Documentof The World Bank FOROFFICIAL USE ONLY Report No. 44996-GT INTERNATIONAL BANKFOR RECONSTRUCTION AND DEVELOPMENT PROGRAMDOCUMENT FORA FIRSTPROGRAMMATIC FISCAL AND INSTITUTIONAL DEVELOPMENT POLICY LOAN INTHEAMOUNT OFUS$200MILLION TO THE REPUBLIC OF GUATEMALA September 17,2008 CentralAmerica CountryManagementUnit PovertyReductionandEconomicManagement Latin America andCaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content may not otherwise be disclosed without World Bank authorization. The GuatemalaCountry PartnershipStrategywas presentedto the World BankExecutiveBoard for discussionon September 23,2008 REPUBLIC OF GUATEMALA-FISCAL YEAR January 1-December 31 CURRENCY EQUIVALENTS As of September 09,2008 US$l.OO = 7.49 QZ (Quetzales) WEIGHTSANDMEASURES Metric System SELECTEDACRONYMS AND ABBREVIATION ACH ElectronicClearingHousefor Checks - GUATECOMPRAS Public Procurement System BANCASAT IBRD InternationalBankfor Reconstructionand BANGUAT GuatemalanCentralBank Development CAT-DDO Catastrophic Risk Draw-DownOperation ICA InvestmentClimate Assessment CAUCA C6digo Aduanero UniformeCentroamericano ICEFI LocalThink Tank specializingonFiscal Issues cc ConstitutionalCourt IDB Inter-AmericanDevelopmentBank CCA Automated ClearingHouse IETAAP Temporary Tax on BusinessIncome CCT ConditionalCashTransfer IFC InternationalFinanceCorporation CD Certificateof Deposit IGN NationalGeographicInstitute CEA CountryEnvironmentalAssessment IMF InternationalMonetary Fund CEM CountryEconomicMemorandum INSIVUMEH MeteorologyInstitute CFAA Country FinancialAccountabilityAssessment LAC Latin America and the Caribbean C-GAC Country GovernanceandAnti-Conuption MARN Ministry of Environment andNatural Resources CIEN Local ThinkTank PER PublicExpenditure Review CPAR CountryProcurementAssessment Report PFM PublicFinancial Management CPI ConsumerPrice Index PRONACOM NationalProgramfor Competitiveness DPL DevelopmentPolicy Loan RAMP ReservesAdvisory andManagementProgram DR-CAFTA Dominican Republic-CentralAmericaFree RECAUCA Rulespertaining to CAUCA Trade Agreement SIAF IntegratedFinancial ManagementSystems EIA EnvironmentalImpactAssessment SME Smalland MediumEnterprise FSAP Financial Sector Assessment Program UN UnitedNations GANA Gran Alianza Nacional(GrandNational UNE UnionNacional de la Esperanza Alliance) VAT Value Added Tax GDP Gross Domestic Product WBI World Bank Institute GEF Global Environment Facility Vice President Pamela Cox Country Director Laura Frigenti Sector Director Marcel0 Giugale Sector Manager Rodrigo Chaves Sector Leader Humberto Lopez Task Managers David Gould and Waleska Garcia-Corzo ACKNOWLEDGEMENTS The World Bank Group greatly appreciates the close collaboration with the Government of Guatemala in the preparation of this First Programmatic Fiscal andInstitutional Development Policy Loan (DPL). The DPL team, including Keisgner Alfaro, Juan C. Belausteguigoitia, Armando Guzman, Antonio Blasco, Stephen Brushett, Mariluz Cortes, Cecilia Corvalan, Enrique Fanta, Martha Garcia, Michael Geller, Michael Goldberg, Jose Eduardo Gutierrez Ossio, Albert0 Leyton, Yira Mascaro, John Newman, Enrique Pantoja, Manuel Salazar, Carlos Sobrado, Tova Solo, David F. Varela, and Pierre Werbrouck, would like to thank the entire country team for their contributions as w e l l as the Country Manager, Ana Abreu andpeer reviewers Elisabeth Huybens andManuel Vargas. Special thanks go to several colleagues in the Bank for critical inputs especially Alejandro Alcala and Todd Crawford. FOROFFICIAL USE ONLY Republic of Guatemala-First ProgrammaticFiscal and InstitutionalDevelopmentPolicy Loan TABLEOFCONTENTS LoanandProgram Summary.................................................................................................................. i I CountryContext.................................................................................................................................. . 1 I1 Economic Context and RecentMacroeconomicPerformance....................................................... . 2 A. Growth and Stability ............................................................................................................... 2 B. Investment Climate, Trade andFinance.................................................................................. 2 C. Governance and Transparency ................................................................................................ 4 D Recent Economic Developments andGrowthOutlook .......................................................... . 6 I11 GovernmentPlanand Key IssuesinFiscalandInstitutionalDevelopment............................... . 8 A. Priority Spending for Reducing Poverty and Inequality: EnhancedMonitoringandEvaluation and MaintainingFiscal Space................................................................................................. 9 B PromotingFinancialMarketStabilityandDeepening .......................................................... . 11 C. Strengthened Governance andTransparency ........................................................................ 13 D. Sustainable GrowthandProductivity.................................................................................... 14 IV The ProposedLoan......................................................................................................................... . 15 A Linkto the Country Partnership Strategy and LoanDesign ................................................. . 15 B Lessons Learned from the Prior Broad-Based Growth DPL Series...................................... 20 C Fiduciary Aspects.................................................................................................................. .. 21 D LoanAdministration ............................................................................................................. . 21 E Monitoring andEvaluationArrangements ............................................................................ . 21 F Consultation, Distributional and Environmental ImpactAspects.......................................... G Risks...................................................................................................................................... 25 .. 23 Map (IBRD33413) Annexes Annex 1. Government o fGuatemala Policy Actions to be Supportedbythe DPL Series...................... 27 Annex 2. Debt Sustainability Analysis ................................................................................................... 3 1 Annex 3. Letter o f DevelopmentPolicy (OriginalinSpanish) ............................................................... 33 English translation. .................................................................................................................. 41 Annex 4 IMF Relations with Guatemala (Pub.Info.Note 08/65, June 4. 2008) ................................... 47 Annex 5 Guatemala At-A-Glance .......................................................................................................... .. 51 .Tables Table 1. Guatemala Macroeconomic Outlook .......................................................................................... 7 Table 2. Fiscal Modernization Proposal.................................................................................................. 10 Table 3 CPS ProgramObjectives and Select Areas o f Action............................................................... . 16 Table 4 DPL Series Contributionto Expected CPS Outcomes.............................................................. . 17 Table A2.1 K e y Macroeconomic Indicators for Debt Sustainability Analysis........................................ 31 Table A2.2 Guatemala -External DebtExposureIndicators ................................................................. 32 .Boxes B o x 1. 2008 Guatemala Investment Climate Assessment (ICA) Findings............................................... 3 BOX2. DR-CAFTA................................................................................................................................... 4 Box 3. Progress on Public FinanceManagement Reform......................................................................... 5 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Box 4. Government Development Themes ...................................................................................... .........8 Box 5. LinksbetweenDPL Series and Prior Analytical and Fiduciary Work...... .. . ...............................19 Box 6. GoodPractice Principles on Conditionality ......,. ................................ . ............................... .. ... ... 22 Box 7. Guatemala Country EnvironmentalAnalysis-Findings and New Developments.....................24 Box A2.1 The IMF and Debt Sustainability inGuatemala ....................................... ..... ....................32 ... .. LOAN PROGRAM SUMMARY AND Republicof Guatemala Programmatic Fiscal and Institutional Development Policy Loan Borrower: Republic o f Guatemala [mplementingAgency: MINISTRY OF PUBLICFINANCE lBRD Loan Amount: USD 200 million. Terms: Commitment-linked fixed spread loan, denominated inU S dollar, withlevel FinancingData: repaymentsofprincipalpayable in26.5 years (including 8.5 years o f grace period). "he Borrower wishes to maintain all risk management options embedded inthe loan, and requestan Automatic Rate Fix when the full amount of the loan i s disbursed. The Front- endfee is 0.25 percent ofthe total loanamount, financed out o fthe loanproceeds. OperationType: First operation of a three-part programmatic Development Policy Loan series. This DPL i s designed to assist the government inimproving fiscal and institutional policies. The government has initiated aprogram to enhancetransparent andefficient priority public spendingand investment for growth andpoverty reduction, includinga Main Policy Areas: targeted conditional cash transfer program. The D P Lwill contribute to the government's mainpolicy objectives by 1) supporting enhanced governance, transparency, and monitoring and evaluation o f increasedpublic expenditure and investment, 2) supporting macroeconomic stability and greater fiscal space for priority spending. 1) Enhanced governance, transparency, and monitoring and evaluation of increased public expenditure and investment Ninety percent of Central Government's expenditures are made withina multi- annual and results-based budget framework. (Baseline: 22percent in 2008) Co-responsibilities verified for 70 percent ofthe CCTbeneficiaries, halfof which Key Outcome are extreme poor, basedon a framework for monitoring and evaluation. (Baseline: Indicators(end 0 in August 2008) FY2011): 2) Macroeconomic stability and greater fiscal space for priority spending Fiscalreformimplementation contributes to additional revenues so that tax collection as a share of GDP increasesto 12.7 percent. (Baseline:12.3percent in 2007) Consolidated supervisionhas been completed inat least h a l f o f the financial groups by assets (Baseline: 0) TheKey Program Development Objectives: - Meeting fiscal and financial needs during a year of economic slowdown. T h i s proposed loan would help meet the Government's objective o f obtaining stable and low cost financing as well as diversifying financing sources for its 2009 budget. This supports the Government's concurrent goals of maintaining fiscal stability and addressing social needs through increased and more efficient spending. Improving the outlook for economic growth, enhanced fiscal space for priorit). spending, governance, and poverty reduction. The loan supports a broad agenda of ProgramDevelopment measures anchored in Guatemala's efforts to increase fiscal resources for priority Objectives and social spending to increase growth and reduce poverty, enhance governance and Contribution to CPS transparency as well as reduce financial sector market risk. T h e agenda includes key actions o f fiscal and institutional reforms to ensure that Guatemala can fully benefit from growthand the opportunities deriving from greater integration into the regional and world economy. Increasing the efficiency and transparency of public sector management. The public sector modernization efforts supported by the loan are expected to improve t h e efficiency o f public expenditures, strengthen governancea n d fight corruption with z specific focus on government procurement and financial management. Efforts ir these areas are also expected to foster an environment more conducive to investmen1 and growth. 1 Zontribution to CPS rhe proposed Programmatic Development Loan is intended to support the fiscal and nstitutional development policy aspects o f the Guatemala Country Partnership Strategy :FY09-12), which was presented to the World Bank Executive Board for discussion on September 23, 2008. The new CPS program envisions supporting policy areas as lescribed inthis DPL, but also investment operations in key areas including, education, health and nutrition, rural infrastructure and disaster risk mitigation, many of which ouild on the ongoing portfolio of interventions in these areas. This loan focuses on the main policy objectives o f the government's development plan within the CPS including: i)fiscalreformto expand fiscalspacefor priorityspendingandinvestment, ii)increased financial market stability and deepening, iii)enhanced governance and transparency, iv) strengthenedpublic fmancial management and procurement, v) improved execution and targeting o f social spending, and vi) improved investment climate by simplifying tax and customs administration. The analytical basis draws on findings set forth in the CEM, PER, Poverty Assessment, the regional and Guatemala Investment Climate Assessment and FSAP update. Public financial management and procurement measuresare based on the findings o fthe CFAA and CPAR. There are three primary risks associated with the proposed programmatic DPL series: political, natural disaster, and economic risks. These risks and the ways they are being mitigated include: Political: Political deadlock may arise, stalling progress on the policy reforms supported by the DPL. In particular, reforms to increase tax collections to fund priority spending have historically been, and continue to be contentious. T h i s concern could be amplified if growth begins to slow significantly inthe context o f the global economic downturn. Mitigation: The risk is minimized by the Government's consultative approach to reform implementation and thefacilitation of dialogue on fiscal action among country stakeholders (with WBIsupport). The operation is also being coordinated with the budget cycle to increase legislative engagement. Natural Disasters: Guatemala is highly vulnerable to multiple natural disaster R i s k s and Risk risks-floods, hurricanes and earthquakes-that pose a significant direct threat to Mitigation: economic growth and poverty reduction, as well as indirect threat by redirecting government resources away from long-run development plans. Mitigation: The CPS program supports government efforts to update and validate the National Program for Disaster Mitigation and Response. A planned CAT-DDO (FY09) would support implementation of comprehensive disaster risk reduction measures and, in the event of a disaster, give the Government access to bridge financing while it mobilizes funds fiom other sources for disaster recovery. In addition, an FY08 non-lending Technical Assistance program, the Development of Scientific Information to Promote the Municipal Planning to Reduce Disaster Risks, has been taken up by Global Facilityfor Disaster Reduction and Recovery grants. Economic: U.S. and global deceleration, risingenergy and food prices, slowdown in foreign investment and lower remittance growth may slow or reverse progress on reforms and poverty reduction actions. Mitigation: Ongoing macro-monitoring and country dialogue to adjust operation ifcritical risks emerge. The operation includes specific actions to manage and respond tofinancial vulnerabilities. These risks and mitigating measuresare explained indetail in Section IV part G. Operation IDNumber: PE-P112312-LEN-BB .. 11 GUATEMALA PROGRAMMATIC FISCALAND INSTITUTIONAL DEVELOPMENT POLICY LOAN I.COUNTRYCONTEXT 1. With a multi-ethnic population of about 13 million and a per-capita GNI of about $2,610, Guatemala is the largest economy in Central America. While a source of cultural strength and rich historical heritage, Guatemala's ethnic diversity has also unfortunately been accompanied by a pattern of conflict and exclusion since colonial times. Inthe latter halfof the 20th century, long-standing socio-political and economic tensions sparked a debilitating 36-year civil war, which ended in 1996 with the signing of a set of Peace Accords between government andguerrilla leaders, following protractednegotiations. 2. Guatemala has made considerable development progress since the signing of the Peace Accords in 1996. Particularly, improvements have been made inconsolidatingpeace and building democratic institutions. The process of consolidating democratic institutions was strengthened most recently with the peaceful transition to the new government of Alvaro Colom of the Uni6n Nacional de la Esperanza (UNE) party in January 2008, following the administration o f Oscar Berger o f the Gran Alianza Nacional (GANA) party. While UNE won the largest numbero f congressional seats (51 out o f I%), of a simple majority has made the lack the new administration's focus on social cohesion and building strategic alliances particularly relevant. Building a broad consensus is important for the successful implementation of its ambitious development planinpromotinginclusive growth and reducingpoverty andinequality. 3. Despite progress on consolidating democratic institutions, poverty and inequality remain high and social indicators (health, nutrition, education) are low compared to other countries of similar income levels. Poverty declined from 56 to 51 percent between2000 and 2006, while extreme poverty has remained roughly unchanged at about 15 percent. Much of the extreme poverty i s among the rural indigenous, with chronic malnutrition o f children in this group running as high as 69 percent. Important impediments to gains in reducing poverty and inequality are the lack of consistent andbroad-basedgrowth as well as programs that specifically target the poor. This, inturn, dependsnot only on improving the attractivenessof the country for both domestic and foreign investment, but also on the fiscal and institutional means to execute efficient and well targeted socialprograms andpublic investment. Relyingexclusivelyongrowth to cut poverty by half by 2015 would require an average annual per capita growth rate of 2.4 percent, a goal that Guatemalahas infrequently achieved.* 4. The Colom administration has highlighted its commitment to making growth m o r e inclusive to address the country's high levels of poverty and inequality. The government has placed particular emphasis on policy reforms inthe areas o f enhancing growth and productivity, governance, transparency, reducing risk and expanding fiscal revenues and opportunities for the poor by providing basic services (education, healthcare, nutrition, etc). It aims thereby to address deep pockets of poverty in the country, particularly in the rural areas, where recent improvements in overall economic growth have not made significant inroads. Crime and 1. Guatemala Country EconomicMemorandum, WorldBank, 2005. 