Report No. 15352-GU

GuatemalaBuilding Peace with Rapidand Equitable GrowthCountry Economic Memorandum

August 22, 1996

Central America DepartmentLatin America and the Caribbean Region

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Currency Equivalents

Currency = Quetzal (Q)US$1.0 = Q6.09 (July 31, 1996)Ql.0 = US$0.164

FISCAL YEAR

January I to December 31

GLOSSARY OF MAIN ACRONYMS AND ABBREVIATIONS

BANDESA Banco Nacional de Desarrollo Agricola (Agriculture Development Bank)

BANRURAL Banco Rural (Rural Development Bank)

CC Constitutional Court

CG Central Government

CORFINA Corporaci6n Financiera Nacional (National Finance Corporation)

CD Consejo Departamental (Departmental Council)

DICABI Direccion General de Catastro y Avaluo de Bienes (Catastre Agency)

EEGSA Empresa Electrica de Guatemala (Guatemalan Electric Company)

ERER Equilibrium Real Exchange Rate

FEGUA Ferrocarriles de Guatemala (Railways Enterprise)

FONAPAZ Fondo Nacional para la Paz (National Fund for Peace)

GUATEL Telefonos de Guatemala (Telephone Company)

IDB Inter-American Development Bank

IGSS Instituto Guatemalteco de Seguridad Social (Social Security Agency)

INFOM Instituto de Fomento Municipal (Municipal Development Institute)

INDE Instituto Nacional de Electrificaci6n (National Electricity Company)

INDECA Instituto Nacional de Comercializaci6n Agricola (National Agricultural Marketing

Institute)

INTA Instituto Nacional de Tecnologia Agraria (National Agricultural Agency)

IUSI Property Tax

NGO Non-Governmental Organization

ONSEC Oficina Nacional del Servicio Civil (Civil Service Agency)

RER Real Exchange Rate

TFP Total Factor Productivity

VAT Value Added Tax

GUA TEMALA:Country Economic Memorandum

Preface

Improving prospects for peace, the consolidation of democracy and theimplementation of stabilization and structural reforms provide a unique opportunity forsustained and equitable development in Guatemala. This report focuses on three keyaspects of the country's development agenda: the macroeconomic framework, reform andmodernization of the public sector, and agricultural development.

* Ensuring macroeconomic stability will be critical, not only to stimulate growth, butalso to finance peace and advance in the battle against poverty. The modestgrowth of the past few years will not be sufficient to make a dent in poverty.

* Guatemala's public sector is notoriously weak and inefficient. Without acomprehensive and longer-term effort to reform and modernize the public sector,there can be little chance of sustaining widespread improvements in the country'shuman capital base, and in efficiently providing the infrastructure and serviceswhich the private sector needs in order to accelerate growth.

* Agriculture lies at the heart of Guatemala's poverty and inequality. At the sametime, more rapid agricultural development must be an integral part of a strategy toaccelerate economic growth.

For each of the three areas mentioned above, the report presents an analysis of keyissues followed by detailed policy and institutional reform recommendations. It should beemphasized that while in some cases the recommendations are quite detailed, they are notintended as prescriptions. They are presented in this detailed way only to illustrate thecomplexity of the challenge. In all cases, there are alternative ways of defining the reformagenda, with different priorities, sequencing and trade offs. Some of these reforms willundoubtedly be politically difficult to implement or may not enjoy a sufficient degree ofdomestic consensus. Moreover, in many areas considerable analytical and design workwould be required to either confirm the diagnoses presented here or to prepare specificreforms, especially when these would require legislative changes or major institutionalreforms.

In the final analysis, reform can not be imposed from the outside. It must be theresult of a process of internal dialogue and consensus building. The role of an institutionsuch as the World Bank -and the aim of this report- is to contribute to this dialogue bypresenting technical analyses and recommendations based on considerable sectoralexpertise and cross-country experience.

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Table of Contents

Improving Land Taxation .................................. 35C. Agricultural Credit .................................. 36

The New Agricultural Credit Agenda .................................. 38

TECHANICAL ANNEX

Annex 1: Stabilization, Structural Adjustment and CredibilityAnnex 2: Constraints of Non-Traditional Exporters: A Summary of Survey ResultsAnnex 3: Financial Sector Reform, SummaryAnnex 4: Agricultural Trade Liberalization Policies in Guatemala

BIBLIOGRAPHY

STATISTICAL APPENDIX

TEXT TABLES

I.1 Key Macroeconomic Indicators. .................................................... 21.2 Factorial Sources of Economic Growth, 1950-94 ................................................... 31.3 Total Public Investment to Social Needs, 1994-96 ................................................. . 7I.4 Average Lending Rates in Central America .................................................... 9.....91111 Area, Production, Yield, Labor Use and Gross Revenues for Principal South

