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Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 36855-GT
INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT
PROGRAM DOCUMENT
FOR A
SECOND BROAD-BASED GROWTH
DEVELOPMENT POLICY LOAN
IN THE AMOUNT OF US$ 100 MILLION
TO
THE REPUBLIC OF GUATEMALA
JULY 28,2006
Central America Country Management Unit and Poverty Reduction and Economic Management Sector Un i t 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. I t s content may not otherwise be disclosed without W o r l d Bank authorization.
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AAA AML-CTF
BANGUAT CAS cc CEA CEM CEPAL
CFA CFAA - CPAR
CGC
CPAR CPI DNCAE
DPL DR-CAFTA
FATF FDI FONDETEL
FONTIERRAS FSAL FSAP FTA GAFI GANA
GDP IBRD
ICA ICAO ICR ICT
IDA
REPUBLIC OF GUATEMALA-FISCAL YEAR January 1 - December 3 1
CURRENCY EQUIVALENTS As o f June, 2006
US$1 .OO = 7.60 QZ (Quetzales)
WEIGHTS AND MEASURES Metr ic System
SELECTED ACRONYMS AND ABBREVIATION Analytical and Advisory Activities Anti-Money Laundering-Counter Financing o f Terrorism Guatemalan Central Bank Country Assistance Strategy Constitutional Court Country Environmental Analysis Country Economic Memorandum Comision Econbmica Para America Latina y e l Caribe (Economic Commission for Latin America and the Caribbean) Country Fiduciary Assessment Country Financial Accountability Assessment / Country Procurement Assessment Review Controlaria General de Cuentas (General Comptroller’s Office) Country Procurement Assessment Report Consumer Price Index Normative Directorate for Procurement and Contracting Development Policy Loan Dominican Republic - Central America Free Trade Agreement Financial Action Task Force Foreign Direct Investment Fondo para e l Desarrollo de la Telefonia (Rural Telephone Fund) Rural Land Municipalities Financial Sector Adjustment Loan Financial Sector Assessment Program Free Trade Agreement Grupo de Accion Financiera Intemacional Gran Alianza Nacional (Grand National Alliance) Gross Domestic Product International Bank for Reconstruction and Development Investment Climate Assessment International Civil Aviation Organization Implementation Completion Report Information and Communication Technologies International Development Association
IEMA
IETAAP
IFC I IG IMF INCAE
INE
INTECAP
LAC MDG MFP
MICA MSME NGO OBA OIRSA PER PFM PIB
PPP PRONACOM PSIA SAG SAT
SIECA
SIAF
Impuestos a Empresas Mercantiles y Agricolas (Commercial and Agricultural Enterprise Tax) Ley del Impuesto Extraordinario y Temporal de Apoyo a 10s Acuerdos de Paz (Temporary and Extraordinary Tax to Support the Peace Agreements) International Finance Corporation Invest in Guatemala International Monetary Fund Instituto Centroamericano de Administracibn de Empresas (Central American Institute for Business Administration) Instituto Nacional de Estadistica (National Statistics Institute) Instituto TBcnico de Capacitacih y Productividad (Technical Institute for Training and Productivity) Latin America and the Caribbean region Millennium Development Goals Ministerio de Finanzas Publicas (Ministry of Public Finance) Multilateral Investment Guarantee Agency Micro, Small and Medium Enterprise Non-Governmental Organization Output-Based Aid Plant and Animal Control Office Public Expenditure Review Public Finance Management Product0 Interno Bruto (Gross Domestic Product) Public private partnerships Promotion of National Competitiveness Poverty and Social Impact Assessment Government Auditing System Superintendencia de Administracion Tributaria (Tax Administration Superintency) Secretaria de Integracion Economica Centroamericana (Central American Economic Integration Secretariat) Integrated Financial Management Systems
FOR OFFICIAL USE ONLY
SIAFMUNI Municipal Integrated Financial
SIT Superintendencia de Telecomunicaciones
SME Small and Medium Enterprise TA Technical Assistance UN United Nations UNDP United Nations Development Program
Management Systems
(Telecommunications Superintendency)
USAID
USDA USFAA UTJ
United States Agency for International Development United States Department o f Agriculture United States Federal Aviation Authority Unidad Tecnica Juridica de Administracion de Tierras (Technical Juridical Unit for Land Administration)
VAT Value Added Tax WBI World Bank Institute
Vice-president: Pamela Cox Country Director: Jane Armitage Sector Director: Ernest0 M a y Task Managers: Neeta Sirur (Country Manager) and David
Gould (Lead Economist)
ACKNOWLEDGEMENTS
The World Bank greatly appreciates the close collaboration with the Government o f Guatemala in the preparation o f t h i s Development Policy Loan (DPL).
The D P L team includes: Juan C. Belausteguigoitia, Waleska Garcia-Corzo, Michael Geller, Enzo de Laurentiis, Monica Lehnhoff, Yira Mascaro, Lars Moller, Charles Schlumberger, Sergio Toledo, Manuel Vargas. Team leaders were Neeta Sirur and David Gould. The team would l ike to thank the entire Guatemala country team, and the peer reviewers, C. Felipe Jaramillo, Ulr ich Lachler and J. Humberto Lopez, for their useful contributions. Special thanks go to several colleagues in the Bank for critical inputs especially, Solange Alliali, Flor Garzaro, Annabella Lucas, Xiomara Morel, and Todd Crawford.
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.
LOAN AND PROGRAM SUMMARY
GUATEMALA Second Programmatic Broad-Based Growth Development Policy Loan
Borrower Implementing Agency Amount Terms
Commitment Fee
Front-End Fee
Tranchmg Objectives
Description
Benefits
Republic o f Guatemala MINISTRY OF PUBLIC F INANCE US$lOO mi l l ion Fixed Spread Loan (FSL) in U.S. Dollars with level repayments o f principal commitment-linked. Automatic Rate Fixing, based on cumulative disbursements o f US$lOO million. The Borrower requested to maintain al l the embedded conversion options that FSL currently offers and also chose a total repayment period o f 20 years, including 2 years o f grace. Debt service payments wil l be made on June 15 and December 15 o f each year wi th the following amortization schedule, during the l i f e o f the Loan:
Payment Date Installment Share Dec 15,2008-Dec 15,2025 2.78%
On June 15,2026 2.70% 0.75% on undisbursed loan balances beginning 60 days after the loan i s signed. 1% o f the loan amount, less waiver to be determined by the Board on 8/3/06. Single tranche for the full amount o f the loan, minus the front-end fee. The proposed Programmatic Development Loan i s part o f a programmatic series o f three to four DPLs intended to support the fundamentals and three main pillars o f the government’s development plan “Vamos Guatemala”. Within this framework, i t focuses on actions aimed at improving the business and investment climate, creating fiscal space for greater social investment and achieving key milestones in improving the fiduciary environment. Other key areas for growth identified in education, health and nutrition and rural economic infrastructure are supported within the CAS program through investment operations, which build on the ongoing portfolio o f interventions in these areas. Future D P L operations are expected to maintain the focus on the growth agenda (trade, investment climate, public private partnerships, access to credit by SME), social sector financing, transparency and efficiency in public spending. This second loan o f the program builds on the successful first operation. I t continues to focus on strengthening the international trade and business environment, for which it draws o n findings set forth in the CEM, PER, DR-CAFTA studies, as well as the Investment Climate Assessment. The C E M and PER, together wi th the Poverty Assessment, also form the basis for the emphasis on means o f expanding social spending and investment. D P L I1 will likewise continue to emphasize transparency and efficiency in public spending by including fol low up actions on public financial management and procurement to ensure the gradual implementation o f measures as prescribed in the CFAA and CPAR.. The Key benefits expectedfiom the program are:
Meeting fiscal and financial needs. This proposed loan would help meet the Government’s objective o f providing financing on more favorable terms and diversifying financing sources for i t s 2007 budget. This, in turn, would support the Government’s concurrent goals o f maintaining fiscal stability and addressing social needs through increased and more efficient spending. Improving the outlook for economic growth. The loan supports a broad agenda o f measures anchored around Guatemala’s efforts to deepen its trade and regional integration agenda, including i t s participation in DR-CAFTA. The agenda includes key actions o f the complementary agenda o f pol icy and institutional reforms to ensure that Guatemala can fully benefit from the opportunities o f trade and
Risks
Operation ID Number
greater integration into the world economy. Key complementary actions include measures to facilitate the expansion o f trade and investment levels, improvements in the investment climate, addressing infrastructure investment and services, and promoting innovation and technology. Increasing the eficiency and transparency ofpublic sector management. The loan supports public sector modernization efforts aimed at improving the efficiency o f public expenditures, strengthening governance and fighting corruption wi th a specific focus on government procurement and financial management. Efforts in these areas are also expected to foster an environment more conducive to investment and growth.
The operation i s subject to four main risks during the implementation o f the D P L series:
Political gridlock, given a divided Congress which creates obvious risks for the timely passage and subsequent implementation o f the Government’s legislative agenda, Societal tensions related to the country’s post-conflict status, especially around controversial areas l ike tax reform, continued trade liberalization, promotion o f increased private participation in infrastructure, and issues surrounding property rights and land, Exogenous shocks related to natural disasters, which could derail efforts to attract investment and necessitate unanticipated spending for emergency assistance and reconstruction, and Macroeconomic risks due to external or domestic market volatility, (e.g., domestic financial market risks, l ow commodity prices, persistently high o i l prices, global recession, political difficulties in the U.S. for DR-CAFTA ratification, unfavorable conditions in financial markets) that could affect the economy negatively.
PO94897
GUATEMALA: SECOND BROAD-BASED DEVELOPMENT POLICY LOAN Table of Contents
I . Country Context .................................................................................................................................. 1 I1 . Economic Context and Recent Macroeconomic Performance ....................................................... 2
A . Growth and Macroeconomic Management: Recent Evolution .................................................... 3 B . Raising Tax Revenues: A Continuing Challenge ......................................................................... 5 C . Government Priorities and Development Plan ............................................................................. 8
I11 . World Bank Country Assistance Strategy (CAS) .......................................................................... 9 I V . Restoring Broad-Based Growth: Progress and Challenges ........................................................ 12
A . Promoting Growth and Strengthening the Investment Climate ................................................ 13 A.1 Promotion o f Trade Expansion ............................................................................................ 13 A.11 Promoting Investment and Business Efficiency ................................................................. 14 A.111 Property Rights .................................................................................................................. 16 A.IV Strengthening Infrastructure through Private Sector Participation .................................. -16 A.V Financial Sector Strengthening, Modernization and Deepening ....................................... -18
B . Enhancing Capacity for Priority Spending ................................................................................. 19 C . Public Expenditure Transparency and Management .................................................................. 20
V . The Proposed Loan .......................................................................................................................... 22
B . Fiduciary Aspects ....................................................................................................................... 27 C . Loan Administration ................................................................................................................... 28 D . Monitoring and Evaluation Arrangements ................................................................................ -28 E . Consultation and Distributional and Environmental Impact ...................................................... 29
A . Progress in the Broad-Based Growth Agenda ............................................................................ 22
F . Risks ............................................................................................................................................ 30 Annexes Annex 1 Government o f Guatemala Plan to be supported by the DPL series .
Results Framework .......................................................................................................... .3 2-35 Annex 2 Letter o f Development Policy (original in Spanish) ........................................................... 36-41
Annex 3 Guatemala at a Glance ........................................................................................................ 47-48 Annex 4 Debt Sustainability in Guatemala ....................................................................................... 49-5 1
Translation into English .................................................................................................... .4 2-46
Map (#33413) ................................................................................................................... inside back cover
Boxes Box A Key Provisions o f the Law for the Strengthening o f Tax Administration ., .................................. -8 .
. . Box B Guatemala Country Environmental Analysis . Preliminary Findings ......................................... 12 Box C The Relevance of S I AF ................................................................................................................ 21 Box D Links between DPL Series and Prior Analytical and Fiduciary Work ........................................ 24 Box A4.1. The IMF and Debt Sustainability in Guatemala .................................................................... 51
Charts Chart 1 a Central Government Tax Revenues (Millions Quetzales 1995 prices) ....................................... 6
Chart 2 Diagram o f “Vamos Guatemala!” ............................................................................................... 8
Tables Table 1 Table 2 Guatemala - Key Macroeconomic Indicators .............................................................................. 5 Table 3 Comparison o f Original Triggers for DPL 2 and Prior Actions for D P L 2 .......................... 25-26 Table 4 D P L I11 Triggers ......................................................................................................................... 27 Table A4.1. Key Macroeconomic Assumptions ....................................................................................... 49 Table A4.2 Guatemala - External Debt Exposure Indicators .................................................................. 50
Chart l b Central Government Tax Revenues (percent o f GDP) ................................................................ 6
Central America, Key Macroeconomic Indicators, 2005 ............................................................ 2
GUATEMALA
SECOND BROAD-BASED GROWTH DEVELOPMENT POLICY LOAN
I. COUNTRY CONTEXT
1. With a multi-ethnic population of about 13 million and a per-capita GNI of about $2,350, Guatemala is the largest economy in Central America. While a source o f cultural strength and r ich historical heritage, Guatemala’s ethnic diversity has also unfortunately been accompanied by a pattern o f conflict and exclusion since colonial times. In the latter ha l f o f the 20th century, long-standing socio-political and economic tensions sparked a debilitating 36-year c iv i l war, which ended in 1996 with the signing o f a set o f Peace Accords between government and guerrilla leaders, fol lowing protracted negotiations.
2. The 1996 Peace Accords marked an important turning point in Guatemala’s development, both ending the civil war and setting out targets to reverse the country’s historically exclusionary pattern of social and economic development. The Accords set national targets in four main areas: (i) resettlement, reincorporation and reconciliation, (ii) human development, (iii) productive and sustainable development, and, (iv) modernization o f the state and improved governance. In the ten years since the signing o f the Accords, progress towards achievement o f the specific targets contained therein has been uneven, with major gains in some areas (e.g., reductions in the military, decentralization, coverage-albeit not q u a l i t y - o f social and basic services) but slower-than-hoped-for progress in others (accelerating economic growth, raising tax revenues to 12% o f GDP, land registrationhedistribution and reducing crime/violence).
3. Largely as a result of the country’s historical legacy, poverty and inequality are high and social indicators (health, nutrition, education) are low relative to the country’s average income. About 56 percent of al l Guatemalans l ived in poverty in 2000 and about 16 percent in extreme poverty, despite a decline in the late1990s when growth rates reached 4 percent or about 1.4 percent per capita on average. The Government is currently undertaking a new living standards measurement survey which will provide updated poverty and welfare statistics by late this year. An economic slowdown in the first years o f the mil lennium (2001-2003) i s l ikely to have dampened the rate o f poverty reduction, although rising remittance flows from family members working abroad probably offset this for many households.
4. I n order to reduce extremepoverty by halfbetween 2000 and 2015 and thus accomplish the first of the Millennium Development Goals, Guatemala needs to both accelerate economic growth and increase investment in basic social and infrastructure services to help ensure that the benefits of growth reach the poor. Calculations presented in the Bank’s 2004 Country Economic Memorandum (CEM) indicate that to meet the extreme poverty MDG by 2015, the economy needs to grow at a per capita rate o f about 2-2.4 percent or approximately 4.5-5 percent per annum in real terms. In addition to growth, i t i s critical to continue to increase investment in human development (education, health and nutrition) and infrastructure to facilitate the participation o f the poor in the growth process.
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5 . An important impediment to steady progress on growth, poverty reduction and strengthening of public institutions since the Peace Accords has been the lack of political and policy continuity. This, in turn, is related to the short pol i t ical cycle, immature political institutions and political and social fragmentation-a legacy o f the country’s colonial history and c iv i l war. For example, the current 158-member congress i s made up o f representatives o f three “major” parties (including President Berger’s party, GANA) each with between 25-30 seats, 3 other parties with around 10 seats each , and remaining seats split among a number o f smaller parties, most with under 5 seats. Presidents are elected for 4-year terms, but given a constitutional limit to a single term, positioning by parties and candidates for the next election begins early, with obvious difficulties for passage o f legislation sponsored by the executive. There have been a number o f efforts to forge longer-term consensus o n development priorities and policies through national dialogues on key issues such as fiscal reform, the MDGs/poverty reduction and land, but the impact o f these has been limited to date.
