the focus of WBG interventions and of our partners in Venezuela's development program. Table 7. Partnerships in Venezuela's Development Programs Development ~~Restonng Attaining Economic tmprovmng Govemance Promoting Socially and Devellpenge Macroeronomic Stability Diversification and and Public Sector Envtronrnentally s and Growth Competitiveness FIsotutious Sustaonable Developmen Government VIII. TH RIK FTEPOPSDSRTG IDB . 183RD fJg,,,l"4!1Wi EFC 4 ^ CAF Pnvate Sector Civil Society . , ,' i'i. ,N High Focus Significant Focus Some Focus Littic Focus VIII. THE RISKS OF THE PROPOSED STRATEGY 78. The assistance strategy put forward in this document confronts a set of significant risks. First, the climate of political polarization (as evidenced by the attempt to remove President 26 Chavez and frequent demonstrations) and civil unrest is still very strong, which has limited the capacity of the authorities to implement credible economic policies and needed structural reforms to remove distortions and enhance the participation of the private sector. While it may not be possible for the government to overcome this polarization, the authorities are attempting to broaden the dialogue with different civil society groups, including labor unions and private sector, to narrow the gap around the economic and social agenda. Furthermore, they have invited the international community, including former US President Carter and General Secretary of the Organization of American States, Cesar Gaviria, to facilitate mediation among the various interested parties. 79. Second, in the integrated economic world of today, the possibility of negative external developments in the oil market and contagion from another emerging market cannot be ruled out. Furthermore, developments in the domestic financial sector and the foreign exchange market must be closely monitored. In addition, Venezuela's macroeconomic management record and policy mix (especially regarding the consistency of fiscal, monetary and exchange rate policies) do not yet provide a solid basis for consolidating stability and increasing confidence in private investors. The new economic team is fully aware of this situation and is attempting to implement better macroeconomic policies. 80. Finally, if the political and economic situation deteriorates, long-standing structural problems will become more acute, and the likelihood of a crisis will increase. For example, a social crisis could emerge if a large state or municipality (or even the central government) is fiscally unable to deliver basic social services. This could, in turn, instigate marginalized urban groups to civil unrest and overwhelm the capacity of the government to respond. This threat is present countrywide, but greater in poor, overcrowded urban areas, i.e., the barrios. IX. CONCLUDING REMARKS 81. The objective of this assistance strategy is to support Venezuela's efforts to create consensus around