Coast Activities, 1991-92 ................................................... 2811I.2 Class I and II Land, Land in Farms and Land Concentration by Department ................... 30111.3 Formal Financial System: Financing the Agricultural/Rural Sector ................................. 36111.4 Formal and Semi-Formal Financial Systems ................................................... 37

TEXT FIGURES

1.1 Key Macroeconomic Indicators .................................................... 21.2 Income Inequality and GDP per capita .................................................. 41.3 Savings and Investments .................................................... 41.4 Mean Years of Education, 1987 .................................................... 51.5 Schooling in Selected Latin American Countries, 1987 .................................................51.6 I ns truments of Monetary Policy (%) .................................................... 81.7 Volatility of Reserve Requirements .................................. 9........... ..... 91.8 Mortgage Bonds and Savings Deposits ...... 91.9 Exchange Rate and Interest Rate Volatility ............................. 91.10 Trend of Real Credit to the Private Sector ........................... 1...0.....0...... 101.11 Net International Reserves to Monetary Base .............................................................. 101.12 Real Effective Exchange Rates and Nominal Exchange Rates ................................... 101.13 Real Exchange Rate Trend .. 10................................ I 01.14 Capital Inflows, Remittances and Migrants .............................. .... 121.15 Merchandise Exports and Imports, FOB .......................... 1..3.................. .. 13

Table of Contents iii

1.15 Merchandise Exports and Imports, FOB ................................................ 13I.16 Trends in Total Capital Inflows ................................................ 13HI.1 1995 Tax Revenues in Latin American Countries . ............................................... 1411.2 1995 VAT Rates in Latin American Countries . ............................................... 1411.3 Size of the Guatemalan Civil Service . . ..........................I .... 17II.4 Comparison of Earnings for Selected Private and Public Sector Jobs ........................... 1911.5 Real Wages in Selected Civil Service Jobs . . ............................ 2011.6 Projected 1996 Financing of the Municipal System . ............................................... 2311.7 Increases in the Aporte Constitucional ................................................ 2411.8 Programmed Public Investment for Peace and Development in 1996 ............................ 25III.1 South Coast Land Distribution, 1979 and 1992 ................................................ 2711I.2 Commercial Banks and BANDESA: Comparative Lending Structure .......................... 37

This report was prepared by Jose R. L6pez-Chlix (L4DCN) based on a series of missions to Guatemala duringmid-1995 and reflects joint efforts by the Government (inistries of Finance, Economy and Agriculture,Secretariat of Planning, Superintendency of Banks and Bank of Guatemala) and the World BankContributors to the report were: Ian Bannon (Lead Economist, LAIXDC); Jorge Shepherd (macroeconomicand quantitative analysis, Annex 4, L4DCN); Peter Gregory and Bruce Perlman (public sector reformconsultants); Fernando Rojas (fiscal decentralization, consultant); Arthur Mann (tax issues, consultant); TomSchweigert (agrarian issues, consultant); Germdn Rioseco (rural credit, Ruta Agricola); Andrew Stone (non-traditional export firms survey, PSD); IDC (non-traditional export firms survey); Margarita Sanfetiu (non-traditional export firms survey, consultant);and Carlos Alba (financial sector, consultant). Peer reviewerswere: Louise Cord, Rodrigo Chaves and Cora Shaw (agrarian issues), Robert Lacey (public sector reform),Tim Campbell (fiscal decentralization) and Utrich Ldchler (fnancial reform). The Department Director isDonna Dowsett-Coirolo.

EXECUTIVE SUMMARY

In the 1990s, Guatemala undertook 3. Sustained growth requiresmarket-oriented reforms... overcoming the following structural

constraints:1. Guatemala has the largest economy * low economic efficiency,in Central American, but in the previous * low human capital accumulation,decade, structural constraints derived from * high income inequality,widespread poverty, income inequality, * low and declining investment and savingsimport substitution policies, loose ratios,macroeconomic perfornance and social * a highly inefficient public sector,unrest constrained its considerable economic * land tenure insecurity, andpotential. Only in the 1990s, after several .s u

decde ofprtecioism Gateal opne * social unrest derived from a 35 years-olddecades of protectionism, Guatemala opened armed conflict.to the rest of the world and implementedmacroeconomic stabilization and structural 4. Overcoming these constraints willreforms. Price stability and higher growth require policies to:have followed, providing the country with a inre savings a v ngood base from which to increase global ascthe reform of thesocial-secucompetitiveness while initiating a systematic system, demonopolization of publicattack on poverty and consolidating peace. e c e tenterprises, continued efforts to