11. ECONOMIC CONTEXT AND RECENT MACROECONOMIC PERFORMANCE
6. The structure of Guatemala’s economy has shifted substantially since the 1980s, moving from a principally agriculture (coffee-dominated) base, to a much more diversified economy, with increased emphasis o n commerce, tourism and financial services. Commerce and services together accounted for about 30% o f GDP in 2004, fol lowed by agriculture (about 23% o f GDP) and industrial manufacturing (13% o f GDP). Maquila, mining, energy, tourism, financial services and transport/ communications were the fastest growing sectors. In terms o f employment, however, agriculture remains dominant, accounting for about 36% o f employment, versus about 22% and 17% in commerce and industry respectively. Consumption remains dominated by the private sector (82% o f GDP), supported in part by steady growth in worker’s remittances, while public sector consumption is small, at about 8% o f GDP. Likewise, gross domestic investment (1 9-20% o f GDP) i s dominated by the private sector-accounting for about four-fifths o f the total or about 16% o f GDP.
GNI per capita (US S) 2,330 2,450 1,170 890 4,820
Real GDP growth rate (%) 3.2 2.8 4.2 4.0 4.2
Fiscal Deficit as % o f GDP 1.5 2.9 3.0 2.0 2.8
Public Debt as % o f GDP 19.4 40.0 72.4 135.1 55.8
Public External Debt (USS bill) 3.6 4.7 4.5 5.3 3.6
Int’l Reserves as % o f Public External Debt 105.1 38.8 45.2 10.1 63.7
Current Account Deficit as YO o f GDP 4.1 3.9 0.5 14.2 4.8
Average Inflation Rate YO 8.6 4.7 7.7 9.6 13.8
Nolet Preliminary. ma. = Not Available. Source: Consejo Monetario Centroamencano, Bank of Guatemala, World Bank.
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7. Since the Peace Accords of 1996, Guatemala has also made notable progress in entrenching macroeconomic stability through the adoption of disciplined fiscal and monetary policies, and key banking reforms. This i s evidenced in part by the economy’s ability to weather significant shocks including the recent o i l price shock and the damage caused by tropical storm Stan which struck the country in October 2005. Table 1 above provides a comparison o f key economic indicators for Guatemala and its Central American neighbors. As the table shows, Guatemala compares favorably o n a number o f key indicators including public debt, fiscal management and external position. Inf lat ion though not out o f l ine with most neighbors, i s a key focus o f Government attention. Currently, the Central Bank is targeting an inf lat ion rate close to 6% for 2006-07, supported through gradual increases in benchmark interest rates (see para 14).
A. Growth and Macroeconomic Management: Recent Evolution
8. For several decades, dating back to the 1960s, Guatemala’s economy has been characterized by low volatility and inflation, but also lower growth, when compared with LAC regional averages. Growth was especially poor in the 1 9 8 0 ~ ~ when per capita income declined drastically due to regional macroeconomic instability and the intensification o f Guatemala’s c iv i l war. In the 1 9 9 0 ~ ~ the Guatemalan economy posted an annual average growth rate o f slightly over 4 percent per annum (1.4 percent per capita). Whi le this pace was a dramatic improvement over the previous decade, i t was nonetheless a somewhat disappointing outcome given high growth expectations fol lowing the cessation o f the c i v i l war in 1996 and major structural reform efforts-in trade and financial sector liberalization, private participation in telecommunications and power and increased spending and policy improvements in education and health.
9. I n the first years of the current millennium (2001-03), growth in Guatemala was once again negative in per capita terms, due both to external and internal factors. Internally, the investment climate was negatively affected by a widespread lack o f private sector confidence in the former government associated with unpredictable changes in public policy, deterioration in governance and a weakening o f the rule o f law. On the external front, the terms o f trade were negatively affected, due mainly to a drastic and long-lived collapse in the wor ld price o f coffee. Coffee export revenues fel l from close to $580 m i l l i on in 1999 to $268 mi l l ion in 2002. Rising o i l prices fol lowing 9/11 have also tended to depress growth. In addition, a slow-down in the world economy (including the U.S. economy) in 2001-02 resulted in falling demand for Guatemalan exports (e.g., maquila products) and affected manufacturing activity through investor sentiment and other channels.
10. The Berger Administration, which took office in January 2004, placed high priority on reigniting growth as a key pillar of its “Vamos Guatemala!” plan to achieve the economic and, especially, poverty reduction and social goals identified in the 1996 Peace Accords. I t s strategy for achieving and sustaining growth rates o f 4-5% i s well-aligned with the findings and recommendations o f the Bank’s Country Economic Memorandum (completed in early 2004) and focuses on: (i) maintaining macroeconomic stability while continuing efforts to raise fiscal revenues; (ii) further expanding international and regional trade; (iii) improving the business climate-including reducing red tape, increasing infrastructure investment and strengthening property rights; and (iv) further strengthening the financial sector. The Vamos Guatemala! plan,
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described more fully below (section C), also includes a number o f other important elements aimed at directly addressing poverty and inequality as wel l as other Peace Accords goals.
11. I n the two years since implementation of the Berger Administration’s development plan began, the economy is showing strong signs of recovery. Reflecting, inter alia, greater business confidence in the new administration, the prospects for increased trade openness (DR- CAFTA, regional integration), improved public sector transparency and a rebound in the prices o f traditional exports, economic growth (just) surpassed population growth for the f i rs t time in four years, reaching 2.7% in 2004. In 2005 growth rates rose further to 3.2%, despite high petroleum prices and the widespread damage and business losses due to Tropical Storm Stan.
12. Private investment has increased substantially since the start of the Berger Administration, growing at 8.6% and 11.2% respectively in 2004 and 2005. By contrast, average growth in private investment during the four years o f the previous administration (2000- 2003) was negative (-0.4%). For 2006, growth rates are expected to rise to 4.4% and reach 4.7% by 2007 according to off icial estimates-Le., about 1.8% and 2.1% per capita respectively. More conservative estimates indicate growth will be closer to 4% per annum for the 2006-07 period, s t i l l broadly in l ine with the Berger Administration’s “Vamos Guatemala! ” development plan. If these growth rates are indeed realized-and sustained-the long-run impact on poverty reduction i s l ikely to be significant.
13. The balance of payments also strengthened in 2004-05, with strong growth in exports and international reserves of about 5 months of imports. Non-traditional exports have been performing wel l for several years with strong growth in the maquila sector and a dynamic non- traditional agriculture export sector (e.g., flowers, seasonal vegetables, fruits and organic crops). Between 2004 and 2005, non-traditional exports grew by a further 11%, from US$1.9 b i l l ion in 2004 to US$2.1 b i l l ion in 2005, with around three-quarters o f this growth derived from increased sales to Central American markets. Traditional exports, fol lowing a period o f decline, also increased dramatically over the 2004-05 period-by nearly 24%&driven by rebounding world prices for coffee and sugar. Imports also rose rapidly over the past 2 years contributing to a still- high trade deficit o f about 15% o f GDP. However, the current account deficit, helped by worker remittances (9.3% o f GDP in 2005) and capital inflows, f e l l slightly f rom 4.4% to 4.1% between 2004 and 2005. Overall, Guatemala’s external position remains stable, given the country’s l o w external debt and strong position with respect to international reserves. This i s reflected in recent upgrades in country r isk ratings by Fi tch (to BB+ with a positive outlook) and Standard & Poor’s (to BB with stable outlook).
14. Fiscal policy remained prudent in 2004-05 while monetary policy slowly tightened in response to higher-than-anticipated inflation. The prudent fiscal pol icy o f successive Guatemalan governments is reflected in one o f the lowest public debt-to-GDP ratios in the region at 19.4% in 2005. Since taking office in January 2004, the Berger administration has maintained fiscal discipline as illustrated by the 2004 and 2005 fiscal deficits o f 1% and 1.5% o f GDP respectively. For 2006 and 2007, budget deficits o f 1.8% and 1.6% are projected although the 3- year budget framework approved by Congress in late 2005 allows for a higher deficit (o f 2.5%) in 2006 to allow for reconstruction needs associated with Tropical Storm Stan. In contrast to
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Table 2: Guatemala-Key Macroeconomic Indicators* ( % o f GDP, unless otherwise indicated)
National Accounts and Prices Real G D P (%) change 2.1 2.7 3.2 4.4 C P I (%) change 5.5 7.5 9.1 7.4 Real exch. Rate (% change, S/Q) -3.5 5.6 2.6 1.7 Central Government Finance Tota l revenues 11.1 11.0 10.7 11.2 Of which, Tax Revenues 10.4 10.4 10.1 10.2 Total expenditures 13.4 12.0 12.1 13.0 O f which, Social Expenditure 5.3 5.0 5.4 6.1 Def ic i t (-) Surplus (7) -2.3 -1.0 -1.5 -1.8 Balance of Payments Current Account Balance -4.2 -4.4 -4.1 -3.9
Trade Balance -14.7 -16.0 -15.4 -15.0 Capital Account 6.4 6.6 4.8 4.4
Trade Performance Reserves (in months o f imports o f GNFS) 4.5 4.8 4.7 4.4
Merchandise Exports (fob) 12.3 12.6 12.2 12.2 Tota l Exports (YO change) 6.5 11.3 15.2 12.7 Traditional Exports (% change) 1.5 2.4 23.6 4.4 N o n Traditional Exports (% change) 9.7 16.5 10.9 17.3
Merchandise Imports (cif) 27.0 28.6 27.6 27.2 Tota l Imports (% change) 6.6 16.2 13.1 10.1
Public and Publicly Guaranteed Debt Tota l Public Debt 19.1 19.5 19.4 19.0
Domestic Debt 5.6 5.9 8.2 7.2 External Debt 13.5 13.6 11.2 11.8 External Public Debt Service / Exports o f GNFS 7.8 9.7 9.0 8.3 * Source: Bank o f Guatemala, Ministry o f Finance and Bank Staff estimates.
fiscal policy, the monetary framework was strained in 2004-05 in the face of: (i) the appreciation o f the quetzal given the global weakening o f the U S dollar; (ii) strong inf lows o f private capital and remittances; and (iii) the cost-push from higher o i l prices. In this context, the authorities adopted a relatively accommodative monetary stance (despite a rise in inf lat ion to 9.2% in 2004) in an effort to contain second-round effects from the o i l price shock and to discourage additional capital inf lows and further appreciation o f the quetzal. Towards the end o f 2004 and in 2005 the central bank began to implement modest increases in interest rates, with the result that inflation came down to 8.6% in 2005, though s t i l l wel l above the target range o f 6 (+ or - 1) percent. Recent inflation data for M a y 2006 indicate a further downward trend at 7.6% compared to 8.5% 12 months earlier. Banguat (the central bank o f Guatemala) has continued to gradually raise its seven-day benchmark interest rate, most recently to 4.75 percent in June 2006.
B. Raising Tax Revenues: A Continuing Challenge
15. A key challenge for Guatemala i s raising tax revenues up to the target of 12percent set in the Peace Accords as well as the 11 percent target for its tenure set by the Berger Administration. Although not a major factor in the maintenance o f fiscal stability, given the country’s strong track record o n fiscal discipline (see Debt Sustainability Annex), higher tax
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16. Movement on tax policy has had a “stop-go” character under the Berger Administration, as it traditionally has done in Guatemala. Throughout recent history, powerful vested interests o n both the right and the left have consistently opposed tax initiatives in Congress or, failing that, launched court challenges to achieve the strike down o f taxes, appealing to Art icle 243 o f the constitution, which protects taxpayers f rom payment o f taxes which exceed their capacity. The Berger Administration has been forced to play catch-up to recover lost ground in i t s efforts to increase tax revenues as a result o f two major setbacks handed down by the Constitutional Court (CC). These include: (i) a December 2003 C C ruling eliminating the minimum corporate tax (IEMA), which had generated about ha l f o f a l l revenues from enterprises in 2003; and (ii) a December 2004 C C injunction against the excise tax o n fuel. In response to the first o f these decisions, which would have reduced revenues to under 9% o f GDP, the Government promoted a new tax package (approved in watered-down form by the Congress in June 2004) that attempted to compensate for the loss o f the IEMA through reintroduction o f excise taxes o n alcoholic beverages, introduction o f a turnover tax as an option under the corporate tax regime and reintroduction o f a lower, and differently structured presumptive minimum corporate tax (IETAAP). This tax package, together with major efforts to improve tax administration (see below) resulted in tax revenue collections o f 10.4% o f GDP in 2004.
17. Tax revenues for 2005, however, fell slightly to 10.1% of GDP from 10.4% in 2004. The decline was largely attributable to three factors: (i) a one-off opportunity provided to corporate tax-payers under the 2004 tax law to pay 2005 presumptive taxes in 2004 with a small discount-thereby transferring about 4600 mi l l ion o f 2005 revenues to 2004; (ii) a 73% drop in the collection o f the petroleum excise taxes which had been struck down by the C C at the end o f 2004 and could not be collected until a revised version was approved by Congress in mid-2005; and (iii) the payment o f overdue VAT refunds to exporters, significantly reducing the stock (0.5% o f GDP) inherited from the previous administration in 2003.
18. I n contrast to the tax policy arena, reforms in tax administration have been progressing strongly over the past two years, supported in part by a Bank TA loan and by the IMF. Under the current administration, the Tax Administration Superintendence (SAT) has made significant progress in implementing strengthened policies and procedures for tax collection, in l ine with i t s strategic plan. Among the main areas in which progress has been achieved are: (i) creation o f a Large Taxpayers Coordination unit, responsible for monitoring the country’s 300 largest taxpayers and a Special Taxpayer unit to administer the subsequent 2,700 largest taxpayers; (ii) the designation o f “account officers” to manage taxpayer files; (iii) required electronic filing by the 3,000 largest taxpayers using SAT software and penalties for banks accepting paper returns for taxes owed in excess o f Q10,OOO; (iv) penalizing o f taxpayers for noncompliance with deadlines, by requiring them to make partial payments based o n previous returns; and (v) electronically linking the waybills o f air and sea carriers to customs declarations to combat smuggling. In addition to these measures already underway, the Government has pushed forward a new law on tax administration-approved by Congress in June 2006-termed the “Law for Strengthening o f Tax Administration” which seeks to broaden the taxpayer base by combating evasion and eliminating loopholes. The L a w (see B o x A) i s a major step forward in improving tax administration and, consequently, revenues. Implementation
7
of the law is expected to result in increased revenues o f around 0.3% o f GDP (IMF estimate) over time.
Box A: Key Provisions of the Law for the Strengthening of Tax Administration, June 2006
0
0
VAT withholding at 6 5 % for exports, 15% for large taxpayer’s purchases, 2 5 % for government agency purchases, 15% for credit card purchases, and 15% for al l other goods. A new simplified VAT system for s m a l l taxpayers, involving monthly payments Requiring o f payment o f invoices over Q50,OOO by bank means o f payment (checks, electronic transfers, credit and debit cards etc.) Authority to seize vehicles found to be transporting contraband Authority to revoke tax registration o f “suspended taxpayers”, many o f whom collude to enable false VAT rebate claims Control by SAT o f the printing o f tax invoices and other fiscal documents to reduce the use o f false invoices.
C. Government Priorities and Development Plan
19. The current Government, in office since January 2004, has affirmed its commitment to the achievement of national goals established in the 1996 Peace Accords in the political and human rights, as we l l as socio-economic, spheres. I ts pol icy document, Vamos Guatemala! (Let’s go, Guatemala!), launched in August 2004, lays out an ambitious program for building social solidarity, competitiveness and trust (chart 2).
