Document of The World Bank FOR OFFICIAL USE ONLY Report No. 50642-SV INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF EL SALVADOR October 29,2009 Central America Country Management Unit Latin America and Caribbean Region International Bank for Reconstruction and Development This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its content may not otherwise be disclosed without World Bank authorization. The last CAS was discussed on February 22,2005 CURRENCY EQUIVALENTS The U S Dollar i s the current currency in El Salvador Fiscal Year January 1 - December 3 1 SELECTED ACRONYMS AND ABBREVIATIONS AAA Analytical and Advisory Activities AECI Spain InternationalCooperation Agency CA Central America CABEI Central American Bank for Economic Integration CAPRA Central American Probabilistic Risk Assessment CAT DDO Catastrophic Deferred Drawdown Option CCT Conditional Cash Transfer CEA Country Environmental Assessment CEPREDENAC Central American Coordination Centre for Disaster Prevention CFAA Country Financial Accountability Assessment COMPRASAL National e-procurement System CPS Country Partnership Strategy cso Civil Society Organization DDO Deferred Drawdown Option DPL Development Policy Loan DR-CAFTA US-DominicanRepublic-CentralAmerican Free Trade Agreement EC European Commission EDUCO Education with Community Participation program ESW Economic and Sector Work FDI Foreign Direct Investment FMLN Farabundo Marti Nacional Liberation Front FSAP Financial Sector Adjustment Program FY Fiscal Year GAC Governance and Anticorruption GDP Gross Domestic Product GEF Global Environment Facility IDB Inter American Development Bank IDF Institutional Development Fund IFAD InternationalFund for Agriculture Development IFC InternationalFinancial Corporation IMF InternationalMonetary Fund JICA Japan InternationalCooperation Agency M&E Monitoring and Evaluation MCC Millenium Challenge Corporation MDG Millennium Development Goals MSME Micro, Small, and Medium Size Enterprise NFPS Non Financial Public Sector FOR OFFICIAL USE ONLY NGO Non-Governmental Organization NPL Non-Performing Loan PAC Anti-Crisis Plan PEFA Public Financial Management (PFM) Performance Measurement Framework PER Public Expenditure Review PFM Public Financial Management PFSS Public Finance and Social Sector DPL PPP Public Private Partnership REDD ReducedEmissions from Deforestation and Degradation RED1 Recent Economic Developments in Infkastructure Study ROSC Report on the Observance of Standards and Codes SAFI Integrated Financial Management system SBA Stand By Arrangement SME Small and Medium-size Enterprise SSGER Sustaining Social Gains for Economic Recovery DPL TA Technical Assistance TAL Technical Assistance Loan UNDP United Nations Development Programme USAID United States Agency for International Development' WBI World Bank Institute WGI Worldwide Governance Indicators This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization. IBRD IFC Vice-president Pamela Cox Jyrki Koskelo Country Director Laura Frigenti Atul Mehta CO Representativemanager Alberto Leyton Hector Gomez Ang Task Managers Andrea Kucey John Barham Alberto Leyton Felix Knidlberger EL SALVADOR COUNTRY PARTNERSHIP STRATEGY TABLE OF CONTENTS Executive Summary . I Introduction ................................................................................................................ 1 I1 Country Context ......................................................................................................... 1 . A . Recent Economic Developments ................................................................................ 5 B. Macroeconomic Prospects and Debt Sustainability ................................................... 8 . I11 Development Challenges and Government Priorities .............................................. 11 A . Growth and Competitiveness ..................................................................................... 12 B. Poverty Reduction and Social Sectors ....................................................................... 13 C . The Public Sector and Institutional Development ..................................................... 15 D. Environment and Disaster Mitigation........................................................................ 17 I V. World Bank Group Strategy ..................................................................................... 18 A . Lessons from the Last CPS (see also the CAS Completion Report) ......................... 18 . B World Bank Country Partnership Program FY 10-12 ................................................ 20 C . Development Partners ............................................................................................... 27 D. CPS Consultations ..................................................................................................... 28 V . Risks and Mitigation................................................................................................. 28 Tables Table 1. El Salvador Progress Towards Millennium Development Goals .......................... 3 Table 2. El Salvador Key Economic Indicators 2005-2009 ................................................ 7 Table 3 . Medium Term Macroeconomic Scenario .............................................................. 9 Table 4 . CPS Strategic Objectives and Areas for Support ................................................ 21 Table 5 . Proposed Lending Program for FYlO ................................................................. 25 Figures Figure 1. Poverty headcount ratio. total and by area (percentage) ..................................... 2 Boxes Box 1. Crime and Violence in El Salvador: An Impediment to Social and Economic Growth ................................................................................................................................. 4 Box 2 . Governance and Anti-corruption in El Salvador .................................................. 16 Box 3 . Central American Probabilistic Risk Assessment (CAPRA) Initiative ................ 26 Annexes Annex 1. El Salvador CPS FY 10-12 Results Matrix........................................................ 30 Annex 2 . El Salvador Country Assistance Strategy FY05-FY09 Completion Rep0rt .....34 Annex 3 . Public Consultations on the CPS ...................................................................... 67 Annex 4 . Debt Sustainability Analysis ............................................................................. 69 Annex 5 . Trust Fund Portfolio.......................................................................................... 72 Annex 6 . External Partners in El Salvador ....................................................................... 73 Standard CAS Annexes CAS Annex A l - El Salvador at a Glance .......................................................................... 74 CAS Annex B 2 - Selected Indicators o f IBRD Portfolio Performance and Management 77 CAS Annex B3 - Base Case IBRD Program Summary .................................................... 78 CAS Annex B3 - 2 IFC Program, 2005 - 2009 ................................................................. 79 C.AS Annex B 4 - Summary o f Non-Lending Services...................................................... 80 CAS Annex B 6 - El Salvador - Key Economic Indicators ................................................ 81 CAS Annex B 7 - El Salvador - Key Exposure Indicators ................................................ 84 CAS Annex B8 El Salvador IBRD Operations Portfolio ................................................. 85 CAS Annex B8-2 IFC Operations Portfolio...................................................................... 86 MAP ACKNOWLEDGMENTS The World Bank Group greatly appreciates the collaboration and contribution o f the Government o f El Salvador in the preparation o f this Country Partnership Strategy (CPS) . Special thanks to the stakeholders who participated in the CPS Consultation during August 17-21 for the discussions and contributions to the preparation o f this program. Contributors to the preparation o f this CPS include: Ana Lucia Armijos. John Barham. Sajitha Bashir. Sarah Berger. Rafael Cortez. Michael Drabble. Maria Lucia Guerra Bradford. Hector Gomez. Armando Guzman. Jania Ibarra. Felix Knidlberger. Humberto Lopez. Sonia Molina. Fernando Montenegro. Edmundo Murmgarra. Sabine Perrissin. Jessica Poppele. Eduardo Wallentin and Gregor W o l f. EXECUTIVE SUMMARY 1. This Country Partnership Strategy (CPS) comes at the beginning of a new political cycle for El Salvador. After 20 years in the opposition, the Frente Farabundo Marti para la Liberacion Nacional (FMLN) has come to power following the Presidential elections that took place in March 2009. The democratic transition, including fair elections, respect for the political process and smooth cooperative transition i s significant and i s an important contribution to political stability in the region. The FMLN received broad support in the elections, and so far has shown significant moderation balancing concerns across party lines. 2. President Mauricio Funes ran on a pro-poor platform that stressed broadening o f social programs and inclusive economic growth. The government's electoral platform included a clear social policy agenda, with an emphasis on employment, job creation, provision o f basic health and education services and social protection for the poor. The creation o f institutional mechanisms to promote the participatory development o f economic and social policy was also a cornerstone o f the electoral platform. 3. The new government came to power against the backdrop of a severe global economic crisis that i s being strongly felt in El Salvador. Following several years o f positive growth performance, the current crisis i s having a significant effect on the country's economy. Despite initial projections above 4 percent, GDP growth reached only 2.5 percent in 2008. Current projections foresee a GDP decline o f about 2.5 percent in 2009. This would be the first full-year o f GDP contraction in over two decades. By early 2009, tens o f thousands o f Salvadoran households had been affected by the loss o f jobs, especially in the export sector, reduction in incomes and a sharp drop in remittances. 4. The impact o f the global economic crisis on El Salvador has generated economic and social risks, limiting the ability o f the new government to implement its long-term social policy agenda. The current economic contraction and financial market instability compound the problem o f a dramatic increase in the poverty rate following the food and o i l price hike in 2008, and threaten hard-won recent poverty and social gains. After several years o f pro-poor economic growth the poverty headcount rate increased from 35.5 percent in 2007 to 42.3 in 2008, reaching the highest ratio since 2002. The dramatic reverse o f poverty trends shows that Salvadorian economy i s s t i l l fragile and highly vulnerable to shocks. This i s particularly worrying in the current environment o f the financial crisis which will hit the employment channel as well. 5. I n response to the economic and social reality, President Funes presented the government's "Anti-Crisis Plan" within weeks of taking office. The Anti-Crisis Plan (PAC) proposes responses geared to mitigate the immediate effects o f the crisis on the most vulnerable population as well as to prepare the conditions for a broad-based recovery once global conditions start improving. The PAC comprises the following components: (i) income protection and employment generation program; (ii) an the creation o f a comprehensive and universal social protection system; (iii)the strengthening o f public finances; and (iv) a comprehensive consultative process to 1 prepare a national development plan for medium-term recovery and long-term development. 6. T o compound the challenges described above, the new government was also confronted with a rapidly deteriorating fiscal outlook. The current fiscal challenges were brought o n by the impact o f the crisis on tax collection, and include: (i) recover a to solid fiscal balance which has deteriorated due to the crisis; and (ii) finance priority to investments required to mitigate the social effects o f the crisis and set the stage for a strong economic recovery. T o address the challenges the government i s proposing tax reform and rationalization o f subsidies to improve the medium-term outlook. 7. The CPS i s based on the strategic principle o f meeting immediate needs to mitigate the impact of the crisis while, at the same time, addressing longer-term development challenges. Given the current economic uncertainties, the CPS proposes a flexible approach where only the lending operations o f the first year are specified and new activities will be defined in close dialogue with the authorities as the National Development Plan i s defined. The CPS proposes a three year US$650 million lending program, subject to availability o f IBRD resources, including US$250 million for FY 10. The government has selected three strategic objectives for Bank support: (i) strengthen fundamentals for economic recovery by addressing macro and institutional vulnerabilities; (ii)strengthen delivery o f social services; and (iii)increase economic opportunities, particularly for the poor. The I F C program includes advisory services and financial assistance aligned with the government's priorities and programs building o n current and potential synergies with the Bank when feasible. 8. This CPS has identified modest outcomes which it expects to influence. The Results Framework (Annex 2) i s organized according to the three strategic objectives mentioned above. Given the limited size and breadth o f the current Bank program, the CPS proposes a streamlined results matrix which includes an indicative set o f outcomes that are consistent with the scope o f the crisis response program that has been defined to date. Performance towards outcomes will be assessed at the CPS Progress Report and the Results Framework will be updated to reflect progress made and new priorities identified for Bank support. 9. The lessons in the CAS Completion Report have been taken into account in the design o f the CPS, including the importance o f consensus-building efforts to ensure successful implementation of the program in a politically polarized environment. The 2005 CAS underestimated the implications o f El Salvador's divided political environment. While the expectation i s that the current situation is different, the Bank and Government intend to mitigate the risk o f individual loans becoming political instruments by presenting a package .of loans to be approved by Congress. As such, this CPS i s accompanied by three operations: a US$lOO million Sustaining Social Gains for Economic Recovery DPL, a US$50 million Income Support and Employability Project, and a US$20 million Fiscal Management and Public Sector Development Technical Assistance Project. ii El Salvador CPS I. Introduction 1. This Country Partnership Strategy (CPS), covering the fiscal years 2010- 2012, comes at the beginning o f a new political cycle for El Salvador and against the backdrop of a global economic crisis. After 20 years in the opposition, the Frente Farabundo Marti para la Liberacion Nacional (FMLN) came to power with an explicit agenda to accelerate implementation o f social programs and promote inclusive economic growth. However, the current economic reality, and more specifically the fiscal impact o f the crisis, will make delivering on campaign promises difficult. The WBG strategy i s supporting the government with a flexible approach designed to balance the need to mitigate the impact o f the crisis while, at the same time, address the longer-term development challenges. The CPS proposes an indicative lending program o f US$650 million' o f which US$250 million i s confirmed for FY10. The IFC program includes both advisory services and financial assistance aligned with the new government's priorities and programs building on current and potential synergies with the Bank when feasible. 1 1. Country Context 2. El Salvador i s a lower middle income country which stands out in the Latin America region for its structural economic reforms and stable macro policies. El Salvador i s a small and densely populated country in Central America with a population o f 6.9 million people and a GNI per capita o f US$3,480 (2008). El Salvador has pursued an outward oriented development strategy, including being the first nation to implement a .regional free-trade agreement (DR-CAFTA) with the U.S. in March 2006. Facilitated by a dollarized monetary regime, a sound macroeconomic framework and a strong record o f economic reforms, El Salvador has diversified i t s export sector, and improved i t s access to international financial markets. 3. El Salvador has had relatively strong economic performance in recent years. Over the last CAS period (2005-2009) economic growth steadily improved from 2.3 percent in 2003 reaching 4.2 percent in 2006 and 4.7 in 2007, up from 2.1 percent over the period 2000 to 2004. The observed acceleration in economic growth was triggered to a large extent by rapid improvements in the external environment which resulted in cumulative export growth o f 26.2 percent between 2002 and 2007. In addition, the country's traditional sound macroeconomic management facilitated the transmission o f positive global developments. Although fairly positive compared to previous periods, economic performance continues to be below the Central American average in many respects. 4. Progress on the economic front has been accompanied by improvements in the country's social conditions, with the main social indicators-including poverty and inequality-showing significant gains in recent years. Higher income levels, combined with increasing social sector spending and reforms in some key sectors, ~~~ ~~ ' Subject to availability o f IBRD resources. 1 resulted in a decline in poverty levels from 43.6 in 2001 to 35.5 percent in 2007. In addition, a number o f social indicators such as l i f e expectancy, infant and child mortality, and child nutrition have improved. School enrollment levels have risen significantly - from 89 percent and 46 percent for primary and secondary in 2001 to 92 percent and 54 percent respectively in 2007. In several areas, including in primary education and access to water and sanitation, the improvements in the indicators have been accompanied by a reduction in the gap between the poor and the non-poor. 5. In fact, most o f the current decade can be characterized by years o f pro-poor economic growth. During 2002-2006 the annual average growth rate o f incomes for the first deciles (the poorest) was much higher in comparison to Salvadorans in upper parts o f the income distribution. Overall, inequality -measured by the Gini coefficient- ' diminished by 6 points, from 0.52 in 2001 to 0.46 in 2008. These improvements are also in line with an increase in social spending aimed at attacking poverty, in particular o f Red Solidaria -a poverty reduction program initiated in 2006. 6. Poverty trends in the 2000's can be divided in two periods: a poverty reduction phase until 2006 and the reverse o f the tendency in 2007-2008. In the first phase o f the cycle poverty f e l l 8.6 percentage points. This phenomenon was even stronger in rural areas (decreased 17.4 percentage points), and also lead to a more equal income distribution. In 2007-2008, the food crisis hit El Salvador hard, and almost all the gains in terms o f poverty reduction were lost. The poverty headcount rate increased from 35.5 percent in 2007 to 42.3 in 2008, reaching the highest ratio since 2002. 7. The dramatic reverse o f poverty trends shows that Salvadorian economy i s still fragile and highly vulnerable to shocks. Thus, public policies should focus on both protecting and generating employment, and shielding salaries and incomes. The food crisis has already showed the fragility o f the price channel: food staples' prices grew 17 percent in 2008 while per capita income increased only 5 percent. This i s particularly worrying in the current environment o f the financial crisis which will hit the employment channel as well, Figure 1. Poverty headcount ratio, total and by area (percentage) 46 - I I 601 +Urban0 -Rural I 44- 42- 40 - 45.? 30 - 40.i 36 - 34- 32 1 8 8 8 8 8 8 8 Source: World Bank staff calculations using EHPM and sample weights 2 8. The need to create economic opportunities for the cohorts entering the labor market i s a challenge for El Salvador, which has a relatively young population. About 34 percent o f the population i s between 0 and 14 years old, and half o f the population i s less than 30. Limited access to high school education as well as to opportunities for quality employment has constrained youth development. The unemployment rate for youth (15 to 24 years old) i s nearly three times higher than for adults, around 11-5 percent. Joblessness i s also particularly high among women (more than twice the rate o f men) and individuals with no education (54 percent higher compared to the next group, namely those with incomplete primary education). ' Baseline Progress Target 2000 2007 2015 Goal 1: Eradicate extreme poverty and hunger 12.6 8.2 6.3 rn Population below $1 (PPP) per day, percentage Goal 2: Achieve universal primary education I 87' I 97' I 100 Net enrollment ratio in primary education Goal 3: Promote gender equality and empower women 46.5 45.5 50 f Share o women in wage employment in the non-agriculture sector Goal 4: Reduce Child Mortality 30 19 17 UnderJive mortality rate per 1,000 live births Goal 5: Improve maternal health 173 57.1 39 Maternal mortality ratio Goal 6: Combat HIV/AIDS, malaria and other diseases 4.6 79.6 100 Antiretroviral therapy coverage among people with advanced HIV infection, % Goal 7: Ensure environmental sustainability 83.5 86.9 80.5 rn Proportion ofpopulation using improved drinking water sources 10. The projected reduction in remittances from the United States will also have a perceptible impact on incomes and poverty. A key feature o f incomes in El Salvador i s the increasingly important role o f remittances which account for 15.4 and 9.2 percent o f total rural and urban incomes. In 2008 workers remittances (mainly from the U S ) represented 17.1 percent o f GDP, but current projections for 2009 indicate that these 3 flows could decline by 10 percent. Beyond the macroeconomic and income poverty implications , there i s a concern `that lower remittances flows will also negatively affect poverty levels and other social indicators such as education enrollment and child malnutrition, as households adjust spending to declining revenues. Box 1. Crime and Violence in El Salvador: An Impediment to Social and Economic Growth In 2006, El Salvador registered the highest rate o f homicides in all Latin America (58 o f every 100,000 inhabitants).' A Bank report on Crime and Violence in Central America (CA) puts this rate in perspective: in 2006 there were 14,257 people murdered in C A versus 336 murders in Spain (a country with roughly the same population). The problem i s regional, with the three northern C A countries most affected. The cost o f crime and violence i s high. According to 2008 surveys almost three-quarters o f Central Americans indicate that crime i s "very much" a threat to society's well-being. One study suggests the overall costs in economic terms could equal as much as 7.7 percent o f the region's GDP. I t i s a convergence of factors that drive the sobering statistics in El Salvador, including: i)the socio- economic dynamics o f inequality and limited opportunity; ii)drug trafficking and the ready availability o f i) drugs, drug money and weapons; and i i ineffective police and criminal justice institutions. El Salvador i s an economically unequal society with high levels of poverty and an expanding youth population. H a l f o f the population in El Salvador i s under 30 years old. Many young people have limited education with just over one-third enrolling in high school. The unemployment rate for youth i s over 10% and o f those who do work, 80% are in low-paying informal jobs. Many live in marginalized urban areas with limited access to social services alongside wealthy Salvadorans whose wealth and lifestyle makes deprivation that much more vivid. Enormous sums of drug money flow into El Salvador and feed the gangs and criminal networks that draw-in large numbers of Salvadoran youth. The prevalence o f youth gangs in SV and other C A countries i s judged to be a product o f limited education and economic opportunities. At the same time, more than 3 million arms are believed to be in circulation in CA, and less than one third are legally registered. Eighty percent o f murders are carried out with guns and most victims are men 15-34 years old. Drug trafficking raises the stakes. Only 25 YOof Salvadorans surveyed by Latinobarometro in 2007 considered that "they could avail themselves of the judicial system to defend their interest^"^ which indicates an inefficient and corrupt criminal justice system. As a follow-up to the 1992 Peace accords, El Salvador created a more independent judiciary including a new national police force. But, much remains to be done in terms o f access to justice. Modernization o f policing through the use o f modem information systems along with community and problem-oriented policing i s among changes needed for justice sector reform. The l i n k s between police, prosecutors and the judiciary also need strengthening. The courts would benefit from information systems and training to enable more efficient and transparent case management. Salvadoran policy makers have been responding to citizens' demands for greater security. The limited long- term impact o f the initial anti-gang policies based mainly on repression gave way to a broader set o f policy interventions. Since 2007, efforts have included measures to improve collection o f data on crimes, convictions and incarcerations to inform policy making; to professionalize the courts and the police; and to address the socio-economic factors which lead young people into criminal behavior. The government's "Anti-Crisis Plan", which responds to the current economic crisis, aims to address the crisis impacts by concurrently focusing on reducing inequality through both short- and-long term social policy reforms. Murders increased between 2002-2005 and then leveled o f f 2006-2008. According to WB estimates the value-added o f cocaine transiting the region i s roughly 20 times Panama's and Guatemala's combined defense budget o f $364 million f The Merida Initiative and Central America: The Challenges o Containing Public Insecurity and Criminal Violence, Diana Villiers Negroponte, Foreign Policy at Brookings Working Paper Number 3, May 2009. p. 27. 