^ ~~~~~~~~~~modernize the financial system and...but deeper and more ambitious structural dergle the ecnand imprvdreforms are needed for more rapid and deregulate the economy, and improvedequitable growth. conditions for pnvate mvestment,

r strengthen human capital and physical

2. Despite significant and solid infrastructure;progress in addressing economic constraints, => modernize agriculture, thus eneouragingthe economy remains in a vulnerable a more efficient and equitable use of landmacroeconomic position. In the current while providing better support servicesenvironment, neither moderate rates of fortsmall farmers.growth nor single-digit inflation will suffice => support a comprehensive peaeto allow more than marginal improvements in agreement and address security concems.per capita income. Low productivity gainssuggest that the process of economic reform A precondition for sustained growth is aneeds to be strengthened in order to sustain sound and credible stabilization programstabilization and economic recovery in themedium term. In order to seize the 5 Ensuring a sound macroeconomicopportunities that peace and globalization framework is essential. Two importantwill bring to Guatemala, visible progress challenges must be urgently faced in the nearmust be made toward the ambitious goals of term:faster and equitable growth, a more open and * the fragility of the fiscal position, thatcompetitive economy with a dynamic export- leaves little scope for needed peace andoriented private sector, a small, strong and social investment;more efficient state, a comprehensive poverty * the weakness of the external positionreduction program, mainly arnong rural and derived from the end of the coffeeindigenous populations, and peace. windfall, reversal in capital inflows, and

partially ineffective monetary policies.

The agenda 1996-2000 must address 6. Uneven stabilization efforts need toseveral structural constraints. be consolidated by strengthening the public's

vi Executive Summary

confidence in a credible economic program, 9. Stabilization has overloadedi.e.: monetary policy-mainly through the use of=> achieving a sound fiscal position, mainly reserve requirements and open market

based on improvements in tax operations, but it has lost effectiveness due tocollections, rather than in control of a recent process of financialfiscal expenditures; disintermediation featuring:

> improving the effectiveness of monetary * high volatility of reserve requirements,policy with more effective and lower * rapid expansion of mortgage bonds,reserve requirements; exempt from reserve requirements,

=> increasing exchange rate flexibility; * development of off-balance sheet=> reducing the current account deficit to operations, and

sustainable levels. * opening of off-shore banks.

The priorities are: closing the fiscal gap, 10. An increased effectiveness ofmonetary policy will depend on a

7. The fiscal situation is fragile due to combination of measures to* a low tax revenue ratio and widespread => extend bank reserve requirement to all

tax evasion, financial obligations;+ a weakened financial position of public => reduce reserve requirements gradually in

enterprises, line with improvements in the fiscal* a slowly decreasing quasi-fiscal deficit, accounts;

and => reduce the monthly maintenance period* potentially significant budget pressures of nonremunerated reserve requirements;

from peace and social expenditures. z* establish reserve requirements for foreignexchange deposits, similar to those on

8. Significant improvements in fiscal domestic deposits;performance are required to ensure => develop prudential regulations on financecredibility of fiscal, exchange rate and companies and banks' open positions inmonetary policies, and to meet social- and foreign exchange; andpeace-related expenditures. Three = strengthen Central Bank and Monetarycomplementary goals are: balancing the Board autonomy.combined fiscal deficit in 1996-97,increasing the tax revenue ratio to at least 12 and adjusting to external imbalances.percent of GDP and eliminating central banklosses in 1999. Key measures to achieve 11. The present current account isthese goals are: vulnerable to=> a strong tax collection effort; * the end of the coffee windfall,= more efficient public expenditure * reduced capital inflows,

management; * a slightly appreciating real exchange=> increased saving from public enterprises, rate, and

including actions to promote * increasing fiscal pressures driven bydemonopolization of public services; peace financing needs.

=> using funds obtained from privatizationof public enterprises to reduce Central 12. A sustainable target is a currentBank losses. account deficit of about 3 percent of GDP.

To reach it, in addition to tight fiscal andregaining effective control of monetary monetary policies, there is a need to:policy, => increase real exchange rate flexibility,

E&cecutive Summary vii

=> promote a rapid expansion of non- => reducing the personal income taxtraditional exports, brackets and the top marginal rate from

= change the composition of capital 30 to 25 percent;inflows, and z eliminating income tax exemptions for

=> complete the peace process quickly. maquila and free-trade zones, whichcontravene WTO norms; and

Social peace and economic modernization =' reviewing tax revenue-sharingrequires reforming the state provisions, e.g., to tertiary education.