1 violence are also recognized as serious economic and social problems and new challenges have arisen, particularly high food and oil prices and the slowdown of the global economy, which have temperedeconomic activity andincome growth amongthe poor. 11. ECONOMIC CONTEXT AND RECENT MACROECONOMICPERFORMANCE A. Growth and Stability 5. Economic growth has been relatively stable compared to the rest of Latin America. Since 1960, annual per capita real GDP growth in Guatemala has averaged about 1.4 percent, nearly the same as Latin America's rate as a whole, but the country's growth volatility was less than half the regional average.2 Much of Guatemala's relative stability can be attributed to prudent macroeconomic policies that have kept inflation and public debt manageable, while avoidingfiscal imbalances that haveplaguedmucho f the region. 6. Sound macroeconomic management has allowed Guatemala to capitalize on favorable external conditions in recent years. Despite Guatemala's susceptibility to natural disasters (e.g. Hurricane Stan in2005), financial market shocks (e.g., the successful resolution of two commercial banks in2006-2007), and terms o f trade shocks (e.g., the coffee crisis in2003- 2004), the economy grew 4.2 percent on average from 2004 to 2007, reaching 5.7 percent in 2007, its highest growth inthree decades. Reforms to improve the investment climate and reduce borrowing costs contributed to accelerating private consumption and investment. Onthe external front, high inflows o f wage remittances and favorable external conditions helped create strong demand for Guatemala's exports and stable balance o fpayments financing. 7. TOaccelerate broad-based growth, Guatemala wishes to improve the investment climate for business, increase educational attainment and make progress on the governance, transparency and security. A challenge in meeting these goals will be to expand fiscal space to support priority public investment and social spending. Since the 1996 Peace Accords, Guatemala's target has been to raise tax revenues to 13.2 percent o f GDP? Despite significant improvements in tax administration, including the passage of an Anti-Tax Evasion Law in2006, political opposition and unfavorable constitutional court rulings on taxes have kept tax collections as a share of GDP relatively flat and below the Peace Accords target! Guatemala's light tax burden, which at slightly over 12 percent i s among the lowest in the region, does not provide sufficient fiscal space to address social needs. B. Investment Climate, Trade and Finance 8. Since 2003, Guatemala has achieved substantial progress in improving its investment climate. While Guatemala still faces challenges in terms o f investment climate, in 2006 and 2007 Guatemala was among the top reformers worldwide, and perceptions of the business environment have improved ~ubstantially.~New free trade agreements have been, or 2. Volatility measuredby the coefficient ofvariation of annualreal GDP growth. 3. 12percent using GDP base year 1958. 4. One major result of the Anti-Evasion Law has been the significant reduction on VAT tax evasion from 34.4 percent in2004 to 26.1percent in2007, below the LAC average. IMF/WB (2008). 5. Doing Business Indicators, World Bank, 2007 and 2008. 2 are being, negotiated, including DR-CAFTA, which became effective in 2006. FDIincreased more than threefold since 2004. Guatemala's sovereign risk ratings also improved (ie., S&P 's, BB w/positive outlook; Fitch, BB+ w/stable outlook; and Moody's, Ba2 w/positive outlook). Still, challenges remain, and the 2008 Guatemala Investment Climate Assessment highlights corruption, energy supplies and crime as the greatest obstacles faced bybusiness (see Box 1). Box 1. 2008 GuatemalaInvestment ClimateAssessment(ICA) Findings The second Investment Climate Assessment for Guatemala was completed in2008 based on 2007 survey data and allows for a comparison with 2004 data. The survey interviewed more than 500 firms from the manufacturing, services and construction sectors. Since 2003, Guatemala made substantial progress in improving its business climate, but there is room for improvement, especially compared to its competitors. Firms still report comption as their number one obstacle, but only 61 percent of firms did so in2007 versus 81 percent of firms in 2004. Perceptions of macroeconomic instability, informal competition, and accessto finance also improved. Only electricity, transport and access to land deteriorated since 2003. In fact, electricity was the second major obstacle in 2007, while perception of crime improved substantially (from 80 to 37 percent). However, crime affects firms differently depending on their size, region o f operation, and exporter status. Small firms suffer the most, and Guatemala continues to suffer more from crime than comparator countries. As for electricity, the I C A highlights that access to reliable electricity supply has become a major concern for firms. Inthe last three years, the frequency of power outages has increased, and there have beenproblems satisfying peak demand. 9. Initial indications are that DR-CAFTA and other free trade initiatives have helped to boost trade, but extending these benefits to the poor will require a broad-based development agenda (See Box 2). Since DR-CAFTA came into effect, exports and imports have grown more rapidly than in previous years, but it is still too early to determine whether these gains can be attributed solely to the free trade agreement or to other favorable external demand factors. Global experience suggests that the extra growth and poverty reduction that Guatemala extracts from its fiee trade initiatives will largely depend on the efficiency and competitiveness o f its economy. Competitiveness reflects many factors, including labor force education and flexibility, reliability o f energy sources, good transportation linkages within the country, port facilities, andthe capacity of the legal andjudicial system to enforce contracts and facilitate business activity, among others. 10. Financial sector legal and regulatory reforms implemented since 2000 have improved banks' solvency and resilience to market volatility, but much remains to be completed and lack of access to finance remains a major issue for the financial sector. The strengthening o f the financial sector regulatory and supervisory framework and practices in Guatemala has helped to reduce the risk of a systemic banking crisis and avoid associated high social costs. In fact, international experience shows that financial crises entail large fiscal costs that crowd out social spending with dramatic effects on poverty. However, the recent failure of two banks, although successfully resolved, pointed to remaining vulnerabilities in the sector, specially the existence o f unsupervised intermediation. This experience has prompted the financial authorities to strengthen the regulation o f financial conglomerates and accelerate the transition from a compliance based supervision approach to a risk-based consolidated supervision approach. The strengthening of banks and increasing profitability are important for financial stability, but they are also important to enable banks to increase lending. W h i l e domestic credit to the private sector increased from around 20 percent o f GDP in 2000 to 30.1 3 percent in 2007, these figures remain low compared to the Central American average (i.e., 47 percent) and interest rate spreads are also relatively high. The problem i s especially serious for smaller firms, whose access to credit is even more restricted. Currently, a wide range of mostly non-regulated financial entities service clients that cannot access the banking system. In this context, a stronger regulatory and supervisory framework would help reduce risk and deepen the development of the financial system. Enhanced consolidated banking supervision, portfolio risk analysis, the implementation o f the Movable Guarantees Law, simplified accounting rules and governance practices for business, a comprehensive credit information system and more efficient procedures for execution o f collateral would improve the stability and access to credit for business. BOX2. DR-CAFTA The DominicanRepublic - Central American Free Trade Agreement (DR-CAFTA) became effective inGuatemala on July 1, 2006. More than providing new incentives, DR-CAFTA offered more permanent access to the U.S. market compared to that of the 1993 Caribbean Basin Initiative (CBI). Under DR-CAFTA, tariffs on about 80 percent of US exports to Central America were eliminated, and the rest will be phased out over the next decade. US trade barriers also fell, but because most products already entered the U S market under CBI preferences, the effect o f their removal was modest. Though it is too early to measure direct trade effects in terms o f productivity, job creation, and contributions to economic growth, preliminary trade data show an estimated 21 percent increase in exports and a 13 percent increase in imports in 2007 compared to 2006. It is unclear whether t h s is due to the impact o f the free trade agreement, per se, or general growth in foreign demand and the domestic economy. Inany case, DR-CAFTA has reinforced a longstanding trend o f growing trade with the United States and intra-regional trade with Central America. A simulation model developed by the Bank o f Guatemala suggests that 0.62 points was added to the GDP in2006 for the twelve months that DR-CAFTA had been in effect. Another important short term impact has been a contribution to increased foreign direct investment (FDI), which has been growing since 2002. Policymakers have high expectations for DR-CAFTA as a means o f attracting investment and improving regional economic integration. Again, a Bank of Guatemala model suggests that without DR-CAFTA, foreign direct investment would have been almost 60 percent lower in2006. Though the causes are not clear, investment in various sectors o f the economy has shifted. Investors seem to be moving out of maquizas (clothing manufacturing's share o f new FDI dropped from 52.2 percent in 2005 to 45.6 percent in June of 2007) and other manufacturing and into services such as call centers and business processing. These changes have labor dislocation effects, with implications for education, technical training, and infrastructure investments. C.Governance andTransparency 11. Despite government efforts in recent years to improve governance and strengthen institutions,public perceptionsof governanceremainlow. Among World Bank governance indicators, regulatory quality and voice and accountability showed some improvement, but the rule of law remains one of the most important challenges as it falls well below averages for Latin America and countries with similar income. Inan effort to fight impunityinthe country, in2007 Congress approved the creation of the International Commission against Impunity.The United Nations Secretary appointed its Commissioner, who has been working in close collaboration with thejudicial, legislative and executive branches, and the UNHighCommissioner for Human Rights. 4 12. Guatemala made steady progress in recent years in transparency. T h e implementation of the integrated financial management system (SIAF), which was built upon a good normative framework and a modern technological platform, contributed to efficiency in financial transactions and the production of timely, transparent information o n most government finances (See Box 3). Moreover, Guatemala's Transparency and Anti-corruption Agenda is one o f the new Government's mainpriorities, which i s being led by the Vice President along with the Minister of Finance, who i s leading efforts on fiscal transparency. Box 3. Progresson PublicFinancialManagement After more than a decade of continuous work inmodernizing and reforming core elements of public sector institutions and systems, Guatemala i s now one o f the leading countries inthe implementation o f Public Financial Management (PFM) reform. Implementation o f integrated financial management system SIAF and public procurement system GUATECOMPRAS constitute the main elements of a more effective and transparent public administration. Most notable achievements reached thus far include: The SIAF system is now considered one of the best regionalpractices in automated public financial management.The system was upgraded to operate under web-based technology and i s now fully operational in all central government agencies and most of the decentralized entities, and furthermore covers approximately 300 executing-level units. It includes most of the public financial management functions New financial management proceduresand systems were successfully implemented in all municipalities.A new framework for municipal financial management S I A F M U N I has allowed for a more efficient and transparent model. New municipal financial management procedures and systems are gradually being implemented inall municipal governments inGuatemala. The e-procurement application GUATECOMPRAS is now operating and registering all centralgovernment agencies' transactions and is gradually beingexpanded to decentralized entities and municipalities. Although the applicationhas yet to support online transactions (such as electronic bidding or electronic purchasing), this system has successfully promoted higher degrees of transparency inthe public procurement practices evidenced by improvements inusers' perceptions and a recent award granted by the private sector association inGuatemala. An automatic and fully integrated payroll system is being implemented throughout all central government agencies, includingthe health and education sectors. Nearly all central government employees are now paid through the banking system and an updated database of public sector employees hasbeendeveloped andintegrated withthe SIAF system. An automatedworkflow systemto support the Comptroller GeneralOffice's audit processes has been developed and is under implementation. Although not completely operational and subject to further evaluations, the government audit system (SAG) is supporting the corebusiness processes o fthe Comptroller's Office. 5 D. RecentEconomicDevelopmentsand GrowthOutlook 13. After a period of stable and declining inflation, prices in Guatemala have seen an uptick, driven in large measure by the high internationalprices of food and oil. Year-on- year headline inflation increased from 5.3 percent in mid 2007 to 14.2 percent in July 2008. Perhaps more womsome, core inflation (excluding food and energy prices) has tracked closely headline inflation and increased markedly from about 5 percent in mid 2007 to 12.3 percent in July 2008. Survey-based inflation expectations for end-2008 have also been on the rise inrecent months. This reversal on the inflation front has been mainly drivenby the evolution of oil and food prices (internationally, oil prices increased by 47 percent and food prices rose by 60 in 2007), and also by domestic demandpressures (credit to the private sector has been increasing at 27 percent on average over 2006-2007. 14. Food price inflation accelerated from slightly below eight percent in mid-2007 to 19.4 percentinJuly 2008. As inother countries, the poor are beinghit hardby inflationof food prices, given that food tends to represent a larger share o f consumption among the poor (54 percent for those below the poverty line and 37 percent in the CPI basket). Infact, inJuly 2008 the effective inflation rate for the Guatemalan poor, considering a typically consumed basket of goods, was about 1.4 percentage points above the officially measured inflation rate. The Government is working to partially compensate for the negative terms o f trade shock (which has been one of the strongest inthe region) through various measures, includinglower import duties and taxes on food, accelerated rural development strategies, and increased payments under a new conditional cash transfer program, which will partially mitigate the rise in food and transportation prices. At the same time, the government has pursued tighter monetary policy, raising interest rates a half a percentage point in July to 7.25 percent. The Central Bank i s attempting to provide a careful balance between sufficiently raising policy interest rates to stem inflationary expectations and inertia, and, at the same time, not raising rates too severely to cause a policy-induced liquidity crunch and economic slowdown. 15. Guatemala'sexternal position remained stable over the past few years. The current account deficit stabilized at five percent o f GDP, and private capital inflows and remittances permitted the accumulation o f international reserves to a comfortable level: about four months of imports of goods and services. For 2008, the external deficit is projected to deteriorate to 5.5 percent of GDP because o fhighoil prices, declining thereafter to about 5.1 percent at the end of 2012, as oil imports moderate and exports and remittances continue growing (see Table 1 on Guatemala's macroeconomic outlook). 16. Guatemala's fiscal deficit and public debt to GDP are among the lowest in Latin America. From 2004 to 2007, the deficit o f the Central Government averaged 1.7 percent of GDP, and public debt o f the non-financial public sector remained less than 23 percent of GDP (of which about 13 percent is external debt). As shown in Table 1, the overall fiscal deficit rose to about 2 percent o f GDP in2007 andis expected to remain at about that same levelin2008 and 2009. Adjusting for the global economic slowdown, this represents a modest fiscal tightening. To address Guatemala's social needs and expand critical programs, fiscal resources will need to grow. A modest fiscal reform program i s thus on the agenda to promote prudent fiscal management and cover additional planned spending. The reform i s designed to cover revenue losses (0.7 percent o f GDP) associated with the expiration o f a temporary minimum corporate income tax in 2008, and provide fiscal space for additional social spending. By the end of the 6 administration, the net additional collection i s estimated at 0.9 percent of GDP to meet the Peace Accords target of 13.2 percent of GDP. 17. Growth is slowing to sustainable levels after a robust pace in recent years. Growthis expected to moderate to 4.6 percent in 2008 from 5.7 percent in2007 owing to sluggish global economic activity, particularlyinthe UnitedStates, softer growth inremittance inflows, andhigh food andoil prices. Export growth slowed to 13.5 percent inMay 2008 from 32.4 percentinM a y 2007, and growth in remittances, a major component o f income for the poor, dropped to 8.5 percent in July 2008 from 14.6 percent in July 2007. Capital inflows have also shown signs of slowing as global financial markets have experienced greater volatility. InJune 2008, the (year- on-year) index of economic activity rose 4.2 percent, well below the 6.8 percent averageincrease in2007. Inflation is also expectedto moderate during 2009, mainly from stabilization of food andoil prices andthe effects of a monetary tighteningpolicy, whichbeganinmid-2007. Month to monthinflationhad already shown adecline from 1.63 percent inJune to 1.25 percent inJuly. 