reforms that restore macroeconomic stability, build the basis for economic diversification and competitiveness, construct an efficient, accountable and transparent government and promote environmentally and socially sustainable development. This strategy is the result of analytical work and lessons of operational experience. James D. Wolfensohn President By: Shengman Zhang Washington, D.C. November 18, 2002 27 Venezuela, RB at a glance 990 POVERTY and SOCAL , Venezuela, Amrc lddle4 P91"W-1y"end SOC ~~ RB& Cari.mn Deveilopment diamond* GNI per capita ~~~~~ ~~~~~~~~4760 3,680 ' 6207 .?d0ulaiion: mid-year (miifons) - 46 -- 1 - 4 Lfe expcac GNI (Alas etod 'USbllos - 117 2 -1,895 Avenage ann'ual growth,.19964f1 Populatzon(96) ~~~ ~~~ ~~~~~~2 0 183 1.3 ' Laborforce(%) , 30 ~L 2 3 2. GNI' Gross Labor fon;*, m ~ ~ ~ ~ ~ ~ ~ -.Tperprimary Motrcnatimaew patest year.avallable, 1995-Of "cpta- erollmet ~Poverty, (% of population below nfafional poverty line), - ,52 Urban popul~~tlon (% oftotalps~laboA) 87 75 776' Life expectancy at blth (yoees) M 7 70 .69 Infant t ortai6lty, (per 1, 00 lve b1rMlS) --19' 30 28 ChIld mailnutrbon% of chikdrsn under' 5)`.` ' '4 9 Access to improved water source A~ccssi to-n Improved water, source (% of population) 84 85 87, llhteacy % ofpopultiona~e 54) 7 12 10, Grs riayenrollmeni I(%-'lcro-geppto) 91 113 10 Vnzuela RB Male ~~~~~~~~~~- ~~~90 0 Upper-nmVddle4ricome grop KEY ECONOMC~4 RATi6S and LON'G DsNu (u~~~~$bllli&tsY ,A~~~~~~~~~~1 E~~conomic. ratios', GDP (US$biffa' o~ .78. 53 5 121.3 1249 ~ ~ - Gross doi8lcnsif 'vestrmen`t/6QD' i 24'4 18-7 171 .2:T"d Excports bf goods and iom646s/GP. 288 313 28.4- ~2.2.7i - Gr~a&m~stI~ia~ngsdGDPt' ' - 29 4,. 23 8 29 3 28 - Grosainbonal evnga/GP, 29 6 21 3- _28 2 -r- Current aooount balanclGDp 5 32i 10.8 Dmetcnese -lrterestpayrlnslD 2 0, 137 - 20 - ; InVestment Totale GP41.2 638- T31 3 27 . 727 debttGD 1,~~~~~~~~~~~~~~~~~~~~Inetdns 1981 91199141 ~~2017 200 201451 - GD Ae1 .32 2 0 ~ - /nzeaR OEABortvsdofgoddsbterv'rts 42.*~ 6 55 '210 - 27'5 1 lilfl- -1916 A201 2001 STUTR anna twhe ECOOM G0 'I"1981i 19913 2000 2001 r G Vtet nezuea,~ RB GP % Agnculture 4.9~~~~~-07 - 55 50. 501A Industry 444 45.m 507 504e25 - - - Manufacturing - 1~~~~~2,' 4.9 196 19 1.'27 SExpvices n 50.7csT 49.3 443 4462 ImpRtCs1k of thedaEd sriNs21 62 13Y7 - ~~~~~~~~~~19811 199141 2000 2001 Growth of envsptman and GDPors(%) Agrnculture 4 28 5 21 2. 1.9 Manufactuding 1469 0.46 3.7 2419 20 Servic,es ' - - .2 02. 4434 3424.0 0 Prvtcons,rn57n 1 01. 6374 47 2 0 o General government consumPtion 129 -09 1 750 5 9 2 Imports of goods and services -0.6 45 2 1543 17 6 ' Note: 2001 data era prel1imi1nary estimatesowh o exort an Imort avrbe Inncomletewth Venezuela, RB PRICES and GOVERNMENT FINANCE t 1981 1991 2000 2001 infation I%) Domesdte pntces (% change) 150 Consumer pnces 16.3 34 2 16 2 12 3 100. Implicit GDP deflator 12 9 21 4 27 6 6 8 _ _o_ t_ Govemment finance (% of GDP, includes current grants) 0 , I I Currentrevenue 27.7 233 187 . 