13. Rapid and equitable growth requires public sector restructuringa smaller, stronger and more efficient state.Comprehensive public sector modernization 16. The key aim of public sector reformwould require broad reforms in at least four is not so much to reduce its size, but toareas: improve its support to the private sector as* tax modernization, an efficient operator, administrator and* public sector restructuring, regulator, coupled with a major role in* municipal and social funds alleviating poverty. The main factors

strengthening, and limiting public sector efficiency arise from:* privatization of public enterprises. * excessive centralization,

* an inadequate and disperse legal andtax modernization, institutional framework,

i uncontrolled public sector employment14. In the previous decade, several tax and processes,reforms and an impressive number of * poor management of financial andextemally-supported tax administration and human resources, andcustoms modernization programs have failed, * a wage structure divorced from the laborlargely because: market and poor labor relations.* an inadequate tax code discourages tax

payer compliance; 17. A strategy for restructuring the* discontinuous support for, and poor public sector should aim to increase its

implementation of, tax administration efficiency and accountability. The remediesreform; and are not susceptible to a quick fix. Public

* lack of a clear medium-term reform understanding and support for modernizationstrategy. should help to diminish any short tern

political costs. The process of reform should15. Options for a reform agenda would => modify the present institutional and legalinclude: framework within which the public=> approval of a new tax code and review of sector operates;

judicial procedures required to enforce it; => modernize the functioning of its financial=> initiation of two radical administrative management, civil service and wage and

reforms: the creation of a new remuneration structure;Superintendency of Tax Administration = explore ways to improve labor relationsand an Internal Affairs Customs Unit. and involve unions in the modernization

=> increasing the VAT rate from 10 percent effort; andtoward the Central American range of => modernize the judiciary system.13-15 percent;

r eliminating VAT exemptions, except for municipal and socialfunds also need to beexports; strengthened and rationalized

viii Executive Summary

18. There is a political consensus on the the 1980s-based on the expansion of theneed for municipal and social funds agricultural frontier-is exhausted,strengthening as part of fiscal agriculture continues to play a dominantdecentralization. It is justified, on the one economic, social and political role. Boominghand, by required democratization and nontraditional exports are largely agriculturalpopular participation in the implementation and produced by small farmers, poverty isof a poverty alleviation strategy and, on the rooted in rural, indigenous and poorother hand, by badly needed modernization of populations, and the unequal distribution ofthe state in an efficiency-seeking process. and access to land is at the root of the 35However, there are two main concerns: year armed conflict (it is a major topic of the* The level of decentralization- current socioeconomic and agrarian issues

municipalities versus regions or peace accord). To reach its agriculturaldepartinents. potential, reforms are required to:

* The role of social funds in the => address the leading constraints faced bydecentralization process. exporters,

=> consolidate agricultural trade20. A reform agenda should consider: liberalization;-' a new legal framework for => develop a land market, which can

decentralization; encourage a more efficient and equitable=- providing financial assistance to develop use of land by shifting large areas

a minimum level of local administration devoted to low-productivity crops to highcapacity in municipalities; productivity crops; and

= developing budget neutral proposals for => develop an agricultural credit market.increasing revenues and expenditures,within the framework of fiscal targets in The main challenges: eliminate constraintsthe macroeconomic program; to exporters,

=' simplifying the existing set of fiscal toolsfor financing decentralization; 22. Enhancing the outward-orientation

= strengthening the municipalities' of the economy, while eliminating constraintsadministrative and tax collection to exporters, requires expediting removal ofcapacity; the major constraints that impinge global

=> abolishing the most obsolete 'arbitrios" competitiveness, including:and transfer of resources from specific * lack of physical security,revenue-sharing mechanisms to the * economic policy uncertainty,Central Government; * political instability,

=> merging Social Funds based on * excessive state regulations, andspecialization, eliminating the less * severe infrastructure deficiencies-efficient; and mainly roads and communications.

=> allowing subcontracting schemes withthe private sector for providing services. consolidate trade liberalization policies,

Rural development is key for rapid growth, 23. The agenda includes major actions inpeace consolidation and rural poverty four areas: farm prices, tariff and non tariffalleviation reform, and export incentives.