18. The outlook for growth over the next four years period is broadly positive. Through 2012, real GDP growth is expectedto average about 4.5 percent, less than the rates since 2005, but higherthan the rate observed over from 2000-2005. Growth i s expected to b e supportedby a recovery inglobal and domestic demand and increased trade and foreign investment under DR- CAFTA, other free trade agreements, and enhancedregional integration. Domestic and foreign direct investment are expected to rise owing to greater business confidence, improved transparency and public sector governance, rural productivity gains, and a rebound inthe prices o f traditional and non-traditional exports. Economic growth is projected to exceed population growth by about two percent over the medium-term, continuing the trend of positive per capita income gains since 2004. Table 1. Guatemala Macroeconomic Outlook Actual Projected 2004 2005 2006 2007 2008 2009 2010 2011 2012 Percentageof GDP unless otherwiseindicated NationalAccountsand Prices Real GDP (%change) 3.2 3.3 5.2 5.7 4.6 4.5 4.5 4.5 4.5 Realper-capitaincomegrowth 0.5 0.6 2.5 3.1 2.0 1.9 1.9 1.9 1.9 (% change) Consumer prices(end of 9.2 8.6 5.8 8.7 8.5 7.0 6.0 5.0 5.0 period, % change) Nominalexchangerate(end of 7.7 7.6 7.6 7.6 7.6 7.6 7.6 7.6 7.6 period-Q per US.dollar) CentralGovernmentFinance Total Revenues 12.3 12.0 12.8 13.1 12.9 13.3 13.4 13.5 14.0 Ofwhich: Tax Revenues 11.5 11.2 11.9 12.3 12.3 12.5 12.6 12.7 13.2 Total Expenditure 13.4 13.7 14.7 15.2 14.8 15.2 15.3 15.3 15.6 Ofwhich: SocialExpenditure 5.6 6.1 6.4 6.0 6.4 6.6 6.7 6.8 6.9 Balance -1.1 -1.7 -1.9 -2.1 -1.9 -1.9 -1.9 -1.8 -1.6 Balanceof Payments Current Account Balance -4.9 -4.5 -5.0 -5.1 -5.5 -5.3 -5.2 -5.1 -5.1 TradeBalance -15.2 -15.3 -16.1 -16.2 -16.6 -16.5 -16.4 -16.4 -16.3 Exports 16.2 16.1 16.6 18.0 18.3 18.3 18.4 18.5 18.6 Traditional 4.2 4.5 4.3 4.8 4.9 4.6 4.4 4.3 4.1 NonTraditional 12.1 11.6 12.3 13.2 13.5 13.7 14.0 14.2 14.4 Imports -31.4 -31.4 -32.7 -34.2 -35.0 -34.9 -34.9 -34.9 -34.9 o/w Oil Imports -4.2 -5.5 -5.8 -6.8 -7.5 -7.5 -7.5 -7.5 -7.5 Remittances 10.6 10.9 12.0 12.3 12.0 12.0 12.0 12.0 12.0 7 Actual Projected 2004 2005 2006 2007 2008 2009 2010 2011 2012 CapitalAccount (including 7.4 5.5 5.9 5.7 5.6 5.6 6.1 6.0 5.8 errors and omissions) Reserves(in monthsof next 4.6 4.5 4.3 4.1 3.7 3.7 3.7 3.6 3.6 year importsof GNFS) Public Sector Debt 21.9 20.8 21.8 22.3 22.0 21.7 21.5 21.4 21.4 o/w foreign-currency 15.5 13.1 13.2 13.0 13.0 12.5 11.9 11.4 11.0 denominated Source:Ministry of Finance, Banguat, IMF and WB. 111. GOVERNMENTPLANAND KEY ISSUES INFISCAL AND INSTITUTIONAL DEVLEOPMENT 19. The Colom administration has focused its efforts on increasing growth and reducing poverty and inequality while maintaining macroeconomic stability. The Government plan is built on eight fundamental principles (prioritizing the poor, gender equality, investing in children, multiculturalism, ethics, environmental conservation, citizen participation, and respect for human rights) that cut across four development themes: (i)Solidarity; (ii)Governance; (E) Productivity; and (iv) Regionalism. Furthermore, it places particular emphasis on expanding the fiscal space to finance the implementation o f its plan as well as on improving transparency and efficiency in the public sector. The government's development themes are presented in Box 4, and the key issues relevant to fiscal and institutional development are discussed within these themes subsequently. 1Box 4. Government Development Themes I I.Solidarity 1. Social Development (includes rural development, education, health and nutrition): Generate employment, reduce poverty and ensure access to basic inffastructure and services, in keeping with the Peace Accords Agenda, the Agenda Nacional Compartida (National Shared Agenda) and the Millennium Development Goals. These objectives are to be reached through an integrated approach, which includes among others: actions to increase productivity and generate employment, expanding fiscal space, SME development, and increasingthe effectiveness of social spending through a targeted CCT program. 2. Municipal Development: Promote democratic principles and processes at the local level by strengthening the role of the municipality in development and service provision through measures that facilitate citizen participation at the local level and that increase municipal capacity. II.Governance 1. Security andRuleof Law: Consolidate rule oflaw andprovide citizen security. Strengthenconstitutional rights, fight corruption (for example, by providing citizens with the means and protection needed to denounce corrupt actions), strengthen institutions that provide citizen security and the penal system, support violence preventionprograms, etc. 2. Democratic Development: Promote the democratic development model by strengthening the role of the state. Promote a true pluralistic political culture by strengthening representative democracy and supporting the modernization of the party system, while increasing decentralization o fpolitical processes. Promote the rights and development o f indigenous populations. 3. Legislative Policy: Enhanced legislativeprocessesto provide security and citizen wellbeing. Actions under this area include capacity development for Congress, increasing transparency and informing civil society about legislative activity (especially inthe social sphere). 111.Productivity 1. Economic Development: Deepen and enhance conditions for sustainable economic growth that translate 8 into fair economic development, job creation, higher salaries, and reduced poverty and inequality. Policies inthis area includetourism and SMEdevelopment, infrastructure, and agricultural modernization. 2. Risk Management and Natural Disaster Prevention: Mitigate and reduce human losses and physical damage originating from risks associated with natural disasters and, thus, create the conditions for sustainable development. A step to achieve this objective i s the implementation of an effective Natural Disaster Mitigation and Management Strategy. IV. Regionalism 1. RegionalIntegration: Develop aproactive, creative and autonomous foreignpolicy to positionGuatemala inaleadership positionwithintheregionandpromote ajoint effort inareas ofcommonregionalinterests such as environment, energy, banking, customs and security. I 20. As outlined above, the government's multi-faceted development program contains a broad array of measures to combat poverty and inequality in Guatemala, including policy reforms and investments ininfi-astructure, social programs, and actions to mitigate the impact of natural disasters, among others. The elements of the government's program described below highlightthe key fiscal and institutional challenges the country faces and policy measures the government is pursuing. These are key development challenges for Guatemala andthe focus the programmatic DPL series. A. Priority Spending for Reducing Poverty and Inequality: Enhanced Monitoring and Evaluationand MaintainingFiscal Space 21. A key focus of the government's first development theme, solidarity, includes reducing poverty and inequality through a conditional cash transfer program. The CCT program targets the most vulnerable by providing cash incentives to poor families to take advantage of health and educational opportunities, as well as income to meet basic needs. In March 2008, the Government launched the pilot phase of the CCT program, Mi FamiZia Progresa, in five municipalities, and the program will be extended to reach 125 cities to benefit about 200,000 families. As o f August 2008, Mi Familia Progresa Program is being implemented in 14municipalities benefitingmore than36,700 families. Dependingonthe numberofchildren and the grades in which they attend school beneficiary families could receive up to Q350 per month (about $50) on the condition that their children regularly attend school and visit health centers. The program is expected to cost around $180 million annually. Ensuring effective implementation, fiscal sustainability and the supply o f related services will be its main challenges. The Government o f Guatemala requested support from the World Bank andthe IDB on the CCT program's design, including mechanisms to enhance monitoring, evaluation, and transparency, and support to help address supply side issues in coordination with the projects in health and education. 22. Reaching the expected impact of Mi Familia Progresa requires strong mechanisms for monitoring and evaluation o f the program. As in any new program, ongoing improvements to execution and efficiency are necessary as implementation experience is gained and the impact o f the program on poverty i s evaluated. Consequently, factors that will determine the program's success include: (i)appropriate mechanisms to select t h e most vulnerable population; (ii)adequacy o f health, nutrition and education sewices in the geographic areas of intervention; (iii) adequate monitoring of co-responsibilities to ensure that families are using 9 available services; (iv) institutional and implementation arrangements, and (v) control and accountability mechanisms and tools to improve transparency in managing funds. The Government of Guatemala i s aware o f these challenges and, on a pilot basis, has designed and begunimplementationo f a transparent monitoring and evaluation mechanism for the Mi Familia Progresa program including the use o fproxy means test inthe selection ofbeneficiaries living in municipalities. The government i s also drafting a plan, with the assistance of IDB, for an external evaluation o fthe program's impact. 23. TOmeet priority social spending and investment goals, the Colom government drafted a fiscal reform program during its first months. Recognizing the political factors constraining a deep and far-reaching program, the current economic slowdown and the expiration of the temporary tax onbusiness income (IETAAP) in2008, authorities are pursuing a modest but important fiscal reform. Consensus on tax reform has remained an elusive goal in Guatemala, with only minimal success in recent years. Within this context, a new draft fiscal modernization reform proposal has been developed by the multi-sectoral Fiscal Dialogue Group, a technical-working group created in 2006 under the auspices o f the National Commission for the PeaceAccords. Table 2. FiscalModernizationProDosal PHASE No. Law Proposal Specific Measures Include: (A) Vehicles Tax Regime: (i)Establishatax on initialvehicleregistrationand(ii)gradually double the annual tax rate applied to vehicle circulation starting in 2009. (B) National CustomsSystem: (i)A national legal customs framework to complement the international (1) Provisionsfor customs framework, including the CMigo Aduanero Uniforme modernizationof the Centroamericano (CAUCA) and its rules (RECAUCA) and (ii)specific tax system and measures to strengthen enforcement. customs (C) Value Added Tax (VAT): (i)Introducenewcontrolsforpurchasesexempt fromVAT;(ii) administrative - submitted to improvements in the small taxpayers regime and the VAT system applied to Congress on August real estate property transfers; (iii) 12 percent VAT on the first purchasekale o f 11,2008; real estate property, the second and further purchasedsales will be subject to a fixed tax o f 3 percent. - expected toprovide FIRST additional revenues (D) Legal Provisions for the Strengthening of Tax Administration and Reformsto the Tax Code: PHASE forabout 0.3 percent of GDP (i)advance on the implementation of the electronic mechanisms for tax declarations (ii)reduce the minimum sum limit above which electronic submission of tax declarations is allowed; and (iii)strengthen SAT'S legal capacity to control and penalize tax evasion including the ability to retrieve financial transactions information from financial institutions and measures to allow the tax authority to temporarily close a business for tax compliance issues. (2) New tax on (E) Transitional tax on business income. This transitional tax will be business income: replaced by a permanent tax on income in the second phase of the reform. The "Solidarity Tax (ISo)" new transitional tax proposed has the same characteristics as the IETAAP and includes: - to be submitted to - fixed rate on gross income of businesses (1.25 percent is proposed Congress in while IETAAP'sis 1.O percent) Aug/Sept 2008; quarterly payments - expected toprovide -- tax paid on IS0 can be applied as a credit to other business income additional revenues taxes for about 0.7 - expires with implementation of the new income tax law percent of GDP 10 PHASENo. I L a w Proposal Specific Measures Include: New Income Tax Law 1 . (i)gradualreductionof the tax rate appliedon net profits (from31 to 25 - to be submitted to percent); (ii)gradual increase o f the tax rate applied on distribution of profits SECOND Congress in early (from 3 to 10percent); (iii) strengtheningof controlson deductible costs under PHASE 2009; the net profits regime; (iv) gradual increase of the single rate on gross income (from 5 percent to 7 percent) starting in2010; (v) broadening of the income tax - expected to become base for employed persons by gradually eliminating the VAT tax credit; and effective in January (vi) simplification of the individualhousehold tax regime by applying a single 2010; rate for income up to Q240,OOO (5 percent)and for income after Q240,OOO a tax rate of 7 percentplus afixed tax amount of Q12,OOO. 24. The Colom government has consulted with a wide array country stakeholders to build consensus and presented a fiscal reform proposal to the Congress on August 11,2008. Originally intended as a single stage reform, but then divided into two phases to facilitate consensus and congressional approval, the Government's proposed reform includes actions to reduce tax evasion, improve the customs legal framework and enforcement, and increase tax collections (see Table 2 for details). The first phase includes two components: (i) provisions for the modernization o f the tax system (including the vehicle tax regimeand tax administration) and customs, and (ii) transitional tax on business income, called the "Solidarity Tax" (Impuesto a Solidaridad, ISo), that will replace the IETAAP (Impuesto Extraordinario de Apoyo a los Acuerdos de Paz, a temporary income tax on businesses). Both components are expectedto be approved in 2008 and become effective by January 2009, providing a gross increase in tax revenues o f about 1.0 percent of GDP through increasing the tax base and reducing tax evasion. Tax revenues are expected to reach 12.5 percent o f GDP for 2009. The second phase includes a new income tax proposal that is expected to be submittedto Congressinearly 2009 andbecome effective by January 2010. Once the second phase income tax proposal i s implemented, the Solidarity Tax will expire. The administration's goal i s to improve the tax system's efficiency and fairness as well as reach the Peace Accord target for tax collections of 13.2 percent of GDP beforethe end o f its term in2012. B. Promoting Financial Market Stability and Deepening 25. Complementing policies for poverty reduction are financial sector reformsto reduce the economy's vulnerability to external and internal shocks and improve access to finance. Guatemala has continued to strengthen the country's financial sector, preserving systemic integrity and stability and improvingaccessto finance indicators. Inpart with assistancefrom the Bank, the IMF and the IDB, since 2001 Guatemala has modernized the financial sector legal and institutional framework. An anti money laundering law was enactedin December 2001 aimed at strengthening prevention and detection o f money laundering activities and a package o f four basic financial laws was a proved by Congress approved in 2002 and subsequent measures g against terrorism financing. Progress has been made in strengthening consolidated supervision 6This package included Banking and Financial Groups Law, a Central Bank Law, a Banking Supervision Law, and a Monetary Law. The Intendencia de Verificacion Especial (Intelligence Unit,N E ) has been active since December 2001, as part of the Superintendency of Banks, in strengthening the AML activities inGuatemala. Savingsand credit cooperatives were obliged to report since November 2002, while lotteries, raffles etc have been included since December 2007. Since 2005 the Law includes the prevention o f the terrorism financing. IVE has implemented new forms of reporting under the "Know Your Customer" rules, cash operations equal or higher than US$lO,OOO, and 11 as well as putting in place better risk-managementpractices by financial institutions, to enable better access to finance. Inthe aftermath o f the failure of two banks in late 2006 and early 2007, systemic stability has been preserved and progress has been made in addressing some of the vulnerabilities that had led to these failures, especially related to the existence of unsupervised intermediation. Bank prudential and profitability indicators have improved, while the ratio of private sector credit to GDP rose to 30.4 percent in2007 (26.8 percent in2006), one measure of access to finance. 26. Crucial actions have been taken to improve the supervision of financial conglomeratesincludingimplementationof recommendationsemerging from the failure of two banks in late 2006/ 2007, while others are in progress. To implement the new risk-based supervision approach, a new manual on risk-based and consolidated supervision is being implemented (supported by IDB-FOMIN funding and Bank technical support), in line with recommendations from thejoint IMF-WB FSAP Update 2005-2006. The new manual allows the SIB to evaluate and follow up the financial and non-financial risks that apply to the supervised entities before they affect their financial and operative situation and prevent them from meeting prudential n o m s and regulations. Based on the risk profiles (liquidity, interest rate, credit, operational and market risks) of the supervised institutions, the SIB can determine the level of supervision and the strategies that need to be applied commensurate with their vulnerabilities or exposure level. At least two o f these risk profiles are being implemented with the new manual and will be completed shortly inat least three o f the largest financial groups. The SIB expects to complete the supervision o f all the risk profiles for all the financial groups intwo to three years. Also, a new unit has been established inthe SIB to undertake supervision o n a "horizontal" basis (i.e. across different financial groups, compared to the "vertical" supervision within financial groups). The horizontal risk analysis will begin with one risk profile for the 100 largest borrowers in the system. The new unit is also responsible for the risk mapping analysis of financial groups that started in 2007.' The SIB has also extended prudential rules, including on credit risk limits, to offshore banks. 27. There have been continued actions to modernize the regulatory framework for deepening financial markets and modernizationof the paymentssystem. These include the standardization of the Central Bank's (Banguat) debt instruments and regular issuance to help develop an interest rate yield curve, A stable yield curve will help to reduce interest rates and guide the market to accurately judge risk and price debt instruments. Also, banks and financial institutions are now required to report to Banguat financial terms o f trading operations related to certificates o f deposit (CDs) and Government bonds, and this information i s consolidated and published in Banguat's internet site to enhance transparency and the development of secondary suspicious transactions, while it has also introduced customs declarations forms. During2002 to 2007, 80 criminal complaints were presented to the Public Prosecutor on money laundering offences. In July 2004, FATF excluded Guatemala from its list o fnon-cooperative countries, following an in-situvisit to the Superintendency of Banks. WE participates in the Caribbean Financial Action Task Force (CFATF), o f which it held the vice-presidency in the period 2005-2006 and the presidency in2006-2007; the Inter-American Committee Against Terrorism (CICTE); the Organization of American States (OAS); and the Egmont Group o fFinancial Intelligence Units, whichhas requested to host its next Working Group meeting in Guatemala in March 2009. Currently, N E has signed MOUs on AML information exchange with 35 countries through the Egmont Group. 