184 -so 97 9 99 00 01 Current budget balance 11.2 51 1.1 -16 GDOP deflator e CP Overall surplus/deficit . . 1 4 -1 3 -2 6 -6 3 . ,, , _ TRADE 1981 1991 2000 2001 (USS millions) ,Export and Import levels 'US mll.) Total exports (fob) 20,181 15,155 33,035 27,056 3s0o Petroleum ,19,094 12,201 27,781 21,561 30,0w Aluminum 293 507 895 800 25,000 . Manufactures 255 1,445 3,006 2,462 20 ooo Totalimports(crf) 13,106 11,147 14,606 16,508 15005 Food 10 .L r_ t* Fuel and energy ,500 Capital goods 2,791 3,303 5,450 6,365 95 9i 97 9s r9 oo 01 Exportpnceindex01995=100) 191 101 141 113 Importpnceindex(1995=1O0) 140 100 105 107 , Exports aImpons Terms7t bade (1995=100) 137 101' 134 105 BALANCE of PAYMENTS 1981 1991 2000 2001 Current account balance to GDP (%) (USS millions) , : t . Exp6rts of goods and services -20,938 16,388 34,564 28,335 ,14- Imports,of goods and services 17,103 13,690 20,038 21,814 12 Resource balance 3,835 2,698 14,526 6,521 e . Net income 574 -598 -1,204 -1,546 9' m ' , Net current transfers -409 -364 -211 -610 42 - 2- Currentaccountbalance 4,000 1,736 13,111 4,365 o -29 99s s 97 3 9 oo o Financing items (net) -4,021 909 -7,293 -6,435 -2 ' s Changes in net reserves 21 -2,645 -5;818 2,070 4 Memo: Reserves including gold (USS millions) 17,070 15,161 15,882 12,295 Conversion rate (DEC, localAUS$) 4 3 56 8 680 0 723.7 EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 '2000 2001 (USS millions) ,I Componit ion of 2001 debbt (USS mill.) Total debt outstanding and disbursed 32,132 34,122 38,001 34,660 IBRD 106 1,340 972 838 A 938 IDA 0 0 0 0 G 3,729 _ 2,363 Total debtservice 5,700 3,322 6,590 7,901 E E 1,713 IBRD 37 62 299 287 |,' IDA 0 0 0 0 Composition of net resource flows Official grants 0 7 34 Ofricial creditdrs -5 830 169 -910 Private credritors 1,469 152 ,, 888 -622, Foreign directinvestment 184 1,916 4,464 3,085 .,t# Portfolio equt . 0 100 71 F 2017 World Bank program Commitments 0 100 20 5 A - IBRD E - Bilateral Disbursenients 0 330 50 78 8 - IDA D - Other muftllateral F - Pnvate Principal repayments 27 0 208 212 C-IMF G -Short-term Netflows -27 330 -158 -133 1 * I Interest payments 9 62 91 . 75 Net transfers -37 268 -249 -208 Development Economics 9/9/02 Annex B2 CAS Annex B2 - Venezuela Selected Indicators* of Bank Portfolio Performance and Management As of November 18,2002 Indicator 2000 2001 2002 2003 Portfolio Assessment Number of Projects Under Implementation 13 12 10 9 Average Implementation Period (years) b 4.0 4.7 5.2 5.1 Percent of Problem Projects by Number a 23.1 33.3 10.0 22.2 Percent of Problem Projects by Amount a 23.9 20.2 2.2 3.8 Percent of Projects at Risk by Number a, d 23.1 58.3 30.0 33.3 Percent of Projects at Risk by Amount 4 d 23.9 63.0 15.3 9.7 Disbursement Ratio (%) 16.7 18.9 24.8 3.9 Portfolio Management CPPR during the year (yes/no) Yes Yes Yes Yes Supervision Resources (total US$000) 1,152.0 1,137.0 