=> Farm prices. Recapturing exchange rate21. Rural development is a major flexibility will encourage newchallenge in the economic modernization agricultural investment;process. Although the growth model prior to

Executive Summary ix

=> Tariffs. Gradually reducing the current => no government intervention in landfive-tier tariff regime to a two-tier tariff purchases, but direct negotiation betweenregime, in concert with Central America, beneficiaries and land-sellers;would facilitate customs tax collection. > government participation restricted toThe new tariff regime should be providing grants, selection ofcomplemented by regional agreements in beneficiaries, legal assistance in titlingthe rules of origin, antidumping issues and land disputes, and financingregulations, and the use of safeguards. for infrastructure and other investment

=> Non-tariff-barriers. Equivalent needs;tarification of agricultural imports => beneficiaries with demonstrated fanmingpreviously subject to NTBs, mainly experience, a family labor force and,basic grains, must be reviewed. A preferably, female headed;consistent, nondiscriminatory, and => permission to sell land by beneficiaries totransparent WTO-based system of eligible persons on the waiting list afterproduct testing and certification of some years;sanitary and phyto-sanitary standards is => no restrictions on leasing land; andneeded. * exclusion of invaded land from the

> Export incentives. Introducing a simple program.and automatic duty draw-back systemfor exporters is an adequate substitute to 26. Land tenure insecurity reduces laborthe presently complex set of tax incentive incomes for small farmers and landlessregimes to exporters. Some income tax laborers through restrictions in sales andexemptions for exporters located in Free tenancy, and biases banking credit towardTrade Zones, contravening WTO large farmers. This is due essentially to anregulations, should be phased-out. obsolete property registry system: the

registry system fails to provide adequatedevelop land and rental markets, evidence of title to land and its institutional

problems have become out-of control.24. An efficient and less concentrated Eliminating such distortions is a priority,land distribution system can only come about including:through the development of land and rental => reform of the present registry system,markets. In Guatemala, improved land with new facilities, modem technologiesdistribution matters because evidence shows and a high level of administrativethat land quality tends to be correlated with capacity;land ownership, large farms do not favor => realization of a country-wide cadastraleconomies of scale and small farms are more survey, linked to the registry;productive than large farms. A tailor-made ' submitting a new Law of land usurpationstrategy would combine three elements: a to discourage further invasions; andmarket-assisted land purchase program, => developing a land market, includingreform of land tenure property rights system leasing and long-term rentals.and improved rural financial services.

27. Any effort to develop a land market25.gra Aould market-assistured: landpu will also need to address the situation ofprogram woulchasd feature: efician eswith other land tenure regimes that exist m=> land purchased by beneficiaries with Guatemala: communal and municipal land,

state grants and bank credit for equity; and land administered by INTA. Some=> the program to be financed domestically possible actions include:

by government bonds and foreign grants;

x Executive Summary

= Communal Lands: realize an inventory that should be established in the mediumof communal lands, in agreement with a term. A territorial tax would require:new national cadastre; develop a simple =' adequate land classification in a smalland decentralized communal boundaries number of zones, tied to the completiontitling and registration system; define and of the national cadastre;implement a participatory mechanism for = specific rates per unit of land area;deciding the passage of communal land => tax collection carried out in ainto private property if the community decentralized fashion at the municipalwishes to do so; and review legislation to level; andfacilitate transfer of communal land => tax revenues used locally for socialproperty into private hands. investments and infrastructure.

= Municipal Lands: realize an inventoryof municipal lands; develop a simple and Agricultural credit is key for ruraldecentralized municipal titling and development.registration system; create titling andregistration districts with an elected 29. Development of land marketsboard; wherever possible, privatize requires an efficient rural financial system.municipal land; overhaul the Improvements in income distribution andmanagement of municipal land to make rural poverty also depend on the use of landits allocation more transparent; and as collateral by those who own it to gaineliminate distortions by updating rental access to formal credit markets. Thefees and limiting usufruct rights periods evidence suggests that past governmentfor renting. intervention in rural credit markets generated

=> INTA's reform. All current occupants distortions and increased financial costs.of 'parcelamientos" should logically Most farmers have very limited access toreceive individual title; and beneficiaries formal financial services.over PACs land should have their landregistered in the name of the group- 30. The objectives of Government policyowners. in the agricultural credit market should be to

=> FONATIERRA and FONAPAZ increase the general availability in rural areasshould merge their land distribution sub- of viable, competitively priced, fair andprograms without any interference from untargeted deposit and credit services fromINTA and after providing titling to their formal financial intermediaries. It impliespresent beneficiaries. improvement of the business environment for