7. Risk mapping of financial groups assesses the risk o f capital becoming ineffective due to concentrated lending above regulatory l i m i t s and the potential effects on the solvency due to the inclusion or withdrawal of related entities. 12 securities markets. Progress related to the payments systems continued to take place, including regulatory changes for reducing operational risks o f the electronic clearing house for checks (ACH, ttCamarade CompensacibnBancaria") an electronic network for financial transactions- inajoint effort by Banguatand the Stock Exchange-and regulations for the automated clearing house (Cumara de Compensacibn Automatizadu, CCA), to be managed and operated by the Bank Association and i s expected to follow the international standards for ACH. 28. Legislationis beingproposedto strengthenthe financialsector further andbroaden access to credit. Several laws to broaden access to credit have been approved or the bills are under discussion in Congress. The Secured Transactions L a w was approved in October 2007, and the Insurance Bill has passed the second o f three discussions in Congress. The financial authorities are in the process o f revising some articles o f the Banking and Financial Conglomerates Law that deal with the expansion o f banking activities. The authorities are also working on a Capital Markets Bill that would strengthen the regulation and supervision o f the stock exchange, establish licensing standards for the intermediaries, strengthen corporate governance for licensed companies, andprovide the regulator with broad disciplinarypowers. 29. The government's commitment to continue its financial sector reform program is particularlyimportantbecause of the impactthat new externalchallenges may haveon the financialsector. These challenges, including the ongoing food price crisis, increasing oil costs, and the reduction inremittances growth as the U.S. economy slows, are producing a decline in real incomes for the majority of the population. This situation could negatively affect the banks' portfolios and thus increase the risk to financial sector stability, potentially creating contingent fiscal liabilities, at a time in which the government is facing unanticipated fiscal pressures resulting from its response to the external challenges. C. StrengthenedGovernanceandTransparency 30. The government's second developmenttheme, governance,focuses on strengthening institutions and enhancing transparency. The Government is pursuing several related activities: a) Congressional approval and implementation of a freedom o f information act to enhance public sector transparency; b) the creation o f a specialized office in the Ministry of Finance to facilitate access to fiscal information, and guarantee transparent use of public resources; c) the strengthening o f the regulatory framework to better control and enhance the transparency o f trust funds; and d) the strengthening o f the Comptroller General office to facilitate processing o f citizen claims and allegations on misuse of public funds and fraud cases. For many years governance-related indicators have ranked low in Guatemala Weak rule o f law and insufficient efforts to combat corruption have been perceived as the most important challenges for the country, while there is recognition that the Government has advanced in improving government effectiveness and simplifying regulations to facilitate business work. T h e present administration has identified this as one o f its top priorities and has from the beginning announced the implementation o f comprehensive actions to tackle the governance issue in the country. The Vice-president has convened a participatory commission including specialized NGOs and donors was convened to provide support in this area and an action plan was put together identifying specific measures to be implemented in the short term. As part o f this agenda, the Ministryo fFinance is leading the efforts to enhance fiscal transparency. 13 31. Complementing these efforts are advances on the public financial management modernization agenda. Guatemala has advanced significantly in the implementation of its public financial management (PFM) modernization agenda. For the past decade and with direct support from the Bank and other donors, the Government has successfully developed the integrated financial management system (SIAF) and procurement system (GUATECOMPRAS) to regulate and support management o f budget and accounting processes as well as to guarantee transparency o f public procurement activities. Within this same framework, the government has also expanded the coverage of both SIAF and GUATECOMPRAS to municipalities and has developed modern instrumentsto facilitate public sector management roles inlocal governments. 32. Currently, all central government expendituresare fully controlled by SIAF and it i s mandatory that all procurement processes for public purchases above Q30,000 (about $4,050) are published in GUATECOMPRAS. Moreover, nearly all the municipalities have implemented customized versions o fPFM systems and are hlly integrated to the national budget process. Both financial and procurement management systems in Guatemala are considered best practice and are being replicated inother countries inthe region. 33. On the basis of its successful track record, the Government is now planning advances in both financial management and procurement by creating more sophisticated instruments and procedures and by consolidating and institutionalizing progress within line functions of the Ministry of Finance. Actions planned include: a) full transferring of systems operation and upgrading responsibilities to line functions inthe Ministry o f Finance for continuing progress on public financial management after the formal conclusion of the SIAF project; b) the development and further implementation o f a multi-annual and result-based budgeting framework on the basis o f the existing SIAF; and c) the development and implementation o f web-based procurement transactions to increase hrther efficiency and full transparency o f public procurement operations. The Ministry o f Finance has expanded the e- procurement System Guutecomprus with a new module (Guutecompras Express), that makes publicly available detailed information (includingunit prices) on executed Government contracts (contrutos ubiertos) for large-quantity regularly purchased goods (i.e. vehicles, office supplies, etc.). D. SustainableGrowthandProductivity 34. The government's development theme of productivity focuses on growth by stimulating domestic and foreign investment, supporting tourism and mediumand small size enterprises, and enhancing opportunities to export goods and services. To reduce business costs, reduce customs processing times, and increase compliance with the tax and customs rules, the government is simplifying rules and enhancing information systems. T h e tax administration (SAT) is adapting its information systems to support new tax reforms fully. The information systems and procedures for VAT withholding will be adapted to include importers and major local distributors. In addition, an internet service portal will b e implemented and distributed to voluntary taxpayers to improve income tax withholding. Finally, the new information system will allow for greater control inthe collection o ftaxes. On the organizational side, SAT will implement a unit for control o f worldwide income, price transfers, and rules for capitalization, relatively modem concepts intax legislation. 14 35. The SAT will continue with its plans to promote the use of electronic invoices to modernize procedures and enhance transparency. It is expected that the use of electronic invoices will reduce the cost of filing and records maintenance. Inorder to simplify and reduce the transactions costs for taxpayers, SAT will implement an Integrated Tax Current Account system for the 300 largest taxpayers after the consolidation into a single data base of their tax records. For the small and mediumsize enterprises (SMEs), the SAT will implementaninternet- basedportal to ease tax compliance. As a first step, the SAT will designand begindistribution of a tax accounting software application 2009, on a pilot basis. Finally, the SAT will implement an alternative application to BANCASAT for submitting VAT and income tax declarations through the internet by August 2011. This system will not require a contract for use as does BANCASAT, a proprietaryproduct ofthe bankingsystem. 36. The new administration is prioritizing actions to reduce customs processing time and speed trade. On customs modernization by August 2010, the SAT will implement its Customs Management System(SAQB'E) on cargo management and on the release and clearance o f importedexported goods and merchandise intransit, inat least six major customs entrypoints. In addition, by August 2011, SAT will have expanded its Customs Management System (SAQB'E) on cargo management and on the release and clearance of imported/exported goods and merchandise intransit, in at least 10 of the major customs. As a means to harmonize the national customs legal framework with international and regional norms, the government has proposed legal refoms to complement the international customs framework, including the CddigoAduanero Uniforme Centroamericano (CAUCA) and its rules (RECAUCA) as well as measuresto strengthen enforcement. IV.THE PROPOSEDLOAN A. Link to the CountryPartnershipStrategy and LoanDesign 37. The proposedDPL series comprises three operations intendedto support the fiscal and institutional development policy aspects of the Guatemala Country Partnership Strategy FYO9-12), which was presented to the World Bank Executive Board for discussion on September 23, 2008. The Guatemala CPS i s aligned with the government's development plan and supports the government's commitment to make growth more inclusive and to address the country's high levels o f poverty and inequality. It proposes a total lending envelope o f $970 million over the fiscal years 2009-2011, of which $470 million would be investment lending and a CAT DDO operation to manage the risk o f natural disasters. The remaining $500 million would be inthe form of budget support through a three part programmatic DPL series o f which DPL Iis the first operation ($200 million in FY09, $200 million in FY10, and $100 million in FY11). The CPS also provides for reimbursable technical assistance, including support for design of the CCT program, and the possibility of coordinated IBRD and IFC operations in energyand tourism and ruraldevelopment. 38. The design of the DPL series is closely aligned with the Government's own priorities, its detailed sectoral plans and draws on the Bank's analyses o f key issues and desirable policy directions through the country and regional analytical work, including: the Guatemala Poverty Assessment, CEM, Central America and Guatemala ICAs, DR-CAFTA 15 study, PER, FSAP, CFAA and CPAR. Within this framework, it focuses on policy and institutional aspects related to inclusive growth and poverty reduction that are most amenable to support via a program o f single-tranche loans. The DPL series i s also designed to complement, from a policy and institutional standpoint, the investment lending program within the CPS. This includes ongoing investment lending for the SIAF and Financial Sector projects, as well as n e w operations supporting Expanding Opportunities for the Poor and Enhancing Productivity. Table 3 below outlines the CPS program objectives and selected areas of action. Bolded items in this table are areas supported under the DPL programmatic series. Also, Table 4 outlines the DPL program outcomes and illustrates the close congruence between program outcomes andkey CPS outcomes. The Government's policy actions to be supported by the programmatic series are outlined inthe policy matrix inAnnex 1. Table 3. CPS Program Objectives and Select Areas of Action Broadobjectivesto which the CPSwill contribute EnhanceFundamentals PromoteSustainableGrowth Expand Opportunities (Macroeconomic Stability and and Productivity (Expanding Opportunitiesfor Fiscal Reform, Governance and (Improving the Investment Vulnerable Groups, Education, Transparency) Climate, Rural Development and Health) Productiviv, SustainableEnergy, Risk Management) Selected ProgramsandAreas of Support* Enhancefiscal space for Enhanceinvestmentclimate in Support design and targeting for priority public spending the contextDR-CAFTA and new CCT program Strengthenintegrated public regionalintegration Develop monitoringand financial managementandtax Promote SME access to finance evaluation frameworkfor administration and deepen micro-finance effective and transparent CCT Strengthensupervision and market program risk managementof financial Promote development of eco- Improve access to and quality of system tourism industry basic health and education Reduceopportunitiesfor Improve quality and access to services, especially among rural corruption water, sanitation, housing and and indigenous populations. Enhancetransparency and roads Mitigate impact onpoor ofhigh efficiencyof publicspending Promote Public Private fuel and food prices Improvedecentralized Alliances monitoringand evaluationand Promote rural productivity and resultsbased budgeting expansion of economic Improve access to justice and opportunities provide opportunities for youth Support development o f hydroelectric and alternative energy sources Manage the risk ofnatural disasters Cross-cuttingthemes Facilitatediscussion among country stakeholders on reform priorities (fiscal reform to expand fiscal space, governance and the anti-corruption agenda); and strengtheninstitutionalcapacity for improved monitoringand evaluationof public expenditures. Note: *Bolded items are supported withm the programmatic Fiscal and Institutional DPL series. 16 Table 4. DPL Series Contributes to ExDected CPS Outcomes Fiscal and Institutional PolicyAreas ExpectedDPL Medium-term Outcomes(end- CorrespondingExpected CPSOutcomes (end- Supported inDPL FY201I) FY2012) Series I.EnhanceFundamentals(LinkedtoCPSObjectiveI:EnhanceFundamentals) 1.A PromoteMacroeconomic Stability and EnhanceFiscal Space for PriorityPrograms Fiscal deficit does not rise above 2.2 percent o f The fiscal deficit does not rise above 2.2 percent of FiscalSpace for GDP, onaverage, for the period 2009-2011,as GDP, on average, for the CPSperiod as priority priority social spending increases. (Baseline 2.I social spendingincreases. (Baseline: 2.I percent, percent, in 2007) in 2007) Fiscal reformimplementation contributes to Fiscalreform implementation contributes to additional revenues so that tax collection as a share additional revenues so that tax collection as a share of GDP rises to 12.7 percent o fGDP. o f GDP rises to 13.2 percent (Baseline:I2.3 (Baseline:l2.3percent in 2007) percent in 2007) VAT tax evasion has beenreducedby3 percentage points. (Baseline: 26.Ipercent 2007) I.A.2 Promote Consolidated supervision has beencompleted inat Improvements inthe supervision of financial FinancialMarket least half o fthe financial groups by assets and conglomeratesincluding: completed Stability and regular supervision completed for the majority o f implementation of enhanced supervision or regular Deepening riskprofiles under the newriskmanual. (Baseline: supervision o fthe majority ofriskprofiles under 0) the new riskmanual. Consolidated supervision completedinat least h a l f ofthe financial groups byassets. (Baseline: 0) I.B. Governance an Transparency I.B.l Enhanced MinistryofFinanceandGeneralAuditor's Office Enhancedtransparency and governance inthe Governanceand using annual audits and monthly financial and publicsector through (a) sustainedstrengthening Transparency execution reports from at least eighty five percent o fpublic financial management and procurement o fthe public trust funds to improve oversight, and (b) enhancedefficiency andcapacity ofpublic management, and efficiency o fpublic trust funds. control institutions by the use ofthe Government (Baseline: 0, 2008) Audit Systemina majority of control entities. I.B.2 Strengthen Ninety percent o f Central Government's open Public Financial contract purchases are executedunder the online Managementand transaction system o f GUATECOMPRAS to Procurement reduce costs and improve transparency. (Baseline: 0, 2007) Ninety percent of Central Government's expenditures are made within a multi-annual and results-based budgetframework. (Baseline: 22 percent in 2008) 17 11. ExpandingOpportunitiesfor Vulnerable Groups(Linked to CPS Objective 11:Expanding Opportunities) 11.1 Improved Co-responsibilities verified for 70 percent o f the Reducedinequality intargeted municipalities Executionand CCT beneficiaries, halfo f which are extreme poor, through: (a) Increased Gross Completion Rates in Targeting of based on a framework for monitoring and primary school by at least 10percentage points (b) Social Spending evaluation. (Baseline: 0 in August 2008) Improved access to public services to meet basic needs in 15 percent of targeted municipalities inat least one o f the following areas: water & sanitation, housing, access to electricity. " I 111.1 Tax declarations submittedthrough the Internet The SAT has expanded coverage of SAQB'E-' Simplificationof have increased by 6 percent (Baseline: 34percent system and initiated the I S 0 9000 certification in tax and customs in 2007). one large product category. (Baseline: SAQB 'E in administrationfor 1majorport, Puerto Barrios) improving Customs times for clearance and releaseof businessefficiency exportedimported goodshas declined by 10 percent. (Baseline: Time to export 19days, time to import 18days; Doing Business Report). 39. The focus of this first loan of the DPL series is on the strategy and design of policies and legislative reforms to be undertaken during the new Colom Administration. The emphasis on promoting fiscal space for priority spending, governance and transparency of public expenditures, improved execution targeting o f social spending and sustainable gowth and productivity recognizes three critical and interrelated development challenges inGuatemala. First, the need for increased targeted social spending and investment to improve growth and reduce poverty and inequality. As mentioned earlier, analytical work suggests that while economic growth i s critical, focusing on this solely i s unlikely to be sufficient to achieve the country's medium-term poverty reduction targets. Second, the importance of fiscal transparency and greater fiscal space to fund increased targeted social expenditures. Government revenues are modest compared to other similar income countries and in order to maintain Guatemala's solid fiscal stance and expand social programs, further deepeningo f fiscal reforms is key. Nonetheless, the tax reform agenda is politically controversial and subject to the decisions of the Constitutional Court (CC). The Government's consultative approach to reform implementation and the facilitation o f dialogue on fiscal actions among country stakeholders should help to inform the population on the economic trade-offs. In doing so, it i s attempting to build a focus on social needs, their costs and the revenue requirements o f meeting them, while also pursuing complementary fiscal actions, mainly to enhance control and transparency inthe use o fpublic finances. And third, the criticality of governance, transparency, and monitoring and evaluation of social spending to generate confidence and political support for reforms and help to ensure that increased spending is executed efficiently. While many stakeholders in Guatemala recognize that there is a need to expand social spending 18 and investment, there are relevant concerns that such spending be efficient and w e l l monitored. The Bank has been working with the government and other institutions, including the Instituto Centroamericano de Estudios Fiscales (ICEFI, a local think-tank specialized on fiscal policy issues), to help provide information for an informed debate on fiscal policy challenges inGuatemala. 