4 11. Increasing levels o f crime and violence continue to affect not only El Salvador, but the sub-region more generally, and threaten development progress. Current statistics indicate 12 cases o f violent crimes per day in El Salvador. The rising incidence o f drug trafficking in neighboring countries is also cause for increasing concern. This situation i s affecting youth in particular, as seen by the high incidence o f youth gangs. This is a complex issue that goes beyond country borders. Progress will require a comprehensive and multilateral approach, along with specific interventions at local levels, to strengthen prevention initiatives (see B o x 1). 12. Within this context, the FMLN came to power in June 2009, after winning the Congressional and Presidential elections, with a pro-poor agenda aimed at accelerating implementation of social programs. The democratic transition, including fair elections, respect for the political process and smooth cooperative change o f administration i s significant and stands out in the region. The party received broad support, and so far has shown significant moderation balancing concerns across party lines. 13. The new government, however, does not have a majority in Congress and will need to negotiate all initiatives requiring congressional support. This represents an additional challenge for the government to implement policies and programs, as well as to ratify World Bank lending activities. In fact five operations which been approved under the previous CAS had to be canceled when Congress failed to ratify the loans. Although this experience suggests political issues could be a major obstacle for the development o f public policies, the notably smooth political transition process may indicate that political practices are evolving and that the traditionally polarized system could be overcome within this new context. 14. The new authorities have requested support from the multilateral banks to help the country cope with the crisis. In view o f the current situation, the authorities have indicated the need for a combination o f financing resources to help close existing financing gaps and finance the development program, as well as technical assistance to support i t s implementation. Recognizing the importance o f a sound macro framework, the authorities have also agreed with the IMF o n a new three year Standby Arrangement, which they intend to treat as precautionary. A. Recent Economic Developments 15. Until 2008 the growth performance o f El Salvador was broadly positive, but the global crisis i s having a significant effect on the country's economy. In 2008 El Salvador started feeling the effects o f the global crisis and, despite initial projections above 4 percent, GDP growth reached only 2.5 percent. Current projections foresee a decline o f GDP by about 2.5 percent in 2009. This would be the first full-year GDP contraction in over two decades. 16. There are several elements behind the evolution of economic activity, including lower domestic investment, a dramatic deterioration in export 5 performance, and a marked decline in workers' remittances. O n the investment front, gross domestic investment i s expected to decline from 16.1 percent o f GDP in 2007 to about 13.1 percent in 2009. This decline would be mainly driven by lower private investment which already declined from 14.1 percent o f GDP in 2007 to 12.8 percent o f GDP in 2008 and i s expected to further decline to 11.1 percent in 2009. At the same public investment has not been able to offset this change as it just increased only from 2 percent o f GDP in 2007 to 2.1 percent in 2008 and 2009. O n the export front, following the positive developments o f the past few years, exports receipts declined over the first half o f 2009 by 16.5 percent with respect to the same period o f 2008 on account o f both lower volume (-14 percent) and lower prices (-2.5 percent). For the year as a whole, export receipts are expected to decline by about 15 percent in 2009. 17. Remittances, which in El Salvador represented 18.1 percent o f GDP in 2007, started to decrease in the second semester o f 2008 and abruptly dropped in the first quarter o f 2009. Indeed, over the first six months o f 2009 remittances reached US$1,740 million and this would be in contrast with the flow over the first six months o f 2008 when remittances reached US$1,939 million (Le., a decline o f more than 10 percent). Despite this decline, for 2009 as a whole, remittances are expected to represent 15.7 percent o f GDP. 18. The economic contraction i s having a negative impact on the country's labor markets. The global financial crisis and decline in remittances forced El Salvador's banks to restrict credit to the S M E sector, the main source o f employment in El Salvador. The 2008 (formal) unemployment rate was 5.9 percent (the lowest in more than one decade) and even if El Salvador does not report periodical figures, the available information points to an increase in 2009. According to the Salvadoran Social Security Institute (ISSS), formal employment was falling at an annualized rate o f 3 percent in February 2009. Taking into account the existing correlation between national employment rates and social security contributions (.78), the country's unemployment could increase to about 9-10 percent by end 2009 (the highest in more than one decade). 19. El Salvador had been making continued improvements on the fiscal front over the past few years, with the non financial public sector deficit falling to 1.9 percent o f GDP in 2007 from a peak o f 4.4 percent in 2001 and 2002. Notably, the primary balance showed a surplus o f 0.6 percent o f GDP in 2007 for the first time in more than a decade. The observed fiscal consolidation was largely due to strong revenue performance as the government managed to increase tax revenues by nearly 1.0 percent o f GDP between 2005 and 2007. However, this trend did not persist in 2008 as public spending increased at faster rate than fiscal revenue (15 and 10 percent with respect to 2007 respectively). A s a result, 2008 closed with a fiscal deficit o f 3.1 percent o f GDP. 20. The crisis has resulted in an increasingly tight fiscal situation. The fiscal situation has continued to deteriorate during the first half o f 2009 to a large extent because o f the negative impact o f the crisis on tax collection. A s in many other countries, the economic slowdown has resulted in a significant decline in tax revenue. During the first half o f 2009 tax collection (which represents three quarters o f fiscal revenues) was 6 12 percent lower than during the same period o f the previous year and for the year as whole estimates o f Government revenue have been cut down from 17.2 percent o f GDP to 15.5 percent. 21. On the spending side, the government has been showing restraint keeping spending levels below those envisaged in the IMF Standby program approved in early 2009. Yet, as a percentage o f GDP public spending i s expected to increase from an early estimate o f 20.1 percent to a current estimate if 20.8 percent. The combination o f these elements i s expected to result in a public sector fiscal deficit o f 5.3 percent o f GDP in 2009. The Government has also sought multilateral support to cover the fiscal gap o f 2009. Table 2. El Salvador - Key Economic Indicators 2005-2009 (percentage o f GDP, unless otherwise indicated) 2005 2006 2007 2008 2009* Income and prices GDP growth (% change) 3.1 4.2 4.7 2.5 -2.5 Inflation (end o f period % change) 4.3 4.9 4.9 5.5 1.o Investment and savings Gross domestic investment 15.7 16.1 16.1 15.0 13.1 Gross domestic savings 12.4 12.5 10.4 7.7 11.4 Consolidated public sector accounts Total revenues and grants 16.3 17.2 17.1 16.9 15.5 Total tax revenues 12.5 13.3 13.4 13.0 12.0 Total expenditure 19.8 20.1 19.0 19.9 20.8 Primary balance -1.3 -0.5 0.6 -0.7 -2.9 Overall balance -3.5 -2.9 -1.9 -3.1 -5.3 Public Sector Debt Total debt 42.0 41.9 39.1 41.2 47.7 Balance of payments Current account balance -3.3 -3.6 -5.5 -7.2 -1.7 Trade balance -17.2 -18.9 -20.0 -19.9 -12.6 Exports (including maquila) 20.2 20.2 19.8 20.8 17.5 Imports (including maquila) -37.4 - 39.1 -39.8 -40.7 -30.2 Foreign direct investment 2.3 1.3 7.0 3.3 0.4 Remittances 17.7 18.6 18.1 17.1 15.7 Memorandum item: Nominal GDP (billions of U S dollars) 17.1 18.7 20.4 22.1 22.2 * Projected Source: Ministry o f Finance, Central Bank, IMF and World Bank staff estimates 22. On the external front the current account deficit i s expected to improve in 2009. After averaging 3.5 percent o f GDP in 2005-2006, the current account deficit expanded to 5.5 percent o f GDP in 2007. This deficit was financed by large capital inflows (7.0 percent o f GDP), in part related to the sale o f three major domestic banks to ' foreign buyers in 2007. The current account deficit further deteriorated in 2008 to 7.2 percent as a result o f the high food and oil prices. As with most countries in the region, imports have contracted more than exports in 2009. As a result, the current account deficit i s expected to fall to 1.7 percent o f GDP as the trade balance improves. 7 23. The banking sector in El Salvador has coped relatively well with both the global crisis and the change in administration. In addition to the challenges put by global developments, during 2009 Salvadoran investors and bankers were concerned about the political risks following the election, including a possible run on the banks. To address this concern, the Superintendence o f Banks raised the liquidity requirements from 25 percent to 28 percent o f deposits, counting as liquid only assets deposited abroad in highly liquid instruments (managed by the Central Bank). As a result o f the raised requirements and o f their own concerns, banks raised their liquidity ratios to an average that, by M a y 2009, had reached 46 percent o f assets. 24. Currently, capital adequacy ratios are at levels comparable to those observed before the current financial turmoil and well above the regulatory minimum o f 12 percent. The system i s relatively liquid with net liquid assets to short-term liabilities o f 34.4 percent. However, the combined effect o f the growth slowdown and lower remittances growth i s leading to an increase in non-performing loans (NPLs). By February 2009 NPLs had increased by 30 percent relative to the same month in 2008. While there are no data relative to sectors, it i s significant that the two banks with the higher exposure to consumer credit have the highest level o f NPLs and the highest rate o f growth o f these loans. By February, four o f the five largest banks had provisioned between 100 percent and 122 percent o f the NPLs, and only one o f them was marginally below 100 percent. 25. As part o f the recovery plan, the Government i s also planning to escalate public sector banking lending through two existing first tier institutions-Banco Hipotecario and Banco de Fomento Agropecuario-and through a second-tier institution that would be turned into a first tier bank -Banco Multilateral de Inversiones (BMI).' However, this strategy will require close monitoring to ensure the financial soundness o f these institutions. B. MacroeconomicProspects and Debt Sustainability 26. Recent indicators suggesting that economic activity i s starting to turn around in the United States are particularly relevant in the Salvadoran context. 48 percent o f Salvadoran exports are directed to the United States and workers' remittances (mainly from the United States) represent more than 15 percent o f GDP. Thus, a recovery in the United States i s expected to result (although with some lags) in a larger demand for Salvadoran products as well as allow remittances flows to revert the decline o f 2009. Current estimates foresee a recovery in GDP growth rates to about 0.5 percent in 2010, 2 percent in 20 11, and around 3 percent in 20 12 and 4 percent in 20 13 and 20 14. (Table 3). BMI was created to provide medium and long-term resources to the banks. Since dollarization, the commercial banks' demand for BMI finds declined sharply because they could mobilize long-term resources much cheaper than the cost o f BMI funds. 8 Table 3. Medium Term Macroeconomic Scenario (% o f GDP, unless otherwise indicated) 2010 2011 2012 2013 2014 Income and prices GDP growth (% change) 0.5 2.0 3.0 4.0 4.0 Inflation (cpi end o f period % change) 2.5 2.8 2.8 2.8 2.8 Investment and savings Gross domestic investment 13.7 15.0 16.0 16.5 16.5 Gross domestic savings 11.1 12.3 13.4 13.8 13.8 Consolidated Public Sector Total revenues and grants 17.0 17.7 18.3 18.8 18.9 Total tax revenue 13.1 13.9 14.6 15.2 15.3 Total expenditures 21.3 21.0 21.0 20.8 20.7 Primary balance -1.3 -0.3 0.3 0.9 1.o Overall balance -4.3 -3.3 -2.7 -2 -1.8 Public Debt Total debt 48.8 50.1 49.5 48.3 46.2 Balance of Payments Current account balance -2.6 -2.7 -2.6 -2.7 -2.7 Trade balance -14.2 -14.4 -14.5 -14.8 14.8 Exports of goods (f.0.b) 17.2 17.7 17.9 18.0 17.9 Imports of goods (f.0.b.) 31.4 32.1 32.4 32.7 32.7 Foreign direct investment 0.8 0.8 1.4 1.9 2.4 Remittances 15.5 15.7 16.1 16.2 16.2 Memorandum Item Nominal GDP (billions o f U S dollars) 23.0 24.0 25.4 27.3 29.2 Source: Ministry o f Finance, EIU forecasts and World Bank staff estimates. 27. Inflation i s expected to remain under control in the medium term. The current medium t e r m macroeconomic framework incorporates projections for the inflation rate that would be consistent with a moderate increase to 2.5 percent in 2010 and 2.8 percent in 2011 and beyond. These projections already incorporate the rebound in o i l prices observed since February 2009 (when the barrel o f WTI o i l reached US$39.1) to US$69.9 by midyear, and the recovery in food prices which after having declined by 40 percent in the second half o f 2008 increased about 12 percent between January and June 2009. 28. The current account deficit i s likely to widen in 2010, but remain at levels experienced before the food and fuel crisis. Improvements in the current account are likely to be driven by a combination o f factors including additional pressure o n imports as commodity and food prices recover, and the relief from an expected recovery in S remittance flows as the U labor market improves. Foreign Direct Investment (FDI) is also expected to recover from less than 1 percent o f GDP in 2009 to pre-crisis levels o f approximately 2 to 3 percent. 29. The difficult fiscal situation will continue to be the main source o f macroeconomic concern in the coming years. The 2010 fiscal deficit (projected at 4.3 percent o f GDP) i s expected to decline slightly with respect to the one in 2009 as the modest recovery projected for next year will not likely result in dramatic improvements 9 on the tax collection front. Similarly, the 2010 budget i s expected to include about US$350 million (1.5 percent o f GDP) in programs and projects from the government's "Anti-Crisis Plan" pushing public spending to 21.3 percent o f GDP. In order to cover the additional financing needs emerging from the revised deficit for 2010 the government i s relying on multilateral support. The Inter American Development Bank (IDB) i s preparing a US$200 million budget support operation planned for 2010 disbursement. Beyond 2010, permanent commitments associated to the "Anti-Crisis Plan" could add to public spending between US$200 and US$250 million (depending on how coverage o f the programs evolves) per year (0.8 percent to 1 percent o f GDP). 30. Public debt levels are also a concern. After declining from 42.1 percent o f GDP in 2003 to 39.1 percent o f GDP in 2007, the stock o f total public debt increased to 41.2 percent o f GDP (of which 23.7 was external public debt) in 2008 and i s expected to further increase in 2009 to 47.7 percent o f GDP (of which 30 percent would be external public debt). 31. The government i s aware o f the need to reduce the fiscal deficit once the crisis i s over and bring the debt path to a sustainable level. In this regard, with World Bank and IMF support, the administration i s working on the preparation o f legislation that will include a reform o f the tax administration. Measures under consideration include administrative actions to fight tax evasion, introduction o f new taxes (such as a new tax on vehicles) and adjustment o f some taxes (such as those on alcoholic beverages). On the spending side, the government i s preparing a plan to rationalize existing subsidies in the water, transport, and gas sectors. This would be in addition to the actions already taken on the electricity front (supported by the Bank's Public Finance and Social Sector Development Policy Loan) to reduce the electricity subsidy for firms. As a result, the fiscal deficit i s expected to decline to less than 2 percent o f GDP in 2014. 32. A revised DSA has been prepared to reflect the recent deterioration in the medium term macroeconomic outlook. The DSA indicates that public debt i s expected to increase to above 50 percent o f GDP in 201 1 and then start declining as the overall balance o f the public sector increases. As for the evolution o f the external debt, Annex 4 indicates that the total external debt to GDP ratio will decline to about 40 percent o f GDP by 2014. 33. Despite the global crisis economic fundamentals remain solid and the government has agreed with the IMF on a macro framework to set the debt trajectory on a sustainable path. The macro framework described above would be supported by a new three year Standby Arrangement (SBA) with the IMF that the authorities intend to treat as precautionary. The IMF and authorities agreed that given the current context it was more appropriate to reach agreement on a new SBA, than to extend the SBA approved earlier in 2009. 10 1. 1 1 Development Challenges and Government Priorities 34. The new administration faces several development challenges and the way in which they are addressed could have profound implications for the future. A s summarized above, the economic challenges have both a short and long term dimension. On the fiscal front, the short term challenge i s to reduce the deficit to sustainable levels. In the longer run, actions are needed to increase the fiscal space to finance priority investments. Similarly, with respect to accelerating growth, short term actions should focus o n reactivating the economy, while in the long run, measures are needed to address the country's l o w structural growth rate. Finally, in terms o f poverty reduction, immediate action is needed to protect the income o f those most affected by the crisis while promoting longer t e r m policies to further reduce poverty. Improving public sector management and strengthening institutions i s a transversal theme for improving long term prospects. 35. Within this context, the government has prioritized the implementation o f an "Anti-Crisis Plan" for 2009-2011 that was announced immediately after its inauguration. The Anti-Crisis Plan (PAC) recognizes the short-term impact o f the crisis and, without ignoring medium-term challenges; proposes responses geared to both mitigate the immediate effects o f the crisis o n the most vulnerable population as well as t o prepare the conditions for a broad-based recovery once global conditions start improving. The P A C comprises the following components: i. An income protection and employment generation program to protect vulnerable populations with households' income impacted by either loss o f jobs or lower remittances and would facilitate reinsertion o f affected population into the labor market; accompanied by a number o f actions to stimulate production by facilitating access t o financial services and lowering production costs in rural areas; *. 11. The creation o f a comprehensive and universal social protection system that would extend the former "Red Solidaria" program to urban areas and would also expand provision o f education, health and nutrition related programs; ... 111. The strengthening o f public finances to face fiscal challenges by implementing a number o f actions o n both the revenue and expenditure sides to expand the fiscal space for priority spending; and iv. The implementation o f a comprehensive consultative process to prepare a national development plan and sector specific policies in a participatory manner in preparation o f the medium-term recovery and long-term development. 36. The PAC balances well the short-term needs a well a the medium-term s s strategic priorities for the country. The measures proposed are also in line with crisis response in other countries, including proposing measures t o strengthen public finance while protecting spending, mitigating the shock o n the most vulnerable and using the opportunity o f the crisis to promote policies which will be positive for the country's long term development. A potential challenge for implementation is that most programs proposed are new, which may be particularly difficult given the capacity constraints 11 associated with a change in administration. To contain the cost o f the P A C and ensure i t s financing, the government has been selective in choosing which programs to include in the PAC, and also indicated that the P A C will be accommodated within the budget. 