Chart 2: Diagram of “Vamos Guatemala ! ’’
.SOCIAL PROTECTION *EDUCATION AND OPORTUNITY CREATION .INCREASE IN RURAL PRODUCTION CAPACITY *SOCIAL PARTlCl PATI ON *GUATEMALANS ABROAD
*PUBLIC INVESTMENTS *PUBLIC AND PRIVATE ALLIANCES *PRIVATE INVESTMENTS *PROMOTION OF EXPORTS *SUPPORT AND DEVELOPMENT OF MSMEs *PRODUCTIVITY INNOVATION AND INVESTMENT CLIMATE CONSUMER PROTECTION
*ENVIROMENTAL CAPACITY STRENGHTENING *DECENTRALIZED ENV MANAGEMENT .PROTECTED AREAS MANAGEMENT *PRESERVATION OF SOCIAL & CULTURAL HERITAGE
I w
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20. Vamos Guatemala comprises four main areas for action during the Berger Administration’s term. At the base are a set o f fundamentals aimed at addressing the foundations o f the national development program which comprise: a stable macroeconomic framework, security (including both citizen security with respect to crime and violence and legal security-access to speedy justice); and improved governance and public sector institutions. Resting on this foundation are three strategic pillars as follows:
Guate Solidaria-aimed at promoting social solidarity, reduced inequality and greater economic integration through strengthening social protectiodnutrition programs for vulnerable groups, accelerating investments in education and health and development o f social-economic infrastructure in indigenous and rural areas as a means o f reducing inequality and creating opportunities;
0
0 Guate Crece/Compite-aimed at accelerating growth to above the 4 percent observed in the 1990s, this component o f the strategy emphasizes trade expansion, financial sector strengthening, improved investment climate, export promotion, public-private partnerships for investments in housing and infrastructure (principal roads, ports and airports, renewable energy), development o f high potential sectors (e.g., tourism and forestry), support for MSMEs and greater attention to quality standards and technological innovation;
0 Guate Verde-aimed at promoting sustainable development including building central and sub-national capacity for environmental analysis, assessment and monitoring, strengthening protected areas management, conserving bio-diversity and preservation o f social and cultural heritage.
In addition to the above components, and recognizing the constraints imposed by the small size o f the state, the Vamos Guatemala strategy formally incorporates a cross-cutting emphasis o n the development o f public-private partnerships (with business, NGOs and community groups) across key areas o f public action.
111. WORLD BANK COUNTRY ASSISTANCE STRATEGY (CAS)
21. The Bank’s CAS for Guatemala, covering the per iod FY05-08, was developed within the Vamos Guatemala program, which represents a satisfactory framework for moving forward the Bank’s core objectives of (i) reducingpoverty and inequality; and (ii) fostering sustained, equitable growth. The strategy adopted by the Bank is to move forward with a balanced program o f roughly equal amounts o f investment lending and quick-disbursing support in the base case, the former focused on interventions aimed directly at improving key social and economic services, infrastructure and governance and the latter focused on reigniting equitable growth. This strategy was predicated on the assessment that Guatemala’s long track record o f sound macroeconomic management, coupled with the Berger administration’s commitment to promoting equitable growth, strengthening public institutions, improving the country’s competitive position and addressing long-standing social issues, makes the country a good candidate to receive DPL assistance at this time.
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22. To ensure that Bank support i s related to steady policy performance by the Government, the base case of the CAS includes a built-in range from $460 million to $660 million, linking processing of each DPL in the series of three to continued progress on a few strategically signijkant policy objectives. These areas include fiscal performance, improvements in governance and public sector management, social sector advances, and progress on trade, financial sector reforms and the business climate, as key drivers o f growth. The country has made notable progress overall on these strategic areas, leading to the judgment that it is appropriate to proceed at this time with the second operation o f the DPL series. With respect to fiscal performance, deficits have been maintained at l o w levels as anticipated, but as previously discussed (paras 15- 1 8), the Government has not been able to make headway in the effort to raise total revenues as a share o f GDP, due to political opposition, unfavorable constitutional court rulings o n taxes and other factors. Whi le the DR-CAFTA is expected to affect revenues negatively due to a drop in tariffs, improvements in domestic tax collections are expected to offset these declines at least partially and the government i s expected to maintain i t s conservative fiscal stance. In al l other areas, performance has met or exceeded targets. For example, advances in transparency and public financial management have far surpassed expectations, with nearly al l central government agencies using a real-time, internet-based system for financial management (SIAF) and procurement (Guatecompras). Moreover, expansion o f the systems to the municipal level has expanded more rapidly than anticipated, with about 110 and 260 (of 33 1) municipalities using S I A F and Guatecompras respectively, as against a target o f 80 for end 2007. Social spending has also exceeded expectations, reaching 5.4% o f GDP by end 2005 versus a target o f 5.5% for end 2007 and progress i s being made o n improving education quality and health and nutrition for vulnerable groups, in part with assistance from Bank investment projects. In the growth and competitiveness arena, there have been continued advances in: (i) trade openness, both international and regional; (ii) financial system strengthening (electronic payments system in place, supervision o f financial conglomerates to curb related party lending, financial sector consolidation supported by Bank lending); (iii) reduction o f red tape and transactions costs and time in key areas such as customs, business licensing and property registration-though much more i s needed; and (iv) public-private partnerships in key infrastructure sectors and development o f the legal framework for concessions for major roads projects.
23. Consequently, a number of strong factors warrant proceeding with the loan. To summarize, these factors include: (i) the government’s persistent efforts, in the face o f a dif f icult political context, to strengthen tax administration, raise public revenues and to lay the groundwork for future increases in taxes through developing political and social consensus on public investment goals and priorities; (ii) despite the lack o f progress in raising the tax ratio, the government has been able to achieve i ts objective o f increasing pro-poor social spending as a share o f GDP within a framework o f fiscal prudence, by making diff icult cuts in military and administrative spending and reallocation o f existing resources; and (iii) the strong progress in al l areas o f the DPL other than the tax ratio, with performance exceeding expectations in key areas such as improved governance and transparency.
24. DPL series, with special reference to the second loan cfor US$lOO million).
This document lays out the program for broad-based growth to be supported by the The quick-
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disbursing support provided through the DPL series i s synchronized with the government’s annual budget cycle and would enable the Government to reduce its external financing costs by partially replacing higher cost bonds issued in the international capital markets. The design o f the DPL series, described in detail in the remainder o f the document, draws on an extensive body o f recent analytical work undertaken by the Bank. Chief among these are the 2003 Guatemala Poverty Assessment (GUAPA), the C E M (2004) the Investment Climate Assessment (2004), the regional DR-CAFTA Study (2005), the Public Expenditure Review (2005) and joint CFAA- CPAR (2005).
25. The CAS envisages that the DPL series in Guatemala will be accompanied by selective investment lending focused mainly on reducingpoverty and inequality in key areas where the Bank has global expertise and which build upon prior successful implementation o f innovative operations in Guatemala. These include projects for (i) education quality and secondary education expansion; (ii) maternal and chi ld health and nutrition; (iii) rural economic development, including infrastructure, technical support and decentralized planning; (iv) land administration (cadastre and titling); (v) infrastructure development through a public-private partnership (PPP) and guarantee approach; and (vi) governance and public sector management improvements. In order to be responsive to the government’s needs, and taking into account the election cycle, investment lending wil l be clustered in FY06 and FY07.
26. I n addition to lending, the CAS encompasses other significant analytical work in support of Vamos Guatemala, including a Country Environmental Analysis (CEA), Poverty and Social Impact Analyses (PSIAs) in FYs 05 and 06 and an update of the Poverty Assessment (FY07). The PSIAs are geared to support key r e f o m s included in the DPL series, ensuring that social impacts are identified and mitigating actions taken as necessary. The f i rs t PSIA was carried out in the first ha l f o f 2005, providing a detailed analysis o f the potential income and welfare impact o f DR-CAFTA tar i f f reductions o n producers and consumers and incorporated into a chapter o f the regional DR-CAFTA report that was widely disseminated and discussed in Guatemala. A new PSIA currently in near-final draf l i s analyzing impacts o f the trade agreement in greater depth on Guatemala’s indigenous population (both urban and rural). In addition, a PSIA o n the distributive impact o f Guatemala’s tax regime-including fiscal reforms supported by the f i rst DPL-was completed in FY05 and disseminated to range o f opinion-makers from c i v i l society and think-tanks. The C E A (Box B) focused o n analyzing the efficiency and effectiveness o f Guatemala’s environmental pol icy and institutional framework to address current and future environmental issues with special emphasis on those arising from trade liberalization and infrastructure investments. The report has recently been sent to Government for review and i t s findings will be supported through ongoing Bank operations and/or grant support. The Poverty Assessment Update, based on the Government’s new 2006 living standards survey to analyze trends in poverty and inequality, will also inform Bank operations design.
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Box B: Guatemala Country Environmental Analysis-Preliminary Findings Guatemala has made significant progress in establishing a solid legal and institutional framework for environmental protection. This fiamework provides a sound - but still incomplete - basis for developing effective environmental policies. The country amended the Constitution to give legal importance to environmental issues; passed an environmental law and created the National Environmental Commission; passed a law o n protected areas and established the National Council o f Protected Areas; created the Environmental Secretariat; expanded significantly the regulatory framework; created the Ministry for the Environment and Natural Resources; and launched an environmental agenda (Guate Verde 2004-2008) aimed at ensuring the long-term sustainability o f the country’s development program through systematic attention to environmental considerations. Despite these institutional and legal improvements, Guatemala s t i l l faces considerable environmental challenges, including: i) over-exploitation o f water resources; ii) water pollution; iii) deforestation; iv) soil and land degradation; and v) vulnerability to natural disasters.
Given the new challenges facing the country wi th the signing o f DR-CAFTA and the proposed scaling-up o f infrastructure investments, there i s a need to accelerate consolidation o f institutional and organizational tasks in Guatemala. Based on the best regional and international practices, the report concludes that mainstreaming environmental considerations into sectoral policies rather than scaling-up the operations o f environmental agencies i s the best way to prepare Guatemalan institutions for current environmental challenges and those i t w i l l encounter in the future. Furthermore, the report concludes that if MARN concentrates on its core fimctions and works in coordination wi th other environmental agencies, ministr ies, and municipalities, most o f these challenges can be met in a short time with minor adjustments to the existing framework o f environmental management. Two important issues to address are: i) improve the effectiveness and efficiency o f the Environmental Impact Assessment system (EM), and ii) delegate some o f MARN‘s responsibilities to other ministr ies, environmental units and municipalities.
The report also emphasizes the need to provide the right incentives to economic agents (e.g., promoting compliance through achievable requirements but with credible sanctions to violators, rather than trying to change behavior by threatening with criminal charges that are ultimately not enforced) and to engage civ i l society by improving information and participation mechanisms. In the long term, deeper reforms to the legal framework for water and transparency would be needed, but they need longer periods o f maturation, consensus building, and .negotiations, and ultimately congressional approval.
IV. RESTORING BROAD-BASED GROWTH: PROGRESS AND CHALLENGES
27. Besides maintaining macroeconomic stability, Guatemala’s key challenges in restoring broad-based growth are: (i) taking advantage o f expanding trade opportunities and ensuring that SMEs can share in those opportunities, (ii) strengthening the climate for both domestic and foreign investment and business, (iii) modernizing property rights, (iv) addressing infrastructure bottlenecks to growth, (v) continuing to strengthen and deepen the financial sector, (vi) enhancing the capacity for efficient and effective poverty-oriented public spending-especially for education and health, and (vii) strengthening public sector management and transparency. The principal issues and government plans with respect to each o f these areas are discussed further below in some depth as they form the background to the specific actions supported by this DPL series. For ease o f reference they are organized in the same order as they appear in the DPL matrix, for which they form the background. Controlling the high levels of crime and violence i s another key element o f the effort to promote growth (as wel l as security) in Guatemala. Issues in this area are not described here as they l ie beyond the scope o f this DPL operation. I t should be noted, however, that Government is currently working with a number o f bilateral donors (including Japan, Spain and USA) to implement an integrated strategy to address this problem, within a regional context.
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A. PROMOTING GROWTH AND STRENGTHENING THE INVESTMENT CLIMATE
A.1: Promotion of Trade Expansion
28. The Berger Administration regards international trade expansion as a principal driver of growth in Guatemala in the short- to medium-term and has expended considerable political and institutional capital on expanding trade and investment opportunities. The Guatemalan Congress ratified the US-Central America-Dominican Republic Free Trade Agreement-DR-CAFTA-in March 2005 (a prior action for DPL I). Over the past year, the focus has been on passing the C A F T A Implementation Law, an omnibus law involving amendments to existing legislation in a number o f areas related to C A F T A provisions. Fol lowing a tough set o f negotiations init ial ly with USTR and subsequently with domestic interest groups and congressional blocs, the C A F T A implementation law was f inal ly approved in early June 2006 and C A F T A became effective o n July 1, 2006. Free trade agreements are now also in place with Mexico and Taiwan, and discussions with Brazil, Canada, Chile, Colombia and the European Un ion are ongoing. T o ensure that opportunities opened up by the new agreements are widely disseminated and to help Guatemalan businesses understand requirements to access international markets, the Government has established an FTA Management and Trade Compliance Office. I t has also taken steps to facilitate and promote foreign investment and support quality improvements in Guatemalan products, as discussed further below.
29. Guatemala is also spearheading regional integration efforts within Central America, with steps already being taken towards a Central America customs union, through the harmonizing and simplification of customs procedures with neighboring countries, most notably El Salvador and Honduras. Specific achievements to date in this area include: (i) harmonization o f about 95% o f customs duties among al l Central American countries-with work ongoing for the remainder; (ii) use o f identical customs forms (FAUCAS) for by Guatemala, Honduras and El Salvador; (iii) reduction o f customs clearance times to 2 hours (against 1-2 days previously) for air and road cargo between Guatemala, El Salvador and Honduras through adoption o f an electronic filing system and a reduction in physical inspections for goods originating in these cooperating countries; (iv) implementation o f a pi lot scheme to eliminate customs inspections at the national borders for goods cleared through specified Central American border entry points'; and (v) provision for customs inspections by other Central American countries at elected regional ports and borders.
30. Poverty and Social Impact Assessment (PSIA) conducted in 2005 and 2006, with support from the Bank, indicate that the net effects of DR-CAFTA on the poor and on the indigenous population broadly would be positive. On average, a typical indigenous household would enjoy gains o f nearly 15% o f i t s average per capita expenditure, with consumption gains dominating income losses. Even though maize prices decline over t ime and this hurts producers, these losses are more than compensated by consumption gains o n clothing, yellow maize, other cereals and dairy. However, i t should be noted that the white maize exception in C A F T A
1. Tecun Uman, Puerto Quetzal, Puerto Santo Toms and Puerto Barrios in Guatemala, Puerto Cortes in Honduras, Puerto Cutuco and Puerto de Ajacutla in El Salvador, and Penas Blancas in Nicaragua.
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provides some protection to producers. An important finding i s that further significant gains can be realized by the poor if the export opportunities brought by C A F T A in agricultural activities and manufacturing employment are complemented by domestic reforms aimed at facilitating production and trade. Government priorities in this respect are summarized below in paras 30- 31.
3 1. The strategy for trade expansion assigns a central role to ensuring that the benefits of new trade opportunities are accessible to SMEs, both directly through access to export markets and indirectly by developing strategic linkages with foreign and local exporting companies. This effort i s being supported through the Rural Economic Program operation which assists rural cooperatives to form product iodTA and marketing linkages with larger formal sector businesses. In addition, the Presidential Commission for Competitiveness (PRONACOM) has supported the establishment o f networks o f SME entrepreneurs (the “grupos gestores”) throughout the country. I t i s also supporting improved availability o f market intelligence, including data o n export contacts, v ia a jo int program with the National Institute o f Statistics (INE). Special efforts are being made to reach out to indigenous entrepreneurs through the Association o f Mayan Entrepreneurs and support to C E C M A to create an Indigenous Competitiveness Research Center. Finally, a network o f “infocenters”, with internet connectivity, i s being established to disseminate information throughout the country, in part with assistance from the Bank’s Rural Economic Program operation approved earlier this year. The infocenters are expected to act as important focal points for support to SMEs outside the capital city.
32. To assist low income farmers and laborers (especially those involved with maize production) to shvt away from traditional livelihoods, the government has also launched an initiative to promote alternative employment in non-traditional agriculture, sustainable forestry and off-farm activities in sectors such as tourism and agribusiness. In partnership with the private banking sector and groups such as the non-traditional exporters association, Agexpront, the initiative combines technical assistance and marketing help for micro, small and medium rural producers with improved access to finance v ia the commercial banking system, through the provision o f a Government guarantee. The initiative i s being supported by U S A I D and other donors. The IDB-, Sweden-, and Wor ld Bank-supported Rural Economic Program is also aimed at strengthening rural cooperatives to take advantage o f opportunities created by trade expansion agreements.