1,008.0 1,100.0 Average Supervision (US$000/project) 88.6 94.7 100.8 110.0 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 15 7 Proj Eval by OED by Amt (US$ millions) 1,853.1 321.7 % of OED Projects Rated U or HU by Number 57.1 42.9 % of OED Projects Rated U or HU by Amt 71.0 51.3 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. Annex B3 CAS Annex B3 - IBRD Program Summary - Venezuela As Of November 15, 2002 Proposed IBRD Base-Case Lending Program Fiscal year Proj ID USS(M) Strategic Rewards' Implementation b (H/M/L) Risks (HIMIL) 2003 EDUCATION IMPROVEMENT 50.0 H H JUDICIAL REFORM 40.0 H M Result 90.0 2004 HEALTH PROJECT 45.0 H H SLUM UPGRADING 45.0 H M RURAL POVERTY, SUSTAINABLE DEVELOPMENT AND GEF-CANAIMA NATIONAL PARK 30.0 H M Result 120.0 2005 EDUCATION IMPROVEMENT II 40.0 H H REGIONAL AND URBAN TRANSPORT 35.0 H H MONTREAL PROTOCOL-OZONE DEPLETING SUBSTANCES PROJECT 15.0 H M Result 90.0 Overall result 300.0 H M a. This table presents the Bank's lending program for the next three fiscal years. b. H=High, M=Moderate, L=Low a. This table presents the proposed program for the next three fiscal years b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L) Template created on 11/18/2002. Annex B3 (IFC MIGA) CAS Annex B3 (IFC & MIGA) - Venezuela IFC & MIGA Program, FY 2000-2003 2000 2001 2002 2003 IFC approvals (US$m)* 71 8 10 Sector (%) Agriculture & Forestry 11 0 0 Chemicals 11 0 0 Finance & Insurance 0 0 0 Industrial & Cons Prod 32 0 0 Nonmetallic Mineral 0 100 0 Oil, Gas and Mining 0 0 0 Transportation & Warehouse 0 0 100 Utilities 45 0 0 Total 100 100 100 Investment instrument (%) Loans 84 100 90 Equity 13 0 10 Quasi-Equity 0 0 0 Other 3 0 0 Total 100 100 100 MIGA Guarantees (US$m) 109 0 0 Annex B4 CAS Annex B4 - Summary of Nonlending Services - Venezuela As of November 15,2002 Product Completion FY Cost(USS000s) Audience' Objective b Recent completions The Remaining Agenda for Trade Reform FY97 US$85 G, D, B KG Characteristics of Labor Supply FY97 US$65 G, D, B KG Human Capital for Growth, Prosperity and Poverty Reduction FY00 US$150 G, D, B KG Public Sector Policies in Agriculture FY03 US$75 G, D, B KG, PS Underway Country Economic Study (CEM) I FY03 US$100 G, D, B KG Economic and Social Policy Notes FY03 US$125 G, D, B KG, PS Analysis of Tertiary Education FY03 US$50 G, D, B KG, PS Planned Financial Sector Assessment & Monitoring FY03 US$150 G, D, B KG, PS Country Economic Study (CEM) II FY04 US$200 G, D, B KG Public Expenditure Review FY04 US$100 G, D, B KG, PS Social Sector Assessment and Review FY04 US$90 G, D, B KG, PS Country Procurement Assessment FY04 US$90 G, D, B KG, PS Country Financial Accountability Assessment FY04 US$90 G, D, B KG, PS Country Economic Study (CEM) III FY05 US$150 G, D, B KG Poverty Assessment FY05 US$125 G, D, B KG, PS a. G=Government, D=donor, B=Bank, PD=public dissemination. b. KG=Knowledge generation, PD=public debate, PS=problem-solving. Annex