37. While the government i s still refining its long run development strategy it has expressed its intention to continue implementationof ongoing policies and programs that proved effective and to adjust and strengthen interventions in areas where results were not a significant. The following sections introduce specific development s challenges in priority areas: growth and competitiveness, poverty and inequality, public sector and institutional development, and environment and disaster mitigation. A. Growth and Competitiveness 38. Beyond the measures necessary to ensure macroeconomic stability in the shorter term, one o f El Salvador's key challenges i s improving growth prospects. El Salvador has succeeded in fostering trade openness and increasing non-traditional exports. Since C A F T A DR was implemented, yearly average trade flows have reached US$5,219 million. C A F T A DR has also allowed the country to strengthen exports towards Central America and the Dominican Republic, and in 2008 exports increased 12.8 percent. However, the current global environment is negatively impacting trade flows, and therefore it will be important to continue efforts to enhance the country's competitiveness as a way to foster opportunities for the private sector, particularly for SMEs. 39. Analytical work carried out over the past years by the Bank has identified a number o f priority areas that appear to be bottlenecks limiting the country's growth potential. These areas include the need to improve: (i) human capital particularly as regards the labor force; (ii)logistics infrastructure and services to help export competitiveness; and (iii) investment climate. the 40. Despite the progress made on the education front, the Salvadoran education system still has important gaps in secondary education. El Salvador has made good progress in expanding access to primary education. In 2007, 97 percent o f children aged 6- 11 were enrolled in primary school. However, with a net enrollment ratio in secondary education o f 59 percent in 2007,6 it is estimated that El Salvador's secondary enrollment i s much lower than that o f similar middle income countries. These gaps are compounded by quality issues (e.g., student performance, as measured by standardized achievement tests, is poor at the lower secondary level) which appear to affect particularly the poor (El Salvador, Poverty Assessment, Report No. 29594). For example, sixth graders perform below the regional average in every subject area (mathematics, science, reading). These human capital issues place the country in a distinct disadvantage in terms o f competitiveness as apart from i t s direct role as a factor o f production, education and human capital determine the rate o f technological innovation in countries that produce technology and the rate o f technological absorption in countries that imitate it. Source: Ministry o f Education o f El Salvador. 12 41. The new government plans to address these issues through a two pronged approach. On the one hand it i s reorganizing the Ministry o f Education and working on a comprehensive strategy for the sector covering 2009-20 14. Priorities include improving the quality and coverage o f education and upgrading the professional standards o f teachers. Efforts will be made to better integrate' science and technology across the curriculum (see next paragraph). On the other hand, the government i s also working to improve the human capital o f adults in the labor force through targeted training programs. 42. The Ministry o f Education's new organizational structure gives a prominent role to the development o f science and technology education and research, including a focus on improving science education from pre-school to high school and training o f scientific and technological professionals. A reflection o f the government's commitment i s the creation o f a position o f Vice Minister for Science and Technology within the Ministry o f Education with the mandate o f integrating the competitiveness agenda in the education system. This emphasis i s particularly welcome taking into account El Salvador's relatively low ranking on the World Competitiveness Index (79 out o f 134 countries). The indicators on innovation and technological capacity tend to rank in the bottom quarter. 43. Infrastructure has improved (particularly electricity and telecommunication) over the past few years but Salvadoran firms still find it expensive to produce and difficult to ship their output. According to the 2006 " E l Salvador, Recent Developments in Infrastructure " (Report No. 37689) direct logistics costs for value-added goods- namely, trucking service contracts, warehousing, and ocean borne shipping tariffs- remain a heavy and growing burden on Salvadoran producers. Moreover, indirect or "hidden" costs caused by delivery delays, lost, damaged and stolen cargo are hurting sales and directly affecting the competitiveness o f the country's firms. Infrastructure upgrades appear to be particularly needed in rural areas and the government has indicated that this i s one o f its priorities. 44. Attention i s also needed to some key determinants o f the Salvadoran investment climate. The 2007 Latin American and the Caribbean Regional Study Economic Performance in Latin America and the Caribbean: A Microeconomic Perspective (Report No. 407 17) reviewed the investment climate o f the region. The study found that the productivity o f the Salvadoran f i r m s (and therefore the country's growth prospects) could be significantly enhanced by addressing the country's high crime rates which in addition to negatively affecting the safety o f the f i r m s and i t s workers also impose costs (such as expenses on security). Similarly, the study also found that regulatory and institutional quality aspects were among the key elements that needed to be addressed to improve the country's investment climate. B. Poverty Reduction and Social Sectors 45. The main anti-poverty program in El Salvador has been the Red Solidaria, now renamed "Comunidades Solidarias Rurales". This program i s designed to combat poverty in rural areas through conditional cash transfers (CCT), providing cash to poor 13 households based on children's regular health check-ups and school enrollment and attendance. Evaluations show the program i s fulfilling i t s objectives o f supporting the consumption o f poor rural households. Moreover, the expansion o f this program in rural areas has been accompanied by significant increases in the availability o f public health and education services, thereby facilitating access to and, utilization of, these services. Coverage o f the program reached 100 poor municipalities as o f August 2009 (there i s a total o f 262 municipalities in El Salvador). 46. There i s currently no systematic approach to social protection, and no specific mechanism to address urban poverty. This i s particularly important in the current environment, as the economic crisis i s expected to have a disproportionately higher impact in urban areas. Moreover, data indicate that the evolution o f remittances i s likely to result in a larger reduction in urban centers than in rural areas.' Among urban poor, youth are particularly vulnerable. High youth unemployment rates and related low levels o f education and training increase their susceptibility to crime and violence. In response, the government i s working towards a universal social protection system which includes support for poor urban households through new program called "Cornunidades Solidarias Urbanas.'' As part o f the enhanced social protection system, the government i s designing a short-term income protection program to mitigate j o b loss and income reduction during the crisis followed b y a more systematic and permanent labor intermediation and quaiification system. 47. I n addition to strengthening social protection, there i s also a need to address inequalities in school enrollments. According to the FY07 Latin American and the Caribbean Flagship, Poverty Reduction and Growth: Virtuous and Vicious Circles, 75 percent o f Salvadoran children in the lower 3 deciles o f the income distribution have less than 6 years o f education. More dramatically, about half o f those have one or less years o f education. At the other end, only 8 percent o f the poorest have 12 or more years o f education. T h i s i s in contrast with the higher three deciles o f the income distribution where approximately 35 percent have 12 or more years o f education. 48. El Salvador has made good progress in the health sector as changes in some health indicators suggest. An example o f this i s the reduction in the mortality rate o f children under five, from 30 to 19 per 1,000 live births between 2000 and 2007. Reductions o f similar magnitude have been reported for other health outcomes such as maternal mortality and infant malnutrition as w e l l as access to health services. Many o f these achievements are likely associated with improvements in socioeconomic infrastructure related to living conditions. T h i s progress notwithstanding, indicators based on micro-data from 2004 and 2007 show that health care utilization among i l people l remained almost unchanged. On the supply side, however, there are some notable changes, including an indication that the quality o f health services provided by the systems as a whole has improved.8 Estimates for 2007 indicate that as a percentage o f total volume received by households, 53 percent o f remittances go to urban areas versus 47 percent to rural. * The fraction o f hcalth care users rating health services as excellent (or also good in urban areas) increased approximately by 3 percentage points. 14 49. Despite progress in recent years, El Salvador faces significant challenges in most social infrastructure categories, particularly in the poorest areas o f the country. The policy challenges identified in the 2006 report "El Salvador, Recent Developments in Infiastructure " remain valid today, including the need to: address shortfalls in the provision o f basic infrastructure within severe fiscal constraints. The I study found the water sector in particular to be performing far below expectations. Water and sanitation has an important impact on living conditions and health indicators and actions such as re-designing subsidies to ensure the poor are primary beneficiaries would contribute to achieving the goal o f universal access to infrastructure. 50. I t i s important to safeguard the advances in health outcomes achieved over the last decade. Regional experience in Argentina, Peru and Mexico has shown deterioration in some social indicators following economic crisis. It i s therefore important to continue to improve the health system, particularly in times o f crisis, including the efficiency and effectiveness o f spending on health systems. The government i s preparing an action plan to achieve universal coverage, greater equity and enhanced quality through the creation o f an integrated network o f health care services. The current challenges which need to be addressed relate to increasing access, particularly for vulnerable populations; reforming the structure and organization o f the health care system; developing human resources; re-enforcing gains acquired in recent years in disease prevention (e.g., dengue, HIV/AIDS, malaria etc.); and formulating a national drug policy. It i s also important to strengthen epidemiological surveillance, particularly in the context o f the HlNl epidemic. C. The Public Sector and Institutional Development 5 1. The government intends to accelerate efforts to strengthen public financial management (PFM) and increase the transparency o f government spending. A recent assessment o f the current situation in El Salvador, sponsored by the European Commission in collaboration with the Bank and IDB, determined that the country's PFM system possesses a number o f strengths, such as a sound legal and institutional framework for managing and monitoring revenue and expenditure budgets, cash flows and balances, and debt. In addition, the country's integrated financial management system (SAFI), conceived not only as a technological platform but as a set o f rules, processes, and skills, has contributed to fiscal discipline and enabled greater transparency by allowing the timely issuance o f budget execution and other fiscal reports. 52. Going forward, the agreed program focuses on further strengthening o f public resource management with particular emphasis on expanding the PFM system, adhering to established international norms where appropriate, increasing the transparency of public spending (including procurement) and improving budget processes. In this latter regard, a key goal i s to move towards a medium-term and results-based budget framework, with an emphasis on the "bottom-up" preparation o f costed strategic plans and ensuing investment programs, consistent with the "top-down" fiscal framework. On the control side, the government has adopted international 15 standards (COS0 framework) and has put in place internal regulations to further stimulate effective operation o f internal control u n i t s in all public institutions. Box 2. Governance and Anti-corruption in El Salvador El Salvador has made important progress in developing i t s democratic institutions and overall governance fiamework. In the last 20 years, subsequent administrations have undertaken a series o f structural reforms to stabilize the economy, open markets and trade, and modernize public sector institutions. These sustained reform efforts have succeeded in placing E l Salvador among the leading reformers in the L A C region according to indicators put forth in the Doing Business Report or the Global Competitiveness Index. Similarly, governance indicators are also relatively positive such as the Worldwide Governance Indicators (WGI) or the Transparency International Corruption Perception Index (TI-CPI). Based on the Bank's assessment as well as several sources o f information and following the LCR G A C Approach, the following table summarizes the status o f progress and performance o f El Salvador's country systems in 12 dimensions o f Governance and Anti-Corruption (GAC): I 1 I Clean and efficient tax administrationagencies I .. .... .. I I 2 3 Transparent comprehensive and open budgets Integratedfinancial management systems for central and sub-national governments ... .. . 88. 4 5 6 Transparent and competitive procurement systems Independent and effective oversight bodies Competitive markets and effective regulatory frameworks to regulate public services . 8. . .. and monopolies 7 8 Prudential regulation and supervision o f banking sector Asset and Income declaration for public officials 8.8 8 .. .. .8. 9 Independent, efficient, accessiblejustice systems 10 Transparency in campaign financing and legislative voting records . . 8 . 11 Professionalized civil service and efficient and transparent delivery of services 12 Adoption and implementation of freedom o f information laws, social monitoring and independent media . .. 8. Likewise, the PEFA'' report has confirmed most o f these perceptions in a more systematic way and has revealed strengths and weaknesses o f existing Public Expenditure and Financial Management systems and practices. W h i l e the report recognizes the existence o f a robust legal fiamework, procedures and supporting instruments for the overall budgeting and financial management cycle, it also flags the need for further strengthening particularly in two main areas: (i) linkage between policy planning and budgeting; and the (ii) the auditing and external control mechanisms and credibility. 53. Strengthening o f existing tax administration systems i s also critical in the current circumstances. Although the government has already made progress in enhancing the overall efficiency and effectiveness o f tax collection mechanisms, there i s For example, the TI-CPI ranks E l Salvador in the 67 place among 180 countries and as the 3rdbest perceived countries in LAC. The WGI ranks El Salvador in the gth place in the Government Effectiveness dimension among 17 LAC countries and in the 4Ih place in the Control of Corruption dimension. loInforme del DesempeAo de la Gestidn de las Finanzas (PEFA), Informe final versi6n 10 de mayo de 2009, Oficina Europea de Cooperacion EuropeAid (AidCo). Rotterdam, 25 August 2009. 16 s t i l l room for improvement. Further integration between the internal revenue and customs agencies i s an area o f opportunity that would yield significant return in terms o f tax collection from a strengthened control system. Integration o f both control procedures and databases i s planned as a complement to tax policy measures to address the critical fiscal situation. 54. Beyond improving expenditure management and controls and in recognition o f the importance of adequate and proactive disclosure, a number of actions are planned to facilitate public dissemination of critical aspects o f public financial management. A state-of-the art public procurement dissemination tool (COMPRASAL) has been successfully implemented and i s now recording and publicizing all central government procurement activities including bidding processes and contracts. COMPRASAL has allowed enhanced transparency and credibility o f public sector performance with respect to an area commonly perceived as most vulnerable to mismanagement and corruption. It i s expected that the government will further automate bidding processes and convert COMPRASAL into a fully transactional tool. The government i s also committed to revisit and adjust, as needed, the legal framework governing public procurement to promote greater transparency and enhance efficiency. 55. Further development o f the transparency and freedom o f information agenda i s deemed critical in view of existing negative perceptions and mistrust among other stakeholders, particularly members o f the legislature, the media and specialized non-government groups. The transparency and freedom o f public information agenda has gained support among these groups and it i s expected that, within the next two years, the government will have established i t s normative framework and developed institutional capacity to make all public sector information accessible to the public. D. Environment and Disaster Mitigation 56. Environmental degradation i s a problem in El Salvador and increases its vulnerability to natural disasters. El Salvador has the second highest economic risk exposure to two or more hazards, according to the World Bank funded Natural Disaster Hotspot study. l1 Due to i t s geographical location and geotectonic characteristics, El Salvador i s exposed to a variety o f natural hazards, and i s one o f the most seismically active regions on earth. Natural disaster data from El Salvador12 indicate 41 natural disaster events for the period 1982 to 2007, with total economic damages estimated at US$4.57 bi1li0n.l~ The country i s also susceptible to climate change forces which can exacerbate risk o f natural disasters. See World Bank, Natural Disaster Hotspots, A Global Risk Analysis (Washington, DC: Disaster Risk Management Series, 2005). Prevention Web. EL Salvador. Data and Statistics. httD://www.preventionweb.net/enalish/countries/statistics/?cid=I 3 1 accessed: March 2009. l3 Economic damage by disaster type was reported as follows: earthquakes accounted for US$3.35 billion; storms US$744 million; floods US$282 million; and droughts $193 million. 17 57. El Salvador faces severe degradation o f its natural resources, especially its natural forests, soil, air quality, and water resources. Only two percent o f i t s natural forests remain, which in the region compares only with Haiti. Yet, there i s evidence o f a significant recovery o f secondary forests and biodiversity, as reported by ongoing studies. The health impact o f environmental degradation has been estimated at around 2.5 percent o f gross domestic product (GDP). Water pollution i s one o f the most pressing environmental problems that El Salvador faces. Inadequate quantity and quality o f the potable water supply, sanitation facilities and practices, and hygiene conditions are associated with various illnesses in both adults and children. 58. These problems compromise El Salvador's long-term economic growth, impose significant socioeconomic costs (particularly for vulnerable groups such as poor children), and have created a growing unmet demand in urban areas for adequate water supply, sanitation services, wastewater treatment, and clean and efficient public transport. From an environmental policy perspective, the challenge i s to strengthen environmental institutions and policies so that they effectively engage in territorial planning, protect the environment and the country's natural heritage (avoiding unrealistic regulations that might hinder competitiveness and investment) while supporting trade-driven growth and a much needed expansion in infrastructure. IV. World Bank Group Strategy A. Lessons from the Last CAS (see also the CAS Completion Report) 59. The Bank Group's assistance over the four-year period covered by the previous CAS (FY05-08) envisaged a strategic program o f lending and non-lending activities to support the three main pillars o f the government's development plan: (i) to accelerate broad-based, equitable economic growth and increase employment; (ii) to improve equity through building human capital and expanding access to socioeconomic infrastructure, assets and markets; and (iii) enhance security and reduce vulnerability to including support to governance and environmental agendas. 60. During the CAS period, however, the political context evolved in such a way that, by the time the CAS Progress Report was prepared (in February 2008) several adjustments were made to the original targets and program. An impasse in the National Assembly on several domestic issues led the opposition to block US$500 million in new foreign borrowing requiring a sovereign guarantee, including five Bank operations, as well as loans from the Central American Bank for Economic Integration (CABEI), the International Fund for Agriculture Development (IFAD) and the IDB. The Bank operations were eventually cancelled after failing to become effective within 18 months o f Board approval. This setback in the implementation o f the CAS lending program led the Bank and the Government to adjust the assistance strategy by minimizing the lending targets and emphasizing non-lending activities to prepare the re- engagement for the new CAS cycle. 18 61. The CAS Completion Report found that in most cases anticipated projects went ahead under alternative financing arrangements, and progress was made towards CPS outcomes, although the pace of reforms did slow during the period. The overall objectives and country development goals set forth in the original CAS remained valid, but specific targets and CAS outcomes had to be revised due to the cancellation o f several lending activities. The Progress Report also proposed a stronger focus on analytical and advisory services which also led to positive CAS outcomes in the absence o f new lending. 62. An important lesson emerging from the CAS Completion report relates to the political polarization in El Salvador and the importance o f consensus-building efforts to ensure successful implementation of proposed programs. The 2005 CAS underestimated the implications o f El Salvador's divided political environment. Despite proactive local outreach effort, including during the project preparation phase, the Bank's loans became hostage to political negotiations. While the expectation i s that the current situation i s different (see paragraph 97), the Bank intends to manage this risk by presenting a package o f loans to be approved by Congress which represent a carefully selected program focused o n priorities where there i s broad support. It i s hoped that this approach will minimize the chance that individual loans are captured in a political debate and that Congress can agree on a comprehensive approach and budget financing to address the crisis. The Bank will o f course continue its consultation efforts and elaborate an information and communication strategy to engage with the country legislative branch, political parties and other stakeholders, including local communities as appropriate. 63. A second lesson i s the importance of analytical work to identify gaps in specific sectors, inform stakeholders and build consensus around important development issues. Experience in El Salvador has shown that the government values the Bank not only as a lending facility, but also for the range o f global expertise it can bring to complex development issues. Even in the case where Bank projects were not ultimately approved in Congress, the Bank continued i t s engagement in critical sectors through analytical work with a positive impact. Analytical work also prepared the ground for future engagement in areas o f mutual interest. This lesson is also relevant for areas where the government and the Bank may not agree o n a policy agenda or need for financing, but where a continued engagement through analytical work is useful to sustain the dialogue. 