A.11: Promoting Investment and Business Efficiency
33. While Guatemala still has a long way to go in improving the overall business climate, there have been some notable achievements in reducing the costs of doing business over the past 1-2 years-an important factor in assisting SMEs in particular. One important achievement has been the implementation o f a lower t ime limit for customs processing, from 4 to 2 days. If the required time expires and the cargo i s not cleared, the trader can go to the warehouse and claim it. There has also been a reduction in discretionality and “red lights” in customs, through adoption o f a new risk based system for inspections, which relies o n objective risk profiles such as type o f import, place o f origin, product type etc). On the basis o f this system, the number o f physical inspections o f cargo has been falling steadily to levels more consistent with international practice-from physical inspection o f about 8 1 % o f imports in
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January 2005 to about 45% in June 2006. A second major initiative has been the recent establishment o f a “one-stop shop” for business start-ups allowing prospective firms to apply for company, tax and social security registration in one step and check the status o f their applications on line, with help services provided through a chat l ine. Once this registration agency is fully operational i t i s expected to grant same-day temporary registration and final registration within around 25 days. A third important development since DPL I has been the presentation to Congress o f a new law which would restrict the abuse o f nullity actions (a mot ion that requests dismissal o f a case o n procedural grounds). To date, debtors seeking to avoid contract enforcement could f i le a nullity action for as l i t t le as a spelling error in a contract, thereby buying considerable time (up to 5-6 months) while the case came up for adjudication. Under the new, proposed law, judges would be given more discretion to reject nullity motions and new, shorter time l imits would be set for the presentation o f nullities.
34. Another area in which progress is apparent i s the promotion of foreign direct investment (FDI). A newly-established agency, Invest in Guatemala (IIG), leads this effort with assistance from MIGA and the Bank’s Competitiveness project. The agency has begun implementing i t s promotion strategy which highlights investments in light manufacturing, tourism, cal l centershusiness process outsourcing and agribusiness. The strategy outlines targets for new investments, j o b creation, indirect employment, and the expected impact o f these FDI flows o n exports. IIG i s now seeking to effectively measure the amount o f local value added. This will set a benchmark to implement programs that increase linkages between the local private sector and international investors operating in Guatemala to provide goods and services that further increase local value added. IIG can already point to a number o f successes in attracting foreign investments-e.g., since it became fully operational about a year ago (a prior action for DPL I), IIG has been instrumental in attracting about US$120 mi l l ion in FDI to Guatemala, involving the creation o f 6,000 new jobs. Government has also sought to increase the operating autonomy o f IIG, through a partnership with a reputable private sector foundation, FUNDESA, operating in Guatemala.
35. To ensure institutional coordination in the competitiveness area, the Government has created an Office of the Presidential Commissioner for the Promotion of National Competitiveness (Pronacom) and maintains a system o f monthly meetings between Pronacom, the Ministry o f Economy, and representatives o f the private sector, universities and c iv i l society, to review and monitor work plans and progress achieved. Pronacom i s part o f a Central American network o f government competitiveness agencies, allowing the region to coordinate closely as i t faces the challenges presented by the DR-CAFTA agreement. In carrying out i t s mandate, Pronacom has developed a strategy o f alliances with key local partners such as Agexpront and the tourism sector as wel l as close connections with regional and international institutions such as INCAE, the USDA, the Wor ld Bank Group and the UN system. far, Pronacom i s holding i tself to a high standard o f performance, with concrete indicators in priori ty areas for the private sector and DR-CAFTA.
Thus
36. The adoption of new technologies and promoting innovation are key elements of the Guatemalan Government’s effort to increase the productivity of Guatemalan businesses. In addition to the appointment o f a Presidential Commissioner for Science and Technology, the Government has established a program linking universities and research centers with the private
15
sector in order to stimulate the research and development process. Another priori ty since 2004 has been the reform o f the national training system, led by INTECAP, as a means o f raising the skills level o f the labor force. In this regard, some pi lot programs have been implemented in the past year under which INTECAP acts as a regulator and certifier o f training programs organized and implemented by the private sector, rather than providing the training directly as it has traditionally done. Depending o n the success o f these pilots, the end-goal i s to transform INTECAP’s role f rom training provider to regulator in the medium-term. A third initiative has been to reorient the focus o f the Council o f Science and Technology towards improved technological diffusion among small- and medium-sized enterprises and to expand the role o f the private sector in its advisory board. In addition, a system o f incentives has been established to promote the acquisition o f new technology via capital goods purchases, technology licensing arrangements and other appropriate mechanisms.
A.111: Property Rights
37. Fundamental to Guatemala’s growth agenda-as well as to the achievement of increased social solidarity and a better business climate-is the establishment of secure rights to land. Over the past several years, considerable progress has been made o n cadastral surveying and regularization o f land-largely in urban, but also in rural, areas where most poor households live. Until 2004, however, this progress was threatened by l imited titling and the transitory nature o f the institutional framework. An example i s the Department o f Peten, where the cadastral work was substantially completed by early 2005 but only about a quarter o f land parcels surveyed had been titled and registered, reflecting both the institutional weaknesses o f the titling entities (municipalities for urban, and FONTIERRAS for rural, land) and the transitory nature o f the cadastral process. With the aim o f rectifying these problems, Government, in 2005, passed a modem law o f cadastre and land registry which, inter alia, establishes an autonomous, unified registry and cadastral office (registro de informacion catastral-RIC) outside o f the court system, and increases the transparency and accountability o f the R I C through establishment o f an independent Board with members representing different societal interests. Since passage o f the law, the new Registry has been established, it’s board installed, and a new, independently- selected, director appointed. Moreover, over the past year or so, the time to register property fe l l by almost two weeks due to an increase in the number o f registrars f rom 3 to 14 and full implementation o f an electronic registration system. The R I C i s now establishing physical maps o f al l properties which will help resolve cases o f overlapping property titles. The Bank’s ongoing Land Administration project i s supporting these efforts.
A.IV: Strengthening Infrastructure through Private Sector Participation
38. On the supply side of the economy, the Government’s growth strategy places strong emphasis on public-private partnerships for both financing and implementation of investments in infrastructure (roads, ports and airports, telecommunication and ICTs and renewable energy). A s a f i rs t priority, the Government has promoted a series o f large infrastructure projects in the transport sector to be implemented v ia public ‘private partnerships. These include: link roads in the northern and Pacific corridors, a link road connecting the
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Atlantic and Pacific ports, a partial metropolitan beltway for Guatemala Ci ty and the construction o f a freeway from Guatemala Ci ty to El Rancho. T o establish a clear legal basis for this effort, the Government presented a framework law for public-private partnerships to the Congress in 2005 as we l l as specific laws facilitating private participation in the construction o f (i) the 362 km northern link-road connecting some o f the poorest areas o f the country (Franja Transversal del Norte) and (ii) the 1 O O k m partial metropolitan beltway (Anil lo Metropolitano). Congress enacted the two specific laws in late 2005 and an international bidding process has been initiated for their construction, with bids expected in August 2006. Work has also begun on the Guatemala-El Rancho freeway with assistance from the Government o f Taiwan, albeit outside o f the PPP model. Thus far, however, Congress has not acted o n the framework L a w o f Public-Private Alliances, despite wide national consultation o f the L a w and its provisions by the Executive prior to its submission to Congress. Government i s s t i l l pressing for its enactment during the second ha l f o f this calendar year.
39. Efforts are also underway to establish partnerships with the private sector to improve management of key infrastructure such as airports and ports. In late 2004, a management committee comprised o f users (including airlines, cargo companies, the tourism agency etc.) and representatives o f the c iv i l aviation authority for better management o f the main international airport (La Aurora). In addition, Government has made substantial progress in implementation o f a well-designed program o f upgrading and expansion o f the nation’s main airport facilities in accordance with an approved master plan, which i s h l ly in l ine with recommendations o f a Bank-supported PPIAF study o f air transport needs and international safety and security norms. Act ion i s also underway to upgrade Guatemala’s USFAA ranking to Category I through a program o f strengthening the c iv i l aviation authority, including security measures. This would enable direct flights (both cargo and passenger) to U.S. destinations by Guatemalan carriers. Government’s efforts with respect to seaports during 2005 and early 2006 were focused on upgrading their security certification to international standards (prior action for DPL I). With this achieved, the focus has now been on improving the efficiency o f operations at Puerto Santo Tomas, the country’s publicly-run main Atlantic sea port, through establishment o f a new private dock for cruise ships (construction now underway) and development o f plans for a privately- operated cargo handling and warehouse facility at the port.
40. Another priority for Government is the diffusion of in formation technologies (ICTs) and telecommunications to previously un-sewed rural municipalities. Guatemala made huge strides in access to telephones due to privatization and liberalization reforms program implemented by the end o f the 1990s. The number o f fixed lines has risen from 400,000 to one mil l ion; and cellular phones, f rom 30,000 to 1.2 million. The Berger administration i s committed to stimulating hrther private sector investment in telecommunications and ICTs by updating the legal and regulatory framework to make i t consistent with DR-CAFTA, to take into account market and technological innovations and to encourage the use o f ICTs to improve governance,’ delivery o f services and increase the competitiveness o f Guatemala’s economy. In order to address the growing urban-rural “digital divide”, a rural access strategy has been adopted that uses output-based aid (OBA) mechanisms aimed at fostering private sector provision to each municipality o f at least one internet access point that enables local governments, NGOs, and private sector operators broad band access to the internet and to ensure that al l rural localities have at least one public payphone. Implementation o f the rural access
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strategy i s already underway and the strategy is being incorporated into a broader Information Society Strategy which aims at determining priorities for the national broad-band internet network. The effort i s being supported by the Bank under the Rural Economic Program operation and by WBI.
A. V: Financial Sector Strengthening, Modernization and Deepening
41. Continuing to strengthen, and deepen the reach oJ; the financial system is a major priority for the government, building on the significant progress made since the banking crisis of 2001. Legislation passed in the wake o f the crisis and complementary regulation addressed a number o f deficiencies in the framework for (a) the conduct o f monetary and financial policy, including the capitalization o f the Central Bank and the modernization o f payments systems and (b) the prudential regulation and supervision o f financial intermediaries moving them closer to international standards, including reforms for strengthening the legal and institutional capacity o f the Superintendence o f Banks (SOB) to engage in risk-based supervision o f financial institutions and financial groups and creating an orderly market exit mechanism. These reforms aimed at: enhancing financial stability and solvency, lowering incentives to engage in excessive risk-taking activities, improving r isk management, improving the quality and availability o f financial information, increasing access to financing, and preventing money laundering to reduce illegal activities and comply with international norms. The Berger administration has continued to implement these legal and institutional changes, with increasingly important progress in areas that typically take several years to implement (such as full-fledged risk-based supervision). In addition, i t supports consolidation o f the banking system through restructuring or closure o f insolvent banks, and through mergers and acquisitions (with increased interest from regional and other international players most recently), using the exit mechanism o f the 2002 banking law and supporting instruments.
42. The reforms and implementation thus far have contributed to making the financial system better able to withstand external shocks and facilitate growth, although some vulnerabilities remain. Guatemala’s financial sector has strengthened substantially since 2000 due to improvements in the prudential regulatory framework and stepped-up onsite inspections, provisions levels are st i l l l o w and related party lending high. The SOB has completed the registration o f financial groups, including offshore banks, in accordance with provisions o f the banking 2002 law, while making progress in their supervision and overall assessment and supervision o f risks. In addition, the SOB has been taking steps towards implementation o f Base1 11-like supervision (analysis o f bank r isks and implementation o f risk-based consolidated supervision) including: (i) undertaking major restructuring o f the SOB to enhance integration o f onsite and offsite supervision and increase coordination among supervisors o f different components o f financial groups, (ii) changing procedures and basis for supervision away from a compliance-based approach, (iii) requiring the creation o f risk management units at banks and promoting improvements in risk analysis, (iv) preparing a revised risk-based consolidated supervision manual, and improving cooperation and exchange o f information with other SOBS, (v) mapping o f economic groups, beyond registered financial groups, to enable broader analysis o f their risks and inter-linkages, (vi) improving the availability and quality o f information at i t s credit registry, (vii) institutionalizing financial institution r isk assessment through analysis o f
18
economic sectors and scenario modeling and (viii) completing consultations on revised accounting manuals for financial institutions, more in l ine with international norms. Guatemala i s also implementing a significantly strengthened anti-money laundering (AML) regime. In July 2004 it was taken o f f the l i s t o f non-cooperative countries o f the Financial Action Task Force (prior action for DPL I) and in 2005 passed the L a w Against Funding o f Terrorism, which makes i t a crime to fund terrorist activities. Also, i t has increasingly participated in regional efforts to jo int ly assess the supervision o f other countries’ AML/CFT system, reflecting i t s improved capacity to analyze and supervise these areas.
43. The focus is now on completing the modernization of the financial sector legal framework, operations and increasing access to financial services, including to SMEs. The Government has recently submitted to Congress a package o f laws, supported under the Bank’s FSAL, as follows: (i) the Microfinance Law, which would allow the strongest non-bank financial intermediaries (currently NGOs) focusing o n this sector to operate as lenders under regulation and supervision by the SOB;^ (ii) the L a w o f Movable Guarantees, which is intended to facilitate the use and repossession o f non-traditional collateral, to promote access to finance; and (iii) the Insurance Sector Law, which wil l modernize the legal and supervisory framework o f insurance companies broadening the availability and access o f financial products, which could eventually include specialized products to address the larger exposure o f Guatemalan f i r m s to weather- related disasters. In addition, laws have been submitted to facilitate the consolidation o f the banking system through the removal o f tax impediments to sale o f Bank assets, and a law o f “Reciprocal Guarantees”, which would set the basis for the establishment o f associations that would provide collateral for i t s member companies to facilitate access to credit. This package o f financial sector laws aims to increase prudent lending to groups and enterprises which have generally been excluded from bank financing, such as MSMEs. In terms o f financial sector operations, Banguat has been modernizing the institutional and supervisory framework for the functioning o f payments systems. A major step has been the full implementation o f the Real Time Gross-Settlement Systems (RTGS) in effect since January 2006. The new system i s substantially increasing the efficiency and accuracy o f financial sector transactions.
B: ENHANCING CAPACITY FOR PRIORITY SPENDING
44. A key element of the Government’s growth and poverty agenda is the objective of increasing public spending in key areas such as human development (education, health and nutrition) and on rural economic and social infrastructure, an area where good progress has been made to date. Notably, the Berger Administration in 2004, reduced by one-third the size o f the military and began a step-wise effort to direct a greater share o f the budget to social programs. Social expenditures (Peace Accords definition) rose fi-om 5% o f GDP in 2004, to 5.4% in 2005 and a further increase, to 5.9%, has been budgeted for 2006. This level would imply expenditures o n the social sectors o f around ha l f o f total public spending and over ha l f o f
2. This i s expected to have positive demonstration effects over smaller NGOs also focusing on microfinance, which will remain self-regulated but for which institutional and legal reforms are also underway. Other complementary efforts to improve the legal, institutional and supervisory efforts could be expected to emerge regarding credit cooperatives, which are very important players in the provision o f microfinance and housing products.
19
total revenues. 78% o f the increase in social spending has been directed to education (excluding tertiary level), health and social assistance. The effort to reorder expenditure priorities is especially commendable in light o f the high proportion (about 41%) o f legally mandated earmarks, which leave very l i t t le room for maneuver. In addition, there has been a concerted effort to increase investment spending vis a vis recurrent spending. Between 2004 and 2005, investment expenditures increased by 18% in nominal terms while the corresponding increase in recurrent spending was 8.6%, close to the level o f inflation.
45. I t is worth noting that Government has launched a campaign to promote public awareness oJ and spearhead a national dialogue on, the country’s social objectives and needs, define their costs, and build consensus on the appropriate role for the public sector in achieving them. In part, the goal i s to facilitate a common vision o f poverty and social development strategy as well as lay the ground-work for further tax pol icy changes in support o f that vision. In parallel, the central government i s working with local authorities to promote revisions to the municipal tax code to enable increases in property tax revenues, in part through provision o f greater autonomy to the municipalities to set appropriate property tax rates. This, in turn, would enable a higher contribution by municipalities to the provision o f key basic and social services in the areas under their jurisdiction.