40. The DPL series is underpinned by the substantial body of analytical work carried out by the Bank in partnership with the Government of Guatemala (See Box 5), the design o f key prior actions, triggers and indicators for DPL Isupports progress in each o f the above three main areas. The primary analytical underpinnings, policy objectives, and development constraints indentified are highly relevant to the country and have informed the design o f the DPLprogrammatic work. IBox 5. LinksbetweenDPL Series andPrior AnalvticalandFiduciaryWork A. Analytical Reports-Recommendations Linksto DPL actions 1. Improving economic growth is keyto reducing poverty, butgrowth alone is unlikelyto be sufficient to achieve targets inlowering poverty and inequality inthe medium-term A CCT program couldplay an important role inan integratedpoverty reductionstrategy inGuatemala. I1 Improving the pro-poor targeting inthe context o f the CCT program is a - - - central component o fthe Gove&ent's program to reduce inequality. 2. Inthe wake o f the DR-CAFTA and an era that presents Guatemala with opportunities to deepen the progress achieved inthe last few years, the country should benefit from improving its competitiveness by 111.1 reducing business constraints and setting conditions for development and broad-based jobs creation. Investment 1. Improve competitiveness to maximize exports and investmentinlight Climate o f DR-CAFTA. Based on enterprise surveys and consultations with the Assessment(2008) businesses, streamlining tax-administration and customs proceduresis a 111.1 kev comonent to immovine thebusiness climate. 2. Strengthen governance (especially corruption and crime control). Increasingconfidence ingovernment expenditure decisions andreducing I.B.l& I.B.2 costs to crime control would improve the investment climate. 3. Improvement intax administration, particularly in modernizing the tax system, customs controls, and reducing avenues for tax evasion, could be III.l& I.A.l further strengthened after the reforms o f 2006 and 2007. 4. Increase access to a broader menu o f financial services. I.A.2 CountryEconomic 1. Consolidate macroeconomic growth, while improving fiscal discipline Memorandum and strengthening the tax base. I.A.l (2005) 2. Improve investment climate by simplifying regulations. 111.1 3. Reforms that improve overall access to credit (legislation relatedto non-bank financial intermediaries and secured transactions.) I.A.2 4. A critical component of reducingpoverty and inequality is to promote progressive public spending, esp. human capital and rural infrastructure. 11.1 Public 1. Improveand increaselevel ofpublic spending through fiscal savings Expenditure generatedby greater efficiency gains and increased taxation. I.A.l& I.B.2 Review (updated 2. Foster effectiveness o fpublic spendinginpriority sectors like health, March 2007) education and housing 11.1 3. Enhance municipal capacity to provide basic services, especially through higher local tax collection and increased accountability. I.B.2 I 19 Financial Sector consolidated supervision and regulation o f the banking sector Assessment to enhance capital adequacy and access to finance. I.A.2 Program Update Country Fiduciary 1.Continue expanding the integratedfinancialmanagement system Assessment (SIAF) to decentralized agencies and municipalities. (CFMCPAR, 2. Continue expanding use o f the procurement information system updated March (Guatecompras), under a comprehensive strategic plan for e-procurement. 2007) 3. Enhance quality o fbudget and fiscal reporting, and compliance with rules for budget execution accounting. 4. Continue enhancing transparency of municipal fiscal information. 5. Strengthenthe government procurement policy andoversight I.B.1 & I.B.2 functions, and modernize implementationtools. 6. Prepare and execute actionplans to address results o finstitutional assessments of internal controls. 7. Strengthenthe external audit function with, inter alia, effective use o f the government auditing system (SAG) inplanning and execution of financial audits. B. Lessons Learned From the Prior Broad-Based Growth DPL Series 41. The Guatemala CAS (FYO5-08) Completion Report (NO9) concluded that "The move towards programmatic DPL lending proved successful." While results insome areas o f DPL support were less than expected, particularly in the area of fiscal reform and increased social spending, the report found that the implementation o f the programmatic lending series (three DPL operations) contributed towards many CAS outcomes. First, these operations helped maintain continuous country dialogue and provided technical support around key priorities. Second, as part of DPL activities, the Bank informed the international community on progress on stabilizing the economy and Peace Accords goals that remain areas of international interest. Lastly, the DPL served as a conduit for two-way communication between the government and international community on the country's development strategy andprogress on policy reforms. 42. It was also concluded that, if amenable to the Government, the DPL structure should be continued. The report recommended that the positive DPL experience indicated retaining this instrument with a manageable agenda to avoid program overload. The focus on key priorities should be kept infurther operations and be complementedby support to improve public project evaluation in line with ongoing efforts to introduce results-based budgeting. The importance o f coordinating DPL budget support operations with the presentation o f the national budgetto Congress was also noted as important for enhancing internal dialog o n Bank supported government policies. 43. These lessons have shaped the design of Fiscal and Institutional DPL series. First, program components have been kept to a manageable number and have focused on government priorities, including results-based budgeting. Second, the DPL i s supporting government actions in developing a broad consensus on critical reform areas, particularly in the highly contentious area o f fiscal reform. Finally, the DPL series will continue to be coordinated with the 20 Government's budget submissionto Congress, and, as such, supportedpolicies will be discussed openly to increase legislative engagement. C. Fiduciary Aspects 44. The 2007 Update of the Country Fiduciary Assessment (CFMCPAR) indicates that the fiduciary environment in Guatemala is adequate, as evidenced by the improvements in the public expenditure management systems made over the previous decade and the actions being taken by the government to continue to increase transparency. While challenges remain, the current administration is moving ahead to strengthen its public fiduciary control framework further and has shown strong commitment to tackling fiduciary issues in many key areas identified by the Country Fiduciary Assessment. Drawing from this ongoing effort, certain key actions and selective milestones inthe context of the DPL program have been identified to help track the public financial management reform progress. The latter, in turn, are largely supported by the Bank-financed Third Integrated Financial Management Additional Financial Project under implementation. The foreign exchange control environment o f the Central Bank i s adequate and, subsequent to the IMF Assessment Report (2002), external auditing is now in place and international foreign currency reserves are managedaccording to prudent international practice. D. LoanAdministration 45. The Bank would disburse the loan proceeds into an account o f the central bank (BANGUAT) denominated in U S dollars.' BANGUAT will immediately credit the disbursed amounts to the Ministry of Finance Treasury Single Account ("common fund"), thus becoming available to finance budgeted expenditures. Within a week of this funds transfer, the Ministry will accordingly provide theBankwith a written confirmation. E. Monitoring and EvaluationArrangements 46. The Ministry of Finance will play the primary role in coordinating monitoring and evaluation of program implementation. The government and the Bank will take advantage o f several important data sources to assess progresso fthe DPL, including: 0 Central andnonfinancial public sectorbudgetmonitoring from the Ministry ofFinance 0 NationalInstitutefor Statistics reports and annual tracking surveys 0 Investment climate surveys 0 Central Bank o f Guatemalareports and analysis 0 Reviews and analyses o f laws and implementing regulations bythe Bank and other stakeholders 8. In the context of the latest IMF central bank safeguards assessment, an action plan has been agreed with BANGUAT. Moreover, BANGUAT is a participant in the Bank's Reserves Advisory and Management Program (RAMP). 21 0 Data from key Government agencies such as SAT, PRONACOM andMinistry o f Economy 0 Financial audits and follow up of CPAR and CFAA recommendations 0 Bank, IMF and IDBsupervision missions andreports CEPAL and SIECA surveys. - ~ Box 6. Good Practice Principleson Conditionality Principle 1:Reinforce Ownership The operation was developed within the objectives o f the 1996PeaceAccords andthe Colom's development plan, which establishes clear priorities developed through wide consultation with stakeholders and broader civil society. The priority legislative agenda is developed in consultation with the Congressional leadership on an ongoing basis. Bank support focuses on promoting enhanced capacity and fiscal space for increased public spending in priority sectors, improving public governance, transparency and expenditure management, and promoting sustainable growth and productivity. These focus areas have all benefited frombroad political support. The DPL series is strongly underpinned by prior analytical and fiduciary work, including the Poverty Assessment (2008), Investment Climate Assessment (2008), Country Economic Memorandum (2005), Public Expenditure Review Update (2007), the regional DR-CAFTA study (2005), CFAAKPAR Update (2007) and Financial Sector Assessment ProgramUpdate (2007). Principle 2: Agree upfront with thegovernment and otherfinancial partners on a coordinated accountability framework The Bank's support i s summarized ina brief and focused policy matrix. Currently, only the Bank, and the IDB are providing budget support to Guatemala. These institutions draw on the country's development plan, thereby ensuring coordination among them and consistency of support. They have also supported enhanced public financial management, progress insocial sector expenditures, and improved competitiveness. Principle3: Customize the accountabilityframework and modalities of Bank support to country circumstances Inaddition to supporting the government's development of its integrated financial management system(SIAF) and e-procurement system, the Bank i s also providing support for capacity building activities to evaluate government information, increase transparency, and build public sector accountability. The Bank has been working closely with the government and donor groups (e.g., Grupo de Dialogo (G-13), which includes the main bilateral donors as well as the WB, IDB, UN, IMF and European Union) on enhancing governance, as well as supportkg various dialogues on social auditing with a range o f civil society organizations. Guatemala was selected as a C-GAC (Country-Governance and Anti-Corruption) pilot country, and the Bank is providing full support to this agenda. Principle4: Choose only actions criticalfor achievingresults as conditionsfor disbursement The Bank's policy matrix uses a limited set ofprior actions (6). They addresskey development policies including actions inpromoting fiscal and institutional development to enhance growth and reduce poverty and inequality. Principle 5: Conduct transparentprogress reviews conducive topredictable andperformance-based financial support As agreed with the government, this programmatic DPL series consists o f three single-tranche operations, timed to the country's budget cycle, with each operation evaluated and monitored for results. Monitoring and evaluation of the program will take place within the government's own processes. Subject to satisfactory overall program implementation, this process allows for a predictable release o f the tranche during each fiscal year, allowing incorporation o f financing into the subsequent year's budget. The policy matrix contains a range of outcome indicators (9),which are assessed as part o f the operation implementation and are closely linked to the supportedpolicy actions. 22 F. Consultation, Distributionaland EnvironmentalAspects 47. The DPL series has been developed within the framework of the country's development plan and the CPS, which was widely consulted and disseminated within the country. Specific laws, institutional reforms and programmatic actions supported by the loan series were also discussed widely with different groups, including civil society organizations, the private sector and the research and academic community. In particular, the government has consulted intensively with country stakeholders, including members of Congress, on fiscal reformproposals-including participation inlocalpublic fora.' 48. The Bank is also providing ongoing support for civil society activities to help build capacity to evaluate government information, increase transparency, and build public sector accountability. The Bank has been working closely with the government and donor groups (e.g., Grupo de Dialogo (G-13), which includes the mainbilateral donors as well as the WB, IDB, UN and European Union) on enhancing governance, as well as supporting various dialogues on social auditing with a range o f civil society organizations including: Coalicion por la Transparencia (a group of CSOs engaged in social auditing in Guatemala including Accion Ciudadana (the national chapter o f Transparency International), CIEN (a domestic think tank), and the Guatemala Chamber o f Commerce. Guatemala was selected as a C-GAC (Country- Governance and Anti-Corruption) pilot country, and the Bank i s providing full support to this agenda. In addition, the World Bank Institute (WBI) is supporting a regional initiative to strengthen social auditing in Central America, which is being supported by the DPL team as complement to other consultation activities. This initiative intends not just to share the experiences, but to build a regional network formed by national civil society groups involved with public expenditure monitoring as a way to strengthen the groups' work in their respective countries. The WBI i s also supporting training and hands-on technical assistance on implementation o fperformance-based budgetingand medium-termexpenditure framework at the national and municipal levels. The Bank and IDB are coordinating support for monitoring and evaluation of the Mi Familia Progresa CCT program, as well as tax administration support. The Bankis also is continuingto work closely withthe IMFonmacroeconomic monitoring, financial sector stability issues, andtax administration reforms. 49. The actions supported by this DPL are not expected to have significant adverse distributionalimpact. To the extent that the measures supportedby the DPL series will play a role in Government's ability to enhance social spending levels, their impact on income distribution, particularly for the indigenous and rural poor, is expected to be positive. This i s confirmed by public expenditure incidence analysis undertaken in the context o f the Poverty Assessment which indicates that public social expenditures (Peace Accords definition) are generally pro-poor. Likewise, the distributive impact of fiscal reforms supported by the DPL series is expectedto be mildlyprogressive. 50. The specific policies supported by this DPL operation are not expected to entail likely significant impacts on the environment, forests or other naturalresources. However, to the extent that measures supportedby the DPL program are successful, over time, inattracting 9. For example, on August 21, 2008 the government participated in a public event organized by ICEFI (Central American Institute o f Fiscal Studies) on the fiscal challenges o f Guatemala and experiences of neighboring countries. 