64. Finally, an important operational lesson emerging from the CAS Completion Report i s to carefully consider capacity and implementation issues early in the process o f project design. Future operations in El Salvador must be designed based on an assessment o f the capacity available in the country, and with due consideration o f the country's political economy issues. Complexity in design should be reduced to the extent possible, and where it i s not, clear project implementation plans are needed before the project becomes effective. This latter point i s particularly relevant in the current country circumstances characterized by the presence o f an inexperienced administration that needs to come up to speed in the midst o f critical conditions and to create capacities while implementing the intended policies and programs. 19 B. World Bank Country Partnership Program FY10-12 65. The overall aim o f the CPS i s to support the government of El Salvador's focus on addressing poverty and inequality through three strategic objectives: (i) strengthen fundamentals for economic recovery by addressing macro and institutional vulnerabilities; (ii)strengthen social service delivery; and (iii)increase economic opportunities, particularly for the poor. Taking into account lessons identified in the CAS Completion Report, this CPS i s selective and focuses in areas where there i s clear commitment from the government at various levels. The analytical work i s designed to be demand-driven and flexible in order to provide just-in-time support to the newly elected government in priority areas. Principles of Engagement 66. A strategic principle guiding the CPS i s to support the government's approach of balancing the immediate response to the economic and social aspects o f the crisis, while also beginning to respond to the longer-term development challenges. Recognizing the imbalance between country needs and resources, and t o maximize the efficiency o f the interventions, the government has requested that Bank assistance is based o n this principle. As such it is reflected in the design o f the operations to be delivered which include shorter-term interventions but with a view to supporting longer-term development. 67. A second principle f o r this CPS includes selectivity and flexibility which i s in line with best practice in Middle Income Countries, and i s particularly necessary given the high degree o f uncertainty in terms o f the global economic outlook. A flexible approach is needed to support the government as it defines the long term government program and works to achieve political consensus. Flexibility will also apply t o the use o f instruments, which include a combination o f development policy lending, investment lending, analytical work and technical assistance to support the government's policy agenda and sustain dialogue during this critical period. In accordance with this principle, the FY 10 lending program i s well-defined and selective, however the outer years o f the CPS will be agreed with government based o n the evolution o f the country environment, and where the needs are most pressing. If political polarization should become an issue, as it did during the previous CPS, the Bank would adjust its program to achieve results through dialogue and AAA. 68. Lessons learned in the CAS Completion Report suggest successful programs require continuous consultation to secure broad support. This principle has been adopted both for the preparation o f the CPS and ongoing work program discussions including o n specific operations. Broad consultations with relevant stakeholders including political parties from the opposition as well as private sector representatives would alert teams o f potential gridlock and help design mitigation measures during project preparation. In addition to the project level consultation, the Bank will sustain a permanent dialogue with all players and monitor potential risks that could affect the program. 20 Strategic Objectives Supported by the CPS and Results-BasedApproach 69. I n line with the results-based approach, this CPS has identified several outcomes which it expects to influence during the CPS period. The CPS Results Framework (Annex 2) i s organized according to the three strategic objectives o f the CPS. Given the limited size and breadth o f the current Bank program, the CPS proposes a streamlined results matrix which includes an indicative set o f outcomes that are consistent with the scope o f the crisis response program that has been defined to date. Performance towards outcomes will be assessed at the CPS Progress Report and the Results Framework will be updated to reflect progress and potential new priorities for Bank support. Strengthen fundamentals for economic recovery by addressing Strengthen delivery o f social Increase economic opportunities, macro and institutional services particularly for the poor vulnerabilities Selected Areas for Support - Expandfiscal space - Protect the income o the f - Enhance employment - Improve targeting of urban poor, through the opportunities subsidies f implementation o targeted - f Improve quality o science - Implement results-based - programs Support design o a f and technology education and training budgeting - Enhance access to Universal Social Protection System - Promote rural infrastructure information and local development - Improve fiscal transparenqv - Ensure access to basic health - Strengthen Financial Sector services - Strengthen disaster risk - Invest in In3astructure management - Improve quality ofprimav education and expand access opportunities to secondary schools Objective 1. Strengthen fundamentals for economic recovery by addressing macro and institutional vulnerabilities 70. Macro-stability and Expanding Fiscal Space. The two-tranche Public Finance and Social Sector (PFSS) D P L is central to this objective and will help set the framework for a possible follow-on programmatic DPL series. The PER under preparation provides analysis and recommendations in the areas o f fiscal management and targeting o f subsidies, and i s complemented by on-demand technical assistance in debt management and public procurement to optimize the use o f scarce public resources. The US$20 million Fiscal Management TAL accompanying this CPS supports efforts to enhance tax collection capabilities through strengthened controls and integration o f databases and procedures. The Sustaining Social Gains for Economic Recovery (SSGER) DPL, .also accompanying this CPS extends the policy actions o f the PFSS DPL by supporting further actions to reduce the cost o f other untargeted subsidies and releasing fiscal space for protecting critical expenditures in the social sectors. Given the fiscal challenges the 21 country i s facing, compounded with the natural disaster risk profile, the government may also consider the possibility o f a DPL with a Catastrophe Deferred Drawdown Option (CAT DDO) to provide a source o f immediately available liquidity during a state o f emergency caused by a natural disaster. 71. Public Sector Performance and Transparency. The PFSS DPL supports enhancing public sector performance and transparency, as does the Fiscal Management and Public Sector Performance TAL, which also accompanies this CPS. The T A L also contributes to results related to multi-year and performance-based budgeting, fiscal transparency and access to information, e.g., improving El Salvador's ratings in selected PEFA indicators and increasing the number o f public sector procurement transactions recorded and disseminated through COMPRASAL. Trust Funds also support activities related to fiscal transparency and building fiscal management capacity. 72. Institutional Strengthening. Building institutional capacities and systems in critical areas o f the public sector i s needed to strengthen fundamentals for economic recovery, but also to implement development policies more broadly. The TAL aims at strengthening capacity in several Ministries, including the broader capacity to carry out policy planning and produce national statistics. Objective 2. Strengthen delivery o f social services 73, Poverty and Social Protection. Drawing from recent Bank analysis o f unfolding income vulnerabilities and poverty impacts, the Bank i s working with the government to strengthen the institutional and policy-making capacity o f the government to develop medium term social policies that target the .urban poor. The Income Support and Employability Project w i l l support strengthening the capacity in the government to design and implement inclusive social policies, particularly on social protection and employment. Through i t s labor market services, this Project also provides opportunities targeted to young under-employed men as well as to head-of-household women. 74. The SSGER DPL also supports efforts to strengthen institutional capacity and policy making in the social sector line Ministries and the Secretaria Te`cnica de la Presidencia. Both these efforts will contribute to the design o f a Universal Social Protection system to improve the targeting o f social assistance programs. Also in the context o f the Income Support and Employability Project, the Bank i s helping the Government to design an income and job training program, the Flagship o f the Government's Anti Crisis Plan, to limit income poverty impacts and improve poverty targeting in urban areas. W h i l e this program i s temporary, it will build capacity to respond to future shocks. 75. H e a l t h and Education. The SSGER DPL promotes policy actions in critical areas to protect the most vulnerable population and has helped establish a strong dialogue across government, including health and education ministries. A possible follow-on DPL series along with specific investment operations are likely to provide continuity for Bank support to key social sector reforms. Ongoing Bank projects and AAA (such as the 22 Pharmaceutical Study and Income Vulnerabilities and Poverty Note) also support outcomes related to protecting and enhancing coverage o f basic health services. The US$143 million Hospital Reconstruction and Basic Health Services Project has been supporting the government's efforts to expand primary health care coverage to more than 500,000 additional households using the targeting criteria set by the Red Solidaria design. Building up on i t s experience in other countries, IFC will seek opportunities in tertiary education areas where access to lower segments o f the population could be expanded in a sustainable manner. 76. C r i m e and Violence. While there are limitations in t e r n s o f Bank interventions in this area, it remains an important country and regional concern and the Bank i s able to assist the government in a number o f important components o f this agenda. Box 1 draws on recently completed analytical work and suggests efforts are needed to address social inequality and issues related to youth, unemployment, poverty, and education. For instance, the Income Support and Employability Project supports activities to address crime and violence through temporary income support and improved labor market services in poor municipalities where crime and violence are pronounced, and where dwelling improvements and public safety initiatives are also taking place. l4 Youth- targeted activities include a JSDF grant to address youth violence through cultural programs and learning. Objective 3. Increase economic opportunities, particularly f o r the poor 77. Job Creation. Building on recent analytical work, the Bank will support the government's efforts to mitigate the current labor impact o f the crisis, and also enhance employment opportunities in the medium-term. Although designed to respond to temporary social needs, the Income Support and Employability Project will include longer-term interventions to help create a labor force intermediation and qualification system and develop institutional capacity at the local and national level. The operation would also support efforts to strengthen the capacity to manage labor markets through building training capacity and providing institutional support, including through local employment offices which are not currently able to respond to policy strategy. Increasing employment i s also the IFC's principal strategic objective in El Salvador. Complementing investment operations, IFC will continue to support strengthening the investment climate, as it i s currently doing through a business licensing (registration, construction and operation) simplification project at the municipal level. I t will also seek to leverage synergies with the Bank. 78. Science and Technology. One significant expected outcome o f the institutional strengthening supported through the SSGER DPL i s an assessment o f the relevance and quality o f science and technology curriculum and teaching, particularly at the secondary education level. The Bank expects to remain engaged through analytical work and possible lending to support medium-term policy measures to improve science and technology education and innovation. l4 The government identified these municipalities through a targeting instrument based on an urban poverty map and additional information on crime. 23 79. Rural Infrastructure. The government i s interested in a more strategic and decentralized approach to rural development and has requested Bank support for a rural infrastructure and development project focused on the provision o f basic infrastructure and financing for income-generating activities. This project i s being designed to help address the impact o f the crisis by creating employment and support public investment in rural areas in order to improve competitiveness in the longer term, including a more market-oriented approach to rural development, capitalizing on CAFTA opportunities.' 80. Financial Sector. IFC's financial sector strategy w i l l remain closely focused on MSME financing and in meeting the needs o f underserved populations. IFC w i l l use established loan wholesaling programs with local banks to support these groups, as well as developing new financial products to meet their needs. In addition, IFC intends to maintain i t s support for the expansion o f El Salvador-based corporates, especially those able to integrate SMEs into their operations or have an impact on low-income groups. The Government has also requested a Financial Sector Assessment (FSAP) to help identify potential risks and opportunities affecting the financial sector in the current circumstances. A small Bank Trust Fund supports improving Corporate Financial reporting. 8 1. Infrastructure. IFC's infrastructure investments will be concentrated on improving El Salvador's logistics and power supply. Activity in logistics includes upgrading the highway network, port system, and energy supplies-notably o f renewable energy sources such as hydropower. In addition, IFC's Advisory Services arm has opened an office in San Salvador from which it w i l l coordinate Investment Climate operations regionally. Beyond the Rural Infrastructure and Local Development Project, there may be interest during the CPS period for additional infrastructure projects. 82. Potential IFC investments would support CPS outcomes related to creating economic opportunities. Currently IFC plans to focus on: (i) renewable energy projects and (ii) supporting local companies in the real sector with expansion plans and/or a regional footprint. IFC i s considering a series o f investments in the agribusiness, fertilizer, commercial real estate development, and waste managemenuenergy generation that fit the country strategy. Opportunities for collaboration with the Bank include awarding an operating concession for the port o f L a Uni6n and supporting the design o f private-public partnership (PPP) solutions to carry out specific initiatives in the health industry and for urban infrastructure and massive transportation in the metropolitan area o f San Salvador. In the power sector, IFC expects to build on the joint Central America energy strategy developed with the Bank. 83. The Bank i s also preparing several pieces o f regional analytical work which will be relevant for El Salvador, particularly in terms o f creating opportunities for broad-based economic growth. Studies are under preparation at this time in the following areas: (i) enhancing regional competitiveness; (ii) CAFTA complementary the IsAs this project i s in the early stage o f preparation there are currently no outcomes included in the Results Framework, however it i s expected that these would be added at the time o f the Progress Report. 24 agenda; (iii) regional energy opportunities; (iv) creating conditions for employment generation; (v) pharmaceuticals; and (vi) addressing crime and violence issues in the sub- region. El Salvador i s also participating in a regional project on Remittance Pricing database which could support efforts to channel a larger portion o f remittances into the economy. The Bank i s prepared to provide hrther support in these areas should the Government request it. The dissemination o f these studies may lead to follow-up at the country level. During the CPS cycle, the Bank also expects to provide specific policy advice for El Salvador on enhancing competitiveness and economic recovery following the crisis. Proposed Program of Support 84. Implementation o f the ongoing portfolio supports the strategic objectives o f the CPS. The current Bank's portfolio in El Salvador includes a Development Policy Loan (US$450 million), two investment operations nearing project completion (US$16 1 million) and a GEF grant (US$5 million). The two ongoing investment operations are rated moderately satisfactory mostly due to the slow pace o f implementation, which i s common during election transitions. The current undisbursed balance i s US$286 million which reflects primarily the undisbursed balance o f the DPL (US$250 million). The Bank has a small portfolio (US$2.5 million) o f Trust Funds under implementation (see Annex 5) which supports ongoing projects and those proposed in the CPS. 85. The indicative envelope for the CPS period FY10-FY12 i s estimated at US$650 million, and i s expected to include a mix of investment and DPL lending. Three operations accompany this CPS: a U S $ l 00 million Sustaining Social Gains for Economic Recovery DPL, a US$50 million Income Support and Employability Project, and a US$20 million Fiscal Management and Public Sector Development TA. Table 5. Proposed Lending Program for FYlO Lending activity Proposed amount Fiscal Management and Public Sector Development US$20 'million Technical Assistance Loan Income Support and Employability Project US$ 50 million Sustaining Social Gains for Economic Recovery DPL US$ 100 million Rural Infrastructure and Local Development Project US$ 80 million Total US$250 million 86. The proposed three-year period i s deemed appropriate given the uncertain circumstances related to the global environment and the economic situation in the U S in particular which factors prominently in El Salvador's economic prospects. While the CPS does not cover the entire 5 year political cycle it will cover roughly half o f the new Government's potential tenure and allow the CPS to be flexible enough to address the current challenges noted in the Anti-Crisis Plan and respond quickly to the evolving medium-term agenda. The Progress Report will provide an opportunity for adjustments as needed. 87. Programmingfor the outer years o f the CPS will be flexible. Early indications following discussions with government suggest possible future lending would support areas under the three strategic objectives, and include possible financing for the health 25 sector, urban infrastructure, and higher education. I t i s anticipated that possible future DPL lending will reflect a certain level o f continuity with the areas supported by the PFSS and SSGER DPLs: (i) fiscal reform; (ii) public sector management; and ( i ) ii improving social sector service delivery and protecting vulnerable populations. The indicative envelope for FY11- 12 i s US$400 million. The actual allocation for outer years will be agreed on the basis o f the identification o f specific priority operations, assessment o f the country's absorption capacity and i s subject to the availability o f IBRD funds. 88. The proposed program o f analytical and advisory services will facilitate both maintaining engagement in priority areas while at the same time generating necessary analytical foundations to facilitate preparation o f new lending operations. Ongoing and recently completed analytical work will be used to stimulate discussion with a broad range o f stakeholders as the government articulates the country's National Development Plan. It will also serve as a strong underpinning for future lending, including Development Policy Lending. Finally, in line with the CASCR findings, M A has proven to be an effective instrument in El Salvador in terms o f achieving results. 89. The Bank will also continue to provide policy and technical advice in the growing Global Public Goods agenda, where the Bank has a comparative advantage. For example, climate change i s o f high concern for El Salvador because o f their vulnerability to natural disasters which i s expected to increase. El Salvador i s a participant in the Bank-led Forest Carbon Partnership Facility, which aims to achieve Reduced Emissions from Deforestation and Degradation (REDD). Similarly, government interest in a CAT D D O and possible infrastructure projects could be an entry point for discussions on environmental management. The Country Environmental Assessment (CEA), completed in FY08 also remains valid. The Bank i s also providing A M support for disaster management through CAPRA (see Box 3). Box 3. Central American Probabilistic Risk Assessment (CAPRA) Initiative The CAPRA initiative i s a flagship Bank knowledge product that seeks to provide Central American countries with an innovative tool to assess risk. CAPRA's goal i s to enhance disaster risk understanding, communication and awareness in Central America, in order to support the adoption o f risk strategies to reduce the impact o f disasters triggered by natural events. CAPRA provides a Geographic Information System (GIs)-based platform o f information on hazard risk. The software i s on-line, open source, and free to download. The hazard and risk maps that are generated by - CAPRA software are available in the CAPRA Geonode a data clearing house where risk data i s served, catalogued, maintained, visualised and manipulated. With the series o f user-friendly applications, such as costhenefit analysis tools and technical premium calculators, CAPRA supports decision-makers in implementing mitigation strategies and incorporating risk in development planning. CAPRA i s a collaborative initiative; jointly financed by the Bank and the IDB, it i s led by the Central American Coordination Centre for Disaster Prevention (CEPREDENAC), in partnership with Central American countries and the U International Strategy for Disaster Reduction Secretariat. N 90. The government has also expressed a strong interest in Bank technical assistance. The Bank will be responsive to government needs and seek to provide just- in-time advice on request. Some areas where the government has expressed an interest include procurement and public finance management, and as mentioned above in the 26 development o f the National Development Plan. In line with the approach taken for lending operations and AAA, the CPS adopts a flexible approach to respond to government priorities. Trust Funds will be sought to leverage CPS activities and enhance their impact. C. Development Partners 91. The Country Partnership strategy i s coordinated with El Salvador's other development partners, notably the IDB. This CPS was prepared in close coordination with the IDB and government to ensure an efficient division o f labor based on comparative advantage. In human development the Bank will take a lead role in education and health, and IDB has a regional operation focusing on medicines. In the area o f social protection both the Bank and IDB will be involved, but the Bank will focus i t s efforts on the design o f essential components o f a universal social protection system. IDB i s likely to remain engaged in the infrastructure sectors. There i s strong coordination with IDB on PFM issues, including supporting efforts to improve the fiscal situation. Past experience shows the value o f some joint activities (e.g., joint PER and CAPRA Initiative) and during the CPS period the Bank w i l l continue to work with IDB to identify areas for possible collaboration. In parallel to the CPS consultation process, the Bank held a meeting with development partners to discuss the proposed Bank program, as well as opportunities to establish specific channels for donor coordination. 