46. I n addition, Government is committed to strengthening budgetary processes in order to increase the efficiency and effectiveness of core ministries, through adoption of a results- based and multi-annual approach to budgeting. The Government took a significant leap towards enhanced planning and accountability in key sectors with the introduction in 2005 o f agreements among MOF, SEGEPLAN and four major Ministries (Education, Health, Agriculture and Infrastructure, Communications and Housing) to move towards this new budgeting framework. The process has been undertaken under a well-designed plan that has resulted in the early communication o f institutional budget ceilings to improve the formulation process within a formal medium-term expenditure framework. T o validate and sustain what is, by nature, a long- term endeavour, a gradual approach is being adopted. The 2006 budget included results-based allocations for key programs in two o f the four pi lot Ministries-Education and Public Health, with extension o f the approach to al l four pi lot Ministries for the 2007 budget cycle. A monitoring and evaluation (M&E) system is also being developed, in part with assistance from a Bank IDF grant.
47. I n addition to the above efforts to strengthen the efficiency and quality of public spending, the Government i s continuing its efforts to vigorously attack corruption and improve the transparency of public expenditures (with support from the Bank’s Integrated Financial Management Project). This, inter alia, should help build confidence in the fiduciary role o f the Government in the use o f public funds and, consequently, reduce opposition to a new tax effort. This i s discussed further below, in the section o n transparency and public sector management.
c. PUBLIC EXPENDITURE TRANSPARENCY AND MANAGEMENT
48. One of the fundamentals of the administration’s Vamos Guatemala! Plan is to improve governance and credibility of public sector management and institutions, as means o f forging higher levels o f t rust between government and the public (in part as the ground work to counter
20
objections to increased taxes) and in enhancing investment climate. Important steps have been taken in that regard, such as the creation o f the Office o f the Commissioner for Transparency, the issuance o f norms for access to public information in the executive branch, the legalization and thorough implementation o f a public procurement transparency portal (Guatecompras), the continued expansion o f the public financial management and public investment systems, and efforts to clean up customs administration.
49. At the center of financial management reform is the continued development of the integrated financial management system (SIAF), which is considered an example of good practice in the region in terms o f a successful IFMS. SIAF i s operating in 70 public sector entities o f the central government (from 63 when DPL 1 was appraised). I t incorporates modem processes and systems in the core areas o f budgeting, treasury, accounting, as wel l as in other areas such as human resource management. The ongoing development o f a management system (SIGES) has the objective o f establishing automatic linkages between the core financial modules and the supporting administrative systems (e.g., procurement and registers o f f ixed assets).
Box C: The Relevance of SIAF
An integrated financial management system with comprehensive coverage has implications for public expenditure management at four main levels: (i) it contributes to fiscal discipline by providing timely and reliable information on budget execution and by enforcing expenditure l im i t s in accordance with approved budgets and cash flows; (ii) increases operational efficiency by expediting and standardizing processes; (iii) supports internal and external controls through transactional safeguards and audit trails; and (iv) contributes to transparency by facilitating the publication o f budget execution reports and other fiscal reports.
50. An ambitious objective of the government’s reform program is to implement a financial management system throughout Guatemala’s 332 municipalities, complementing basic tools for budgeting, accounting, and treasury with additional modules in areas such as c iv i l registry, services administration and property tax for pertinent local governments. A simple version for budget recording (SIAFITO-MUNI) was installed in 3 17 municipalities during 2003 and 2004. A more robust version (SIAF-MUNI) has been in deployment since 2005 and has replaced the simplified version in a number o f municipalities. This new version was already operational in over 110 municipalities (from 46 when the D P L series was appraised) by December 2005, and the two largest ones (Guatemala and Quetzaltenango) have adopted the central government’s version o f the system. This progress significantly exceeds what was anticipated at the time o f DPL I, when i t was estimated that about 40 additional municipalities would transition from SIAFITO to S IAF-MUNI in the year between the two operations.
5 1. Looking ahead, the Ministry of Finance is planning to further increase operational coverage of SIAF to at least 7 additional central government entities and of SIAF-MUNI to at least 40 additional municipalities in the short term. While the DPL program supports these selective actions, i t should be noted that these are framed in a larger action plan adopted by the Ministry for improvement o f public financial management. Through these measures, the comprehensiveness and availability o f public information o n fiscal and budgetary performance wil l be increased, carrying unquantifiable benefits such as facilitating external scrutiny and analysis, which in turn enhance the government’s financial accountability framework.
21
52. By December 2005, the government e-procurement system (Guatec0mpras)was in use by 104 public sector procuring agencies of the central government, and over 260 municipalities. Through an executive decree, social funds, trust funds and NGOs using public funds are required by law to use Guatecompras, and the recent C A F T A Implementation Law modifies the National Procurement L a w making it mandatory for a l l government entities. Moreover, an interface o f Guatecompras and S I A F has been achieved through the implementation o f SIGES. I t i s expected that further development o f the system will take place in the context o f a comprehensive strategic plan for e-procurement, product classification and information standards and use o f data for procurement planning.
53. Going forward, the procurement policy formulation and oversight responsibilities, including leadership for implementing and monitoring the reform, need strengthening. Currently, capacity building initiatives are not we l l coordinated, the development o f key implementing tools (e.g. bidding documents and procedures) is lagging, and there have been no in-depth assessments o f the government’s procurement strategy or the supplying markets to support the introduction o f new contracting approaches and cost reduction programs. At the executing entity level, in government entities, most institutional procuring units are non existent or have poor capacity. I t i s expected that short-term priori ty will be given to the strengthening o f the procurement regulatory body (DNCAE) and to the creation or strengthening o f the institutional procurement units.
V. THE PROPOSED LOAN
A. PROGRESS IN THE BROAD-BASED GROWTH AGENDA
54. As the discussion in Section I V above describes, Guatemala has made steady progress in promoting more equitable, broad-based growth in all areas supported by this DPL series. Given the design o f the Bank’s CAS and the DPL series within Government’s own Vamos Guatemala! plan (paras 19-20), there i s strong client ownership o f the DPL agenda, namely:
0 promoting equitable growth and strengthening the investment climate
0 enhancing capacity for increased public spending in priori ty sectors
0 improving public expenditure transparency and management
Fol lowing the medium-term framework laid out in DPL I-underpinned by the substantial body o f analytical work carried out by the Bank in partnership with the Government o f Guatemala (see B o x D), the design o f key prior actions, triggers and indicators for DPL I1 support progress in each o f the above three areas.
5 5 . As noted above and discussed in detail in Section IV, the DPL program remains on track, with solid progress in each of the three main areas of the agenda. Table 3 below provides a comparison o f the original triggers for DPL I1 laid out in the DPL I document and the
22
prior actions for the DPL I1 operation. As the table shows clearly, there has been strong momentum in al l areas o f the DPL program with the original triggers either fully met as anticipated when DPL I was presented to the Board or surpassed in virtually al l cases. Notably, original triggers were exceeded in areas related to improved transparency and efficiency o f public resource use, in tax administration. One area where a change in strategy occurred, relates to actions o n the National Mortgage Bank (CHN), where the dif f iculty in obtaining a qualified Congressional majority to support closure (the first-best option) has forced a reassessment. However, major advances o n risk-based supervision-arguably a more central issue for sectoral strengthening-have been made much more rapidly than originally anticipated. Moreover, significant progress has been made o n containing C H N vulnerabilities. In infrastructure, substantial progress has been achieved in passage o f laws pertaining to major PPP-oriented roads projects and in moving forward the air transport agenda, although the PPP framework law has been delayed in Congress due to other pressing legislative priorities. The Law remains o n the legislative agenda and wil l be discussed in Congress during the second ha l f o f this calendar year. All other areas proceeded as planned with only minor changes to original expectations.
23
Box D: Links between DPL Series and Prior Analytical and Fiduciary Work
Poverty Study (2003)
Investment Climate Assessment (2004)
A. Analytical Reports-Recommendations ’
3. Reduce transaction costs in accessing markets by expanding and improving
2. Reduce red tape in registering new businesses and general operating
3. Reduce transaction costs in accessing markets by expanding and improving
2. Reduce red tape in registering new businesses and general operating
3. Enhance municipal capacity to provide basic services, especially through
(CFMCPAR) (Draft report, 2005)
3. Other reports regarding Challenges and Opportunities o f DR-CAFTA for Central America , the PSIAs , the CEA and specific sector pol icy notes (eg. infrastructure, rural growth) also underpin the strategies and actions included in the DPL series.
24
0
0 0
0
0
0
0
0 0
0
0
P B z 0
L
0
0
I S
0 0
56. Looking ahead to DPL III, the focus i s on full implementation of many of the policy and legislative reforms undertaken to date in areas critical to achievement of the DPL program 's specified results. The emphasis on implementation rather than legislative actions also reflects recognition o f the reality that the already-complex process o f getting Congressional approval for new legislation will become st i l l more dif f icult going forward, as 2007 i s an election year. With this in mind, the DPL program was always designed to focus the third operation in the series on actions which contribute substantially to program objectives but remain under the control o f the Executive. The specific triggers identified are described in Table 4 below. I t should be noted that a trigger on environment could be added fol lowing discussion with Government o f the recently-completed CEA.
Table 4. DPL I11 Triggers
0 Maintain stable macroeconomic frame work
One-stop shop for business registrations fully operational, with permanent registrations granted within 25 days
Guatemala rated Category 1 by USFAA International Aviation Safety Assessment and satisfactory progress in implementing the planned upgrading o f Aurora International Airport in l ine wi th I C A O safety standards.
Further improvements in supervision o f financial conglomerates as evidenced by: (i) implementation o f new risk-based consolidated supervision manual; (ii) scenario analysis o f financial groups; (iii) progress in implementation o f insurance law; and (iv)improvements in credit registry data.
0 Implementation o f the Legal Provisions for the Strengthening o f Tax Administration and further progress in implementation o f strategic plan, including: (i) requiring electronic f i l ing by the 3,000 largest tax payers; (ii) extending control program o f cross-checks to these 3,000 taxpayers; (iii) further expansion o f the unified tax register 0 Satisfactory execution o f social expenditure in 2006 and increase in 2007 allocation; and results based budgets prepared for Education and Health Ministr ies for 2007
0 Increased operational coverage o f S I A F (to about 7 additional agencies and about 40 additional municipalities)
0 Strengthening o f the regulatory body (DNCAE) by developing appropriate tools for procurement management ( ie., procedural manuals, standard bidding documents, etc.), as well as creationlstrengthening o f the institutional procurement uni ts in government entities through training on the use and implementation o f those tools
B. FIDUCIARY ASPECTS
57. The 2005 Country Fiduciary Assessment (CFMCPAR) indicates that the fiduciary environment in Guatemala is generally adequate, as evidenced by the improvements in the public expenditure management systems made over the previous decade and the actions being taken by the current administration to continue to increase transparency. Indeed, as described in detail in previous sections o f the report, the government has shown strong commitment to the tackling o f fiduciary issues and surpassed targets in many key areas identified by the Country Fiduciary Assessment. Drawing from this work, certain key actions and selective milestones in the context o f the DPL program have been identified to help track the public financial
27
management reform progress. The latter, in turn, are significantly supported by the Bank- financed Third Integrated Financial Management Project under implementation.
C. LOAN ADMINISTRATION
58. The Bank would disburse the loan proceeds into an account of the central bank (BANGUA T ) denominated in US d01lars.~ BANGUAT will immediately credit the disbursed amounts to the Ministry o f Finance Treasury Single Account (“common fund”), thus becoming available to finance budgeted expenditures. Within a week o f this operation, the Ministry will accordingly provide the Bank with a written confirmation.
D. MONITORING AND EVALUATION ARRANGEMENTS
59. assess progress for the DPLs, including:
The government and the Bank will take advantage o f several important data sources to
e
e
Central and nonfinancial public sector budget monitoring f rom the Ministry o f Finance
National Institute for Statistics reports, including a living standards survey planned for 2005, and annual tracking surveys
e Investment climate surveys
e
e
Central Bank o f Guatemala reports and analysis
Reviews and analyses o f laws and implementing regulations from the Bank and other stakeholders
Data from key Government agencies such as SAT, Pronacom and R I C
Financial audits and fol low up o f CPAR and C F A A recommendations
Bank and IMF supervision missions and reports
e
e
e
e CEPAL and SIECA surveys.
60. The government of Guatemala and the Bank have agreed to monitor progress in the DPL program regularly, including at the annual reviews of CAS progress, when revisions to the scale and timing of the Bank’s lendingprogram can be undertaken. Discussions will be held with the Ministry o f Finance, the main counterpart agency for the loan, who will be in charge o f M&E for the loan and for collecting f rom the appropriate sources the data necessary to assess implementation progress. Other agencies that will play an important role in this process are the Central Bank (for financial sector issues), the Ministry o f Economy and the Commission for Competitiveness (for trade and investment climate issues), the SAT (for tax administration
4. In the context o f the latest IMF central bank safeguards assessment, an action plan has been agreed with BANGUAT. Moreover, BANGUAT i s a participant in the Bank’s Reserves Advisory and Management Program (RAMP).
28
issues), the R I C (for cadastre and land titling issues) and the Off ice o f the Commissioner for the Government’s Plan.
E. CONSULTATION AND DISTRIBUTIONAL AND ENVIRONMENTAL IMPACT
61. The DPL series has been developed within the framework of the Government’s “Vamos Guatemala! ”plan, which was widely consulted and disseminated within the country. Specific laws, institutional reforms and programmatic actions supported by the loan series were (and are) also discussed widely with different groups, including c iv i l society organizations, the private sector and the research and academic community. A PHRD grant for the DPL series supported by the Japanese Government included a series o f studies on key issues such as social needs and tax reform, sectoral impacts o f CAF’TA, improved efficiency o f procurement, and public-private alliances in infrastructure which were discussed at workshops at the national and regional levels. With respect to improvements in business climate, including customs reforms, reduction o f red tape etc., consultations have occurred through the PRONACOM expanded committee, which includes representatives o f diverse constituencies. Finally, workshops have been held for members o f Congress to increase understanding o f the nature o f DPLs and their main features.
62. The actions supported by this DPL are not expected to have significant adverse distributional impact in the short- to medium-term. T o the extent that the measures have played a role in Government’s ability to maintain social spending levels, their impact on income distribution i s expected to have been positive. This is confirmed by public expenditure incidence analysis undertaken in the context o f the GUAPA which indicates that public social expenditures (Peace Accords definition) are generally pro-poor. Likewise, a FY 05 PSIA o n the distributive impact o f fiscal reforms supported by the DPL series, found the reforms to be mildly progressive. With respect to the social impact o f CAFTA, the Bank’s regional report “DR- CAFTA: Challenges and Opportunities for Central America” found that about 84% o f the Guatemalan population are net consumers who would benefit from price reductions as a result o f increased competition. A follow-up PSIA, focused on analyzing the impact o f DR-CAFTA on the indigenous population, found that an average gain in consumption o f a l l income groups (including the poor) would be o n the order o f 15% (para 29). The PSIA found that even households engaged in maize production would benefit f rom DR-CAFTA because o f consumption gains o n other necessities and because maize price declines would be mitigated by the white maize exception included in the treaty. As a result o f the exception, white maize prices would likely fal l by 19% over time rather than by 38% (without the exception). Nonetheless, to the extent that a small minority o f maize producers could be adversely affected by the gradual decline in maize prices, possible mitigating measures would be part o f the pol icy dialogue for future DPLs and other Bank interventions in Guatemala.
63. The specific policies supported by this DPL operation are not expected to entail significant direct impacts on the environment, forests or other natural resources. However, to the extent that measures supported by the DPL program are successful, over time, in attracting new investment (including in infrastructure) and trade expansion, there will be a need to strengthen Guatemala’s national institutional capacity to identify and address environmental pol icy and regulatory issues. With this in mind, a strategic Country Environmental Analysis
29
(CEA) was undertaken in 2005-2006 (Box B) and discussed with the Government. The C E A provides cost effective recommendations for closing gaps in institutional capacity for environmental regulation. The Government acknowledged the usefulness o f most o f the CEA analysis and recommendations and has requested the Bank’s assistance to implement them. A s a first step, Government intends to allocate an additional Q5 m i l l i on to MARN in the 2007 budget to strengthen i t s capacity for environmental monitoring. I t has also asked the Bank to form part o f a commission to try to raise additional funds for this purpose f rom donor sources.