23 new investment (including in infrastructure), there will be a need to strengthen Guatemala's national institutional capacity to identify and address environmental policy and regulatory issues. With this inmind, a Country Environmental Analysis (CEA) was undertaken in2005-2006(Box 7) and discussed with the Government. The CEA provides cost effective recommendations for closing gaps in institutional capacity for environmental regulation. A s a first step, the CEA conclusions and recommendations helped to prepare the ground to obtain approval o f the National Environmental Policy (Politica de Conservacion, Proteccion y Mejoramiento del Ambiente y 10s Recursos Naturales). The government is continuing to update its National Environmental Policy and expects to undertake a Strategic Environmental Analysis with Bank support. Box 7. Guatemala CountryEnvironmentalAnalysis-Findings and New Developments Guatemala has made important efforts to ensure the long-term sustainability o f the country's development program through the systematic attention to environmental issues. This approach was strengthened under the recent Central American Presidents' Summit on climate change (May 2008), which set principles for the sustainable development agenda in the region. Despite some institutional and legal improvements, Guatemala still faces considerable environmental challenges, including: (a) over-exploitation o f water resources; (b) water pollution; (c) deforestation; (d) soil and land degradation; and (e) vulnerability to natural disasters. Giventhe new opportunities facing the country with the signing o f DR-CAFTA and the proposed scaling-up o f infrastructure investments, there is a need to accelerate the consolidation o f institutional and organizational tasks in Guatemala. Under the Ministry of Environment and Natural Resources' (MARN) leadership, the new administration is focusing its environmental agenda in four areas: (a) ecological debt, (b) environmental justice, (c) natural freedom, and (d) bioethics. The CEA report concluded that if MARN concentrates on its core functions, such as the planning and application of environmental policy and enforcement o f environmental regulation, while workmg in coordination with other environmental agencies, ministries, and municipalities, most o f these challenges can be met in a short period of time with minor adjustments to the existing framework o f environmental management. Three important issues that need to be addressedare: (a) the establishment o fa cohesive andcoordinatedenvironmental framework, (b) animprovement in the effectiveness and efficiency o f the Environmental Impact Assessment system (EIA), while introducing the use o f other tools (Le. Strategic Environmental Analysis); and finally (c) promotion o f compliance with environmental law. Since the broad dissemination o f the CEA, positive developments have occurred in the previous and current administration, including: (a) the approval o f the National Environmental Policy by the cabinet and the President (that i s currently in implementationand subject to expand its scope); (b) the initial supplementary allocation of Q5 million to MARN in the previous administration and the pledge o f additional QlO million for 2009; (c) the expansion and consolidation of initiatives, such as environmental laboratories with two mobile units (the use of these vehicles can be expanded, with a possible fiuther expansion to the rest of the Central American region); (d) establishment of a donor roundtable on environmental issues led by MARN, which is seeking to prioritize and harmonize environmental initiatives, guided in part by the priorities established in the CEA; and (e) the establishment of an environmental and social cabinet with the participation o f the civil society, and the private andpublic sectors. At the institutional level, the GoG is evaluating the possibility o f consolidating the Meteorology Institute (INSIVUMEH) and the National Geographic Institute (IGN) with MARN. The CEA report also emphasizes the need to provide a more flexible and efficient regulation, that will nevertheless provide strong incentives for polluters to change their behavior (the GoG is focusing its efforts on working with private sector-managed mining companies (gold, coal) and hydroelectric plants). Market-based instruments, such as pollution taxeslcharges, could be introduced in a gradual manner, pending the implementation of a reasonable and acceptable monitoring and enforcement mechanism. The right incentives would also include engaging civil society by improving information andpublic participation mechanisms. Inthe long term, deeper reforms to the legal framework for water and transparency are needed, but require longer periods o f maturation, consensus building, negotiations, and ultimately, congressional approval. 24 G. Risks 51. Sustainability of the program is subject to three main risks during the implementation of the DPL series: (i) political risks, given the polarized electorate, (ii) exogenous shocks related to natural disasters, and (iii) macroeconomic risks due to the U.S. and global deceleration, rising energy and food prices, a slowdown in foreign investment and wage remittances growth. These are described below. 52. Political risk i s inherent in Guatemala, where there continues to be deep fissures within society, the electorate is polarized, and the Government lacks a simple majority in Congress. While UNE won the largest number o f congressional seats (51 out of 158), the lack of a simple majority makes passage o f deep reforms challenging. This poses a risk for the DPL program implementation. The new administration's focus on social cohesion and building strategic alliances is especially pertinent in this context as developing a broad consensus is important for the successful implementation of an ambitions developmentplan. 53. Especially controversial is the tax reform agenda, particularly the new income tax proposal which is highly contested and subject to the decisions of the Constitutional Court (CC). The Government's consultative approachto reformimplementation and the facilitation o f dialogue on fiscal actions among country stakeholders should help to mitigate this risk. It is also attempting to address the issue through shifting the focus o f the public dialogue to social needs, their costs and the revenue requirements of meeting them, while also pursuing complimentary fiscal actions, mainly to enhance control andtransparency inthe use ofpublic finances. Political as well as social tensions also arise in other controversial areas includingregional integration, promotion of increased private participation in infrastructure, and rural development, all o f which are crucial to accelerating growth, reducing poverty, and are part o f the Government's agenda. The Bank is engaged in promoting dialogue with all relevant stakeholders o n the development challenges o f the country, including the taxation issue, as a means to facilitate an informed debate on Guatemala's development needs. Moreover, the DPL Ii s beingprepared for the Government's September 2008 budget submission to Congress, and, as such, supported policies will bediscussed openly to increase legislative engagement. 54. Besides political risks, Guatemala is also susceptible to external risks deriving from natural disasters. As with the other Central American countries, Guatemalais highlyvulnerable to multiple natural disaster risks-floods, hurricanes and earthquakes-that pose a significant direct threat to economic growth and poverty reduction, as well as indirect threat by unanticipated spending for emergency assistance and reconstruction, thereby affecting achievement o f established development goals inthe short term. Experiencewith Tropical Storm Stan shows, however, that fiscal discipline has been a high priority for the country even in the face o f an emergency. Providing additional support to Government measures, the Bank i s supporting efforts to update and validate the National Program for Disaster Mitigation and Response. A plannedCatastrophic Risk DifferedDraw-Down operation (CAT-DDO, FY09) will also provide contingent financing, accompanied by implementation of comprehensive disaster risk reduction measures. A non-lending technical assistance program, the Development o f Scientific Information to Promote the Municipal Planningto ReduceDisaster Risks inFY08, has been continued through the Global Facility for Disaster Reduction and Recovery grants. 25 55. The main macro-economic risks derive from the U.S. and global deceleration, rising energy and food prices, a slowdown in foreign investment and lower remittance growth. Rising food and oil prices have had a significant impact on the poor (as the household budget share dedicated food and transportation i s relatively high). Higher prices, combined with the slowing in growth o f wage remittances due to the U.S. economic slowdown, have deepened the adverse economic situation for the poor. The government has shown strong commitment to mitigate these risks though the implementation o f the conditional cash transfers program and a rural development agenda to improve income prospects for the poorest. These risks should also be mitigated by the Bank's ongoing macro-monitoring and country dialogue to adjust the program if critical issues emerge. Bank supported programs, including the country's CCT program and analytical work on developing sustainable energy market are specifically designed to manage and respond to these economic vulnerabilities. 26 3 2a L. 0 2 z 3 - 0 m ANNEX 2: Debt Sustainability in Guatemala 56. Guatemala's public debt ratio of GDP remains one o f the lowest in Latin America and among countries with similar income levels, reflecting a historical tradition o f conservative debt management. Nonetheless, a mid-tern debt sustainability analysis becomes relevant within the preparation o f the First Programmatic Fiscal and Institutional Development Policy Loan as Guatemala expects to increase its IF1borrowing.. The debt sustainability analysis was prepared under the keymacroeconomic assumptionspresented inTable A2.1 and estimated disbursement o f US$575millionwithin the US$960 millionCPS FY09-12" envelope as well as budget support for US$ 600 million estimated to beprovidedbyIDB for the same time period. Table A2.1 Key Macroeconomic Indicators for Debt Sustainability Analysis Actual Preliminary Projection 2005 2006 2007 2008 2009 2010 2011 2012 RealGDP (%) change 3.3 5.2 5.7 4.6 4.5 4.5 4.5 4.5 CPI(end ofperiod% change) 8.6 5.8 8.7 8.5 7.0 6.0 5.0 5.0 Public Sector Balance(% of GDP) -I.7 -1.9 -2.1 -1.9 -1.9 -1.9 -1.8 -1.6 ExportsGNFS (%) change 11.5 23.5 12.6 12.2 11.6 11.4 10.9 10.9 CurrentAccount Balance(% of GDP) -4.5 -5.0 -5.1 -5.5 -5.3 -5.2 -5.1 -5.1 Gross Int'l Reserves(monthsofGNFS imp( 4.5 4.3 4.1 3.7 3.7 3.1 3.6 3.6 Source: Banguat,Ministry ofFinance,IMFArticleIV Reportand Staff calculations. 57. Under relatively conservative macroeconomic assumptions, the results of the debt analysis show that all external vulnerability indicators would remain within prudent ratios. Public external debt stabilizes at 17.7% o f GDP in201211,while total debt service as percentage of exports of GNFS decreases from 7.6 percent in 2008 to 5.3 percent in 2012. Furthermore, as expected within the new CPS FY09-12, borrowing from the Bank as a share of total debt outstanding (TDO) increases from 13.4percent in 2008 to 13.7 percent in 2012, although I B R D ' s debt service as percentage of exports o f GNFS remains at 1.5 percent on average during 2008- 2012. The share o f JBRDportfolio inGuatemala increases from 0.9 percent in2008 to 1.3percent in2012. "A one-time increaseinamortizationpayments is expected for 2011, as $325 million outstanding due inthat year is repaid and financed through n e w external. 31 Table A2.2 Guatemala -ExternalDebt Exposure Indicators Actual Preliminary Projection 2005 2006 2007 2008 2009 2010 2011 2012 Total debt outstanding (TDO, US$@ * 5,338.4 5,571.1 6,002.3 7,087.2 8,165.0 9,059.3 9,791.1 10,128.6 ofwhich, Public Sector 3,602.4 3,995.8 4,440.0 5,103.5 5,464.6 5,772.1 6,026.0 6,387.7 ofwhich, IBRD 477.8 641.5 854.9 946.5 1,115.9 1,293.6 1,410.8 1,391.5 Total debt service (TDS, US$m)a 545.0 551.0 633.0 628.4 770.6 855.9 1241.8 932.9 ofwhich, Public Sector 485.0 471.5 614.2 581.2 622.4 660.9 980.9 626.2 ofwhich, IBRD 46.0 64.6 77.2 126.9 139.2 146.9 159.3 169.3 Total Debt anddebt serviceindicators(%) TDO / GDP 19.6% 18.4% 17.7% 18.2% 19.0% 19.0% 18.8% 17.7% TDS / ExportsofGNFS 11.0% 10.0% 9.3% 8.2% 9.0% 8.9% 11.6% 7.9% Public Debt anddebt serviceindicators(%) Public TDO / GDP 13.2% 13.2% 13.1% 13.1% 12.7% 12.1% 11.5% 11.1% Public TDS / ExportsofGNFS 9.8% 8.6% 9.0% 7.6% 7.2% 6.9% 9.2% 5.3% Preferredcreditor debt / TDO 38.3% 43.6% 53.0% 51.7% 49.3% 47.8% 47.5% 46.9% Preferredcreditor DS/TDS (%) 48.1% 50.1% 48.3% 69.0% 61.2% 59.9% 40.2% 54.8% IBRDexposureindicators IBRDDebt / TDO 9.0% 11.5% 14.2% 13.4% 13.7% 14.3% 14.4% 13.7% IBRDDS/TDS 8.4% 11.7% 12.2% 20.2% 18.1% 17.2% 12.8% 18.2% IBRDDS/ ExportsofGNFS 0.9% 1.2% 1.1% 1.7% 1.6% 1.5% 1.5% 1.4% Share of IBRDportfolio ("h) 0.5% 0.6% 0.9% 0.9% 1.1% 1.3% 1.4% 1.3% a. Includespubliclyguaranteed debt (includingIMF), privatenonguaranteedandprivateshort termdebt. Excludesdebt ofCORFINA for US131 million. b. "GNFS" denotesexportsofgoods andnonfactor services. c. Preferredcreditorsare defined as IBRD, IDA, IFC,the regionalmultilateraldevelopmentbanks, the IMF,andthe BIS IBox A2.1 The IMF andDebt SustainabilityinGuatemala In its latest Article IV consultation report of June 4, 2008, 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 decrease to 21.5 percent of GDP by 2012 from 22.3 percent in 2007, well within the country's capacity to service its debt. While total public debt is expected to decrease slightly, Guatemala's total external debt i s projected to slightly increase, from 25.2 to 30.3 percent o f GDP over the same period, but remains relatively modest and serviceable. Finally, public external debt is projected to fall from 13.0 percent of GDP in 2007 to 11.4 percent in2012, consistent the government's objectives. A scenario with key variables at their historical averages (real GDP growth, real interest rate andprimary balance in percent o f GDP) would lead to increases in debt ratios for public and external debt of no more than two percentage points of GDP on average during 2008-2012 to the baseline. 32 ANNEX 3 12de septiembre de 2008 Q-RVFB- 7-42 8-08 EstimadaWkwa Cox: Con w e propbaito, Gobism est6 implementando on pian basado en cuatro pragremasestmtdgicaa que son: i)Solidaridad;ii)Gobemabitidad;iiij ProducUvido3d; y, iv) Regionalidad. Pam hawr frente B estos desaflos, en un marc0 be a o ~ ~ ~ n i ~ i t ~ a d fiscal, la actual ad~i~i$tra~onGobierno, estd compromettida en dos acciontm de paralelias:a) aumentar fa rscaudaci6nfiscal;y, b) la eficietncia en la ejscucidndel gasto plrblico. Adernds, el GObl8mO est&cornprometido a fortalecer 10s procesospresupuestarios a fin de incrementsr la efficiencia y efectividad de !as instituciones pOblice$,para que atiendan la demanda actual y futura de sus servicios prestadas con el fin de cto descojdar la$ cobartusas de atenddn a 10s gnrpos mas vulnerable$ (prOtmi6n del presupue9a, SOCW)y, por otro lado, dinarnbn9 la$ inversbnes fmxlkhdolas en proywtw y programsprioritarios,con el fin de rnejwarla eficiencis y $u impacto en las acWescoberturas dsateMliBny p r m v e r su ampliacldn 33 En 81aiio 2007 la adwidad ecctnrirnica guaternalteca enfrentb 10s slfectos del impact0 del crecimiento significative de 10s precios internacionatesdel petrfrleo, del maiz y el trigo, utilizados para la produccibn de bioeombustiblea, Adicionalmente, hubo problemas en el mercado hipoteeario de la Bconomia de 10s Estados Unidos de America, lo cual gene& expractativasdedesaceleracitm e induso de recesittnen dlcho pals,que 8sel principalsocio Gomsrciaide Guatemala. El lndice general der precios al consumidor registrr)una variacldn de 8.75%,superior a ta meta planteada por la$autotidades monetarias para el 2007. No obstanteel repunte hiflacionarb, lacoordinacitrnde lasspoiiticasrnunetarigsy fisdes permitietonmantener mWrvb la estabiliiidad econhirca que ha si* s fundamentos para un mmjo adecuedo de lacaracterisfb demanda agfegwfa, cwt lo cual m del pals en #osQib"m ams. Un obyetrvo daws del Programa del actual G0biet.mha sido rnsnZFaner una$ftnawas diminuciirn de b pobresed peis, no cornprometen su e ~ a b ~ ~ ~mcroecon6m~~ @Micas ~ j ~ ~ i y~ordenadas, que a la v ~ i que coadyzdvan al desamrllo y a la a s ! de4 d a d con dhficit fiscales elavedos e insostenibtes. El prudenta manejo de la politica flsc,erl, combinsdo con una adecuada polltica monstaria, $8 tradujo en el a b 2007 en un deficit fiscal de 1.5%. Los ingresos tributarios netos registrados durante et 2007 aicanraronQ31,543.3 millones, supekiores en Q4,305.2 milioness (15.8%)a lo captado en el 2OoEi. mientrasquecon rela&n a las metasde recaudaci6nse situsrrxrQ2,342.7 milimes(8.0%)soke lzr meta &nual. En su cornpromiso de COntfFwar mejotando la ramdaci4n tsibutaria, el GoWmo present6 al Cmgreso de la RepWlica la i n j ~ ~dmrninada "Dispositiones w ~ ~ ~para la Mrrdarnizacibnd d Sistema TribuWio lndirectdy Aduamm", a ~ n ~ ~ ~ finde retomar10s principiosy mpromisos del Pat% Fiscal,con el fin de hater viable el cumplirnientode10s Acusrdos de Pasy lasmetasde Owandlo def Miienio. 34 La lnidativa de Ley integra en un mismo cuerpo legal, en forma ordenada !as normas tributarias siguientes: el Titulo I crea un lmpuesto Especfficoa la Primera Matricula de VehiculosAutomotorea Terrestres, el Ti&~oestabtece las Disposiciones Apllcablesal fl Sistema Aduanaro National, d VWlo Ill reformael Decreto27-92 del Congrew da la Repitblica, Leydel lrnpu@stoai Valor Agregado, el Titub IV reforma el Oecreto 20-2006 del Congreso de la ~~p~~~~~ Olsposics'ones Legales para el F ~ ~ ~de ia4 ~ ~ ~ i ~ r n ~ ~ Triributaria, et fitutrr V reforma la Ley det Irnpwstosobre CSrtxA&b de i s t r ~ ~ VehiaAosTansstm, Madtimsy a&-, Decreta 70-94 del Cor~r@so ta RspWrCa, da el %tubW contSenslesrefomsa1Wig0Tributario, Decreta&SI del Congrewde la Reptiblica,y 4 TiaUro Vi4 contime lasDisposiciCmesFirrafss,transitorilss, DetogWaS y Vgencia de ia Ley. En materia flnanciera y en linea con las reformas financieraa que se han venido impulsanda, dentro de la estiwctura organizacionalde la Superintendencia de Bancos (SB) existe una intendenciaque time a su cargo la supervisibn de grupas financieros y forman parte de la rnisma, tres departamentoscon la ~ ~ i ~ lt&nicaa necesaria~ n ~ ~ i atsndiendo a las enttdades que conforman dichos grupoa, y un departamento encargado de la evaluaciibnglobal delsistema bancario. Respecto a la irnplementacir5nde normativa prudencial para entidades off shore, la S 5 tiene en vipncia IDS reglarnentos relstivos a IlmiZes de crbdito, capital adecuado y disposiciones sabre envio de informacidnfinancieraperibdica,con 10scualss se pede 35 administtar e! Rlesgo de CtMito. Dichos r%giam~~os es#n contenidas en las resoluciones Junta Monetada Nos. JM-191-2007 JM 200-2007 y en el Acuerdo 14-2007 del Superintendentede Banco$. Et GobiE?mo de Guatemala ha con fa ~~~~~~n de medidas ~~~ orientadas a me)or?;\rla~eflcisncia y tramparenciaen 81 us9 de krs re3cursos dd emrio pirblico, ~ n en 4p forblecer la suditoria social. ~derendicidn~de wentas, ~ de !asl pfincipales acciones destacsl la~creacien ~ para mdyuvar ssf a ~ dentrodd Minisbriode Finanzas Pfblicasdel Vicsrninisteriode Transparencia Fiscal y Evaluacidn (VMTFE), por medio del Acuetdo Gubernativo No,982008. Dicho Viceministeriotendrb mprincipalfuncibn garantlzat dlibre a m de Eociudadania a la infonnacidn en materia @saly financkm; BE~E corn promover refomas e innovaclones en la legistacitln y ~~b~~~~ a lat r y ~ vincula&~ a tas finanaas plsibticas que ~ ~ ~ ~ Para d &ato se ha daborado un Ptan de ArxiCEn del nuevoViceministaria, de inmediato plwo perm el period0 agost0 2008 B fsbrera 20063. Lo$ ejes de este plan son Ids siguientas: a) Acceso Pirblico a la inforrnacidn; b) Marco Norrnatlvo para la Transparencia;y, c) FomacidnanTransparencia Fiscaly Presupuestarta 36 Lo anterior, ha corttribuido a transparentar la gsstidn pljblica en mateda de compras y contrataciones y tambieSn a pmpiciar un mayor nrjmro de ~~~~~~~~, generar una mayor cornpetencia entre 10s ofarenbs, lo que se Wuc;a en mjores e;rdem& de pre~iosy calidadde produc2os. PW lltimdFpnfK)del antepruyectode Ley presentadoa1Congreso de la Rapljblicaque apnteba d ~~~~~0 det t n g y ~Egrstsos~del Esbdo 2009, est@MInisterio ha ~ estab~ecidc,normas espttcificm para contribui a una ejecucibn mls effactiva y transparent0del presupuesto. Se fortalece la ~~a~~~ de registrar en el Sistema de tnversi6n Publica 10s proyectos ejecutados necliante menios, y la8 widad- ejecutaras d.ar fondos en fldelcomisos quedan obliggdas a registrar rOs contratos que suscriban, ademrjs de requetines infomes que dsben presentar a la Contraloria Generalde Cuantas. Para implemmtar el eje de Solidandad mendan- s u p , el Gobierno e&&eci6 un mecanisrnode CoordinaciM denominado Consejode Cohesidn Social, esl Cuss t h e objetivogmpt?dfims:i)elevsr el Irnpmto de la invmit4nsdal; ii)establecc3.runmenejode1 presupuersto del Estado y de Eos programas involucmdos, con enfoqua de ptihpor resyftadaer; ill) atencih gmgdfica (municipios con ias mayores nivelas de pob tica (pragramas m8s mta-dectivas); iv) orientar con transparencia !as invef9iones sociales del Wimo; v) disaAzv programas y herramientasinnovadormde gestidn social; vi) para log fondori sociaimrs;y, vi) dar cumpfimimb awar Metas y Objetiw8 del hdilf#rio lamecanim deesp&aJimdEm (mortalidadmaternae infentll,pobr-, pobreza extremay anatfabt3friam). 