B5 CAS Annex B5- Venezuela - Social Indicators Latest single year Same regionrineome group Latin Upper- America middle- !70.75 1980-85 1995-01 & Carib. income POPULATION Total population, bud-year (millions) li.7 17 1 24 6 515 6 647 0 Grwth rate'(% annual averageforpenoda) 3.4 25 20 1 6 6 1.3 Urban populanon (Vo of population) 75 8, 81 9 87.4 75.3 75 7 Total fertiity ate (birtihsperwoman) 47 38 29 26 24 POVERTY (%o afpopulatioi) National headcount index 31.0, 52 0 INCOME GNI per capita (US$) 2,590 3,800 4,840 3,680 4,620 Consumer pnce index (1995-100) 1 3 656 . 152 141 INCOMEtCONSUMPTION DISTRIBUTION Gii index 04 0.3 , 0.5 Lowest quintile (96 ofincome or consumptionJ) 3,0 4.7 30 Highest qwntile (96 of income or consumption) 54.0 47 8 53 2; SOCIAL INDICATORS Public expenditrire Heltbh(fGDP), . 2.4 2.6 34 34 Education (%,of GPI) 45 51 4:9 36 . 51 Socal securnty and welfre (% ofGDP) -2.2 46 -7 4 79 Net l*linary school enrollment rate (Yoofagegroup), Total' 80' 84 84 91 94 Male .. 85 Female 83 Access to an improved water source (96 o population) . Total . 84 85 87 Urban . . 88 93 92 Rural , . 54 62. 70 Immuniiation rate (YO under 12 months) Measles , 56 79 90 90 DPr . 49 79 87 88 Child malnutrition (*Aunder5years) 10 4 9 Life expectancy at birth (years) Total 67 70 73' 70 69 Male 64 67 70 67 66 Feinale 70 74 76 73 73 Mortality Infant (perithousand live births) 43 . 30 19 30 28 Under S (per ihousand live biths) 61 42 23 38 35 Adult (15-59) - Male (per 1,000population) 23i 219 155 207 226 Female (pier, 00population) 157 123 88 122 143 Buths attended by skilled health staff 6) 79 82 05t29/02 Annex B6 Page 1 of 2 CAS Annex B6 - Venezuela - Key Economic Indicators Actal Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 National accounts (as % of GDP Gross domestic product 10o 100 100 100 1oo 100 1oo 0oo 100 Agnculture 4 5 5 5 5 5 5 5 5 Industry 43 35 36 51 50 48 49 49 50 Services 52 60 59 44 45 47 46 46 46 Total consumption 72 79 77 71 76 73 74 76 76 Grossdomesticfixedinvestment 19 19 16 14 16 17 17 17 17 Government investment 9 8 7 6 7 6 6 6 6 Private investment 9 11 9 8 9 11 11 11 11 Exports (GNFS' 28 20 22 28 23 34 33 30 30 Imports (GNFSY 22 21 16 16 18 26 26 26 26 Gross domestic savings 28 21 23 29 24 27 26 24 24 Gross national savings 25 19 22 28 22 25 25 22 22 Memorandum stems Gross domestic product 88704 95849 103311 121258 124948 84084 89104 92954 96220 (USS million at current pnces) GNP percapita(US$, Atlas method) 3520 3540 3730 4310 4760 3351 3488 3574 3633 Real annual growth rates (%) Gross domestic product at market pnces 6 4 0 2 -6 1 3 2 2 7 -6 1 2 5 2 0 2.0 Gross domestic income 3 6 -7 3 3 6 17 2 -5 7 -7 6 1 4 -1 6 0 7 Real annual per capita growth rates (%) Gross domestic product at market pnces 4 3 -1 9 -8 1 1 3 0 8 -7 9 0 7 0 2 0 2 Total consumption 2 9 -1 9 -5 2 2 0 3 0 -8 4 0 3 -0 9 - II Pnvate consumption 3 0 -2 1 -6 2 1 8 2 8 -6 5 0 4 -0 9 -1 1 Balance of Payments (USS millions