F. R I S K S
64. Continued strong performance by the Government is subject to four main risks during the implementation of the DPL series: (i) political gridlock, given a divided Congress, (ii) societal tensions related to the country’s post-conflict status, (iii) exogenous shocks related to natural disasters, and (iv) macroeconomic risks due to external or domestic market volatility. These are described below.
65. Political risk i s inherent in a post-conflict situation such as Guatemala’s, where there continue to be deep fissures within society, the electorate is very polarized and the Government lacks a simple majority in Congress. This, in turn, creates obvious risks for the timely passage and subsequent implementation o f the Government’s legislative agenda. Given that the executive’s party, GANA, holds only about 30 o f 158 seats in Congress, consensus needs to be reached with opposition parties for a l l legislative priorities, with important implications not only for the pace o f reforms, but also the ability to retain the technical and pol icy coherence o f the agenda within a political context o f continuous trade-offs and compromises. Especially controversial i s the tax reform agenda which (as discussed in para 16) is strongly opposed for different reasons by powerful interests on both the right and the left and subject to the decisions o f the Constitutional Court (CC). Government is attempting to address this issue through shifting the focus o f the public dialogue o n social needs, their costs and the revenue requirements o f meeting them, while also reactivating the fiscal pact. Recent changes to the composition o f the CC, giving i t a more technocratic orientation, should also help with respect to fiscal reforms going forward. Political as wel l as social tensions also arise in other controversial areas including trade liberalization and promotion o f increased private participation in infrastructure, and issues surrounding property rights and land, al l o f which are crucial to accelerating growth and are central to the Government’s agenda. Several o f these areas are also part o f the national dialogue initiated by the executive to reach broader consensus o n directions with different, interested c iv i l society groups, the private sector and the political parties.
66. Thus far, the executive has largely been able to maintain its development agenda in Congress, through the establishment of clear priorities with the Congressional leadership and wide consultation with different interest groups within Congress and with broader civil society groups. Efforts by the international community (including IMF, IDB, UNDP, bilateral and the Bank) to modernize and professionalize Congress have also helped create better understanding o f the technical issues surrounding the legislative agenda. In addition, the Government’s public communicatiodconsultation initiatives as wel l as i t s continued anti-corruption and public expenditure transparency campaign, have helped build credibility with some groups and opinion- makers.
30
67. Besides political and social risks, Guatemala i s also susceptible to external risks deriving from natural phenomena. As with the other Central American countries, Guatemala i s vulnerable to natural disasters (hurricanes, and seismic or volcanic activity) which could necessitate unanticipated spending for emergency assistance and reconstruction, thereby affecting achievement o f established development goals in the short term. Experience with Tropical Storm Stan shows, however, that fiscal discipline has been a high priori ty even in the face o f an emergency.
68. The main macro-economic risks derive from the financial sector and the external environment. The financial sector, though substantially stronger than in the past, needs to be further strengthened through consolidation, improved provisioning and better assessment o f risk. There has been strong commitment in Guatemala towards tackling financial sector vulnerabilities since the 1998 banking crisis and steady progress in reforming the sector has been made with support from the IMF and the Bank (through the FSAP program and two complementary financial sector operations). The DPL’s focus o n strengthening risk-based supervision i s also expected to have a positive impact. In addition, there remains the threat o f shocks from the external economic environment (e.g., l o w commodity prices, persistently high o i l prices, a slow- down in the US economy, unfavorable conditions in financial markets) that could affect the economy negatively-affecting the achievement o f higher growth rates and negatively affecting efforts to raise tax revenues.
69. The Bank’s DPL program i s particularly well suited for managing the risks inherent in Guatemala’s difJicult political and social context. The choice o f a programmatic series o f single-tranche operations for the provision o f quick-disbursing support means that there will be several points at which the Bank’s program could be reassessed if political gridlock or social tensions appear to be derailing the development agenda, despite the Government efforts to address them. In addition, the overall f lexibi l i ty o f the single tranche design means that- provided overall progress i s o n track-specific elements o f the planned program can be adjusted in terms o f the scope and form o f specific reforms as wel l as necessary sequencing changes to take into account changing political and social realities. Moreover, as noted earlier, the focus in DPL I11 on implementation o f legislative reforms undertaken in DPLs I and 11, helps to reduce r isks f rom the political environment going forward.
31
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e
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8
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*
Annex 2
Letter of Development Policy
0387 MINIZT€.RIO D f F1#GNZAS PURLITAS
GUFST€MRLA. C. A
24 de julio de 2006
Seiiora P a m a cox Vlcepresidenta para AmOllca L a h a y ef Caribe Banco Mundlal Washington, D.C. Estados Unidos de Amdrlca
Estimada sefiora Cox
dministraci6n el.Presidente Oscar Berge;;-&G ha.fija3o mrno una de sus principales metas duck 10s rtibeles de pobreza. lo wal se pretende alcanzar por medb de la bnplementaci6n de Programas focaiizados en b s grupos mas wlnerables. asf coma de pollticas nacionales que busquen la axistencia de fnstituches m h eficientes y transparentes, que pem-tarr mmados m& compeffffvos y mayores oportunidades para todos IUS dudadanos, en donde se ampfle el aparato productive, el emp)ea y la inversi6n den& de un mar00 macroecondmlco estable; 88 decir, rnedianfe la Msqueda y promocibn del &sandlo mnbrnim sostenible y equitativo.
Con &e propbslta ha puesb en marcha un programa que induye reformas estrucfuralos en 10s dr rk ia ecm6mIc0, polltico y social que permitirh la m c b n gradual d~ las condidones proplchs para un crecimlento e~onbmlw sastenido y el lmpulso de ia cornpetitivldad del pals, b que mdyuvara a almnrat las Metas de Desarmflo del Milenlo.
El Pian de Go.bismo 2004-2008 formulrj el Progrma "Vamos Guatemala", el cual lncluye laas acciones mcretas de fmplernentacian de k estrakgla a s q u k en el cwto y mediano plazo, conformado por dnco eJes mtratdglcos: Guatesddarh, Guatecrece, Gueteinviarfe, Guatecompite y Gudeverde y plantea una ser(e de accianss cuyos objetivas son promover un clirna favorable a la inversibn productiva que se traduzca en mejores condciones de vlda para la poblacifin guatemalteca. A partir de d iho Progma, se han aprobado y wt4n en lmplementacibn importantes polltioas corn: e) SegurSdad Aimentarh; b) La Agenda Nacional de Competjfividad, c) El Pmgrama de Reforestadbn Nacional.
La estrategia de asisfencia amrdada entre el Gobernc de Guatemala y el Banco Mundlal cantempla, entre otros, apoyar la irnpfementaclfm de V a m Guatemala a traves del otorgamiento de tres o cuatro P&tamos para PolltJcas de Desanollo
36
Pdicy Loans) a lo largo del perlodo 20052007. Desde la apmbadh del primer prhtarno en el aiio 2005, el Goblerno ha mosttado avancw contfnuos en L s direas daw definldas en la rnatrk de lmplementacibn del program, d n por la a a l se encuentra en capacidad de solldtar la negociadbn y sprohdbn del segundo pr&tamo, por un rnonto de US$lOO millones. Al lgual que el anterior, el ptestarno sofldtado coadyuvard a promver mayores avanw en la agenda econ6mica y social dd p a h a la vez que permitirfr mejorar e! perRl de endewfamiento Memo.
A confinuacitjn se sintetitan 10s prindpales avanw registrados en:
1. Cmt'rniento econdmlco y mejam en el cclma de lnvenranCs
En materia epon6mica, .la consoRdaci6n de. la estabilM~rnacroeconiKnica y el incremsnto en la conflanra en el pais, permiti6 que en el aflo 2005 e qistrara una tasa de creamiento del 3.2% - la mayor observada en 10s Oltlmoa clnco aRos, mientras que la inflacidn regtstro una tasa de 8.57%, lo anterior, a pesar del efecto del incremento en los preeios del peWleo' y del Impact0 d d hura&n Stan'. Para 2006 se pnv6 un crecimiento econtknica afrededor de 4.4%, miwttras que la tasa de infJaci6n in@fanual ha venido desacelerhdose, registrando a junio del 2006, 7.55%, scedndose a la rneta de InRaclbn prevlsta por la Junta Monetaria.
Un objetlvo claw del Prcgrama de Bobism ha sldo rnantenef unas finanzas ptrblicas disdphadas y ordenadas, que a la vw que coadywan'al desarrdto y a la dismlnlmddn de le pobreza del pals, no comprometen su establlidad mruecon6mlca con dMdt flscales elevados e Insustenfbles. Con este propbito, e! Gobierno ha Intentado generar recursos ffscales adicionales para flnanclar un Incremento slgnlflcatlw, de las inversiones p4bllcas y, en particular, de 10s gastos sociales. €1 prudente man& de la politlca flscal, combinado con una adecuada polltica monetarla, se tradujo en el aiio 2005 en un deficit ,fiscal de .1.5%. cam0 parte de 10s esfuepos del Gobierno por generar recursos que le permitan financiar gasto plrblico orlentado 8 la Inversldn social, en octrrbre de 2005 se present6 al Congreso de ta RepClblica una ln/ciatlva de ley cuyo objetivo es combatir la evasi6n y ekrsidn tributaria a trm& de mecanismos que permitan e Is Superfnkndencki de Adrninlstracldn Tributaria SAT-, un mayor control y monitoreo que le permilan al Estado fortalecet la recaudacion tributaria. Luego de ma arnpfia consulta y discusldn con 10s diferentes sectores y cabildeo con los diferentes Partldos Pdlticoe, se logr6 un cvnsenso que $e materlalizb el 8 de junb de 2005, con
' El lmpacto ncaatlva del precio del petrijlleo sobre el crecimiento se ha EIstimado en 03% del PIE, y 8u hcidencia sobre la inflacih ha skto de 2 gontos porcmiuales en 2005. ' El Impado negalivo del hurach Stan en tkrninos de peinWdas de flu@ ewndmicos se hs d m a d o an 1 ,i% del PI6 de 2005.
37
la aprobsdbn por parte del Cur~reso de la Repbblice del DecretC No.20-2006 ‘Disposicianes Legales paca el Fortalecimfento de la Admlnistracidn Tdbutaria”, C a b indlcar que, m obstante dicha in ic iat i no %e aprobada mmo orfgirralmnte se habla planteado, su apmhdbn representa un logro importante, que permitid aumentar 10s ingresas Mbuhdos en alrebdcr de 0.3% del PIB en 2007.
En su camprmiso de cantinuar rnejbranda la mudacibn tributarla, e1 Qoblerno vlene apoyandb 4 trabajo que 51 Consejo Nacional de 10s Acuerdos de Paz ha inklado para la evahuacfbn, actualiracicSn y tel;anzamklmtx, de un diEtlogo que retom 166 pdnclpim y campromisos del Facto Fiscal mn el fin de hacer viable el cumpimiento de las Acuardos de Pat y h s Metes de DeearroUo del Mllenio.
La poslcbbn extema del pab, merfida por el nlvel de resewas momtarlas internacionales, m w t m un n b t satisfactorio (aquhlente a casi 5 m~s88 de knportadones de bienss y servkb), mientras que el salda an menta m h t e de k Balanza de Pagos, registrb et'^ ef 2005 un deflcil de 4.1% fnferlw a1 4,446 del 2004. Asimismo, se mantuvo un bajo nivel de &&a a d e m a1 registrarse un sal& de US$3,591.63 mllkxles equivalente 8 11.5% del PIB, mientras que la deuds Wbllca total del Sedw PWbtico se situ6 en US$5,750.3 millones, lo que representa un 18% del Pl5, et miss baJo de la regibn centroarnericana; manejo de la deuda externa es congruente con 168 principicw del Pado Fiscal, orienbdos 8 nsantener una polftlca pNdsnte de endeudamlenlo.
En mbrla oomwcial, el p r o m s de Integrad6n de la r e g h coniinu6 a trwfts de la sfmplifiwclbn y anwrlracKKI de ks pracedlmientos aduaneros entre Guatemala, El Sahrador y Honduras. En material fiwal. sa firmam dos importanfes Convenlos entre 10s Minisbs de I-facisnda o finanzas de la Regibn. Asknismo, en la bbquede de mayms oportunidades de creciniiento e InvemMn, el Gobierno ha prwnovido la aperlura de la ecmmia a trave& de negocleclones comerdales bllsteraies oon RnexiCo, Tab& y recientemente ccn EstadOs Unidos de ArrnMca. En rehCi641 con est0 Qttimo, posterfor a la ratificadon por parte del Gongmo de la Rep3blica del Tmtado de t i r e CMletcb entre CentroamBrica, Repi3blica Domfnicana y Esbdos UnMos en rnarzo de 20005 (TLC OR-CAFTA), el Gobiemo cenM sus etfuems en la aprobacitm de leglsladbn inferna que permPera Itl efectbddad del trafado. OespueS de varias negocbciones con la oontraparls norteamsfkana y un esfuem interno dsntro del Cdngresa que requirli, de extendidos debates, el TLC- DR-CAFTA cob& M i d a d a parUr del 1 de juno de 2006.
El Gobierno de GuaWala est4 mvencido de que b apertura de rnk y rnejores mercados fan solo tend& bneficios en la medida en que el pals continue mejorando el clima para la inVerskk.1 y 10s negaelos y con la InfraesZtuctuFa apmpiada para ello,
38
La modemiza&n del skt43ma aduanero del pais que induye entre otras acxfonea, le ImplernenMddn del rnanlffesto adumefo electr6nico, la drnplMcacidn de la dwbraci6n aduanera y la reducd6n en los tiimpas de promamiento de mercadeh en los puertos y aeropuwbs es tan d o una de las medidas que se han llevado a cab0 en &ita dlrecdbn. En materia de infraestruchrra flsica, el Congreso ya ha dado lur verde a dos grandes proyectos carreterns que pePmitir&n alianzas publiir&vadas. y en la ectuaildad SB wan= de forma acelerada en le modemhdh del principal aeropuruto del pals.
Por atra parte, el Goblem tarnbien ha promavklo & s%gutidad jurfdica de la pmpiedad, aspto fundamental para acOeder a los beneficios de la apertura econbmics. En este contsxto, luego de haber sido aprobada la Ley de Informaci6n Catastral, mediante Decreio del Congreso de la replrblica No. 41-2005 del 15 de Junlo de2005. se nmb& a una Junta Directhra fndependienttl del Registm de Informaci6n Cabstral, la cual se Mcuentra elsboramlo el plan de ttabajo para 10s pruktimcw a b del referido Registm.
En materia finsnasra y en Jhea m ha reformas finanderas de hicios de esta d h d a , la supedsih bancaria se ha orientado hacia el rnanejo de rlesgos, lo que ha impiicado la reestructusacibn de la SupeWtendencia de Bancbs. Asimisrno, se ha modemizado el sttema de p a p s por media de la liquidacldo de operaciones en tiempo real, de acuerdo a las mejoras pr&icas a n i d hbmacbnal.
11.
Como park de su program de trablo, el Gobierno ha priorlzado hs acciones en hs sectores ed~mcbn, d u d , segufidad, judicia y las redes de proteccian &I, lo cud se ha vis@ reflejado en las asignaciones presupuestarias de 10s rninisterbs rec- y entidaks ejecutoras cotrespondientes al Estado.
El Wierno de la RepBbtica ha heck suyo el prfncipio de que b paz f i rm y duradera debe dtnenhi236 sobre un desamlb socioeconbrnico partfcipativo orientada al bten cornfin, que nssponda a las MCesldade8 de toda la poblacibn. Dicho desanollo requiem de la sdidaridad e lndusibn soda1 cornu una de 10s pilares de la unidad national. Es por elf0 que el Plan de Gobierno 2004-2008, retoma 10s Acuerdos de Paz y define su cumplimlento carno un cornpromiso de toda h socledad. El Program Varnos Guatemala, a tr&s de su componente Gllate SolMarla apunta predsarnente a promover la reducdbn de la pobreza y de la exciwibn. En congrwcia con io anterior. en 20305 $6 otargb mayor atencibn al gasto social prlwlffario de 10s Acuerdos de Par, el cual corresponde enlre o m , a aquellas erogaciones dustinadas a 10s sectotes de Educadbn, Selud y Vivienda, gastos qus en ese atlo representaron un aumenk, de 10.7% con respecto de 20M. Por Who BS irnpwtante resaltar que para 2005, la
hwmk5n y gasfa pdrbllco prlcrIfarjo
39
ejecucibn del gasto soda1 respecto a] period0 1695-2005 &am6 el nlvel m L atto en th-tinas del peso que este tiene sobre el gasto total de la administradhn cenm, slendo esie al ciem de 2005 de 44.7% y su relacibn coo el PI€? fue de 5.4% (5.046 m 2004; para el 2006 en el Presupueslo de tngmos y Oastas b asignaclones para este pmp&Jto equlvakn a 6.1% del PIB). Es Impaftante seiiahr que a1 adionar a sste con- de gasto soclal asignadones de previsidn social, desarrollo urban0 y wml, y, gs& sadal del InstRuta Guatemffm de Squridad Sacial, wte aumsnta con respecto al PI5 e 8.5% para 2005, el cuai es superior al9.396 de 2004 y de acuerdb af presupuesto para el 2006 ascenderb a un 10.-1%.