92. The Government has taken the lead in promoting division o f labor among donors in line with development needs. In light o f the financing needs arising from the international economic crisis working with donors has become increasingly important for El Salvador. The main multilateral partners are CABEI, the IDB, the European N Commission (EC), the U agencies and the World Bank. Bilateral agencies like USAID, JICA (Japan) and AECI (Spain) continue to provide support in the country. The Millennium Challenge Corporation i s funding a transportation project in the North o f the country. The Bank i s working with UN agencies closely, in particular in the preparation o f the urban employment program. The donor community plans to establish regular meetings with other partners to improve coordination efforts, reduce duplication and to promote the design complementary programs. There are very few external partners active in El Salvador which should facilitate donor coordination and division o f labor. 93. The Bank has been collaborating closely with the IMF. A workshop was organized jointly by the Bank and the IDB and IMF in May 2009, before the new government took office in order to discuss possible areas o f support. These coordination efforts have continued since then and consultation with the IMF has been particularly close in the context o f preparing the review o f macroeconomic development and in the update o f the Debt Sustainability Analysis. Looking forward the Bank will continue to work with the IMF particularly in the context o f the tax reforms being currently considered by the administration. 27 D. CPS Consultations 94. During the week of August 17, 2009, the Bank held a series of CPS consultations. Participants included NGOs, think tanks, universities, the media, private sector representatives and members o f Congress. Stakeholders were broadly supportive o f the focus o f the Bank program and the Bank's relevance in El Salvador. Many agreed with the flexible nature o f the CPS, particularly in light o f the current environment and given that a longer-term national strategy i s not yet clearly articulated. At the same time, participants raised some priorities for the Bank to consider, including concerns regarding the impact o f the crisis on poverty, unemployment and security; the severity o f fiscal constraints and the implications for longer-term debt sustainability; and how the country could sustain higher rates o f growth in the future. Stakeholders were also particularly concerned about the increasing levels o f crime and violence in El Salvador. Participants o f the CPS process were asked to complete a brief survey to solicit feedback, and these discussions were supplemented by a web-based consultation process. Most respondents found the Bank had an important role to play in El Salvador. V. R i s k s and Mitigation 95. On the macroeconomic front, the main risks derive from the global financial crisis and more specifically from a deep and prolonged global deceleration. The current global situation i s negatively impacting El Salvador as credit to the private sector becomes tighter, remittances and foreign direct investment decrease, and the U S demand for Salvadoran products declines. While these factors have been taken into account in the preparation o f the CPS, to the extent that the global slowdown lasts longer or i s deeper than anticipated, the government may find some difficulties implementing i t s program. In particular, there i s a risk to the fiscal situation if tax collection does not recuperate as quickly as predicted. The Bank will maintain actively engaged through development policy lending. 96. A critical element behind the efforts to mitigate macroeconomic risks i s related to the need to find fiscal space to address the country's emerging needs and also maintain a sustainable fiscal policy stance. On the social front, the expansion o f social protection programs i s expected to mitigate some o f the risks by improving income prospects for the poorest. Rising unemployment may exacerbate the problem o f crime and violence which could also increase social and economic costs and negatively impact institutions. The strong focus in the CPS o f addressing inequality and focusing on job creation, particularly for youth in urban areas, aims in part to mitigate this risk. 97. The highly polarized political climate in El Salvador could affect program implementation. Although the recent presidential elections suggest a consensus on the need for a greater focus on policies to stimulate growth, reduce unemployment, improve revenues and address the needs o f the most vulnerable segments o f the population, the government w i l l face political challenges in creating a consensus on future economic policies. The recent history, including the approval o f the Bank and IDB loans in late 2008 and agreement on the appointment o f the Supreme Court justice for example, indicate that there i s room for collaboration in the current environment. The Government 28 and the Bank recognize the need for effective dialogue and consensus-building processes, including involvement o f the opposition in defining fiscal priorities and the opportunity to comment on project design. The Bank may help by providing technical input to the economic debate and engaging in policy dialogue with stakeholders. 98. CPS implementation i s also susceptible to risks deriving from natural disasters, to which El Salvador i s subject by virtue o f its geographic location. As with other Central American countries, El Salvador i s highly vulnerable to multiple natural disasters risks -floods, hurricanes and earthquakes. A major climatic or seismic disaster would, o f course, pose a significant threat to economic growth and fiscal stability and could also delay the government's program including the need to divert allocation o f funding to support emergency related efforts. Government focus o n social protection, in rural and urban areas, is intended in part to help the population's most vulnerable segments better withstand this recurring shocks. 99. Finally, CPS implementation could be also affected by limited institutional capacity. The current government i s a new administration with no previous executive experience. The government will need time to develop necessary implementation capabilities. The Bank program envisages technical support and training as part o f the preparation o f all proposed engagements to strengthen absorption capacity. Still, realistic timeframes and outcome projections will need to be considered in the preparation o f all proposed activities. 29 8 .I c .I .k c 9 s e 0 * 5 - 8 .I c, .I B C E 3 3 - B m . B 5 I - * 3 m C 0 * a, * .I 3 C 3 * .I c t 2l P C m P U 3 bo 0 m .I C m w E '0 m c) e $ 8 E U 2 0 C 8 a, i 8 I m m * C a, w 9 e 8 8 B M e i a, 5; 3 a, .2 c 0 g a, - .- 0 m a .I I .I .e I 4 % 3 - r 0 .- I m z c) s E I ii a I a 3 2 a c) E 3 C 0 I m Q) 0 m m Annex 2. El Salvador Country Assistance Strategy FY05-FY09 Completion Report country: El Salvador CAS Coverage: FY05-08 (extended to FY09) Date o f Progress Report: February 1,2008 CAS Completion Report completed by: Sabine Perrissin Date: September 17,2009 Introduction The Country Assistance Strategy (CAS) for El Salvador, covering the period FY05 to FYOS, was discussed in January 2005. The CAS aimed to support the Government's development plan "Safe Country 2004-2009", and envisaged a strategic program o f lending and non-lending activities, including: (i) series o f programmatic Development Policy Lending loans a (US$300 million total), the first o f which was considered by the Board at the time o f the CAS discussion; (ii) investment operations (US$185 million total); ( i ) six i i several Analytical and Advisory Activities (AAA), and technical assistance; and (iv) targeted private sector assistance provided by IFC and MIGA. However, the CAS program evolved substantially as political and economic events unfolded. Even though President Antonio Saca had won the presidential election o f 2004 with a solid margin o f 58 percent o f the vote (to 38 percent for it nearest rival), El Salvador's political environment was characterized by a high level o f polarization. Moreover, power in the National Assembly remained divided between the ruling National Republic Alliance Party (ARENA) and the Farabundo Marti National Liberation Front Party (FMLN), giving the latter the possibility to block the passage o f items requiring a two-thirds majority, such as foreign loans requiring a sovereign guarantee. I n the initial phase following Board discussion o f the CAS, the Bank proceeded to prepare and present to the Board five operations totaling US$265 million between February and December 2005: (i) Environmental Services; (ii) Excellence and Innovation o f Secondary Education; (iii) Social Protection and Local Development; (iv) Land Administration; and (v) the Second Broad Based Growth Development Policy Lending. Yet, Bank-approved operations were soon to become pawns in the National Assembly. Indeed, an impasse in the National Assembly on several domestic issues led the opposition to block US$SOO million in new foreign borrowing, including the five World Bank operations mentioned above, as well as loans from the Central American Bank for Economic Integration (CABEI), the International Fund for Agricultural Development (IFAD) and the Inter American Development Bank. The Bank operations were eventually cancelled after failing to become effective within 18 months from Board approval. This setback in the implementation o f the CAS lending program led the Bank and the Government to reassess the assistance strategy in late 2007. The shift in the assistance strategy was formalized through the CAS Progress Report in February 2008 when, besides the five cancelled operations, two other lending operations were dropped from the original pipeline. 34 El Salvador Country Partnership Strategy FY05-FY09- Completion Report The Progress Report included a set o f revised outcomes and greater focus o n AAA and non- lending technical assistance (TA). I t also extended the CAS coverage period by one year, through FY09, to coincide with the country's political cycle. Despite the fact that the Bank was unable to implement its lending program, i t remained strongly engaged through non-lending and technical assistance which were highly valued by the Government. The continued engagement of the Bank resulted in new lending towards the end o f the CAS period (late 2008) when fiscal pressures emerged in the context o f the global financial crisis. Moreover, in addition to the increasing amount o f outstanding short-term debt that needed to be rolled over in a context o f tight credit markets (both domestic and international), the medium- term fiscal situation was further complicated by the need to amortize a bond series in 201 1 that would more than double the country's debt service that year. Against this background the Government reached out to the opposition party which, for the first time in the last 20 years had reasonable chances o f winning the presidential elections scheduled for March 2009 (and eventually won). This created a series o f incentives for both ARENA and the FMLN to jointly address the country's financing needs through multilateral budget support, which in the case o f the Bank took the form o f a DPL. Although not planned at the time o f the Progress Report, the new Bank-financed DPL was consistent with the Bank's response to support several countries in the Region who were facing similar challenges. The D P L was approved in January 2009 and has disbursed i t s first tranche. The Government Strategy El Salvador has long been recognized as a regional leader in the implementation o f the economic reforms. Since the early 1 9 9 0 ' ~ ~ country has tackled a number o f key challenges including trade liberalization, tax reform, financial sector strengthening, and promotion o f private participation in telecoms, energy, and pensions. O n the social front, the country also increased the resources devoted to schooling, health and other basic services. I n spite of these key improvements, several key challenges remained, at the time o f CAS preparation, with the potential to slow down or reverse progress: . Economic performance. Although El Salvador had generally maintained a solid track record o f macroeconomic policy since the end o f the civil war, the fiscal . accounts had started to deteriorate and the current account deficit was on the rise. Governance. Further efforts to modernize the public sector were s t i l l required to . improve the efficiency and transparency o f public institutions. Growth. Several areas critical to growth needed further improvement, such as: trade, investment climate, infrastructure, and the overall educational level o f the population. ~ Poverty. Despite significant progress since the 1 9 9 0 ' ~regional and spatial . dimensions o f poverty remained important. Vulnerability to external shocks. Natural disaster or unfavorable external economic developments can have a significant adverse impact, leading to decelerating growth levels. Page I 35 El Salvador Country Partnership Strategy FY05-FY09- Completion Report Crime and Violence. This was a critical issue, with significant economic, social welfare, health and governance impacts. Persistently high levels o f crime and violence affect the investment climate, undermine social capital and erode the assets . and incomes o f the poor. Political polarization and lack o f national consensus. The division o f power between the two lead parties increased transaction costs for the Executive, introducing some degree o f uncertainty and slowing down the reform process. The Government's "Safe Country 2004-2009" development plan aimed to address these challenges. The Government plan, summarized in Annex 1, was articulated in three main pillars: (i)accelerating broad-based growth; (ii) improving equity and building human capital; and (iii) enhancing security and reducing vulnerability. When financing from the multilaterals failed to receive approval from the National Assembly, the Government sought and secured alternate sources o f financing that did not require a qualified majority in Congress (e.g., the issuance o f short-term bonds or reliance on the Pension Trust or bilateral suppok in the form o f grants) to implement i t s development plan albeit at a slower pace and at a higher cost than anticipated. The Government development plan was adjusted in 2008 to face the social impact of the food and o i l price crisis as well as the economic impact of the global crisis. El Salvador's strategy to protect vulnerable households from the impact o f high commodity prices relied on the expansion o f the existing safety net, reduction o f import tariffs for selective agricultural goods, support for agricultural production, and increases in transport subsidies. The Government also strengthened the monitoring o f the financial sector to be able to react to any potential problem in the banking sector in the context o f the global financial crisis, and negotiated access to long-term multilateral financing. Multilateral support came as a package including a US$SOO million precautionary Standby Agreement from the IMF, a US$500 million budget support loan and a US$400 million operation under the Liquidity Program for Growth Sustainability from the IDB, and a US$450 million Public Finance and Social Sector Development Policy Loan (DPL) from the World Bank. Results achieved and Progress towards Country Development Goals &ogress towards Country Development Goals Although political developments during the CAS period weakened the Government's ability to advance i t s policy agenda in the National Assembly, El Salvador made much progress in achieving country development goals which remain relevant today. The macroeconomic environment improved between 2005 and 2008. The Government maintained a sound macroeconomic framework during the original CAS period, and over the period 2005-2009 economic growth steadily improved reaching 4.2 percent in 2006 and 4.7 percent in 2007. Although slightly below the Central American average, the economy was growing at double its historical levels in the period 2005-2007. This improvement reflects an increase in broad economic activity since the end o f 2005, driven by stronger performance in the tourism, non-traditional agriculture, construction, financial and transport sectors. Foreign direct Page I 36 El Salvador Country Partnership Strategy FY05-FY09- Completion Report investment and non-traditional exports also showed positive trends. Some progress was also made in stabilizing the non-financial public sector debt through reducing spending and increasing tax revenues. Notwithstanding progress in structural reforms and sound macroeconomic management, growth decreased to 2.5 percent in 2008, reflecting a decline in export performance, a tightening o f domestic credit markets and a slowdown in remittances and foreign direct investment, due to the global financial crisis. El Salvador's relatively strong economic performance was accompanied by important socioeconomic progress and reductions in poverty (from 43.6% in 2001 to 35.5% in 2007). Access to basic services, including safe water and sanitation has increased; and core health outcomes, such as l i f e expectancy, infant and child mortality, and child nutrition have all improved. In several areas, including in basic education, infant mortality, and access to potable water, the gaps between the poor and the non-poor have also declined over the period. The Government also designed and implemented a national strategy for a more effective social protection program which targeted poor households in rural areas. El Salvador continued to make progress in its governance agenda, particularly in the public sector through improvements in public financial management and control tools. According to a recent Public Expenditure and Financial Accountability (PEFA) Assessment, P F M functions in El Salvador are reasonably well-developed and rank above the L A C regional average. During the CAS period further progress was also made in strengthening internal controls through the expansion o f the Integrated Financial Management System (SAFI). El Salvador's ranks relatively well in Doing Business (#72 in 2009 DB up from #77 in 2008 DB). W h i l e indicators related to Starting a Business improved significantly, in some areas ratings have remained stagnant and more work may be needed. Overview o Results Delivered by the CASprogram f In terms o f World Bank contribution, as discussed in paragraph 5, a substantially revised World Bank program and outcomes were established in the CAS Progress Report to respond to developments on the ground and the inability to lend in the new political environment. The CAS Completion Report finds the results were satisfactory for all three pillars, with stronger results in Pillars Iand 1 1 The following sections provide an assessment o f progress in each o f the three 1. pillars. Specific indicators and further detail on CAS outcomes and progress towards long-term development goals are included in Annex 2. : Pillar I Accelerating Broad-based Growth and Increasinp EmDlovment The Country Development Goal under the first pillar was to provide a foundation for an accelerated broad-based growth path by fostering trade openness, improving the investment climate, and maintaining a sound macroeconomic framework. The Government achieved all the CAS outcomes under this pillar. However, the expected growth and employment benefits have been overtaken by the effects o f the global financial crisis. Over the CAS period significant progress was made on the trade and investment climate fronts. El Salvador was the first country in Central America to begin full implementation o f the DR-CAFTA Treaty in mid-2006. The CAS outcomes in this area were the approval by the Page I 37 El Salvador Country Partnership Strategy FY05-FY09- Completion Report National Assembly o f the package o f legal amendments required to ensure consistency with DR- CAFTA provisions in 2005, and the March 2006 ratification o f the DR-CAFTA. Similarly, El Salvador has greatly improved i t s overall investment climate by simplifying regulations and facilitating most critical requirements to start and close businesses, access financing, and enforce contracts. Both CAS outcomes in this area were exceeded, Le., the cost to start a business as a percentage o f income per capita f e l l from 128 percent in 2004 to 49.6 percent in 2009, and the number o f days needed to start a business fell from 115 days to 17 days. The "El Salvador EJciente" program led by the Presidency Office was probably one o f the critical elements contributing to these results, as well as the passage o f new commerce-related legislation. The country's traditionally sound macroeconomic management was maintained in recent years. Until El Salvador was hit by the global crisis in mid-2008, the country was on track to achieve the CAS outcomes. The Government made significant progress in reducing the Non- Financial Public Sector (NFPS) deficit and in stabilizing NFPS debt ratio as percentage of GPD, primarily through implementation o f the fiscal reform package approved in 2004 that led to an increase in tax revenues o f 1 percent o f GDP between 2005 and 2007 (although tax collection declined in 2008 as a result o f the crisis) and the elimination o f early retirement provisions to improve the sustainability o f the public pensions system. Moreover, recognizing the challenges associated with its unfavorable debt service profile, El Salvador took steps to improve its public debt management capacity. Progress was achieved in the development o f the cash-flow simulation model and scenario analysis and in design o f a preliminary debt management strategy. World Bank support under Pillar I : Progress towards achieving CAS outcomes under Pillar I was satisfactory. The Bank supported the Government's impressive record in Pillar I through a mix o f analytical work, development policy lending, ongoing investment lending (e.g., Public Sector Modernization Project) and grant-supported technical assistance. The DPL series underpinned by important analytical work (CEM, PER, Regional ICA, FSAP) contributed substantially to progress achieved under this Pillar. Although funds for DPL I1 were never approved by the Congress resulting in cancellation o f the loan, i t s triggers were completed. DPL I11 was halted prior to Board approval, however, i t s preparation contributed to policy dialogue with the authorities. As new lending came to a standstill, the Bank remained engaged through the preparation o f the ROSC on accounting and auditing and the implementation o f several grants (REDI, IDF and a WBI/BNPP grant). In addition, the Bank provided technical assistance based on the 2005 diagnostic "Needs Assessment o f Public Debt Management and Domestic Debt Market Development", including help in the establishment o f a debt management office. Due to i t s continued engagement with the authorities, the Bank was able to respond quickly to requests for budget support as the effects o f the global financial crisis rocked El Salvador. Lending resumed in January 2009, to support the Government's goal o f maintaining macro stability through the implementation o f a two-tranche Public Finance and Social Sector Development DPL. Page I 38 E l Salvador Country Partnership Strategy FY05-FY09- Completion Report I Pillar I:Improving:Eauitv through Building Human CaDital and ExuandinPAccess to Basic Infrastructure Assets and Market The second pillar o f the Government's plan aimed to achieve universal primary education and improve access to secondary education, improve access to basic health services in targeted areas, and improve land tenure security