Exports (GNFSt 25192 19037 22122 34564 28335 28400 29300 28000 29000 Merchandise FOB 23703 17576 20819 33035 27056 26500 27300 25900 26800 Imports (GNFSJ' 19173 20251 16985 20038 21814 21900 23300 24300 25400 Merchandise FOB 13678 15105 13213 15491 17282 17400 18600 19400 20300 Resource balance 6019 -1214 5137 14526 6521 6500 6000 3700 3600 Netcurrenitransfers -144 -108 70 -211 -610 0 0 0 0 Current account balance 3467 -3253 3689 13111 4365 4900 4400 2200 1900 Net pnvate foreign direct investment 5036 4262 2669 4357 3085 2520 2590 2640 2680 Long-termloans(net) -301 1398 316 66 -1891 -1150 -100 650 960 Other capital (,,et, mci enors & ommssuens) -5633 -6627 -7092 -9298 -7228 -7060 -6760 -5510 -5480 Change in reserved -3075 2931 -1041 -5818 2070 410 -490 -370 -490 Memorandum items Resourcebalance(%ofGDP) 67 -12 53 121 51 77 67 40 38 Annex B6 Page 20f2 CAS Annex B6 - Venezuela, RB - Key Economic Indicators (Continued) Actual Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 Public finance (as % of GDP at market priees Currentrevenues 280 214 248 306 24.6 280 280 260 260 Currentexpenditures 183 175 165 188 210 210 200 200 200 Current account surplus (+) or deficit(-) 9 7 3 9 8 3 11 8 3 6 7 0 8 0 6 0 6 0 Capitalexpenditure 116 99 75 81 98 100 100 100 100 Foreignfinancing 06 07 -01 00 -1.2 -10 00 10 10 Monetary indlcatorw M2tGDP 193 184 187 174 183 124 130 130 130 GrowthiofM2(%) 611 154 207 231 153 -149 340 190 17.0 Privatesectorcreditgrowth/ 829 757 76.1 858 779 59.6 610 620 620 total credit growth (%) Price indices (1987-100) Merchandiseexportpnceindex 110.6 78 5 103 6 152 3 121.6 1217 1210 1110 111 0 Merchandise import pnce index 744 73.7 767 766 78.0 788 81 0 830 850 Merchandisetermsoftradeindex 1487 1066 1350 198.8 1559 1544 1490 1340 1310 Real exchange rate(US5/LCU)r 1312 160.9 1809 1919 2055 144.1 1441 1441 1441 Real short-term deposit interest rates -22 3 -7.1 -14.8 -19.2 -3 9 -25 0 -23 0 -15 0 -13 0 Consumerpnceindex (%change) 500 358 236 162 123 27.0 320 220 160 GDP deflator (% change) 384 209 270 276 68 320 240 160 140 a. GDP at factor cost b "GNFS" denotes "goods and nonfactor services' c Includes net unrequited tansfers excluding official capital grants d Includes use of IMF resources e Consolidated public sector f "LCU" denotes "local currency units n An increase in USS/LCU denotes appreciation Annex 67 CAS Annex B7 - Venezuela - Key Exposure Indicators Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total debt outstanding and 35765 38161 38085 38001 34660 33500 33400 34000 35000 disbursed (TDO) (US$m)' Net disbursements (US$m)' 1539 4506 841 1037 -1533 -1150 -100 650 960 Total debt service (TDS) 8361 5565 5158 5083 7703 7500 6300 6300 6100 (US$m)^ Debt and debt service indicators (%) TDO/XGSb 1420 2005 1722 1099 122.3 1200 1100 1200 1200 TDO/GDP 40 3 39 8 36 9 31.3 27.7 40.0 37.0 37.0 36 0 TDS/XGS 33 2 29 2 23 3 14.7 27.2 26 0 22.0 23.0 21 0 Concessional/TDO 02 0.2 0 1 0.2 0 1 00 