ES knportmnte msaltar que cbntro de I# esfuenas por rrtejorsr b calidad del gasto, se ha fnfdado el procesb de fmulacldn presupwstatia por msultadas, e( arai est4 simdo aoompq~dq,m-el .Institup del, @noo, mqiiente la ,cap,citaci&~ del personal de l a unldades ejecutom, El pm&s.b eg i e o r a r ai preSiy& 10s resultados que se preteode alcanzar can k& eslgnadones de rewm, mediants la inoorporaci6n de oQetivos, metas e lodicadores de gasto, lo cual s8 reRejarla en el presupOst0 para ei 2007 de b prinapales Ministen'os d d Ejecutiw, En adldbn, se ha definklo un marc0 general para llevar a cabo el monitorno y evaksaclbn del gasto pWllco, et cual estarEt a cargo de manem conjunfa entre rsl Minlsterlo de flnanms PObIFcas y la Secretarb General de Planificacidn Eoonijmica
tt!.
Ei Gobierno cmtlnutj cbn la irnplementacidn de meciidss arlentados 81 mjorer la efidmcia y transparencia en el us0 de los r e c u m del e w b pClbPco, flndpalmenb, en el tema de rendicsdn de arentas, para aoadywar asf a fortaiecer la audikxla s d a l . Tal coma Rabfa planiffado, se ha lagrado el objetiw de W N a r la extwsibn del SMema lntegrado de Adrninistra&n F/na.ndm y Control (SIAF-SAG) a sbte anWdades descentrathdas, lo que ham un tofal de 29 entidades cuyos registm de ejecuch presupufsjartg ,se .i.ea&&ij Cin f o m integrada? tr;e&, d$ sistem en tiempo real. Aslmkrno se ccKltinGa con la incorporacidn de 10s gpbiemos locales, Gon k que 64 munidpalldades passnn a lnkgrar el slstema.
Modemizaisclldn y tmnsparwrch del sector p&Mw
En materia de adquisiciones gubemamentaFes, el GoMerno ha ten& avanC8-s signaicatlvos con el us0 del Sislerna de lnfomadlbn OUATECOMPRAS, slsbma que oontrlbuye a transparentar la gestbn psIbllca en mafeita de Domprhas y confratadones y tambihn propiaa un mayor nljmeru de parflcipantes, a d e d s de generer una mayor cornpetencia entre los oferentes, lo que se traduce adem& en rrme]om preckxs y calidad. Pw mandato gubemativo desde febrem del 2004 y por mandato legal a pram del 2006. todas las mrnpras por endma de un mnto espeoificado que raalfctsn tanto entidades del gobierno Genfra! w m ~ de 10s goblemos locales, deben hacar LEO de
40
&&e sistema En a d i c h 8 lo anterior, y con el glopbslto de furteleder kw ptocesos de adqulslclanes, se ha iniciado un progma de tbttakknlento de la Dlreoclh de Namtlvas y Contrataciones del Estado, para fo cu& se tw solicitado el apap del Banco para b pnpamu6n de un plan esstrategico de dicha Ditgodbn y la estandarizadbn de procedimientcs y documentos del praceso de adquisiamss, as! como, la preparacibn de manuales y la eepacitaddn del personal que partidpa en bs distfntos p m e m ds adquisieiones.
C m $e puede abserwar, el Gobierno de Guatemsla esg aHamenCe mprometida con la prornocib e irnpfementadtjn de tas accimw nmsarias para alcazar un mayor crec;imiento econdmico safrtenMo de base mplb, un LnaemeMo en la inversh producfiva, prlarkada en las: Breas de dud, educab;t#l y protedh Socjal, asl como, el fOrtdhCimient0 de la hnsparendia y efiienncla en fa be1 gaab pQbllco, todo ello Con ef propdsito de aumnfar el desendlo econdmioo de! pals y m#orar la caliiad de vida de la pobkd6n guatemalteca, en especial de bs grupas mas wherabk.
Es en este context0 que el apoyp finsnuero del Banco Mundial a tfaveS del segunda Pr6stam para Pollticas de Deserrallo cobra particular releutrnda, y se enrnarca dentra de la esfrategia de financiamiento det presupuesto de la nacidn.
Al agradecer el conlnuo apoyo que nos brinda at Banco Mundml, aprovgcho la oportunMad para expresarle las muesb-as de ml consideraoKin y estima.
Afentaments,
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TRANSLATION OF LETTER OF DEVELOPMENT POLICY
July 24,2006
Ms . Pamela Cox Vice President for Lat in America and the Caribbean Wor ld Bank Washington DC, U S A
Dear Ms. Cox:
’ Since the inception o f the current Government, the administration o f President Oscar Berger has established poverty reduction as one o f its principal aims. To achieve this, the focus has been on the implementation o f national policies which seek to establish efficient and transparent institutions and a stable macro-economic framework as means o f enabling more competitive markets, and o f creating opportunities for a l l citizens to increase their productivity, gain employment and invest. In other words, the goal is to promote development in an equitable and sustainable manner.
Given this aim, the Government has implemented a program o f structural reforms in the economic, political and social arenas, which allows for the gradual creation o f propitious conditions for sustained economic growth and improved national competitiveness, which, in turn, would support the achievement o f the Mi l lennium Development Goals (MDGs).
The Government’s plan for 2004-2008, formulated in the program “Vamos Guatemala” includes concrete actions for a medium-term strategy and is made up o f five strategic components: Guatesolidaria, Guatecrece, Guateinvierte, Guatecompite and Guateverde. I t establishes a series o f actions whose objectives are to promote a favorable climate for productive investment, which, in turn, should translate into better conditions o f living for the Guatemalan population. A s a result o f this program, important policies have been approved and implemented, these include: a) Food Security; b) National Competitiveness Agenda; and c) Program for National Reforestation.
The assistance strategy agreed between the Guatemalan Government and the Wor ld Bank envisages, inter alia, support to “Vamos Guatemala” through a series o f 3-4 Development Pol icy Loans over the period 2005-2007. Since approval o f the first loan in 2005, the Government has achieved continued progress in the key areas defined in the matrix o f program implementation, which i s why we now feel qualified to request the negotiation and approval o f the second loan for an amount o f US$ 100 mil l ion. As with the f i rs t loan, this requested loan would support the achievement o f further progress in the economic and social agenda o f the country and will also help improve the external debt profile.
The fol lowing i s a b r i e f summary o f progress achieved in the fol lowing areas:
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I. Economic Growth and Improvement of the Investment Climate
In terms o f the economy, the consolidation o f macroeconomic stability and the increased confidence in the country allowed for a growth rate o f 3.2% in 2005 while inflation reached 8.57%. This is the best growth rate experienced in five years, despite the impact o f high petroleum prices5 and the impact o f Hurricane Stan6. For 2006, real economic growth i s expected to be around 4.4% while the rate o f inflation registered in June 2006 was 7.55%, as against a target o f 6% established by the monetary authorities.
A key objective o f the Government’s program has been to maintain a l o w fiscal deficit. In this respect, the Government has tried to generate additional fiscal revenues to finance a significant increase in public investment, in particular in support o f social expenditures. The Prudent fiscal management combined with an adequate monetary policy, led to a real fiscal deficit o f 1.5% o f GDP in 2005. As part o f Government’s efforts to generate revenues to enable increased public spending for social investment, the executive presented to the Congress a proposed law aimed at combating tax evasion and loopholes through control mechanisms to facilitate the detection o f evasion and elusion practices and at enabling the state to improve tax collections. Fol lowing a process o f wide consultation with different interested sectors, and negotiations with the different political parties, a consensus was achieved which resulted in the approval by the National Congress on June 6,2006 o f Decree No. 20-2006 “Legal Provisions for the Strengthening o f the Tax Administration”. Although the Executive’s original proposal was watered down, the Decree nonetheless represents a major step forward and i s expected to yield additional revenues o f about 0.3% o f GDP in 2007.
At the same time, the Government continues to be committed to the objective o f improving tax revenues and has been supporting the work initiated by the Peace Accords National Council for the assessment, update and launching o f a dialogue that revitalizes the principles and commitments o f the Fiscal Pact with the aim o f making more feasible the achievement o f the Peace Accords and the MDGs. .
The country’s external position as measured by the level o f international monetary reserves i s satisfactory with reserves equivalent to almost 5 months o f imports o f goods and services, while the deficit in the current account in the balance o f payments in 2005 was 4.1% lower than the 4.4% registered in 2004. At the same time, external debt was maintained at a l o w level, amounting to US$3,591.9 m i l l i on or 11.3 percent o f GDP, while total public debt (external and internal) amounted to US$5,750.3 mil l ions or 18 percent o f GDP, the lowest in the Central America region. This management o f external debt is congruent with the principles o f the Fiscal Pact which emphasizes the maintenance o f a prudent pol icy with respect to indebtedness.
On the trade front, regional integration continues by means o f simplification and harmonization o f customs procedures between Guatemala, El Salvador and Honduras. Similarly, in the search for better opportunities for growth and investment, the government has promoted the opening o f
5.
6.
The negative impact on growth o f high petroleum prices was estimated to be 0.5% o f GDP and i t s contribution to inflation was about 2% in 2005. The negative impact o f Hurricane Stan in terms o f lost economic flows was estimated at 1.7% o f GDP in 2005.
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the economy through bilateral trade negotiations with Mexico, Taiwan and with the USA. With respect to the latter, subsequent to the ratification by the National Congress o f the DR-CAFTA treaty in March 2005, the government focused its efforts on the approval o f internal legislation to permit the coming into effect o f the treaty. After several negotiations with the U S counterpart and extensive debates in the National Congress, the DR-CAFTA came into effect f rom the lSt o f July 2006.
The Government o f Guatemala is convinced that openness to more and better markets will only bring benefits in the sense that the country wil l continue to improve i t s investment and business climate, and to provide for appropriate infrastructure. The modernization o f the country’s customs system, which includes, inter alia, the implementation o f an electronic customs manifest, simplification o f the customs declaration forms and reduction o f processing times at ports and airports, i s just one o f the measures that have been taken in this direction.
With respect to physical infrastructure, the Congress has already given green lights to two large highway projects which wil l enable public-private alliances and there has been rapid progress in the modernization o f the country’s principal airport.
In parallel, the Government has promoted secured legal property rights and the strengthening o f the financial system, both fundamental to maximizing the benefits o f the trade opening. Fol lowing the approval o f the Cadastral Information Law, v ia Congressional Decree No. 41- 2005 o f June 15, 2005, an independent directorate for the Cadastral Information Registry was appointed and i s currently developing an operational plan for the Registry for the next few years.
In the financial sector, and in continuation o f the financial reforms that began at the start o f this decade, banking supervision has been oriented towards risk management through the restructuring o f the Superintendence o f Banks. Likewise, the payments system has been modernized to enable bank settlements in real time, in accordance with good international practices.
11. Investment and priority public spending
A s part o f i t s program o f work, the Government has given priori ty to interventions in the education, health and social protection sectors, as reflected in rising budgetary allocations for the ministries and executing entities responsible for these sectors at the national level.
The Government has taken on board the principle that solid and durable peace should cement participatory socioeconomic development oriented toward the common good and responsive to the needs o f a l l citizens. Such development requires solidarity and social inclusion as one pi l lar o f national unity. I t i s to this end that the Government’s Plan 2004-2008, reaffirms the Peace Accords and defines their achievement as a commitment o f a l l Guatemalan society. The Vamos Guatemala! Program, through its Guate Solidaria component, gives specific focus to means o f reducing poverty and exclusion. In l ine with the foregoing, social spending as defined in the Peace Accords, which includes among others expenditure on education, health and housing, received additional emphasis in 2005, registering an increase o f 19.7 percent with respect to 2004. It i s important to note that in 2005 social spending rose to its highest level since 1995 as a
44
proportion o f total central government spending, accounting for 44.7 percent or 5.4 percent o f GDP at end 2005 (versus 5.0 % o f GDP in 2004; the budgeted social expenditure for 2006 i s 6.1% o f GDP). In addition, i t i s noteworthy that when expenditures o n social pensions, rural and urban development, and spending o n social security by the Guatemalan Institute for Social Security, is added to the Peace Accords definition o f social spending, total social spending rises to 9.5 percent o f GDP in 2005, which is higher than the 9.1 percent registered in 2004. In 2006 the budget allocation for this broader definition o f social spending will rise again to 10.1 percent o f GDP.
I t i s important to emphasize that, as part o f the efforts to improve expenditure quality, a process for results-based budgeting has been initiated with the support o f the Wor ld Bank Institute. The purpose o f this effort is to include in the budget the results that have to be achieved with the allocation o f resources, through the incorporation o f objectives, targets and expenditure indicators. A results-based budget will be reflected in 2007 budget for the main ministries. In addition, a general framework has been defined for monitoring and evaluation o f public expenditure, which wil l be coordinated by both, the Ministry o f Finance and the Secretary o f Economic Planning.
111. Modernization and transparency of public sector
The Government continued with the implementation o f measures aimed at improving the efficiency and transparency in the use o f public resources, focusing principally o n the issue o f accountability. A s had been planned, the objective o f expanding the coverage o f the Integrated Financial Administration and Control System (SIAF-SAG) to 7 decentralized entities has been achieved, bringing to 29 the number o f entities with budget execution authority which can be monitored in real time. Likewise, the affiliation o f local governments to the system has continued, with 64 additional municipalities having been integrated into the system.
With respect to public procurement, the Government has made significant advances in the use o f the GUATECOMPRAS information system, a system which contributes to increasing the transparency o f public purchases and contracts and allows a greater number o f bidders thereby increasing competition. Starting this year, a Government decree requires that al l purchases by central and local government entities, above a specified threshold, are required to use the GUATECOMPRAS system. In addition, and with the purpose o f strengthening procurement processes, a program for strengthening the National Directorate o f Norms for Public Procurement (Direccion de Normativas y Contrataciones del Estado) has been initiated. For this purpose, the Wor ld Bank’s support has been requested for the preparation o f a strategic plan for the regulatory body, for the standardization o f procedural manuals and bidding documents as we l l as for training o f government officials involved in procurement.
Conclusion
A s the foregoing shows, the Government o f Guatemala remains highly committed to the promotion and implementation o f actions necessary to launch higher, sustained and broad-based economic growth, increased productive investment and employment, as we l l as reduced levels o f poverty through priori ty investments in the health, education and social protection sectors.
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I t i s in this context that the support o f the World Bank through the Second Development Pol icy Loan takes o n special relevance and forms part o f the strategy for budget financing o f the country.
With thanks for the continuing support received from the Wor ld Bank, I take this opportunity to express to you my esteem and regards.