=> Solving land disputes. Extensive new financial transactions, implementation oftitling programs and perhaps land conducive policies toward the sector andtribunals will be required. reform of the government's specialized

financial intermediaries. Hence, theand improve land taxation in the medium instruments to achieve this strategy are:term = enticement of commercial banks into

rural areas;28. Land taxation can be useful for n divestiture or reform of BANDESA and,promoting a productive use of land, but in the former case, creation of a viableimproving it requires considerable retooling. second-tier financial intermediary;.The current IUSI tax has many r reform of the legal and institutionaladministrative shortcomings, is incompatible framework for secured creditwith the aim of decentralization and transactions; andcompetes unfavorably with a territorial tax

Executive Summary xi

=> approval of a new regulatory framework = introducing a uniform code governingfor non-bank formal financial rural secured transactions in movable goodsintermediaries ("financieras"). (equipment, inventory, consumer goods),

and pledges, regardless of the nature ofThe agenda: promoting expansion of the collateral or the type of lender; andcommercial banks and "financieras" w reviewing civil law jurisdictions andtoward rural areas, procedures with a minimum of court

intervention.31. Commercial banks are rapidlyexpanding lending to the main urban centers and updating the prudential regulationsoutside the Department of Guatemala. framework.Government participation should focus onremoving non-financial constraints that 33. Completion of financial reform inshould result in improved incentives for this field requires:expanding formal lending to rural => a regulatory framework for financialentrepreneurs, including: companies, and=> the establishment of rural financial units => a financial holding law, which updates

of various sizes, proportional to the size prudential regulations on a consolidatedof the market and close to each other to basis.dilute supervisory costs, combined withmobile banking services.

=> examining the possibility of creatingsmall (banks) financial intermediaries,with lower minimum capitalrequirements initially, so as to beconsistent with the size of the marketthey will serve.

divesting or reforming BANDESA

32. The optimal choice regardingBANDESA is to shut it down for fourreasons: its reputation has been terminallydamaged; the economic cost of closing it isminimal; the political cost of reforming it isfairly close to that of divesting it; and part ofits functions can be assumed by a newinstitution. These operations are not risk-freeand their success depends on the design of asound charter, a solid institutional frameworkand healthy banking practices.

reforming the legalframework,

33. The reform agenda involves creatinga legal environment where property rights aresecure, contracting is flexible and readilyenforceable, and hence financial services areable to prosper. Some possible actions are:

CHAPTERI _

Framework for Macroeconomic Sustainability: The ChallengesAhead

1.1 This chapter depicts overall macroeconomic developments during the 1990s and stresses the need fbrcontinuity of stabilization and adjustment efforts. Guatemala's modest economic performance during the presentdecade has been the result of solid, albeit, slow and interrupted progress to modemize the econmy. However,expected increases in domestic savings and efficiency gains from reforms are yet to materialize, and theeconomy's external position remains vulnerable. National savings are low. Small productivity gains suggest thatthe process of structural reforms needs to be deepened and widened. There has been very little progress inimportant areas such as public sector restructurng, privatization, social security reform and state deregulation.An uneven record in stabilization, in part due to political reasons, and a substantial pending agenda of strucuralreforms, have prevented more rapid economic growth, which would be essential to reduce poverty and reverseincome inequality significantly. Macroeconomic vulnerability is due to a weak fiscal base, declining effectivsof monetary policy and the presence of external imbalances. Moreover, the implementation of the peace accordsand the fiscal decentralization process are putting additional pressures on an already tight fiscal position.

1.2 This chapter focuses on the need to continue stabilization policies, and broaden structural adjustncnt inorder to increase productivity and accelerate growth. Critical stabilization elements are to:

=> achieve a sound fiscal position, mainly through higher revenues rather than lower expenditures;=> regain control of monetary policy with effective and lower reserve requirements;=> increase exchange rate flexibility; and=> reduce the current account deficit to sustainable levels.

A. Constraints to Growth

1.3 Economic recovery has been partly the result of important structural reforms (Annex 1)-tadeliberalization, financial sector modernization, price deregulation, and social sector development-whichhave contributed to a revival of growth, increased private sector activity, a slight improvement inproductivity and some strengthening of social programs. A deepening of the reform program, within astable macroeconomic framework, is critical. The future reform agenda needs to focus on four key areas:(i) reducing macroeconomic vulnerability; (ii) comprehensive public sector modernization, including taxadministration, institutional and civil service reform, decentralization and privatization; (iii) reform of theagriculture sector, including a market-assisted land program and improvements in access to credit; and(iv) development of a longer-term poverty alleviation and human resource development strategy.

1.4 Key structural constraints to growth include:

* low economic efficiency, as reflected in low total factor productivity (TFP) growth,' and low schooling(enrollment) ratios, which negatively impact human capital formation (Figures 1.4 and 1.5);

* high income inequality, inefficient and insecure use of land, and deep and widespread poverty, mostly rootodin rural areas and among the indigenous populations;

* low investment and savings ratios; and* a highly inefficient public sector, which has led to a weak social and physical infiastructure base.