0 0 0 0 0 0 IBRD exposure indicators (%) IBRD DS/publicDS 7 8 3 4 5 6 7.2 7.3 4.6 4.0 4 9 6 1 Preferred creditor DS/public 20 4 9 3 15.0 21.4 22 9 28.9 25 7 24.3 22 8 DS (%)' IBRD DS/XGS 1.1 I 0 1.3 1 3 0 9 1.0 0 9 0 9 1 0 IBRDTDO(US$m)d 12127 12190 1129.5 971 9 838.5 6790 601 0 518.0 5250 ShareoflBRDportfobo(%) 1.3 1 1 1 1 1.0 08 0 7 0 7 0 6 06 IDA TDO (US$m)d 0 0 0 0 0 0 0 0 0 IFC (US$m) Loans 104 115 148 221 229 221 Equity and quasi-equity' 77 82 93 94 87 70 MIGA MIGA guarantees (US$m) IN 109 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for Intemational Settlements d Includes present value of guarantees e Includes equity and quasi-equity types of boih loan and equity instruments. m 4) C C~~~~~~C 0R WX~~~~ E _ ~ ~~~~ 8~ 000 N j -- a0 .0 e~~~~~~~~~~~~~~~~~~~~~~~0 o vo I~ ~ ~ ~ - CN - ° C.==0 ~ ~ 00 0So 0 n 0 0 0 . N (N x N ' x N o - c NC a > 9 9 9 9 9 9 = ( I E g N 00 Y E o~~~~~~ o bo Annex B8 (IFC) CAS Annex B8 (IFC) - Venezuela Statement of IFC's Held and Disbursed Portfolio As of September 30, 2002 (In US Dollars Millions) Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001 Andino 762 000 000 2438 476 000 000 1524 1996/1997 CANTV 000 000 2500 000 000 000 2500 000 1995/1998 COMSIGUA 23 34 10 00 000 6516 23 34 10 00 000 65 16 1999/2000 EDC 57 29 0 00 0 00 23 33 55 09 0 00 0.00 23 33 2000 ForestalTrillurn 16 80 3 00 3 00 10 00 501 120 120 2 99 2002 GMSVIACBL 865 000 000 000 321 000 000 0 00 2000 Intersea 5 00 3 00 0 00 0 00 0 00 300 000 000 1992 Jose Methano 8 78 6 80 0 00 0 00 8 78 6 80 0 00 0 00 1997/2000 MineraLoma 5874 443 411 4231 5874 443 411 4231 1997/1998 Movilnet 2188 000 000 3000 2188 000 000 3000 1990 Pralca 8 22 0 00 0 00 0 00 8 22 0 00 000 0 00 1999 Profalca 21 75 0 00 0 00 15 33 21 75 0 00 000 15 33 1991/1994 Zuliano 000 000 1407 000 000 000 1407 000 Total Portfolio 23807 2723 4617 21051 21079 2543 4437 19436 Approvals Pending Commitment Loan Equity Quasi Partic 2002 VRT 0 1000 0 0 1999 Ccraven 15000 0 0 25000 Total Pending Commitment: isooo 1000 0 25000 a)~~~~~~~~~~~~~~~~~~~~~~~~~4 .0 UO~~ F. 00 0 -~~~~~~~~~~~~~~~~~~- t te' e8 ~~~~~~~~~~~~~~~~~~1 8 Ra U Z us a u ¢op3 04~~~~~~~~~~~~~~ CL r 09 IN~~~~~~~~~~~~~~~~ t ~ ~~~ 2 S a0.= n { 2 1, , ^ E E 1 2 2 3 " E * E E * t b 8 E 00 0~~~~~~~~~~~~~~~~~~~~~~~~~~~ x~~~~~~~~~~~~~~~~~~~~~~~ a L 9 t a > E e saMc YiS ,! 3EZ | aE tz-9 a K e v ~ Cl| l} I i 6<~~~~~~~ I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I kn ~~~~~~~~~~~~~~~~~~~~~~~~~~~4: 'mo ' U0 S- o Pt ctcG$z cXgm - *0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i ar~~ U 8 3 . ¢ | z i g i o ] 0$ | E E~~ _ C11111 K -a _ 7la~a I e 2 :E " c 4 aa z8 E r o 5 8 | §t -= g 60.. o s 4 - t~~~~~~~~~~~~~~ Z e*.j ax ia axi as C~~~~~~~~~~~ i . u) A E~~~~~~E LI MAP SECTION IBRD 31 255 W" ME z LU LU -W. z -th a W ui Z-0 < z 5; > k. 0 -p-, -24 (10 J"- < Pd. z 0 q Nl- V) co < c t3 z D 0 Lu < a Z Z 0 0 z 9 O Uj R O > Vt z :R 4L.: co  i LU JANUARY Report No.: 25125 VE Type: CAS