and land transactions. The Government achieved all the outcomes linked to health service delivery and partially achieved the CAS outcomes for education. l7 El Salvador has a strong history o f education reforms and i s expected to meet the Millennium Development Goals in the sector. The country has made good progress in expanding access to both primary and lower secondary education, and the C A S outcomes have been exceeded, with net primary enrollment rate and primary completion rate both standing at 97.7 percent in 2007.'' At the secondary level, coverage i s s t i l l an issue as only 58.6 percent o f children now attend secondary education (a 10 percent increase from the 2003 ratio). The Government i s addressing this problem through an innovative program, "EDUCAME", which aims to provide secondary education to young people who have abandoned the formal education system and are part o f the labor force. Further challenges will need to be addressed, however, with respect to equity, quality and efficiency both in primary and secondary education. Progress in the education sector was achieved through the implementation o f the Government's landmark education strategy: "Plan 2021 ". Progress was also achieved in terms of quality and access to health services. Recent information f i o m household surveys indicates that the quality o f health services provided by the systems as a whole has improved ~ 1 i g h t l y . lSimilarly in terms o f CAS outcomes related to ~ expanding coverage and quality o f health services to the most vulnerable, coverage in poor targeted areas was extended to 635,805 people, and access to basic healthcare was improved through the rehabilitation or reconstruction o f several main hospitals. The Government achieved this progress through the creation o f a Health Sector Fund to improve health coverage, funded by excise taxes on cigarettes, beer, alcoholic beverages, and guns and by extending coverage o f essential health and nutrition services through a targeted community-based outreach approach. This approach was successful in covering the country's poorest municipalities using the same targeting criteria as the conditional cash transfer program Red Solidaria. World Bank support under Pillar 11: Bank support to the Government's CAS achievements under Pillar I1 was moderately satisfactory; while highly relevant, the impact o f support was more limited than envisioned. The Government highly valued the technical expertise brought into the preparation o f the new operations (Secondary Education and Land Administration 1 ) and secured alternate financing to implement them when IBRD lending 1 became unavailable, while the Bank remained engaged in the education sector through technical l7 The Original CAS also supported land tenure security under this Pillar. Although the Government continued to advance on this agenda, the Bank-financed loan included in the CAS was cancelled and so the Bank program as revised in the Progress Report no longer included support for outcomes in this area. Source: MINED, Ministry o f Education. Source: Human Development for Poverty Reduction in El Salvador AAA: Income Vulnerabilities and Poverty in El Salvador Page I 39 El Salvador Country Partnership Strategy FY05-FY09- Completion Report assistance and non-lending activities. The Bank also continued supervising the Earthquake Emergency Recovery and Health Services Extension project which contributed to expanding health access to a half-a-million people primarily through support to a target community-based approach and by advancing on the reconstruction or rehabilitation o f several key hospitals. The Bank also produced a study on HIV/AIDS and a regional study o f Health Strategies and Reforms. I: Pillar I I Enhancinp Security and Reducinp Vulnerability Under Pillar 1 1 the Government aimed to improve governance, reduce vulnerability, provide 1, better environmental protection, and reduce crime and violence. Remarkable progress was achieved in the design and implementation o f social protection programs. Progress was also observed in the other six areas supported by the CAS, albeit more modest. Outcomes were partially achieved in four o f these six areas and there was some progress toward the outcomes in areas o f developing environmental assessment capacity and regional catastrophic insurance program. El Salvador has continued to improve its overall governance framework for the public sector by further developing and improving its public financial management and control tools. In terms o f CAS outcomes, the Integrated Financial Management System (SAFI) continued to be expanded and according to a recent Public Expenditure and Financial Accountability (PEFA) assessment, 95 percent o f central government expenditures are being recorded, accounted and controlled according to international Performance Measurement Framework (PFM) standards, just short o f the CAS goal o f reaching all public sector entities. Progress was also achieved on the public procurement front, where the Government implementedthe state-of-the-art public procurement dissemination tool COMPRASAL. This tool has allowed enhanced transparency and credibility o f public sector performance with respect to an area perceived as vulnerable to mismanagement and corruption. The Government's main vehicle in order to expand opportunities to vulnerable groups has been the expansion o f the Red Solidaria program. Red Solidaria was launched in 2005 as a conditional cash transfer program targeted to households with children living in the country's poorest municipalities and now covers about 85,000 households. An independent evaluation found that the program i s among the best in the region, along with programs in Brazil and Chile. In terms o f CAS outcomes, approximately 500,000 people were pulled out o f poverty, primarily in rural areas. The expansion o f Red Solidaria in rural areas has been accompanied by significant increases in the availability o f public health and education services, thereby facilitating access to and, utilization of, these services. The challenge for El Salvador moving forward will be to maintain the gains achieved in recent years, to expand the Red Solidaria program in rural areas, and to design specific interventions targeted to the urban poor. Environmental protection remains a challenge in El Salvador. The country suffers from significant environmental degradation which has led to poor water resource management as well as loss o f biodiversity and natural resources. Developing a national environmental policy and strategy and consolidating the regulatory and legal framework for environmental management Page I 4 0 El Salvador Country Partnership Strategy FY05-FY09- Completion Report were high priorities for the Government at the onset o f the CAS. Some progress was made toward the CAS outcome o f a tested strategy for protected area consolidation; 3,100 hectares o f protected areas were legalized, including all remaining subtropical dry forest remnants in the region. On the disaster risk management front, the Government has made significant progress in improving its ability to manage disasters through some key measures, including (i) appointing one single entity, the Ministry for Environment and Natural Resources (MARN) to oversee the national policy for risk prevention and reduction; (ii) including environmental risks and disasters in the National Environmental Law regulation, and (iii) improving prevention and management o f environmental risk and degradation through the formulation o f a land development plan (Plan Nacional de Ordenamiento y Desarrollo Territorial). Still, the country's exposure to natural disasters remains a significant threat to economic and social development. The creation o f a regional catastrophic insurance program, the specific outcome supported by the CAS, was not achieved. As questions began to emerge about the feasibility o f a catastrophe insurance program for Central America, the scheme evolved into a flagship program to create the Central American Probabilistic Risk Assessment tool (CAPRA). Developed in partnership with other multi-lateral agencies, CAPRA i s an innovative Bank knowledge product that uses open-source information to create a comprehensive approach to risk management. CAPRA i s a multi-hazard disaster risk analysis and communication tool which supports the decision-making process in risk reduction, public and private investments, emergency management, and financial risk transfer strategies. It i s extremely relevant for El Salvador and could serve as the basis for developing a national catastrophe risk insurance program. Crime and violence continue to pose serious risks to El Salvador's economic and social development, a they do in most Central American countries. Heavy-handed anti-gang s policies were put into law in 2003 and 2005 ("mano dura"). Their limited longer-term impact made way for a broader set o f policy interventions beginning in 2007, including improving collection o f data on crimes, convictions and incarcerations to inform policy-making, efforts to professionalize the courts and the police and activities to address underlying socioeconomic factors. The potential impact o f these measures has been overtaken by the economic and social effects o f the global financial crisis. So while a consensus had been reached on priorities for tackling crime and violence problems, this issue will have to be taken up again in the new context. Crime and violence will likely continue to be a key challenge, not just for El Salvador but for the Central American region as a whole, and more specific activities could be considered in a new CAS. The regional Crime and Violence Policy Options Study which i s under preparation by the Bank i s designed to inform national dialogues on crime and violence. World Bank support under Pillar 111: Bank support to the Government's CAS achievements under Pillar I11 was moderately satisfactory. As was the case for Pillar 1 , Bank 1 support was highly relevant, but i t s impact was more limited than expected. Most notably, the Bank was a key partner in the design and implementation o f the Social Protection (Red Solidaria) program, providing support for institutional design and sustainability, sharing international best practice on similar conditional cash transfer efforts in other countries and supporting the development o f an ongoing impact evaluation effort to allow for recalibration o f the program as needed. The Bank contributed to progress in the area o f governance primarily Page 1 41 El Salvador Country Partnership Strategy FY05-FY09- Completion Report through DPL Iand DPL 1 , and through the Public Sector Reform and Judicial Modernization 1 projects. Some progress was made through the implementation o f the Protected Areas Consolidation and Administration Project (PACAP), a GEF grant aimed at Strengthening El Salvador's Natural Protected Areas System, prioritizing conservation efforts, and addressing land tenure and sustainable development within pilot protected areas to preserve globally important biodiversity. The relationship with the Government was also maintained through various analytical works (CPAR, CEA, etc.). Lending resumed in early 2009 in the form o f a new DPL which, in addition to addressing fiscal issues, supports the Government's efforts to expand opportunities for vulnerable groups and expand coverage o f targeted social protection. Partners and Other Donors IFC IFC has focused attention on Central America more closely by opening local offices and assigning investment staff to the region in the last year. This has led to the development o f a substantial pipeline o f new transactions in the food processing, retail, financial institutions, real estate development, manufacturing, and renewable energy sectors with country and regional perspectives. Financial markets and infrastructure investments w i l l be o f strategic importance going forward. IFC has also opened an Advisory Services office in San Salvador. W h i l e only two projects were committed during this CAS period, El Salvador has benefitted from regional projects, particularly in the financial and transport sectors geared towards strengthening regional integration. IFC portfolio detail i s available in Annex 6. other PartnersDonom As mentioned above, to implement programs originally supported by cancelled Bank loans (2006-2007), the Government mobilized alternative funding sources including grants from bilateral donors. Indeed the Red Solidaria program was financed in part with grants from the European Union and Luxembourg. Similarly, a significant inflow from the United States Millennium Challenge Corporation supported other investment projects. CABEI also provided funding to contribute to the implementation o f World Bank operations that were cancelled. More recently, the IMF, IDB and the World Bank put together (paragraph 10) a complementary financial package to support the country's economic strategy to cope with the adverse effects o f the global financial crisis. For example, the IMF intervention sought to provide a contingent line o f liquidity to the Central Bank. Similarly the IDB operation under the Liquidity Program for Growth Sustainability window sought to provide liquidity to the private sector by facilitating productive sector access to financial resources. Finally, the Bank's D P L and the parallel IDB's budget support operation were designed to provide liquidity to the Ministry o f Finance. Effective collaboration among multilateral institutions in delivering this package was welcomed and acknowledged by Government authorities. Important exogenous factors affecting the CAS outcomes Political developments weakened the Government's ability to advance its policy agenda in the National Assembly as both the 2004 and the 2006 mid-term elections intensified the Page I 4 2 El Salvador Country Partnership Strategy FY05-FY09- Completion Report division o f power in the Assembly and provided the main opposition party with veto powers over certain decisions such as foreign loans. The opposition blocked new foreign borrowing between September 2006 and June 2007, forcing the Government to use alternative financing vehicles such as trust funds (Fideicomisos). On the economic front, the global economic turmoil and the slowdown o f the U.S. economy have affected El Salvador's expected growth rates (2008 and 2009) and negatively impacted poverty outcomes. Borrower Performance The Government's development plan, "Safe Country 2004-2009" was ambitious and during the almost five years o f implementation o f its plan, the Administration worked to establish the conditions to accelerate economic growth and decrease poverty levels. Owing to i t s good performance and despite the difficult political context, the Government achieved progress towards the country development goals, which the CAS supported, under all three strategic , pillars o f i t s development plan, exceeding targets in some cases. The Government's strong ownership o f the design and outcomes o f the plan "Safe Country 2004-2009'' lead to the achievement o f several key indicators established under the various CAS objectives, effectively demonstrating the positive performance o f the Borrower a well s as its commitment to achieving its medium-term development goals. More specifically, the Borrower completed actions and policies originally agreed upon in the development plan supported by the CAS, such as the implementation o f the fiscal reform package approved in 2004, the elimination o f early retirement provisions to improve sustainability o f the public pensions, and the implementation o f the action plan to improve tax administration. The Government's failure to obtain congressional approval o f loans from multilateral agencies had a serious negative impact on the implementation o f the lending program. To i t s credit, however, the Government was able to secure alternate sources o f financing to implement projects, and, together with World Bank management decided to maintain a policy dialogue through other instruments, such as technical assistance, analytical work and grants. Bank Performance (Moderately Satisfactory) Design o the Country Assistance Strategy and Progress Report f The CAS and CAS Progress Report design was appropriate and relevant. The Strategy- closely aligned with the Government's "Safe Country 2004-2009" development plan and i t s three pillars-was amply discussed with the Government and other stakeholders who engaged early in the process. These early discussions improved the CAS design and set the basis for good implementation. A critical decision was the inclusion o f the DPL series, which addressed emerging challenges, particularly with regards to macro stability and fiscal consolidation. The Progress Report laid out the changes in strategic direction and revisions to the Results Matrix. I n light o f the evolving Salvadoran political context, the CAS specific outcomes were adjusted to respond to developments on the ground and the inability to lend in the new environment. The Bank emphasized continued support to ongoing operations as well as proactive and innovative non-lending activities to maintain the Bank's engagement on key issues Page I43 El Salvador Country Partnership Strategy FY05-FY09- Completion Report on the Government's development agenda and provide a foundation for possible future lending should opportunities open up. Such opportunity did open up in the second half o f 2008, when the Government requested new lending in the form o f Development Policy Lending to cope with the developing economic downturn. While this DPL had not been planned in the original CAS, i t s objectives were consistent with the three pillars o f the Government's development plan and the CAS. Risk Idenitjkation The CAS identified three sources o f r i s k s that could impact program implementation, namely: possible political gridlock, the threat o f natural disaster, and a deteriorating external environment which could forestall needed growth. While the country did not experience any devastating natural disaster during the CAS period, the other two potential risks did materialize. Political gridlock led to the cancellation o f five World Bank loans, and the ongoing global slowdown has impacted El Salvador. Although the risk o f political gridlock had been anticipated, the Bank did not f i l l y appreciate the extent o f the risk, and therefore did not include appropriate mitigation measures at the program and project levels. This i s the primary reason for the ``Moderately Satisfactory" rating on World Bank performance. World Bank Engagement with the Government and beyond Given the cancellation o f several operations, Bank management opted to remain engaged in El Salvador through: (i) the continued implementation o f ongoing projects, which, in some o cases meant allowing some operations to g beyond their normal life-span thus increasing the number o f overage projects in the portfolio, and (ii)the development o f non-lending activities. Engagement through proposed non-lending activities was welcomed not only by the Government, but also by a myriad other groups, who supported the presence o f the Bank in El Salvador. For example, the Salvadoran Foundation for Economic and Social Development (FUSADES), an influential and well-regarded think-tank, expressed i t s interest in working jointly with the Bank, especially on analytical activities addressing transparency, crime and violence, poverty and quality o f public expenditures. The value added o f World Bank work, especially i t s innovative project designs and policy advice in critical areas such as economic growth and fiscal management was highly regarded by the Government. Last but not least, the presence o f a local office in San Salvador has been a key factor in maintaining a dialogue with the authorities and engaging other stakeholders, including the opposition party, opinion-makers, representatives o f multilateral organizations and civil society on the ground. IBRD Lending During the CAS period, the Bank approved seven operations, including three DPLs for US%650million and four investment operations for US%151million. Two o f these seven operations (the DPL I and the Public Finance and Social Sector DPL) were actually implemented, the latter s t i l l ongoing. Five operations were canceled by the Bank as they failed to reach effectiveness within the expected timeframe, due to extreme polarization in the Salvadoran Congress. Given this setback in the Bank's program, two operations planned in the original CAS (the DPL I11 and the SME Participation in CAFTA) were dropped, and the Modernization o f the State was postponed to the next CAS period. Page I 44 El Salvador Country Partnership Strategy FY05-FY09- Completion Report Development Policy Lending The approved DPLs have been an appropriate instrument to support El Salvador's development strategy and priorities. Indeed a Quality Assurance Review (QAR) rated the first DPL as "highly satisfactory", noting that the program responded to the Government's policy agenda, was timely and took into account the political cycle, focused on key issues, and brought analytical depth highly valued by the Government and other stakeholders. Quality-at-Entry, Quality o f Supervision and Overall Bank Performance were rated "highly satisfactory" in IEG's Implementation Completion Report. Yet, the difficulty faced by the Executive in obtaining Congressional support for external loans impacted the DPL program. D P L I I , aimed at addressing fiscal issues and strengthening the international trade and business environment, was 1 canceled and DPL I11 was dropped. Despite the cancellation o f DPL 1 , the Government advanced the implementation o f all policy actions agreed under that operation. As for the Public Finance and Social Sector DPL, it has been critical to maintaining a fluid dialogue with the authorities at a time o f economic turmoil, while supporting continuity o f the institutional and social sector program and assisting with fiscal needs. DPLs prepared during the CAS period were closely aligned with Government policies and underpinned by a substantial body o f analytic work carried out by the Bank in partnership with the Government o f El Salvador. The programmatic DPL approach took into account the lessons learned from past operations in El Salvador and the latest thinking on budget support for well- performing countries such as El Salvador. The DPL instrument was new and the Salvador DPL I 1 was the very first DPL ever approved by the World Bank Board. DPL 1 , aimed at addressing fiscal issues and strengthening the international trade and business environment, was supported by extensive work done by the Bank and findings set forth in the CEM, PER, DR-CAFTA studies, as well as the Investment Climate Assessment. Despite the cancellation o f the loan, the Government advanced the implementation o f all policy actions agreed under the first and second DPL operations. Page I45 El Salvador Country Partnership Strategy FY05-FY09- Completion Report Policy and InstitutionalReforms supported by DPL series and related AAA Area o f Action DPL I DPL I1 DPL I11 AAA 0 Implementation Increase o f excise taxes 0 Banks began o f the fiscal approved by the Assembly implementation o f CEM reform package and later successfully new rules on loan approved in implemented classification, PER 2004 . Issue budget formulation provisioning and Elimination o f policy for 2006 consistent credit risk FSAP Macroeconomic early retirement with a NFPS deficit target administration Stability an'd Fiscal provisions to o f 2.3% o f GDP 0 NFPS deficit at 3% Consolidation improve Issuance o f new rules on o f GDP for 2005 sustainability o f loan classification, the public provisioning and credit risk pensions system administration consistent with international best practices A two-tranche Public Finance and Social Sector Development Policy Loan (DPL) for US$450 million, not planned under the Bank program, was approved by the World Bank on January 22, 2009. The two-tranche approach was particularly effective in both facilitating discussion and consensus in Congress as both major parties were interested in easing the fiscal situation for the upcoming administration, and protecting continuity in the implementation o f critical actions and policies openly discussed with the two key parties. This