37 una bass W e Indice de Selseddn& de un Sistema lntegrado deara Derivado de lo anterior, sobre Seleccicjnexpeiirntwntalsl Gobierno inicM la implementaGibn de Beneficiaries y el con^ la identificaddin de farnilias wvien extnrna en 10s munici pofIaAdministraGibn200&2012. En consonancia con las medidas adoptadas. y con el objejeto de gmerar mayor captaci6n de recumus, la Superintendencia de Administracion Tributaria (SAT), deserrdld rcjclentenrente UR sofwampara ta ditacibn de las retenclones del lmpussto wbre la Rem (IsR), el asat faciiita el w ~ ~ de la8 obligacionss ~ ~ ~ ~ t o tributariascorraspondisntm. 38 Como se puedeobsewar, el Gobismade Guatemalaest4 altamente cornprometidocon la promoeibn e implementacidn de las acciones newsarias para alcanzar un mayor credmimto econdrnico sostenklo, un incremento en la invwsibnproductiva, priorizada en las Breas de saiud, educacibn y pmtwciirnsocial, asl como, el fortalecirniento de la transparenciay SftcienCia .e~.ifa gsastindel gasto @Mica, todo stlo wn eS pmpirsitode awrnerrtard d e m l l o erco&rnb dat paisy mejmr la cstidad de vlda de la poblacicsn g u a t m l ~enespialde 10s ~rupos , m;iSwlnenrMw. AI agradwr el continua apoyo que nos Wnda el 8enco Mundial, eprovscho la oportunidad para exprs-sadelas muestras de mi consideracidn y estima. Atentarnente, ,c- 39 TRANSLATION OF LETTEROFDEVELOPMENT POLICY MinistryofPublic Finance Guatemala, Central America September 12,2008 Ms.PamelaCox Vice Presidentfor the LatinAmerica andCaribbeanRegion WorldBank Washington, D.C. UnitedStatesofAmerica Dear Ms.Cox: The Government o f Guatemala, headed by Mr. Alvaro Colom Caballeros, has established, as one o f its key goals, the promotion o f sustainable and equitable economic development that meets the needs o f the entire population, in particular persons living in extreme poverty. In that regard, the commitment of the current administration focuses on moving forward with achievement o f the Peace Agreements andthe MillenniumDevelopment Goals. To that end, the Government is implementing a plan based on the following four strategic programs: (i)solidarity; (ii) governance; (iii)productivity; and (iv) regional issues. To meet these challenges, and in the context o f fiscal sustainability, the current administration i s committed to working simultaneously on two fronts: (a) boosting the tax yield; and (b) achieving efficiency in public expenditure execution. In addition, the Government is committed to strengthening budgetaryprocesses with a View to enhancing the efficiency and effectiveness o f public institutions, so that they can meet current and future demand for the services they provide in such a way as to cover care to the most vulnerable (social budget protection), while increasing investment by targeting priority projects and programs, with the aim of enhancing efficiency and the impact o fthese projects andprograms on care currently provided, andworking towardtheir scaling up. The assistance strategy agreed upon between the Government o f the Republic of Guatemala and the World Bank includes, among other things, support for implementation o f the Government's plan by granting three Fiscal Policy and Institutional Development Programmatic Loans for the 2009-201 1 period, the first o f which is expected to be disbursed in 2009 and will be aimed at supporting the Government o f Guatemala's efforts to implement and institutionalize policies that facilitate higher growth, improved governance, poverty reduction, deepening o f financial markets, and enhanced efficiency inpublic expenditureas well as transparency inpublic sectormanagement. 41 I. PromotingMacroeconomic Stability and Expanding the Fiscal Space for Priority Programs In2007, Guatemalan economic activity was impactedby the sharp increase in global prices of oil, corn, and wheat, which are used inbiofuel production. In addition, the problems plaguing the U.S. economy, spawned by difficulties in the housing market, fanned expectations of a slowdown and even recession inthe UnitedStates, Guatemala's maintrading partner. The difficult international context notwithstanding, the Guatemalan economy grew inrealterms by 5.7 percent, maintaining the trend seen in recent years. This growth was fueled, respectively, by robust exports and private consumption tied to higher prices for the main traditional exports and the income generated by family remittances. The overall consumer price index rose by 8.75 percent, exceeding the rate set by the monetary authorities for 2007. Despite the uptick ininflation, the coordination of monetary and fiscal policies made it possible to maintain the elements underpinning sound management of aggregate demand, thereby preservingthe economic stability enjoyedby Guatemala inrecent years. One key objective o f the Government's current program has been adherence to a disciplined and orderly approach to public finance which, while contributing to development and poverty reduction inthe country, staves offthreats to macroeconomic stability linkedto high and unsustainable fiscal deficits. As a result o f the prudent management o f fiscal policy and the application o f sound monetary policy, the fiscal deficit stood at 1.5 percent in 2007. Net tax revenue stood at 431,543.3 millionin2007, exceeding the 2006 figure by Q4,305.2 million (15.8 percent), while actualcollection exceededthe annual target by42,342.7 million(8 percent). Inits bidto continue boosting tax collection, the Government submitted to the Congress of the Republic draft provisions entitled "Supplementary Provisions for the Modernization of the Customs and Indirect Taxation System," with a view to reinstatingthe principles and commitments o f the Fiscal Agreement, in order to pave the way for achievement o f the Peace Accords and Millennium Development Goals. The draft provisions include, in one legislative document, the following tax regulations: Title I, which establishes a specific tax on the initial registration o f automobiles; Title 11, which establishes provisions applicable to the national customs system; Title 111, which amends Decree 27-92 of the Congress o f the Republic - Law on Value Added Taxes; Title IVYwhich amends Decree20-2006 o f the Congress o f the Republic - Legal Provisions for Strengthening the Tax Administration; Title V, which amends the Law on Taxation o f the Movement o f Land, Maritime, and Aerial Vehicles - Decree 70-94 o f the Congress o f the Republic; Title VI, which contains amendments to the Tax Code -Decree6-81 oftheCongressoftheRepublic; andTitleVIl, whichsets forththe final, transitory, andrepeal provisions, as well as thosepertainingto entry into force. In addition, in order to finance the economic and social programs necessary for the country's development, the Ministry o f Public Finance also submitted legislative provisions to the Congress o f the Republic for the imposition o f the "solidarity tax," to remain in effect untilpassageby Congress o f the draft income tax law, includedinthe second phase of this Government's fiscal modernization process. 42 Inthe financial sphere and inline with the financial reforms beingpromoted, the Office of the Superintendent of Banks has, within its organizational structure, an office responsible for the supervision of financial groups. This office is composed o f three departments that have the technical expertise suited to the profiles of the member entities o f these groups, as well as a department responsible for the global assessment o f the banking system. The supervision fbnctions assigned to the Office o f the Superintendent o f Banks for 2008 include assessment of the banking system's main debtors, with a view to determining the level of credit risk assumed by the creditor entities supervised and whether this risk i s properly measured [and] managed. Furthermore, the four main bankso f the system are implementing a new supervisionsystem this year, outlined inthe Risk-based Supervision Manual, which is expected to be completed inFebruary 2009. Inthis regard,two ofthe risk assessmentprofilescontained inthis manualhave alreadybeenapplied, andwork onfive otherprofiles is currentlyunderway. They willbe appliedbetween September 2008 andFebruary2009. Intheareaofprudentialregulationsapplicabletooffshore entities, theOfficeofthe Superintendent of Banks has implemented the regulations pertaining to credit limits and capital adequacy, as well as provisions on the periodic reporting o f financial information, which can be used to manage credit risk. These regulations are set forth in Decisions Nos. JM-191-2007 and JM-200-2007 o f the Monetary Board, andinAgreement 14-2007 ofthe Office o f the Superintendent of Banks. 11. GovernanceandTransparency The Government of Guatemala has continued to implement measures aimed at improving efficiency and transparency in the use o f public funds, primarily in the area o f accountability, in order to help strengthen social auditing. Among the main actions initiated is, in particular, the establishment of the Vice-Ministry for Fiscal Transparency and Assessment [Viceministerio de Transparencia Fiscal y Evaluacidn VMTFE] in the Ministry of Public Finance, through Government Agreement No.98-2008. The primary function o f this vice-ministry will b e to guarantee free access by citizens to fiscal and financial information, and promote reforms and innovations in public finance laws and regulations, which will contribute to transparency and anticomption efforts. To this end, an actionplanhas beendeveloped for the new vice-ministry to be implementedimmediately (August 2008 to February 2009). The central themes of this plan are: (a) public access to information; (b) aregulatory framework for transparency; and(c) traininginfiscal andbudgettransparency. This vice-ministry will provide support to improve the electronic and technological resources to grant single-window access to information. It will also assess public expenditure and fiscal policy execution, andwill promote transparency inpublicmanagement, procurement, andcontracting. Inthe area of government procurement, the Government is continuing to make significant strides using the GUATECOMPRAS system, creating GUATECOMPRAS EXPRESS, a new window through which the entire management process for open contracts i s automated, from electronic invitations to tender and electronic awards, to electronic purchase orders and other relevant 43 processes. In addition to promoting transparency, this system focuses on ensuring more rapid and efficient procurement, with particular emphasis on open contracts. This system i s utilized for all procurement inexcess o f Q30,000.00 entailing the use o fpublic resources. Transparency, efficiency, the promotion o f small andmedium-sized enterprises, andthe strengthening of e-government and e-trade processesare the mainbenefits o fthis newplatform. In addition to generating greater competition among bidders, which results in better prices and higherquality products, the aforementioned platform has helped to enhance transparency inpublic procurement and contracting management, and to increase the number o fparticipants. Lastly, under the draft law submitted to the Congress o f the Republic, which approves the State income and expenditure budget for 2009, the Ministry o f Public Finance has introduced specific regulations for more effective and transparent budget execution. The obligation to register projects executed under agreements has been bolstered, and executing agencies for trust funds are still required to register contracts that they conclude, in addition to the requisite reports that must be submitted to the General Accounting Office. 111. ExpandingOpportunitiesto VulnerableGroups In order to implement the aforementioned solidarity program, the Government established a coordination mechanism known as the Social Cohesion Council, which was designed to achieve the following specific objectives: (i)increase the impact o f social investment; (ii) establish a management process for the State budget and the participating programs, with emphasis on results- based management; (iii) establish priorities from a geographical (municipalities with the highest levels of extreme poverty) and programmatic (programs that are more cost-effective) standpoint; (iv) oversee the Government's social investments ina transparent manner; (v) design programs and innovative tools for social management; (vi) establish specialization mechanisms for social funds; and (vii) achieve the Millennium Development Goals (maternal and infant mortality, poverty, extreme poverty, and illiteracy). Inorder to achieve the aforementioned objectives, the Government is implementinga Conditional Cash Transfer Program (CCTP) called "Mi Familia Prugresa" [My family progresses - MIFAPRO],which is the result, on one hand, of the urgent need to improve the education, health, and nutrition indicators for Guatemalan children, and the favorable assessments that several CCTPs in Latin America have received with respect to their ability to improve said indicators, on the other. The highlevel o fpriority accorded to the CCTPhas prompted a clarion call for actionby the ministries and participating entities, and a request to step up the pace of its implementation. This Program will be comprehensive in nature and will be executed in municipalities and towns with high levels of poverty and vulnerability, with the poverty map being used to identify these areas. The first phase of the program targets up to 45 priority municipalities, and i s expected to cover a total of 125 of the 333 municipalities in the country, with a view to improving and expanding education, health, andnutrition services. Based on the foregoing, and on an experimental basis, the Government began implementing a Comprehensive Integrated Beneficiary Selection System [Sisternu Integrado de Seleccibn de BeneJiciarios] and the accompanying Beneficiary Selection Index to identify families living in abject poverty in the municipalities deemed priorities by the Government for the period 2008- 2012. 44 The system includes the identification of eligible families, which are those with girls or boys between the ages of 0 and 15, or with pregnant or breastfeeding mothers. It also uses a Proxy Means Test to identify households living in extreme poverty, which i s based on the consumption aggregate of families surveyed during the 2006 ENCOVI. These variables can b e classified into household and head o f household characteristics under four specific categories: (i) access to basic services and housing conditions; (ii) ownership o f property; (iii) capital of the household human head; and (iv) the demographic characteristics o f the household identified. Means tests, which are usedto identify families, are conducted to ensure that most of the resources reach the extreme poor (coverage of the target population). The portions o f the resources that do not reach the extreme poor are referred to as program "leakages" (inclusion or exclusion errors). In other words, the means tests are used to reduce resource "leakages" and maximize coverage of the target population. IV. SustainableGrowth and Productivity The Government of Guatemala is confident that the opening up o f more and better markets will yield benefits only ifthe country continues to improve the investment andbusiness climate, and is equipped with adequate infrastructure to achieve this objective. One key objective of the Government's program is adherence to a disciplined and orderly approach to public finance which, while contributing to development and poverty reduction in the country, staves o f f threats to macroeconomic stability linked to high and unsustainable fiscal deficits. T o this end, the Government has endeavored to generate additional fiscal resources to finance a significant increase inpublic investments, and inparticular, social expenditure. Inkeepingwith the measures adopted, andwith a view to generatingmoreresources, the Office of the Superintendent o f Tax Administration [Superintendencia de Administracidn Tributaria SAT] recently developed a software package for income tax withholding, which facilitates compliance with the relevanttax obligations. This software entails the use of an electronic form to fill inthe data on the sworn income tax statement, which salaried employees must submit to their employer. This allows businessesto generateanautomatic and electronic Annual Sworn Statement of Reconciliation of Deductions made for Salaried Employees [Declaracidn Jurada Anual de Conciliacidn de Retenciones a Empleados en relaciBn de Dependencia] (SAT-107 Form) andthe Annual ReconciliationofDeductionsmade for SalariedEmployees [Conciliacibn Anual deRetencionesPracticadasa Empleados en Relacidn de Dependencia] (SAT-108Form). U s e of this software also provides documentaryproof ofincome tax deductions madeby businesses for salaried employeesandother taxpayers domiciled inthe country (Form SAT-106), andbased onthe relevantdata, generates areportthat facilitates completion ofthe Sworn Statement andReceipt o fMonthlyPayments of IncomeTax Deductions [DeclaracidnJurada y Recibo de Pago Mensual de RetenciBn del ISR] (SAT- 105 Form). 45 It bears notingthat one of the advantages o f this application software is that taxpayers can either use the BancaSAT system to electronically submit the aforementioned forms, or print them to submit hardcopies to the SAT offices andagencies. 111. Conclusion As can be noted, the Government of Guatemala is firmly committed to promoting and implementing actions required to achieve greater sustained economic development and increased productive investment, with priority being accorded to health, education, and social coverage, and to enhancing transparency and efficiency inpublic expenditure management, with a view to boosting the country's economic development andimprovingthe standardofthe living o fthe Guatemalan people, particularly the most vulnerable groups. It is against this backdrop that financial support fiom the World Bank through the First Fiscal Policy and Institutional Development Programmatic Loan amounting to US$200 million has become particularly important, and is in keeping with the financing strategy of the country's general budget. We thank the World Bank for its continued support. 