"TFP is the variation in output not explained by input (capital, labor, human capital) changes and measures the efficiencywith which those inputs are used, i.e., changes in output per unit of all inputs combined." (Nehru and Dhareshwar, 1994).

2 Chapter I

FiEure 1.1 Key Macroeconomic Indicators. ........ - -.-....... ,.- >.-.-...

GDP and Per Capita GDP Growth Rates (%) Inflatom Rate (End-Year mad Aneraa %)

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1989 1990 1991 1992 1993 1994 19951989 1990 1991 1992 1993 1994 1995

_ r ~~~~~~~~~~~~~~~~~~~~~~~~~.. . .......... ........-, . . ............-;S; XX= SXSS -

Current Account Deficit (X DP . 2 Public Sector Derie t (% *afGDP)

-,n 399 990 1091 1991 1991 1994 1095 1909 1990 1991 1902 1993 3994 3995 x

Real Mean wa*ges (1988=o 100). Urban Uneemployment (96)

14 420 12

to D - I 4-_

50~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

60 6 o :"

0~~~~~~~~~~~~~~~~~~~~~~~~~

Table Li Key Macroeconomic Indicators

National Accounts (% of GDP)GrossInvestm9ent 132 13.5 13.6 143 18.3 17.2 15.5 154rrOSs Notional Savings 9.1 8 4 10 3 N 8 10 5 10 7 10.2 11 5Gross Financial Gap 4.2 5.2 3 3 2.5 7 8 6.6 5.4 3 9

Public Investment 4.0 3.2 2 7 2.2 3.0 2.7 2 5 2 4Public Savings 1.3 0.2 04 34 7 35 1.7 1 3 2.0PublicSavingsGap 28 30 2.3 -5 -05 10 12 04

PrivateInvestment' 92 10.3 109 121 153 14.5 13.0 13.0Private Savings 708 8.2 9.9 8.1 70 9.0 8.9 9.5

Private Savmngs Gap 1.4 2 2 1.0 4.1 8.3 5.5 4.2 3.5

Nonfinancial Public Sector (% of GDP)CurrentRevenues5 11.4 12.3 111l 12.1 13.0 11.1 101 10.9

o/w Tax Revenues 7.2 7 9 6.9 7.3 8 3 7.9 6.8 7.6CurrentExpenditures 10.2 12.1 10.7 8.4 9.5 9.4 8.8 8.9Overall NFPS Balance -3.2 -3.5 -2.9 -0.2 1.I -1.3 -1.5 -0.1CombinedPublic SectorBalance -44 -52 -42 -1.8 00 -24 -2.7 -1.0

Balance of Payrnents (¾ of GDP)ExportsofGNFS 15.2 17.2 20.9 17.9 18.0 17.7 17.8 19.1Imports of GNFS 18.3 22.2 24.7 21.6 27.2 26.1 25.1 25.3

Resource Balance -3.2 -5.0 -3.8 -3.6 -9 2 -8.4 -7.3 46.2o/w Trade Balance -1.2 -3.3 -2.4 -4.0 -9.1 -8.1 -6.7 -5.9

Net Factor Income -1.8 -2.0 -1 8 -1 2 -1.4 -0.9 -1.1 -1.1Net Private Remittances 0.8 1.8 2.3 2 3 2.8 2.7 3.0 3.4Current Account Balance -4.2 -5.2 -3 3 -2 5 -7.8 -6.6 -5.4 -3.9Short-Term Private Capital Inflows 0.4 1.9 3 4 8 7 5.4 6.8 2.3 1 3

Credltwos-thinen IndlcatoraTotal DOD/GDP 25.5 31.4 37 1 30 0 26.4 25.4 23.5 22.1TotalDOD/ExportaG&S 165.1 182.0 177.6 1674 146.2 143.4 132.0 112.2TotalDebtService/Export G&S 20.3 20.9 13.3 17.1 275 15.0 12.4 11.3

Includes changes in stocks2 HIMF and staff estimates.3Includes net operatingo surplus of nonfinancial state companies.

Sourscs: Hank of Guatemala IMfF, World Bank, ILO, IGSS.