ongoing loan is intended to support the Government's program for addressing fiscal and related public finance management issues and for maintaining and/or enhancing the social gains achieved over the past decade. This new financing package allowed the Government to reasonably address liquidity problems in 2008 and 2009, which contributed to the achievement o f CAS outcomes. Investment Lending The long effectiveness delays experienced with all operations approved under the CAS contributed to Unsatisfactory Implementation Progress (IP) ratings, and subsequent cancellation o f several operations. Performance indicators are available in Annex 7. All investment operations implemented during the CAS period were designed and approved under the previous CAS. Three operations suffered implementation challenges (the Public Sector Modernization (closed in 2007), and the ongoing Judicial Modernization, and Hospital Reconstruction and Health Services). These challenges stemmed primarily from overly ambitious objectives and complex designs. The Bank intensified supervision as issues arose and in most cases implementation recovered. The Judicial Modernization project is expected to reach partial results. The Hospital Reconstruction and Health Services project will likely receive an extension and an assessment o f project achievements will be provided in the context o f the Implementation Completion Report. However, the significant implementation delays this operation has suffered point to some early findings: (i) this project finances construction o f several hospitals, more intensive supervision as and greater technical expertise would have helped implementation; (ii) furthermore, this project has been susceptible to political interference and changing political priorities which have Page I 46 El Salvador Country Partnership Strategy FY05-FY09- Completion Report hindered implementation. This type o f risk, including mitigation measures, should be better reflected in future operations. Quality-at-Entry. IEG evaluated five o f the seven operations delivered and rated Quality-at- Entry satisfactory in all cases (two "satisfactory", two "moderately satisfactory" and one "highly satisfactory"). Detail i s available in Annex 7. Quality o f Bank Supervision. Six lending operations were under implementation at the onset o f the CAS, o f which two are ongoing (the Hospital Reconstruction and Health Services and the Judicial Reform). The other four closed during the CAS period, together with the DPL I approved in FY07. IEG rated the quality o f Bank Supervision satisfactory on all five operations. Furthermore, IEG rated Overall Bank Performance "Satisfactory" for four out o f the five operations while a fifth one was rated "Moderately Satisfactory" rating. Detail i s available in Annex 7. AAA and Economic and Sector Work The non-lending program carried out during the CAS period was critical to maintaining the Bank's engagement on key issues o f the Government's development agenda. The AAA, which was closely coordinated with other donors (e.g., the PER was prepared jointly with the IDB), was also an important element behind the Bank's rapid response to the Authorities' request for budget support in the second half o f 2008. A concerted effort was made to enhance dissemination o f analytical work during the run-up to the March 2009 elections, which was key to informing the current Administration prior to i t s taking office in June 2009. The Bank, IDB and IMF held a two-day workshop for the incoming President, members o f his transition team, and members o f Congress, to discuss the country's short- and long-term development challenges and propose steps to address those challenges. Participants in the workshop appreciated the analyses and best-practice examples brought to the table to help the new Administration work through the costs and benefits o f proposed policy responses. The point was also made that such independent analyses could be particularly helpful in building a consensus in Congress to approve loans from multilaterals, a stumbling block in the past. Economic and sector work conducted during the CAS period has been relevant and o f good quality. Findings in all analytical work were used to inform current or planned Government programs. Though at the time o f the CAS Progress Report new investment lending was not under preparation, the Bank continued to provide technical support to project implementation and policy dialogue in key sectors. In some cases (e.g., social protection, education) the Bank supported programs financed with Government financing through non-lending TA. f Justification o Ratingfor Overall Bank PerfoPmance Bank performance i s rated as Moderately Satisfactory based on the following: While Bank management was proactive and engaged despite the difficult political context in El Salvador to try and build consensus in Congress, the Bank could have better estimated the extent o f the risk o f political polarization to the CAS program. Page I 4 7 El Salvador Country Partnership Strategy FY05-FY09- Completion Report On the positive side: CAS (and Progress Report) design was appropriate and relevant and Bank management remained flexible to adapt the outcomes as the `country political context evolved. The Bank was able to maintain a dialogue with the Borrower in spite o f limited lending options, to provide a foundation for possible future lending; The Bank provided extensive and timely support to the Government, both from Task Managers and Management based in Washington, but especially through the decentralized office in San Salvador; Project preparation was solid, based on quality sector work, in close collaboration with the Borrower. IEG rated Quality-at-Entry satisfactory on all five operations it evaluated, that were approved under the CAS; Quality-of-Bank Supervision was rated by IEG satisfactory on all five operations it evaluated that closed under the CAS. Sustainability of the CAS outcomes The sustainability o f the CAS outcomes cannot be guaranteed given the variety o f risks identified in the CAS and DPLs. These include: Fiscal risks. El Salvador NFPS debt burden o f 39.2 percent o f GDP at end 2008 i s expected to boost to above 45 percent o f GDP in 2009 and could reach 50 percent in 2010, increasing the country's vulnerability to potential shocks as the fiscal space will shrink accordingly. Political risks. Despite the strong electoral mandate o f President Funes, a divided Assembly could become an obstacle to certain reforms and the impasse experienced . during the CAS period in the approval o f foreign loans could reoccur. External risks. The global recession could continue affecting negatively El . Salvador's economy and delay the recovery. Implementation risks. The arrival o f the FMLN to power for the first time since the end o f the civil war could result in significant changes in line ministries, which, in . turn, could affect implementation capacity. Natural disaster risks. The country has proven vulnerable to earthquakes and hurricanes, which could hurt the performance o f the economy and negatively affect CAS outcomes. Lessons and Recommendations Two types o f lessons may be drawn from this CAS program design and implementation: strategic lessons (some are sector-specific) and operational lessons. Most o f these lessons emerged from Implementation Completion Reports and Cancellation Notes, and from discussion with task managers and staff whose assessments are the result o f direct experience or knowledge o f our work in El Salvador. Page I 4 8 El Salvador Country Partnership Strategy FY05-FY09- Completion Report Strategic lessons The polarized political environment in El Salvador requires the Bank to identify areas o f consensus across the board to define the appropriate mix o f lending and non-lending assistance. Given the Salvadoran context, the Bank's consultation process needs to be extended beyond the executive branch to engage with the legislative branch and other stakeholders. B y the same token, proactive local outreach effort and a strong communication strategy are critical. Experience suggests that successful programs require continuous consultation to secure broad support. When considering Development Policy Lending in a highly politicized context like El Salvador, the Bank could proceed with multiple-tranche operations (as in the case o f the Public Finance and Social Sector DPL) to minimize the number o f Congressional approvals needed in the context o f a DPL series, although clearly this line o f action would result in lower flexibility to adjust the program. Similarly there may be value in (i) submitting several loans as a package for congressional approval, and (ii)focusing project preparation on few larger operations as opposed to many small operations. In cases where the Borrower decides to use grant funds to finance projects prepared with Bank assistance, Bank management needs to decide whether to remain engaged in project implementation by offering non-lending technical assistance. In El Salvador, non-lending technical assistance proved to be a viable alternative to lending. Analytical work i s an extremely important tool to identify gaps in specific sectors, inform stakeholders, build consensus around important development issues and prepare the groundwork for future engagement in areas o f mutual interest. Experience in El Salvador has shown that the Government greatly values the range o f global expertise the Bank can bring to complex development issues. In addition, experience in implementing this CAS program has shown that the Bank can have a positive impact even in the absence o f a significant lending program. In terms o f results, many CAS outcomes were achieved through technical assistance and analytical work. Recommendations Greater flexibility in the new CAS. The country faces a number o f challenges associated with the global crisis including significant uncertainty as to the timing o f the recovery. Flexibility to react to potential emerging but s t i l l unknown challenges appears to be critical in this context. Need for effective dialogue and consensus-building, Although, recent agreements between the Government and opposition parties regarding the country's financing needs suggest that there may be some space for collaboration and consensus on key issues, the new Administration will face serious political and economic challenges in ensuring support for i t s future economic policies. The need for more effective dialogue and consensus-building i s an urgent challenge, which donors, including the World Bank, could help address by providing necessary technical input to the economic debate. Page I 4 9 El Salvador Country Partnership Strategy FY05-FY09- Completion Report Sector-specific: Disaster Risk Management. Given the fiscal challenges Latin American countries are facing as a result o f the global financial crisis, the possibility o f Development Policy Lending with a Catastrophe Deferred Drawdown Option (CAT DDO) could be a cost- efficient option for El Salvador to strengthen its risk financing framework. Contingent loans such as the C A T D D O provide a source o f immediately available liquidity during a state o f emergency caused by a natural disaster, while allowing the country to pursue i t s development programs during a catastrophe. Sector-specific: Procurement Reform. Procurement reform i s complex and often unsuccessful unless the appropriate tools are applied. Reforms can fall into the trap o f starting by tackling structural change (Le., legal reform) rather than addressing non-structural changes. The new CAS could benefit from the lessons learnt in Panama and Peru, two countries where procurement reform has advanced significantly supported by just-in-time technical assistance from the Bank. B y leveraging the banks international reach and knowledge base the policy dialogue was backed up with high-level advice on how to modernize and reform the various components o f the public procurement system. The CAS could highlight the importance o f a well-functioning public procurement system in a modem state. The Bank's role in providing technical advice will be critical in this process. Sector-specific: Land Administration. A pragmatic and incremental approach to legal reforms i s often the best approach. The Land Administration Iproject envisaged support for key reforms, some o f which turned out to be too ambitious, such as legislative changes. I t became clear that, given the sensitivity o f land administration reform, flexibility and incremental learning and experimentation was more effective to consolidate gains and move forward. Operational lessons Future operations in El Salvador should be designed based on an assessment o f the capacity available in the country, and with due consideration o f the country's political economy. Complexity in design, particularly multiplicity o f implementing agencies, should be reduced to the extent possible, and where it i s not, clear project implementation plans must be available before the project becomes effective. During the project preparation phase, the Bank's team should elaborate an information and communication strategy in order to engage with the country's legislative branch o f and other stakeholders, including local communities where appropriate. Project management in complex political environments requires Bank Task Team Leaders (TTLs) with a specific skills set encompassing negotiation, conflict resolution, and alliance building abilities. Building an adequate system o f Monitoring and Evaluation (including baseline data collection) i s not only essential to assess progress but also to make effective mid-course corrections during implementation as and when needed. M&E needs to be in place in advance o f implementation and needs to include a focus on project impacts. Page I 50 El Salvador CAS Completion Report ANNEX 1 Government Strategy "Safe Country 2004-2009" Pillar I Accelerating Broad-Based Equitable Growth and Increasing Building Human Capital and Vulnerability Employment Expanding Access to Basic Infrastructure, Assets and Markets Government Priorities 0 Ensuring sound macro- 0 Modernizing education and 0 Making El Salvador a safe management and fiscal building country the knowledge through control and reduction responsibility. society. of violence. 0 Deepening insertion in world 0 Improving quality and 0 Ensuring social and economic markets through regional universal coverage of health rights of individuals and integration and trade. services. businesses by strengthening Increasing productivity and 0 Designing local and regional rule of law. competitiveness through strategies- focused on 0 Modernizingpublic improving the investment expanding access to basic administration and services, in climate and taking advantage of infrastructure, promoting order to improve transparency technology and connectivity. agricultural diversificationand and efficiency o f resource use. 0 Generating employment and facilitatingprivate sector Promoting social cohesion and opportunities by supporting investment. stronger families through a SMEs. 0 Strengthening family assets by more effective social safety net 0 Improving market regulation facilitating access to housing and improving quality of l i f e at and supervision. and expanding land the local level. administration and titling Enhancingthe interest of future efforts. generations by protecting the environment. 51 I I"' 0 W X . . . . -0 P 8 g .d e, a 43 0 g m Y I cd i e, i 8 c N Y d 3 a, 90 z E . El Salvador CAS Completion Report ANNEX 3 - El Salvador Planned Lending Program and Actual Deliveries CAS Plans Progress Report (February 2005) (February 2008) US% US% FY Project (m) Status (m) 2005 DPL I 100 Delivered FY05 100 Land Administration I1 40 Delivered but cancelled Environmental Services Project 5 Delivered but cancelled Subtotal 145 Subtotal 100 2006 D P L I1 100 Delivered but cancelled Education Reform I 1 85 Delivered but cancelled Social Protection and Local Development 35 Delivered but cancelled Ensuring SME Participation in CAFTA 10 Dropped Subtotal 230 Subtotal 0 2007 D P L I11 100 Dropped Modernization o f the State I1 10 Forwarded to FY 10 Subtotal 110 Subtotal 0 2009 Additional Actual Projects: Public Finance and Social Sector D P L 450 Subtotal 0 4511 Total FY05-09 485 550 62 El Salvador CAS Completion Report ANNEX 4 - El Salvador Planned Non-lendinn and Actual Deliveries CAS Plans Progress Report (February 2005) (February 2008) FY Products Status 2005 Investment Climate Assessment Delivered2005 CAFTA Regional Study Delivered2005 Shocks and Social Protection Study Delivered2006 ROSC (A+A) Delivered2007 PSIAs on Tax and Pension Reforms in CAFTA Delivered2005 2006 Recent Economic Developments in Infrastructure Delivered2006 Education Study (regional) TA delivered 2009 Corporate Social Responsibility Strategy Completed 2006 Country Environmental Analysis Actual Country FinancialAccountability Assessment Update Completed 2007 Health Strategy (regional) Completed 2007 Additional Actual Products: Poverty Assessment 2007 Additional Actual Products: Country Procurement Assessment Review Study on HIV/AIDS situation and response Progress Report Plans (February 2008) ComDletion ReDort (June 2009) 2008 Regional ICA Update Completed 2009 Public Debt Management Technical Assistance Delivered2008 Program 2009 Regional Crime and Violence Study Underway (to be completed in FY 10) Central America Social Services Delivery (regional) Underway (to be completed in FY10) Poverty Assessment Update Delivered2009 PER Underway (to be completed in FY10) Regional Hazard Risk Insurance Study* Dropped CEM Update** Dropped ( 2 ) Additional Actual Products: Policy Notes (completed in FY09) CAPRA (to be comdeted in FY 10) * The Regional Hazard Risk Insurance Study was replaced by the Central America Disaster Risk Strategy CAPRA (to be completed in FYlO) ** The CEMupdate was replaced by Policy Notes (delivered in FY09) 63 El Salvador CAS Completion Report ANNEX 5 - El Salvador Key Economic Indicators 2005-2009 (percentage o f GDP, unless otherwise indicated) 2005 2006 2007 2008 2009* Income and prices GDP growth (?!change) 3.1 4.2 4.7 2.5 -2.5 Inflation (end o f period % change) 4.3 4.9 4.9 5.5 1.5 Investment and savings Gross domestic investment 15.7 16.1 16.1 15.0 13.1 Gross domestic savings 12.4 12.5 10.4 7.7 11.4 Consolidated public sector accounts Total revenues and grants 16.3 17.2 17.1 16.9 15.7 Total tax revenues 12.5 13.3 13.4 13.0 12.1 Total expenditure 19.8 20.1 19.0 19.9 20.8 Primary balance -1.3 -0.5 0.6 -0.7 -2.7 Overall balance -3.5 -2.9 -1.9 -3.1 -5.1 Public Sector Debt Total debt 42.0 41.9 39.1 41.2 47.5 Balance of payments Current account balance -3.3 -3.6 -5.5 -7.2 -1.8 Trade balance -17.2 -18.9 -20.0 -19.9 -12.6 Exports (including maquila) 20.2 20.2 19.8 20.8 17.5 Imports (including maquila) -37.4 - 39.1 -39.8 -40.7 -30.1 Foreign direct investment 2.3 1.3 7.0 3.3 0.4 Remittances 17.7 18.6 18.1 17.1 15.4 Memorandum item: S Nominal GDP (billions o f U dollars) 17.1 18.7 20.4 22.1 22.2 * Projected Source: Ministry o f Finance, Central Bank, IMF and World Bank staff estimates 64 El Salvador CAS Completion Report ANNEX 6 El Salvador CAS - I F C Portfolio As o f M a y 2009, IFC had five active clients in El Salvador and an outstanding balance o f $86.24 million. In Calendar Year 2008, IFC clients employed 5,880 workers compared with 1,166 in C Y 2005. Payments to the government by IFC clients rose to $8.5 million in C Y 2008, an increase o f 90% in the same time period. The number o f SME loans saw an increase o f 80% to 24,000. The number o f microfinance loans posted a rise o f 51%. Eighty percent o f transactions had high development outcomes in FY 2009. Financial institutions accounted for $64 million, or 57% o f the committed balance, as o f June 30 2009. The balance o f the investments i s in air transportation, commercial real estate, and a US$49,000 equity stake in a hand tools manufacturing company. 8 IFC has three clients in the financial services industry. Fundaci6n Calpiii i s a non- profit organization that supports micro and small enterprises in all sectors o f the economy. IFC lent Calpia $10 million in 2004. Average loan sizes are $1,000 equivalent. Up to 20,000 individuals benefit directly or indirectly from access to credit provided by IFC through i t s facility to Calpia. In 2004, IFC lent Banco Agricola $50 million to promote primary mortgage lending and strengthen its balance sheet by providing scarce long-term funding. This has enhanced i t s ability to offer medium- and long-term funding to companies in key sectors, complementing the government's effort to help SMEs and export-oriented corporates benefit from regional trade liberalization. A $3 0 million loan in 2005 to Banco Uno to finance i t s regional expansion was prepaid when the bank was sold to a foreign investor. IFC has supported mortgage lender L a Hipotecaria in i t s primary business o f providing long term mortgages for the low and middle income segment o f the residential mortgage market in Panama and El Salvador. By providing long term mortgages, the client can make house purchases more affordable, particularly for lower income consumers. In the infrastructure sector, IFC committed $30 million in 2005 to TACA, a Salvadorian airline to expand i t s network, and so provide safe air travel service to and fiom Central America. This i s needed to facilitate regional economic growth. 8 In the commercial real estate sector, IFC supported Metrocentro with a $25 million loan in 2004 to anchor urban development in a strategic development zone, develop a modern retailing industry, and creating small business opportunities and jobs. I El Salvador has a history o f sound economic policymaking. It has well-managed banks and corporations which have already taken strategic positions in neighboring countries. However, the local and regional economies are heavily exposed to the U S either through exports or worker remittance flows. IFC i s preparing to support its current clients and seek new opportunities to help viable companies survive the crisis and maintain employment. 