Sincerely,
Maria h t o n i e t a de Boni l la Minister o f Public Finance
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Annex 3 Guatemala at a Glance
1995-05 2004 2005 (average annual growth) Agriculture 3.1 2.6 3.7 3.3 Industry 3.6 2.7 0.9 2.9
Manufacturing 2.5 2.0 2.3 2.9 Services 4.1 3.7 2.9 3.3
Household final consumption expenditure 3.8 3.7 3.7 4.1 General gov't final consumption expenditure 4.3 3.2 -10.1 4.6 Gross capital formation 7.8 8.1 7.0 -4.3
POVERTY and SOCIAL Guatemala
2005 Population, mid-yeqfmillions) 13.0 GNI per capitqAtlas method, US$) 2,230 GN I (Atlas method, US$ billions) 29.4
Average annual growth, 1999-05
Growth of exports and Imports (Oh)
lo 5 0
-10 - Exports @d- Imports
PopulatioM%) Labor force(%)
2.6 3.6
Most recent estlmate (latest year available, 1999-05) Poverty(% of population below national poverty line) 56 Urban populatiorf% of total population) 41 Life expectancy at birt@ears) 65
40-45 44 92 70 99
Male 103 Female 95
Infant mortalitfper 7,000 live births) Child malnutritior$% of children under 5)
Gross primary enrollmed% of school-age population)
Access to an improved water sour@ of population) Literacy(% of population age 75+)
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1985 1995
GDP (US% billions) 9.7 14.7 Gross capital formationlGDP 11.5 15.1 Exports of goods and serviceslGDP.. 11.9 19.3 Gross domestic savingslGDP 10.5 8.9 Gross national savingslGDP 8.9 11.1 Current account balancelGDP -2.5 -4.1 Interest paymentslGDP 1.4 1.0 Total debt/GDP 27.5 24.9 Total debt servicelexports 27.9 10.6 Present value of debt/GDP Present value of debtlexports
1985-95 1995-05 2004 (average annual growth) GDP 3.7 3.2 2.7 GDP per capita 1 .I 0.5 0.1 Exports of goods and services 5.2 1.6 6.6
Latin America 8 Carib.
54 1 3,600 1,948
1.4 0.9
77 71 28
89 89
123 126 122
2004 27.4 19.8 17.0 5.8
15.4 -4.3 0.7
20.1 5.3
2005
3.2 0.6 2.7
Lower- middle- income
2,430 1,580 3,847
1 .o 0.7
49 70 33 11 81 90
114 115 113
2005 31.7 18.0 16.3 4.9
14.7 -4.1 0.6
18.6 4.6
2005-09
3.9 1.4 5.3
Development diamond.
Life expectancy
T GNI Gross per primar! capita enrollmen
I
Access to improved water source
- Guatemala - Lower-middle-income ~ r o u i ~
Economlc ratios.
Trade
T Domestic Capital savings formation
Indebtedness
- Guatemala - Lo wer-middle-income group
STRUCTURE of the ECONOMY
(% of GDP) Agriculture Industry
Services Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services
Manufacturing
1985 1995 2004 2005
25.9 24.2 22.9 22.9 19.7 19.7 18.9 18.8 15.8 14.1 12.7 12.6 54.5 56.2 58.2 58.2
82.6 85.6 87.9 88.7 7.0 5.5 6.4 6.4
13.0 25.4 31.1 29.4
Growth of capltal and GDP ( O h )
/ L O T
10 5 0
-5 -10
I -GCF -GDP
15 10 5 0
-5 . IO
Note: 2005 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond
wilbe incomplete.
47
riwx
Faod Fml and enargy Ceprtel goods
rndex 1 rndax I de 120
BALANCE of PAYMENTS
EXTERNAL DEBT and RESaURCE FLOWS
1985
-20 1 15 8
1985
f os0 4%
44
1,1
262 197
9 12 75
9 95s
1161 1257
-86
-1 70 19
-24 7
3 -1
325 II
1955
2 677 225
0
335 24 0
27 132
3 BP
0
45 48 13 36 31 24
2998
8 4 8 7
1995
2 158 539 246
281 835
11 74 96
1985
2 802 3 721 "839
-1 73 48 1
-600
502 5 8
1985
5 158
0
350 53 0
1 08 26 12 78 0
0
-26 14
-40
2604
7 6 7 0
i o 8 2 %
-3 5
2004
3 430 326 191
i ,a35 1,089 1,714
2064
4 648 8 486
-5,838
-357
-1 188
.e09 1,797
3
1064
5 500 478
0 391 46 5
135 85
330 I55
0
47 78 29 $0 17 33
2005
9 1 7 7
i o 3 2 5
-5 5
2085
1,801
133 126 10G
2005
8 8 9
-548 3,482
-1 303
1
3
2005
5 $88 479
0 380 52 0
7 39 -5'3
0 f 95
0
f 00 34 35
1 19
.I7
I -
4 479
Annex 4. Debt Sustainability in Guatemala Guatemala has one o f the lowest debt levels as a share o f GDP in Lat in America and among developing countries worldwide, reflecting a tradition o f very disciplined macroeconomic management. Given the relatively l o w level o f tax revenue to GDP it i s nevertheless relevant to analyze the sustainability o f public debt. To explore this issue a medium term sustainability analysis was prepared under the key macroeconomic assumptions presented in table A4.1 and a f i l l delivery o f the $6 10 mi l l ion IBRD CAS envelope.
-0.6 -0.4 -0.3 -0.3
Even under relatively conservative macroeconomic assumptions public external debt would stabilize to 11.4 percent of GDP by 2009 in the baseline scenario (see table A4.2 below. Similarly, debt service o n external public debt would decline to 7.9% o f exports by 2009 . Fol lowing the Government’s current debt policy, the baseline scenario assumes no new sovereign bond financing o f the fiscal deficit. The use o f less costly DPL lending during the 2006-2008 period would prevent sharp increases in interest payments. These conclusions are consistent with the analysis presented in the Public Expenditure Review (see Public Domestic Debt section below) as we l l as with the IMF’s debt sustainability analysis in i t s most recent Article N report (see B o x A4.1 for details). The debt sustainability analysis (DSA) presented here contains an improved outlook compared to what was presented in the DPLI program document. The DPLI D S A assumed that the government would increase external borrowing substantially in 2005 to finance reconstruction expenditure in light o f Hurricane Stan. In actual fact, the government borrowed much less than expected and this, combined with a 4 percent appreciation o f the exchange rate, reduces the external debt-to-GDP ratios.
?
This analysis also indicates that all external vulnerability indicators would remain sound. Although the share o f preferred creditor debt to total debt increases over the period (including that o f IBRD) this should not be a cause o f concern because o f Guatemala’s relative ease o f servicing total debt. The current account deficit would remain stable at around 3.9 percent o f GDP by 2009 as a result o f steady growth in remittances and stronger nontraditional exports. The scenario also contemplates that debt-creating inf lows would be reduced due to new DR-CAFTA-related foreign direct investment and as a result, Guatemala’s private external debt would stabilize at around 5.2 percent o f GDP by 2009, slightly lower than 2004 levels. International reserves would also remain strong at 4.3 months o f imports o f goods and nonfactor services throughout the period.
7. A one-time increase in amortization payments i s observed in 2007, as the outstanding US$lSO mil l ion due in that year i s repaid.
49
Table A4.2 Guatemala - External Debt Exposure Indicators Actual Prelinnnary Projection
2001 2002 2003 2004 2005 2006 2007 2008 2009
Total debt outstanding (TDO, US$m)' 4,288,7
o f which, Public Sector 2,702.2
ofwhich, IBRD 329.5
329.4
o f which, Public Sector 252.7
Total debt service (TDS, US$m) a
ofwhich, IBRD 33.9
Total Debt and debt service indicators (%)
TDO I GDP 20.4%
8.5% TDS I Exports o f GNFS
Public Debt and debt service indicators (%)
Public TDO I GDP 12.9%
Public TDS I Exports o f GNFS 6.5%
37.9% Preferred creditor debt / TDO E
46.2% Preferred creditor DSI TDS (%)
IBRD exposure indicators IBRD Debt I TDO 7.7%
IBRD DSI TDS 10.3%
0.9%
0.3%
IBRD DS I Exports o f GNFS Share of IBRD portfolio (%)
4,432.5
2,896.7
399.8
420.1
311.1
35.5
19.0%
10.5%
12.4%
7.8%
41.9%
46.9%
9.0%
8.5%
0.9%
0.3%
5,082.1
3,255.3
427.6
460.5
334.7
36.5
20.4%
10.7%
13.1%
7.8%
38.1%
48.0%
8.4%
7.9%
0.8%
0.4%
5,438.4
3,702.4
477.8
545.0
485.0
46.0
19.9%
11.7%
13.6%
10.4%
38.3%
48.1%
8.8%
8.4%
1 .O%
0.4%
5,245.3
3,s 8 4.3
479.0
456.0
403.0
52.0
16.4%
8.8%
11.2%
7.8%
38.9%
50.9%
9.1%
11.4%
1.0%
0.4%
6,142.6
4,245.6
583.8
566.1
485.3
68.0
17.1%
9.7%
11.8%
8.3%
44.2%
55.5%
9.5%
12.0%
1.2%
0.5%
6,477.2
4,470.3
730.9
769.8
657.4
73.5
17.6%
12.7%
12.2%
10.8%
45.5%
44.0%
11.3%
9.5%
1.2%
0.7%
6,818.7
4,693.3
819.1
683.2
538.7
95.8
17.5%
10.6%
12.0%
8.3%
45.5%
56.2%
12.0%
14.0%
1.5%
0.7%
6,903.2
4,723.4
815.5
767.6
541.9
96.7
16.7%
11.2%
11.4%
7.9%
44.4%
49.8%
11.8%
12.6%
1.4%
0.7%
a. Includes publicly guaranteed debt (including IMF), private nonguaranteed and private short term debt. Excludes debt of CORFINA for U S 1 3 1 million. b. "GNFS" denotes exports of goods and non factor services. c. Preferred creditors are defined as IBRD, IDA, IFC, the regional multilateral development banks, the IMF, and the BIS.
Public Domestic Debt An analysis o f total public debt undertaken in the Guatemala PER (June, 2005) complements the results presented above by including public domestic as we l l as external debt. It finds that Guatemala's total public debt o f almost 20.6 percent o f GDP in 2004 i s sustainable even at relatively l o w GDP growth rates between 2.0 and 2.5 and no primary fiscal surplus. The analysis also shows that if annual GDP growth were to increase significantly (e.g., to 4 percent), there could be some scope for a temporary, but not permanent, expansion o f fiscal deficits that will result in a higher public debt level. Such a debt expansion must be approached with caution, however, taking into account the various r isks inherent in an economy that is vulnerable to external and internal shocks. Indeed, i t would be prudent to postpone major expansions o f public debt until the country has established a track record o f higher growth, and seek to maintain a cushion o f debt-absorption capacity in the face o f possible adverse shocks.
50
Box A4.1. The IMF and Debt Sustainability in Guatemala
In i t s latest Article IV consultation report o f April 29, 2005, the IMF finds that Guatemala’s external and public debt outlook i s sustainable, even under alternative negative shock scenarios for the underlying macroeconomic variables. The baseline scenario estimates that total public debt would decline to 15 percent o f GDP by 2010, from 18 percent in 2004. Similarly, public external debt wil l decline f rom 14 to 12 percent o f GDP during the same period. The ‘weaker policy’ scenario assumes that tax revenues are not raised, inflation remains at current levels and financial reform i s postponed. The results show that public debt would remain at 18 percent by 2010, instead o f declining. Nevertheless, the ratio o f public debt to tax revenue would s t i l l be the lowest in Central America and Guatemala’s protection against vulnerabilities would remain relatively strong. Temporary negative shocks to key variables (interest rate, exchange rate and GDP growth) would lead to some increase in the level o f public and external debt, nevertheless the ratios return to a declining path once the shocks disappear. Under such negative circumstances, the IMF warns that the investment climate could be affected, raising the cost o f borrowing for Guatemala and Mher lowering GDP growth.
51
MAP SECTION
SSii ee rr rr aa
MM aa dd rr ee
CChhaammaa MMttss.. SSiieerrrraa ddee SSaannttaa CCrruuzz
SSiieerrrraa ddee llooss CChhuuaaccúússTTajumulcoajumulco(4220 m)(4220 m)
HUEHUETENANGOHUEHUETENANGO
Q U I C H EQ U I C H E
BAJA VERAPBAJA VERAPAZAZ
I Z A B A LI Z A B A LA LA LTTA V E R A PA V E R A PA ZA Z
Z A C A PZ A C A P AA
CHIQUIMULACHIQUIMULA
JALAPJALAPAA
JUTIAPJUTIAPAA
ELELPROGRESOPROGRESO
GUAGUATEMALATEMALA
TOTONICAPTOTONICAPANAN
SANSANMARCOSMARCOS
SOLOLASOLOLA
RETRETALHULEUALHULEU
SANTSANTAAROSAROSA
SACASACATE-TE-PEQUEZPEQUEZ
E S C U I N T L AE S C U I N T L A
SUCH
ITEPE
QUE
Z
SUCH
ITEPE
QUE
Z CHIM
AL
CHIM
ALTE
NANGO
TENAN
GOP E TP E T ÉÉ NN
QQUUEEZZAALLEENNAANNGGOO
PaxbPaxbáánn
MelchorMelchorde Mencosde Mencos
SayaxchSayaxchéé
San LuisSan Luis
El NaranjoEl Naranjo
La LibertadLa Libertad
TikalTikal
BarillasBarillas
CahabCahabóónn
ChajulChajul
ModestoModestoMMééndezndez
El EstorEl Estor
LLíívingstonvingston
MoralesMorales
Los Amates Los Amates
EsquipulasEsquipulas
CobanCoban
JalapaJalapa
SololaSolola
ZacapaZacapaSalamaSalama
FloresFlores
CuilapaCuilapa JutiapaJutiapaEscuintlaEscuintla
RetalhuleuRetalhuleu
ChiquimulaChiquimula
San MarcosSan Marcos
MazatenangoMazatenango
El ProgresoEl Progreso
TTotonicapanotonicapan
ChimaltenangoChimaltenangoQuezaltenangoQuezaltenango
HuehuetenangoHuehuetenango
PuerPuertotoBarriosBarrios
AntiguaAntiguaGuatemalaGuatemala
Santa CruzSanta CruzDel QuicheDel Quiche
GUAGUATEMALATEMALA
EL SALVADOR
HUEHUETENANGO
Q U I C H E
BAJA VERAPAZ
I Z A B A LA LTA V E R A PA Z
Z A C A P A
CHIQUIMULA
JALAPA
JUTIAPA
ELPROGRESO
GUATEMALA
TOTONICAPAN
SANMARCOS
SOLOLA
RETALHULEU
SANTAROSA
SACATE-PEQUEZ
E S C U I N T L A
SUCH
ITEPE
QUE
Z CHIM
ALTE
NANGO
P E T É N
QUEZALENANGO
Paxbán
Melchorde Mencos
Sayaxché
San Luis
El Naranjo
La Libertad
Tikal
Barillas
Cahabón
Chajul
ModestoMéndez
El Estor
Lívingston
Morales
Los Amates
Ocós
Champerico
Sipacate San José
Las Lisas
Esquipulas
Coban
Jalapa
Solola
ZacapaSalama
Flores
Cuilapa JutiapaEscuintla
Retalhuleu
Chiquimula
San Marcos
Mazatenango
El Progreso
Totonicapan
ChimaltenangoQuezaltenango
Huehuetenango
PuertoBarrios
AntiguaGuatemala
Santa CruzDel Quiche
GUATEMALA
BELIZE
EL SALVADOR
HONDURAS
M E X I C O
M E X I C O
Negro
Motagua
SarstúnCancuén
Mac
haquilá
Mop
ánUsumacinta
Pasión
Ixcá
n
Salin
as
Chiyú
Selegua
San Pedro
Cahabón
Polochic
Motagu a
Suchiate
L.Atitlan
PACIFIC OCEAN
Gulfof
Honduras
L. deIzabal
L. Petén Itzá
To Tuxtla Gutiérrez
To Tonalá
To La Unión
To La Unión
To El ProgressoS
i e r r aM a d r e
Chama Mts. Sierra de Santa Cruz
S ierra de los ChuacúsTajumulco(4220 m)
92°W13°N
14°N
15°N
16°N
17°N
13°N
14°N
15°N
16°N
17°N
18°N 18°N
91°W 90°W 89°W 88°W
92°W
91°W 90°W 89°W 88°W
GUATEMALA
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
0 20 40
0 10 20 30 40 50 Miles
60 Kilometers
IBRD 33413
SEPTEMBER 2004
GUATEMALASELECTED CITIES AND TOWNS
DEPARTMENT CAPITALS
NATIONAL CAPITAL
RIVERS
PAN AMERICAN HIGHWAY
MAIN ROADS
RAILROADS
DEPARTMENT BOUNDARIES
INTERNATIONAL BOUNDARIES