46 ANNEX 4 1MonetaryonFund nternati a1 INF Executive Board Coiicltrdes 2008 Artick I V Constrltatisn with Guatemala Public Infotmabon Notice (PIN) No, Ofif65 June 4, 2008 Public lnfonnationNotices (PINS) form part of the IMF'sefforts to promotetransparency of tbe IMFs viewsand analysis of economicdevelopmentsand policies.Withthe consent of the countay (orcountcies)concerned, PINSare issuedafter ExecutiveBoarddiscussions of Article 1V consultationswith member countries, of its surveillanceof developments at the regionallevel, of post-programmonitoring, and of ex postassessmentsof member countrieswith longer-termprogramengagements.PINSare also issuedafter Executive Boarddiscussions of general policymatters,unlessotherwisedecidedby the Executive Boardin a particularcase. On May 19, 2005, the Exeaibve Board of the Intematronal Monetary Fund (IMF) cancluded the A h d e I V consultation wth Guatemala.A Background Macroeconomicdevelopments have been broadly pwtive since the last Arhck N consultation, anchored by prudent macroeconomic polrcies. Despite tensions inthe financial sector in late 2006 and early 2007, macroeconomicstabiltty has been maintained, and growth has risen substantialfy abovehistorical averages, to 5.2 percent in 1006and 5.7 percent in 1007. Despite the rising oil import bill, the current account remafnedat 5 percent of GDP, thanks to continuedgrowth of exports and remittances. The overall surplus of the balanceof payments has permitted the accumulation of tnternational reserves, which remain equivalent to about 4 months of importsand 100percent of publrc external debt. Inflation mse to 8% percent in 2007, due to both bargeexternat price shocks (oil and food) and domestic demand pressures. The fiscal position remains solid, with the central government deficit contained and the public debt, estimated at about 22 percent of GDP in 2007, among the lowest in the region. The central government deficit declinedonly slrghtiy to 1.8 percent of GDP in 2007 despite a substantial imease in revenues, mainly due to spending on infrastructure in excessof approved budget cerlings. To avoidthe reoccurrenceof these overruns, measures have been taken to improve the control of budget execubon. Revenueperformance has been strong, especially as a result of tax administration reforms introduced in 2006, yielding a b u t 0.7 percentof GDP in additionalrevenues in 2007. Higheroil and food prices, explaining about 3 percentage porntsof headline inflatronin 2007, contributed to the rise of inflation abovethe central bank objective in 2007. However, domesticdemand pressures, includingdue to high credit growth, still pewst. An early response OF monetarypoiicy to containthem was constrained by tensions in the banking sector in late 2006 and early 2007, but since then the central bank has increased gradually the policy interest rate to 6.75 percent by end-March2008. The structure of the Guatemalan banking system has undergone important changes. Two bank failures in late 2006 and early 2007 were resolved quickly and effectivety, and in the aftermath, the sy5te;m has consolidatedthrough a wave of mergers and aquistions. Mirroring developments in other countries in the region, international bankshave also increased their presence in the country. The authorrties have taken measuresto improve financial sector regulation and supervision, rncludingthrough better monitoringof bank Iquidity, implementing risk-based superviston, and issutng new regulations, including on credit concentration ltmits and fiquidity requirements for offshore banks, and rules for the appointment of external auditors. Executive Board Assesswent ExecutiveDirectors commendedthe Guatemalan authorities for the strong performanceof the economy 47 in 2007, substantial impr-ocenientsin tau admrnrstration, and continued efforts to promote growth and regionaleconomic integiatton. While near-term prospects remain favorable overall, there are downside risks from a sharper deceleiation of the U.S. economy, qwen strong economic linkages through trade, rernrttances, and financial flows. In additron, inflation risks remain ttlted to the upsrde, given the increase in international food and fuel prices. Directorswelmmed the authonties' focus on improving Guatemala's resilience to shocks and sustaining high growth fates to reduce poverty. This will require further strengthening of banking regulation and supervision, raising tax revenue and key pm-poor expenditures, and continuingefforts to improve the business environment and lower inflation. Directors noted that the !ow level of public debt has been a key strength of Guatemala's macroeconomic policres. The recent strong revenue performance provides an oppoituntty to address social and infrastructure needs wtthoutpqardiang debt sustainabrhty. 5lrectOrS supported recent initiatwes to strengthenthe social safety net and to protect the p r from the impact of higher food prices. They saw scope for automattc stabilizersto work in the event of a Larger-than-expectedeconomic slowdown. They concurredwith the authonties' pianto secure contingent external finanung, if needed, to avold crowding out private sector credit and drawing down government deposits at the central bank. Directors supported the authorities' intention to submit a revenueenhancing tax reform to congress to achieve the objectives of the 1996 Peace Accords. Higher revenues should be directed to strengtheningsocial policies, publtc security, and infrastructure. Directors called for continuedefforts to improvethe transparency and efficiency of publtc spending. Directors noted that high food and oil prices were a major factor behind the increasein inflation in 2007, and that continurng external inflation pressuresare complicatingthe conduct OF monetary poltcy. They welcomed the Increaseinthe plicy interest rate, and noted that, white downside nskswarrant a dose mltonng of developments, further monetary tightening may be needed to avoid semnd-round effects of external inflation and to anchor inflationexpectationsat a low level. To increase monetary policy effectivenessand strengthen the credibility OF the inflation targeting framework, most Directors recommendedthat the authorities allow greater exchange rate flexibility. This would atso tower stenlization costs, reduce incentivesfor dolianzatton, and help the economy adlust more smoothly to changes in global and domestic conditions. A few Directors, however, advised caution in revising exchange rate policy, noting the significantpass-throughof exchange rate movements to the domestic economy. A number of Directors suppsttedthe authorities' request for Fund technical assistance in developingthe secondary market for governmentdebt, which will strengthen the monetary policy transmtssron mechanism. Directorsobserved that Guatemala's current account is projected to be sustainable over the medium term, and that the appreciation of the realeffective exchange rate has beenbroadly consfstent with fundamentals. While the strong export growth in recent years suggeststhat competitiveness has been maintarned, the authonties should eonhnue pursuingproductivity-enhanung reforms to boczst long-term growth, Directorscommended the authonties for thear effective resolution of two bank farlures m 2006 and 2007. Actions are needed to strengthen the bankingsystem's prudential and legalframework and addfess remainingvulnerabilittes, includingthe increasingdoltanzationof loans. Directors welmrned the recent progress made to irnplemwit nsk-basedsupervisionand the plan to refarm the banking law in 2foO8. These should be acmmpanied by addrtionaleffortsto enhancethe bank resolutron Framework, better ring-fence offshore banks, and eliminate legal constraints to effective bankingsupervision. Directors emphasized that burlding larger capitalcushions, increasing loan-loss provisioning, and dosely monitoring credit concentration iiithe banking sector will increasethe financtal system's resiiience to adverse econmic shocks. Directorswelcomed the progressmade in improving macmeconornicstatisticsand emuraged the authonttesto continue with therr efforts, especiallywith respectto the quarterly GDP figures, consolidated public sector statistics, and measurement of balance of paymentsflows, 48 Guatemala: SelectedErenornit Indicators R O j 2006 2007 2008 2 s 3.2 3.3 S ? 5.7 48 5.9 9.2 8.6 5 8 8.7 6 2 6.8 14.6 13.3 237 23.0 163 11.0 11.4 14.5 168 12.4 160 8 1 10.8 12.9 141 20.8 8 5 6 3 16.2 14.1 150 16.7 8 7 -2.5 -0.4 -0.2 -1 9 0.0 -2.1 -1 5 2.1 7.9 3 2 0 1 (31percentofGDP,unlessotherwisetndtcaied] Corrent accollat -4.6 -4.9 -4.5 -5.0 -5.0 -5.5 Tradebalance -13.5 -15.2 -15 3 -16.1 -16.2 -16.6 Expms 16.0 162 161 166 18.0 183 m -29.5 -31.4 -314 -327 -34.2 -35.0 O h (net) 8.9 10.3 108 11.1 11.2 11.2 Capitalaccount 3.0 3.7 2.8 3.9 11 4,f publtcsector (ictudu?goffirralcapital tranrfers) 1 4 1 1 -03 1 1 0.7 o s Pitmate sector 1 6 2 6 3 1 2 9 3.1 4 3 Qfwhirh FDI 1.o 1 1 17 1 s 2.0 20 Emrsandolai&ons 4.1 3 7 2 7 15 0.8 o s Set internationnfreserves (inmittionsof U.S. dobra) 2,799 3,380 3,607 337s 4,xzo 1J70 (SW rnm hofnestyear m p d s ofgoods aadmwes) 4.5 4.6 4 5 4.3 -1.0 3 7 Gross domestie investment 20.3 20.8 19.7 20.9 20A 30.0 Gross nationalw i n g 15.7 16.0 15.2 15.8 15.4 14.5 Esteradsarhg 4.6 4.9 4.5 5.0 5.0 5.5 CentralGovernment Revenues 12.5 12.3 12.0 12.8 13.1 129 Ofwhtrh.TLLYm n u a s I t 7 I 1 5 i t 2 I 1 9 1 2 3 12 1 Espcaditures2f 15.1 13.4 13.7 14.f 149 14.4 Qfwhich Sotoland otherpe~c8related 6 0 5.6 6.1 6.4 6.0 6.5 49 Iimiw:fpymeiits 1 3 1 4 1 4 I J 1 5 1 6 Overaif balance ?/ -2.6 -1.1 -1.7 -1.9 -1.8 -1.5 Overall balance of the nonfinancialpnbiic sector -2 2 -06 -06 -1.2 -1 2 -1 0 Combinedpublic sector balance, includingcpstrai b a d -2.8 -1.2 -0.9 -1.4 -09 -03 Xonhnancinlpublicdebt (inpercentof GDP) 21.5 11.3 20.8 t1.8 22.0 11.7 Qfwhrch extminl 15.2 15 5 13 1 13.1 I 2 9 I16 rioniestt~ 6.3 6 4 3 7 8.7 9.1 9.0 174,044 190.440 207.729 229.106 356336 289.509 IMF EXTERNAL RELATIONS DEPARTMENT PiiblicAffairs Media Relations Phone: 202-623-7300 Phone: 202-623-7100 Fax: 202-623-6278 Fax: 202-623-6772 50 ANNEX 5 Guatemala at a glance 9/12/08 Latin Lower Key Development Indicators America middle Guatemala 8 Carib. income Age dlstrlbutlon. 2006 ( 2 ~ 7 ) Maie Female Population,mid-year(millions) 13.3 563 3,437 7578 Surfacearea (thousandsq. km) 109 20,421 35,510 Populationgrowth (%) 2.5 1.2 1.o 8084 Urbanpopulation(%of total population) 48 78 42 45-40 GNI (Atlasmethod,US$ billions) 32.8 3.118 6,485 3&24 GNI per capita (Atlas method. US$) 2,450 5,540 1,887 1519 GNI per capita (PPP. international$) 4,440 9.320 4,544 04 GDPgrowth (%) 5.7 5.7 9.7 20 10 0 10 zo GDP per capita growth(%) 3.2 4.5 8.6 percent (most recent estimate, 200&2007) I Povertyheadcwnt ratioat $1.25 a day (PPP. %) 8 Povertyheadcountratio at $2.00a day (PPP,%) 18 Under4 mortallty rate (per 1.000) Lifeexpectancyat birth(years) 70 73 69 n Infant mortality(per 1.000 live births) 31 22 41 80, I Child malnutrition(% of children under 5) 18 5 25 Adult literacy, male (% of ages 15 and older) 75 91 93 80 Adult literacy,female (% of ages 15 and dder) 63 89 85 Gross primaryenrollment. male (%of age group) 118 120 112 30 Gross primaryenrollment, female (% of age group) 109 116 109 zo 10 Access to an improvedwater source (% of population) 95 91 88 0 Accessto improved sanitation facilities (% of population) 86 78 54 0Guatemala Net Aid Flows 1980 1990 2000 2007 a (US%millions) Net ODA and official aid 73 201 263 487 IGrrmth of GDP and GDP per capita ('h) Top 3 donors(in 2006): Spain 0 15 224 UnitedStates 17 88 58 67 Japan 3 5 67 39 Aid (%of GNI) 0.9 2.7 1.4 1.6 Aid per capita(US$) 10 23 23 37 pi...-IXI Long-Term Economic Trends Consumer prices (annual% change) 10.8 41.0 6.0 0.5 GDP implicitdeflator(annual % change) 10.0 40.5 6.8 6.1 GDP pef capita O5 Exchangerate (annualaverage, localper US$) 1.o 4.5 7.8 7.6 Terms of trade index(2000= 100) 89 80 100 134 198G90 1990-2000 200047 (averageannual gmwth %) Population, mid-year(millions) 7.0 8.9 11.2 13.3 2.4 2.3 2.5 GDP (US$ millions) 7.879 7,650 19,291 33.855 0.8 4.2 3.6 (% of GDP) Agriculture 24.8 25.9 22.8 10.7 1.2 2.8 3.0 Industry 22.0 19.8 19.8 27.9 -0.2 4.3 2.9 Manufacturing 16.6 15.1 13.2 18.3 0.0 2.8 2.8 Services 53.2 54.3 57.4 61.4 0.9 4.7 4.1 Householdfinal consumptionexpenditure 78.9 83.6 83.9 88.1 1.1 4.2 4.1 Generalgov't final consumptionexpenditure 8.0 6.6 7.0 8.1 2.6 5.1 0.4 Gross capital formation 15.9 13.6 17.8 20.7 -1.8 6.1 4.1 Exportsof goods and services 22.2 21.0 20.2 25.6 -1.8 6.1 2.3 Importsof goods and services 24.9 24.8 29.0 42.4 -1.7 9.2 3.4 Gross savings 13.9 10.0 Note: Figuresin italics are for years other than those specified.2007 data are preliminary. ..indicatesdata are not available. a. Aid data are for 2006. b In 2007 was a changein the base year forthe National Accounk (from1958 to 2001) which is not reflectedinthe structureof the economyin years prior to 2001 DevelopmentEconomics, DevelopmentData Grwp (DECDG). 51 Guatemala Balance of Paymentsand Trade 2000 2007 Governance indicators, 2000 and 2007 (US$ millions) Total merchandiseexports (fob) 3,085 5,196 Total merchandiseimports (cif) 5,171 11,648 vofce and accountability Net trade ingoods and services -1,705 -5.968 Political stability Current accountbalance -1,049 -1,723 as a % of GDP -5.4 -5.1 Regulatwy quality Workers' remittances and Rule of law compensationof employees (receipts) 596 4,130 Contrd of corrupbon Reserves, includinggold 1.811 4,335 0 25 53 75 loo Central Government Finance 2007 Country's perwnblerank (O-lm) 02000 hipher valuer nn@y b t t W TBIIWS (% of GDP) Current revenue(includinggrants) 10.4 13.0 Source Kaufmann-KraayMastmUmWorld Bank Tax revenue 9.5 12.2 Current expenditure 8.5 9.6 Technology and Infrastructure 2000 2007 Overall surplugdeficit -1.8 -2.1 Pavedroads(% of total) 34.5 Highest marginaltax rate (%) Fixedlineand mobile phone Individual 31 31 subscribers (per 100people) 14 65 Corporate 31 31 Hightechnologyexpotts ( O h of manufacturedexports) 7.9 3.1 External Debtand Resource Flows Environment (US$millions) Total debtoutstandingand disbursed 3.853 5,776 Agricultural land ( O h of landarea) 42 43 Total debt service 390 626 Forestarea (YOof land area) 38.8 36.3 Debtrelief (HIPC. MDRI) - - Nationally protected areas(Yoof land area) .. 23.4 Total debt (Yo of GDP) 20.0 17.1 Freshwaterresources per capita (cu. meters) .. 8,592 Total debt service(% of exports) 8.4 5.5 Freshwaterwithdrawal (X of internalresources) 1.8 Foreigndirect investment (net inflows) 230 354 C02 emissionsper capita (mt) 0.91 0.98 Portfolioequity(net inflows) 0 0 GDP per unitof energy use (2005 PPP $ per kgof oil equivalent) 6.1 6.4 :omposition of total external debt, 2006 Energyuse per capita (kg of oil equivalent) 636 828 IR8 (US$ miLons) IBRD Total debt outstandingand disbursed 296 740 Disbursements 51 136 Principal repayments 13 38 Interestpayments 21 37 IS$ millions IDA Total debt outstandingand disbursed - - Disbursements Private Sector Development 2000 2008 Total debt service -- -- Time requiredto start a business (days) - 26 IFC(flscdyear) Costto start a business (% of GNi per capita) 50.6 Total disbursedand outstanding portfdio 118 57 Time requiredto register property(days) -- 30 of which IFCown account 84 46 Disbursementsfor IFCown account 21 0 Rankedas a major constraint to business 2000 2007 Portfoliosales, prepaymentsand (% of managerssurveyed who agreed) repaymentsfor IFCown account 9 52 Corruption 80.9 Crime .... 80.4 MlGA Grossexmure 18 101 Stock marketcapitalization ( O hof GDP) Newguarantees 0 0 Bank capital to asset ratio (%) 8.9 9.1 Note: Figuresin italics are for years otherthan those specified. 2007 data are preliminary. 9112/08 ..indicatesdata are not available. indicatesobservationis not applicable. - DevelopmentEconomics, DevelopmentData Group(DECDG). 52 Millennium Development Goals Guatemala With selected targets to achieve between 1990and 2015 (estimate closestto date shown, +/- 2years) Goal 1:halvethe rates for extreme povertyand malnutrltlon 1990 1995 2000 2007 Poverty headcountratio at $1.25a day (PPP. % of population) Poverty headcountratio at nationalpovertyline (% of population) 57.9 56.2 Share of income or consumptionto the poorestqunitiie (%) 2.2 3.5 3.9 Prevalenceof malnutrition(% of children under 5) 20.3 Goal 2: ensurethat children are ableto complete primary schooling Primaryschd enrollment (net.%) 85 94 Primary completionrate (% of relevantage group) 48 58 77 Secondaryschool enrollment (gross,%) 23 38 53 Youth literacy rate (% of peopleages 15-24) 73 77 79 Goal 3: eliminate gender dlsparlty In educationandempower women Ratioof girls to boys in primaryand secondary education (%) 89 92 Women employed in the nonagriculturalsector (% of nonagriculturalemployment) 37 38 Proportionof seats held by women in nationalparliament(%) 7 13 7 12 Goal 4: reduce under4 mortality bytwo-thirds Under-5mortalilv rate (Per 1.000) 82 64 53 41 Infant mortality rate(per 1,000live births) 60 49 39 31 Measlesimmunization (proportionof one-yearolds immunized. %) 68 83 88 95 Goal 5: reducematernalmortalityby three-fourths Maternalmortalityratio (modeledestimate, per 100,000live births) 290 Birthsattendedby skilled healthstaff(%oftotai) 34 41 Contraceptiveprevalence (% of women ages 15-49) 31 38 Goal 6: haltand begin to reversethe spread of HlVlAlDSand other major dlseases Prevalenceof H N(% of populationages 15-49) 0.8 0.8 Incidenceof tuberculosis(per 100,000people) 90 87 83 79 Tuberculosiscasesdetected under DOTS(%) 43 50 56 Goal 7: halvethe proportion of peoplewithout sustalnable access to bask needs Atcess to an improved Water source (% of population) 79 85 91 95 Access to improvedsanitationfacilities(% of population) 58 68 78 86 Forestarea (% of total land area) 43.8 38.8 36.3 Nationallyprotectedareas (96 of totalland area) 23.4 C02 emissions(metrictons per capita) 0.6 0.7 0.9 1.0 GDP per unitof energy use (constant 2005 PPP$ per kgof oil equivalent) 6.5 6.7 6.1 6.4 Goal 8: develop a global partnershlp for development Teleohone mainlines(Der 100 people) 2.1 2.9 6.0 70.4 Mobile phonesubscribers(per 100 people) 0.0 0.3 7.6 76.0 Internet users (per100 people) 0.0 0.0 0.7 10.1 Personalcomputers (per 100 people) 0.3 1.2 2.1 iducatlon lndlcators (%) Measles lmmunlzation (% of 1-yearoids) IC1indicators (per 100 people) 1007 70 BO 50 40 I25 m m2! 2w ZwBr 30 20 to 0 lseo 19% 2000 2wB 2m zw2 xC4 me +Primary net enrollmentratio +Ratio of girls to boys in primary 8 0Guatemala I OFixed + mobile subscribers secondaryeducation 0LabnAmerica 8 the Canbbean mlnternet users Note: Figures in italicsare for years Other than those specified. ..Indicatesdata are notavailable. 9/12/08 DevelopmentEconomics, Development Data Group(DECDG). 53 54 MAP SECTION IBRD 33413R1 GUATEMALA 91°W 90°W 89°W 88°W SELECTED CITIES AND TOWNS DEPARTMENT CAPITALS NATIONAL CAPITAL M E X I C O RIVERS GUATEMALA PAN AMERICAN HIGHWAY MAIN ROADS 18°N RAILROADS 18°N DEPARTMENT BOUNDARIES PaxbánPaxbán INTERNATIONAL BOUNDARIES 92°W Carmelita San Pedro P E T É N TikalTi El Naranjo El Naranjo Melchor Melchor de Mencos de Mencos L. Petén Itzá BELIZE 17°N 17°N Flores Flores Usumacinta opán La Libertad La Libertad M To M E X I C O Tuxtla Gutiérrez PasióSayaxché n Sayaxché Machaquilá Salinas Gulf San Luis San Luis of 16°N Cancuén Honduras 16°N cxáIn Sarstún Barillas Barillas Chiyú Modesto Modesto Lívingston Lívingston Méndez Méndez HUEHUETENANGOHUEHUETENANGO Puerto Puerto AL ALTA VERAPAZVERAPAZ nta Cruz Barrios Barrios Cahabón Cahabón SaIZABAL IZABAL QUICHQUICHÉ QUICHÉ Mts. Sierra de Selegua El Estor El Estor Chajul Chajul Chamá Cahabón L. de CobCobán Cobán Izabal Morales Morales Huehuetenango Huehuetenango Los Amates Los Amates SANSAN Sierra Negro Polochic de MARCOSMARCOS los Motagua BAJA VERAPAZ BAJA VERAPAZ Tajumulco ajumulco TOTONICAPANTOTONICAPAN Santa Cruz Santa Cruz Chuacús Salamá SalamSalamá Z A C A P A 15°N (4220 m) (4220 m) Del Quiché Del Quich Quiché ELEL San Marcos San Marcos Totonicapán otonicap otonicapán Motagua Zacapa Zacapa 15°N To PROGRESOPROGRESO To Tonalá S El Progresso Suchia i NQuetzaltenango GO e El Progreso El Progreso Quetzaltenango Sololá SololSololá ANGO GUATEMALAGUATEMALA Chiquimula Chiquimula et UETZATLLT rENAr SOLOLSOLOLÁ SOLOLÁ a CHIQUIMULACHIQUIMULA MazatenangoL.Atitlan M ALTENANGO TENChimaltenango Chimaltenango QRetalhuleu GUATEMALAGUATEMALA Jalapa Jalapa Esquipulas Esquipulas HONDURAS Retalhuleu Mazatenango M SACATE-SACATE- Antigua Antigua JALAP JALAPA Ocós a CHI CHIMAL PEQUEZPEQUEZ Guatemala Guatemala d RETALHULEU RETALHULEU Cuilapa Cuilapa Jutiapa Jutiapa Champerico SUCHITEPEQUEZSUCHITEPEQUEZ r e Escuintla Escuintla SANT SANTA JUTIAP JUTIAPA ESCUINTLAESCUINTLA ROSAROSA 14°N 14°N Sipacate San José EL SALVADOR EL SAL ADOR Las Lisas 0 20 40 60 Kilometers To La Unión 0 10 20 30 40 50 Miles To La Unión This map was produced by the Map Design Unit of The World Bank. PACIFIC OCEAN The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any 13°N endorsement or acceptance of such boundaries. 13°N 92°W 91°W 90°W 89°W 88°W NOVEMBER 2006