65 El Salvador C A S Completion Report ANNEX 7 Portfolio Indicators and IEG Ratings Ef Salvador - Investment tending Net C o n r n Amt 160 X I 610 sf ............................. Undisb 831 31 N I 192.0 I 208.9 I 748.0 I 119.31 76.5 IEG - Quality-at-Entry Ratings IEG - Quality of Supervision Ratings SV SECONDARYEOU SV PUBLIC SECT0 66 Annex 3. Public Consultations on the CPS The Bank held a series o f meetings to obtain feedback on the Bank's proposed program in El Salvador during the third week in August, 2009. A total o f about 50 participants from NGOs, think tanks, universities, the media, private sector representatives and members o f Congress participated in the consultations in San Salvador. A PowerPoint presentation was prepared and delivered to describe the Bank's program which includes operations in response to the Government's Anti Crisis Plan as well as the country's longer-term development challenges. Participants were supportive o f the focus o f the Bank program and the Bank's role in support o f the country. At the same time, participants raised some issues and priorities for the Bank to consider. Below is a summary o f the views expressed by different stakeholders during the meeting. The current economic crisis. The various participants broadly agreed with the development challenges as described in the presentation, and supported the Bank's program in response to the current country context. Several groups o f stakeholders raised concerns about the impact o f the crisis on unemployment and security in particular. Some suggested the crisis would be an opportunity to create more efficient public policies for the medium- and long-term. Several participants raised concerns regarding the fiscal situation and the implications for longer- term debt sustainability. Many suggested the need for fiscal reform and suggested the Bank's knowledge in this area could help. It will be important that the country move towards a more sustainable debt trajectory in the near future. Medium-term agenda. There were several discussions regarding the medium-term agenda, including h o w to achieve higher rates o f growth and the need for economic development to accompany social development. Some participants mentioned the positive role I F C could play in the private sector. Other participants mentioned that more could be done to promote Public Private Partnerships for example. Many participants recognized there was scope to improve public finance management, including the quality o f public spending and implementation o f enhanced procurement practices. There was also broad support to enhance transparency and public access to information. All stakeholders were particularly concerned about the increasing levels o f crime and violence in El Salvador. While the Bank has conducted some analytical work in this area participants suggested more could be done as this i s an issue o f critical importance to the National agenda. Several stakeholders also raised the fact the Bank should continue to be active in Global Public Goods such as the environment and climate change. These issues represent serious challenges for El Salvador and should not be lost in the current focus on the economic crisis. Instruments and Implementation. There were some questions raised regarding the role o f Development Policy Loans (DPL) and the activities which it could finance. The Country Manager explained the difference between investment and DPL lending, including that: "Development policy lending funds are disbursed against satisfactory implementation o f the 67 development policy lending program, including compliance with tranche release conditions and maintenance o f a satisfactory macroeconomic policy fiamework. The borrower commits not to use development policy lending funds for ineligible expenditures. The Bank normally disburses the loan proceeds into an account that forms part o f the country's official foreign exchange reserves (normally held by the central bank), and an amount equivalent to the loan proceeds i s credited to an account o f the government to finance budgeted expenditures." This was important to clarify as some participants believed finds would be disbursed directly to Sector Ministries or to finance expenditures which were not agreed within the budget. There were some concerns raised regarding the current Government's implementation capacity, and the fact that there were significant delays in implementing the current Bank portfolio. There i s a need to work with the new government to further build capacity, and the Bank i s well placed to provide knowledge services, technical assistance and capacity building. This i s important for the short term as well, as many o f the interventions identified in the Anti Crisis Plan represent new activities which will need to be designed. CPS Bank Program. Many participants agreed with the flexible nature o f the CPS, particularly in light o f the current environment and given that a longer term National vision will need to be developed. There were no specific issues raised with the indicative projects mentioned for the outer years o f the CPS. In fact, several participants supported a possible Urban Transport Project, and several stakeholders mentioned the importance o f science and technology and in particular the idea o f a National system to promote innovation. Some stakeholders did suggest the possibility o f working with local governments directly. This would also help communities to see tangible results o f the Bank's financing in El Salvador. Risks. Finally participants agreed with the risk related to the polarized political environment and suggested more could be done to expand consultations during CPS implementation and promote a political dialogue. In response the Bank will work to continue to consult with various stakeholders regularly, including in the preparation o f specific projects, and will incorporate to the extent possible recommendations made during the CPS consultations meetings into the design o f the CPS. Participants o f the CPS process were asked to complete a brief survey to solicit feedback. These discussions were supplemented by a web-based consultation process. Most respondents found the Bank had an important role to play in El Salvador. 68 Annex 4. Debt Sustainability Analysis 1. The outlook on El Salvador's medium-term macroeconomic prospects has deteriorated since the last D S A was prepared in the context o f the Public Finance and Social Sector Development Policy Loan. As a result debt dynamics have also changed. The revised debt sustainability analysis in this Program Document i s based on the macroeconomic framework developed by IMF staff for the Standby Program and Bank staff projections. 2. The debt sustainability analysis (Table A.l) indicates that the public debt to GDP ratio is expected to continue on an increasing path until 201 1, when it will reach 50.1 percent o f GDP before starting to decline to reach 46.2 percent in 2014. This trajectory would be consistent with a primary fiscal balance deficit averaging 1.5 percent o f GDP over 2009-2011, and a primary balance surplus averaging .7 percent o f GDP over 2012-2014. The fiscal improvement after 2011 would be driven by both an expected better economic environment and the fiscal interventions o f the Government (tax reform and rationalization o f subsidies). As for the trajectory o f the total external debt, the revised macroeconomic framework assumes an average non interest current account balance surplus o f 0.4 percent o f GDP over 2009-2014 and is consistent with stable debt dynamics until 2011 (at about 44 percent o f GDP) before declining to 40.5 percent o f GDP in 2014. Table A.l. Debt Sustainability Analysis Projection 2009 2010 2011 2012 2013 2014 Total External Debt (%of GDP) 44.2 44.4 44.3 42.9 41.8 40.5 Public Debt (YO f GDP) o 47.7 48.8 50.1 49.5 48.3 46.2 Key Assumptions Real GDP growth (%) -2.5 0.5 2.0 3.0 4.0 4.0 Inflation (%, e-o-p) 1.0 2.5 2.8 2.8 2.8 2.8 Growth o f real primary spending (% o f GDP) 1.7 0.5 2.0 3.0 4.0 4.0 Primary balance (% o f GDP) -2.9 -1.3 -0.3 0.3 0.9 1.0 Nominal interest rate on public debt (%) 5.9 6.5 6.4 6.4 6.3 6.3 Growth o f exports ( S dollar, %) U -15.0 2.8 6.5 7.0 7.4 8.1 Growth o f imports (US dollar, %) -23.0 6.6 6.0 6.8 8.5 8.5 Non-interest current account balance (% o f GDP) 1.2 -0.2 0.2 0.4 0.1 0.0 3. Thus, even though the higher public debt levels in the revised D S A imply an increase in the country's vulnerabilities, in the absence o f a crisis scenario the medium-term public and external positions o f El Salvador remain sustainable. 69 4. There are, however, a number o f risks to the medium-term outlook associated with the global situation, as well as with the ability o f the new administration to maintain macro stability and push structural reforms in a very volatile environment. Table A 2 presents projected debt dynamics under more pessimistic alternative scenarios: o Under less optimistic growth scenarios with growth .5 percentage points over 2009-2014 lower than the one in the baseline (3.5 percent over 2008-2013) -scenarios A1 and B1- the total external debt to GDP ratio would be about 1 percentage point o f GDP higher than under the baseline scenario, whereas the public debt would be 2.5 percentage points o f GDP higher than under the baseline scenario. o Under tighter financial market conditions resulting in higher interest rates both for the external and the public debt o f around .5 percentage points over 2008-2013 -scenarios A 2 and 32-, projected debt indicators for 2014 would be .5 higher than under the baseline scenarios for the external debt and 1.4 percent higher for the public debt. o Under a more difficult external environment -scenario A3- resulting in a higher current account deficit (-8 percentage points o f GDP), the total external debt to GDP ratio would reach about 44.7 percent in 2014. o Under a looser fiscal policy -scenario B3- with an average primary balance deficit o f .7 percent o f GDP over 2009-2014 rather than the assumed 0.4 percent o f GDP under the baseline scenario, the public debt to GDP ratio would be in 2014 about 2 percentage points o f GDP higher than under the baseline scenario. o Scenarios projecting the impact o f contemporaneous shocks (albeit more moderate than those in Al-A3 and Bl-B3) -scenarios A 4 and B4- would result in indicators for 2014 o f 43.3 percent o f GDP and 48.7 percent o f GDP for the external and public debt, respectively. o Scenarios based o n key variables fixed at 10 year historical levels -scenarios A5 and B5- would result in an external debt t o GDP ratio 2014 projection that is 2.3 percentage points lower than under the baseline and in a 2014 public debt to GDP ratio that i s 1 percentage point higher than under the baseline. 70 Table A2.3. Debt Sustainability Analysis: Alternative Scenarios 2009 2010 2011 2012 2013 2014 External Debt Sustainability Analysis A l . Real GDP growth i s baseline minus 1/2 sad. 44.2 44.6 44.7 43.5 42.6 41.5 A2. Interest rate o n external debt i s baseline plus 1/2 s.d. 44.2 44.4 44.4 43.2 42.2 41 A3. Non-interest C A B i s baseline minus 1/2 s.d. 44.2 45.2 45.9 45.4 45.1 44.7 A4. Combination o f Al-A3 using 1/4 . s.d. shocks 44.2 44.9 45.4 44.6 44.1 43.3 A5. K e y variables are at their 10 year historical averages 44.2 42.5 40.7 39.1 38.6 38.2 Public Debt Sustainability Analysis B1. Real GDP growth i s baseline minus 1/2 sad. 47.7 49.2 51.8 50.8 50.2 48.7 B2. Interest rate o n public debt i s baseline plus 1 s.d. 47.7 49.1 51.6 50.4 49.4 47.6 B3. Primary balance i s baseline minus 1/2 sad. 47.7 49.3 51.9 50.8 50 48.2 B4. Combination o f B1-B3 using '/4 s.d. shocks 47.7 49.3 52.1 51.1 50.4 48.7 B5. K e y variables are at their 10 year historical averages 47.7 46.5 47.8 46.9 47.4 47.2 71 4 8 3 z 3 3 3 $ N 9 W 3 2 00 )9 3 n I VI m 0 s W 00 Annex 6. External Partners in El Salvador Partner l- Bilateral - S a h 2008) 56.4 - X - X X X X - I JICA (2007) 10 - X X I I I MCC(2008- 46 1 X Luxembur EU (2007-2013) X - X - X OPS/WHO UNDP UNFPA WFP - -- I '$500 I llion in 7 2010 73 CAS Annex A l - El Salvador at a Glance El Salvador a t a glance 9/24/08 Latin Lower Key Development Indicators El Amenca middle Salvador &Carib. income Agedldrlbutlon, 2007 72007) Population, mid-year (millions) 6.9 563 3,437 Surface area (thousand sq. km) 21 20,421 35,513 Populationgrowth (a 13 12 10 Urban population (%of total population) 60 70 42 GNI(Atlas method,US$ billions) 29.5 3,118 6,485 GNIpercapita (Atlas method, US$) 2,850 5,540 1887 1 GNI per capita (PPP, international S ) 4,840 9,320 4,544 GDP growth (%) 4.7 57 9.7 15 10 5 a 5 10 15 GDP percapitagrowth (%) 3.3 4.5 8.6 prcent ( m o s t recent estimate, 2000-2007) Povertyheadcountratio at$125aday(PPP,%) 8 U n d e r 4 mortality rate (per 1,000) Poverty headcount ratio at $2 00 a day (PPP, %) 18 Life expectancy at birth (years) 72 73 69 Infant mortality(par 1000 live births) Child malnutrition (%of children under 5) 22 6 22 5 41 25 I 1 Adult literacy, male (%of ages 25 and older) 82 91 93 Adult literacy, female (%of ages 25 and older) 79 89 85 Gross primary enrollment, male (%of age group) 1 13 PO 121 Gross primaryenrollment,female (%of age group) IP 16 139 Access to animprovedwatersource (%of population) 84 91 88 Access to improved sanitation facilities (%of population) 86 78 54 I 1990 1995 2000 2006 I OEl Salvador DLatln Amenca a t h e Canbbean N e t A i d Flows 1980 1990 2000 2007 a /US%millions) Net ODA and official aid 96 347 180 157 Growth of GDP and GDP per caplta (Oh) T o p 3donors (,n 2006) Spain 3 22 44 Japan 0 8 67 30 United States 43 247 37 25 Aid (%Of GNi) 2.8 7.4 14 09 Aid percapita (US$) 21 60 29 23 Lo ng-Term Eco n o m Ic Trends 95 05 Consumer prices (annual %change) l7.4 24.0 2.3 49 GDP implicit deflator (annual %change) l7.O 47 3.2 40 Exchange rate (annual average, local per US$) 10 10 10 10 Terms o f trade index (2000 = 130) 130 130 90 1980-90 1990-2000 2000-07 (average annual growth %j Population, mid-year (millions) 4.6 51 62 69 1.1 19 14 GDP (US$ millions) 3,574 4801 0'04 20,215 0.2 4.8 2.7 (%ofGDP) Agnculture 774 0 5 0 7 -11 12 27 Industry 27 2 316 29 0 02 51 23 Manufacturing 22 1 24 7 22 1 -0 1 52 24 Services 55 3 57 9 60 3 07 40 29 Household final consumption expenditure 7 18 68 9 87 9 93 4 08 53 33 General gov't final consumption expenditure 14.0 99 132 111 01 28 17 Gross capital formation 0.3 0 9 139 6 2 22 71 25 Exports of goods and services 34.2 186 27 4 26 3 -3 4 0 4 49 Imports o f goods and services 33.2 3 12 42 4 47 0 04 n6 49 Gross savings a.3 63 07 It4 Note: Figures in italics are for years otherthan thosa specified. 2007 data are preliminary. .,indicates data are not available. a.Aiddataarefor2006. Development Economics Development Data Group (DECDG) 74 El Salvador Balance o f Payments and Trade 2000 2007 (US$ millions) Total merchandise exports (fob) 2,963 4,073 I Governance indicators, 2000 and 2007 Voice and amntablity Total merchandise imports (cif) 4,947 7,890 Net tradein goods andservices -1975 -3,877 Pollboa stablity Workers' remittances and corn pensatio n of employees (receipts) 1765 3.776 Regulatoryquality Rule of law Current account balance -429 -11s as a %of GDP -3.3 -5.5 Control of curu@on Reserves, including gold 2,033 2,88 0 25 50 75 100 Central Government Flnance 02007 Cwntry's percenble rank (&loo) 02000 hrgher velu86 impybdtermtm$!s (%of GDP) Current revenue (including grants) P.1 #.4 Source KaufmanMmey.Mastnm Wodd Bank Taxrevenue xl.2 0.4 Current expenditure 11.8 #.1 Technology and Infrastructure 2000 2007 Overall surplusldeficit -2.3 -2.3 Paved mads (%of total) 8.8 Highest marginal taxrate(%) Fixediineandmobilephone Individual 30 subscribers (per 1,000people) 22 x15 Corporate 25 25 High technology exports (%of manufactured exports) 6.0 2.8 E x t e r n a l D e b t a n d R e s o u r c e Flows Environment (US$ millions) Total debt outstanding and disbursed 4,467 9,06 Agncultural land (%of land area) 81 82 Total debt service 369 10 3 Forest area (%of land area) 25.6 1 4 Debtrelief(HIPC,MDRI) - - Nationally protected areas (%of land area) 19 Totaldebt (%of GDP) 34.0 49.0 Freshwater resources per capita (cu. maters) 2,669 Total debt service (%of exports) 6.6 0 .1 Freshwaterwthdrawal (%of internal resources) 7.2 Foreign direct investment (net inflows) n3 204 CO2 emissions percapita (mt) 0.93 0.94 Portfolio equity(net inflows) 0 0 GDP per unit o f energy use (2005 PPP $ per kg of oil equivalent) 6.5 6.4 Energyuse per capita (kg o f oil equivalent) 658 694 Short-tem 1230 4847 574 US$ millions P r l v a t e S e c t o r D eve l o p m e nt 2000 2008 Time required to start a business (days) - n Cost to starta business (%of GNipercapita) - 49.6 Time required to register property(days) - 31 Ranked as a major constraint to business 2000 2007 (%of managers surveyedwho agreed) Crime .. 49.0 Anticompatitive o r informal practices .. 44.5 Stock market capitalization (%of GDP) 25.5 33.4 Bank capitalto asset ratio (%) 8.8 116 Note' Figures in italics areforyears otherthanthosespecified. 2007dataare preliminary 9/24/08 ..indicates data are not available. -indicates observation is not applicable. Development Economics Development Data Group (DECDG) 75 Millennium Development Goals El Salvador with selected targets to achieve between 1990 and 2015 (esfirnateclosest to date sho wn, +?years) G o a l 1: halve the rates f o r extreme poverty and malnutrition Poverty headcount ratio at $125 a day (P PPI %of population) Poverty headcount ratio at national poverty line (%of population) Shareof income orconsumption to the poorest qunitile(%) Prevalenceof mainutntion (%of childrenunder5) G o a l 2: ensure that children are able t o complete p r i m a r y s c h o o l i n g Pnmaryschool enrollment (net, %) Pnmarycompletion rate (%of relevant age group) Secondaryschool enrollment (gross, %) Youth literacyrate (%of people ages 15-24) G o a l 3: eliminate gender disparity in education and empower women Ratio of girls to boy; in pnmaryandsecondalyeducation (Oh) Women employed in the nonagnculturalsector (%of nonagnculturalemployment) Proportion of seats held bywomen in national parliament (%) G o a l 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1000) Infant mortalityrate (per 1,000 live births) Measles immunization (proportion of one-yearolds immunized,%) G o a l 5: reduce maternal m o r t a l i t y by three-fourths Maternal mortalityratio (modeled estimate, per 00,000 live births) Births attended by skilled health staff (%of total) Contraceptive prevalence (%of women ages 15-49) G o a l 6: halt and begin t o reverse the spread o f HlVlAlDS and o t h e r m Prevalenceof HN(%of populationages 15-49) incidenceof tuberculosis (per 00,000 people) Tuberculosis cases detected under DOTS (%) G o a l 7: halve the proportion o f people without sustainable access t o Access to an improvedwter source (%of population) Access to improved sanitation facilities (%of population) Forest area (Ohof total land area) Nationally protected areas (%of total land area) CO2 emissions (metnc tons per capita) GDP perunit ofenergyuse(c0nstant 2005PPP $ perkgofoilequivaient) G o a l 8: develop a global partnership f o r development Telephone mainlines (per 0 0 people) Mobile phone subscnbers (per 0 0 people) Internet users (per 0 0 people) Personal computers (per 0 0 people) Education indicators (X) Measles immunization (% of 1-year ICT indicators (per 1,000 people) olds) 100 125 1 100 75 75 50 50 25 25 2000 2002 2004 20W 0 0 1990 1995 2000 2006 2000 2002 2004 2006 . - - O Pnmary net enroiiment mtio OFixed t mobile subsonbers -Ratio ofgirii to boys in pnmary &secondary OEl Salvador OLatin Amenca a the Canbbean Olntemet U S ~ R education Note Figures initaiics are foryears otherthan thosespecified. indicates dataare not available 9/24/08 Development Economics, Development Data Group (DECDG) 76 - C A S Annex B2 Selected Indicators o f IBRD Portfolio Performance and Management As Of Date 9/18/2009 Indicator 2007 2008 2009 2010 Portfolio Assessment Number of Projects Under Implementation a 4 3 4 4 Average Implementation Period (years) 6.2 6.1 5.6 5.9 Percent of Problem Projects by Number 25.0 0.0 25.0 25.0 Percent of Problem Projects by Amount 2.6 0.0 2.9 2.9 Percent of Projects at Risk by Number 25.0 0.0 25.0 25.0 Percent of Projects at Risk by Amount 2.6 0.0 2.9 2.9 Disbursement Ratio (%) e 8.3 34.2 56.9 11.5 Portfolio Management CPPR during the year (yeslno) no no no no Supervision Resources (total US$) 660 325 277 310 Average Supervision (US$/project) 165 108 92 91 Last Five Since FY 80 Memorandum Item FYs Proj Eva1 by OED by Number 26 8 Proj Eva1 by OED by Amt (US$ millions) 793.7 267.7 % of OED Projects Rated U or HU by Number 9.1 0.0 % of OED Projects Rated U or HU by Amt 3.5 0.0 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. 77 - CAS Annex B3 Base Case IBRD Program Summary As of September 18,2009 Proposed IBRDllDA Base-Case Lending Program a Strategic lmplementation Pro] ID. US$(M) Rewards b b Risks year (H/M/L) (H/ML) 2010 Fiscal Mgmt. and Public Sector Perf. TAL 20.0 H M Sustaining Social Gains 100.0 H M Income Support and Employability 50.0 H H Rural Infrastructure and Local Development 80.0 , Overall Result 250.0 .78 - CAS Annex B3 2 IFC Program, 2005 - 2009 2005 2006 2007 2008 2009 Commitments (US$m) Gross 50 0.25 0.70 0 10.10 Net** 50 0.25 0.70 0 10.10 Net Commitments bv Sector (%) Financial Markets 40 100 100 0 100 Transportation & Warehousing 60 Total 100 100 100 0 100 Net Commitments bv Investment Instrument (%) Equity 0 0 0 0 0 Loan 100 0 0 0 50 Guarantee & Risk Product 0 100 100 0 50 Total 100 100 100 0 100 79 - C A S Annex B4 Summary o f Non-Lending Services As of September 18,2009 cost Product Completion FY (US$OOO) Audiencea Objectiveb Recent completions Country Procurement Assessment Review FY07 G,B KG,PS ROSC (A+A module) FY07 G, PD,B KG,PS Study on HIVIAIDS Situation and Response FY07 PD,B KG,PD Regional Study on C. America Health Reforms FY07 G, B KG, PD,PS Country Financial Accountability Assessment Review FY08 G, B KG, PS Regional ICA Update FY08 172.7 G, PD,D KG, PD Public Debt Management Technical Assistance Program FY08 G KG, PS Strengthening Poverty Reduction FYO9 C. America Social Services Delivery FYO9 74.2 G, PD,B KG, PD Underway Regional Crime and Violence Policy Options Study FYI0 357.3 G, PD,B KG, PD,PS Central America Disaster Strategy FYI0 G, PD,B KG, PD,PS Regional Energy Study FYI0 G, PD,B KG, PD,PS Public Expenditure Review FYI0 G, PD,B KG, PD,PS El Salvador Governance Diagnostic FYI0 G, PD,B KG, PD,PS Policy Dialogue and Consensus Building FYI0 G, PD,B KG Human Development for Poverty Reduction FYI 1 G, PD,B KG, PD,PS a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. 80 0 m 00 I r b - m o 909 m N b b, m w 2 3 N c o r n b m \ O m N 0 10 W I r m * 3 0 m N b e m 2 3 N - I r m m N 0 m 00 m o 3 0 z09 -? 4: 3 N N b w m 3 i P m m m N 0 bb,WZ 00 N O 0 0 0 T F 8 3 4: b, N 4: N b i r n c o b P 0 0 N m N m m m o 0 2 2 3 3 3 3 P " % m 9 3 m m N 0 c o o 00 2 2 3 N m ci ern 0 z c? N b 1 g 8 3 2 N 0 3 W I r c!\q 4: 3 N b b m 0 2 - 3 0 m Irb N b 0 I O r 0 m P "r: G N 2 - 0 m n B .& 0 0 m rn .& a, 0 * 3 % E Y cd Y mtl 0 & Y a 4 E .B E D .e > a E !? .-0 nn ..m 0 m m .. 0 Y B Y EE Y B F4 a 8 $ a B 0 0 0 v v g a a `E m r n Y Y rn m rn a rn m E 8 M CA 88 m m od-P : m m m m z m m o w m w 3 f md- m w p 3I : 3 rl P Y : m :-:y v, m m P h " E u .d 0 m Y . . . . : - t'9 w m w m 3 Y m q m o m d r - \D d ." * rd .3 u m a 00 - Q e, * E! 5 Q x e, 3 rd 2 CAS Annex B7 - El Salvador - Key Exposure Indicators Actual Esthated Projected Indicator 2006 2007 2008 2009 2010 2011 2012 2013 Total debt outstanding and 9723 10475 11817 12053 11415 10973 10352 9487 disbursed (TDO) (US$m)" Net disbursements (US$m)a 1605 785 1301 236 -638 -442 -621 -865 Total debt service (TDS) (US$m)a 1284 1191 1282 2430 2272 2251 1846 1706 Debt and debt service indicators (%) TDOKGS~ 109.4 110.1 116.6 140.2 129.2 116.7 102.2 86.8 TDO/GDP 52.1 51.4 53.4 54.4 49.9 46.1 41.2 35.3 TDSKGS 14.4 12.5 12.7 28.3 25.7 23.9 18.2 15.6 ConcessionaVTDO IBRD exposure indicators (%) IBRD DS/public DS 8.3 1'1.0 10.0 8.1 7.5 7.7 7.7 Preferred creditor DS/public 50.3 52.9 59.3 68.9 62.8 46.8 59.6 55.2 DS (%)' IBRD DS/XGS 0.7 0.8 0.7 0.8 0.9 0.9 0.8 IBRD TDO (us$m)d 417 40 1 400 580 745 1040 1097 Of which present value o f guarantees (US$m) Share of IBRD portfolio (%) 0 0 0 1 1 1 1 IDA TDO (US$mld 11 . 10 9 9 8 7 6 6 IFC (US$m) Loans 124.9 109.0 86.2 *79.8 Equity and quasi-equity /c 26.8 5.o 5.0 3.8 MIGA MIGA guarantees (US$m) Footnote: IBRD exposure projections assume IBRD lending o f US$250 million in FYlO plus and an indicative IBRD lending program of US$400 million in F Y 11-12 that remains subject to the Bank's capacity to lend. * as of end-September a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f 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 International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. 84 Q) 0 Q) gv) B Be m * ( v m t t 0 0 0 0 0 0 0 0 0 0 0 0 (v(vcv(v(v(v MAP SECTION 90°W 89°W 88°W To Quezaltepeque To Nueva To Ocotepeque Ipala G U AT EM ALA Metapán La Palma Lago de Cerro El Pital HO NDURA S (2,730 m) EL SALVADOR A To Güija N Jutiapa A TA Candelaria de la Frontera C H A L AT E N A N G O N Nueva Tejutla SA To Concepción Jalpatagua Lempa Chalatenango Santa Embalse Lem To Ana pa Marcala SA S 14°N Chalchuapa Cerrón Grande 14°N z CU CU Pa N Jocoaitique Ahuachapán N Volcán de Aguilares Suchitoto CABAÑAS PÁ To SC Santa Ana LA S L SAL Taxisco A (2,365 m) Ilobasco Sensuntepeque H L I B E R TA D AT La Hachadura C Lago de To A VA D ro la LÁ Coatepeque U Osicala A H Ciudad Barrios N Armenia Nueva Izalco MORAZÁN A Esparta SAN SAN OR SALVADOR San Francisco VICENTE R Sonsonate Lago de Cojutepeque Goascorán (Gotera) S O N S O N AT E Nueva Illepango San Salvador San Vicente To Santa Rosa Nacaome Acajutla Volcán de a de Lima Jibo Vicente (2,182 m) Olocuilta Tecoluca Santiago LA Zacatecoluca de María SAN MIGUEL UNIÓN pa La Libertad LA San Miguel Le m San Luis Volcán de PA Z San Miguel 90°W USULUTÁN (2,130 m) B La ahía La Herradura San Miguel Un de Jiquilisco de d e ión n Usulután Gr a La Unión EL SA LVA D O R Bahía de Jiq uilis c o Laguna de Olomega SELECTED CITIES AND TOWNS Intipuca Golfo de DEPARTMENT CAPITALS F onseca NATIONAL CAPITAL PA CI FI C O CE A N RIVERS This map was produced by MAIN ROADS the Map Design Unit of The 13°N World Bank. The boundaries, PAN AMERICAN HIGHWAY colors, denominations and any other information shown 0 10 20 30 40 Kilometers NOVEMBER 2006 RAILROADS on this map do not imply, on IBRD 33401R the part of The World Bank Group, any judgment on the DEPARTMENT BOUNDARIES legal status of any territory, 0 10 20 30 Miles or any endorsement or INTERNATIONAL BOUNDARIES acceptance of such boundaries. 89°W 88°W