Framework for Macroeconomic Sustainability: The Challenges Ahead 3

Total Factor Productivity

1.5 Economic reform during the 1990s seems to have contributed only moderately to improvements in

overall economic efficiency. Whereas one-third of East Asia's growth is due to strong (above 3 percent)

TFP growth rate (World Bank, 1995e), rough estimates for Guatemala show only modest, albeit

encouraging, positive TFP growth rates and TFP contribution to growth.2

Table 1.2 Factorial Sources of Economic Growth, 1950-94' (%)

: ~~~~~~~.-. . . . ......- .- - ; -

.... P d -...... P -. L a: K . .I..:1950-1994 4.20 4.75 2.91 0.37 2.99 1.08 0.13

1950-1979 4.85 5.73 2.91 0.28 4.13 0.82 -0.09

1986-1994 5.11 2.88 3.01 0.52 1.38 1.57 2.16

Source: Nehru and Dhareshwar (1994) and staff estimates.' Base year 1987=100.

* In line with trends in most LAC countries, Guatemalan TFP growth rates were negative, -0.02 percent,

during the pre-reform period (1960-87) (Nehru and Dhareshwar, 1994); but turned positive, averaging

2.3 percent annually during the past decade (1986-94), when economic reforns began;

* During 1950-79, TFP contribution to growth was negative, -0.09, reflecting the existence of long-standing

structural constraints in the economy. However, as factor productivity increased with structural reforms

during 1986-94, its relative contribution rose to about 42 percent and translated into a positive 2.2 percent

annual average increase in output (Table I.2).

* The late reform of the financial system in the 1990s, possibly played a critical role in explaining the declining

relative contribution to growth of capital during the last decade.

1.6 Income inequality and widespread poverty also limit the savings capacity of the population. Both

conditions are aggravated by land concentration and one of the most rapidly growing populations in Latin

America (2.9 percent annually). Guatemala ranks fourth in income inequality in Latin America, after Peru,

Colombia and Mexico (Figure 1.2). Poverty is concentrated in the rural areas, mainly among women and

the indigenous population. Approximately one half of the income differential between indigenous and

nonindigenous populations can be attributed to differences in two productivity-enhancing characteristics:

schooling and rate of return to schooling (Patrinos, 1994). Had Guatemala invested in education to

increase attendance to a relatively modest 50 percent since 1960, the country's per capita growth rate from

1960 to 1985 would have increased by 1.3 percent a year (Barro, 1991). Land concentration is also high.

According to the most recent agricultural census (1979), 2.5 percent of Guatemala's 5.3 million farms

control 65 percent of the agricultural land (World Bank, 1995a). Since land concentration and land quality

are positively correlated, land concentration reinforces income inequality and suggests an economically

inefficient use of land.

Savings and Investment Rates

1.7 Low savings and investmnent rates are a serious constraint. National savings rates were between 10-12

percent of GDP in 1991-95 (Table 1.1) - about half the Latin American average and less than a third of East

Asian countries. After declining steadily during the 1980s, domestic investment has recovered moderately during

2 Results are based on the methodology proposed by Nehru and Dhareshwar (1994), but updated with the use of Johansen'scointegration method, that is more powerful than Engle and Granger's seminal cointegration method, particularly indealing with small samples (Cuthberson and Taylor, 1992). Results were computed using MICROFIT 3.0 (Pesaran andPesaran, 1991). A first-difference (FD) model was preferred over an error-correction (EC) model because weak evidenceof cointegration was found (eigenvalues and trace statistics were significant, but the residuals of the cointegrating vectorfollow nonstationary patterns). Serial correlation was corrected by autoregressive or moving average exact maximumlikelihood methods. Due to small sample bias, which usually produces unstable parameters, the values of the coefficientsmust be taken with some caution and are not as important as their sign and significance, which were found consistentunder alternative FD and EC formulations.

4 Chapter I

the 1990s but has yet to reach the levels of the late 1970s. Low national savings can be attributed to a weak fiscalbase with linited public savings, inefficiencies and distortions in the financial system which have only begun to beaddressed in recent years, and widespread poverty and income inequality which have limited the scope for privatesavings.

Figure 1.2 Income Inequality and GOP per Figure 1.3 Savings and Investments, 1965-1995Caibta, 196092 25.0

2.5

CdC bia 20.0 Gros Domestic Investment

2 .10 - ........ ..ho ... ... ........ .. .. .......

.0 5 5 - gChile* 'co:7 Costa Rnoa

1 .5 - .... ... .. ..... .... ...... ....... . .... 0 15 .0

O~~~~~~~~~~~~

BoliAa

1.0- I .02 ~~~~~~~~ElISadr(or

* ~~~~~Peru

~0.50.0 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __0 .

0 5 10 15 20 25 ~Income nequaliy Oi

Sotice: BESO u,~poovet Oprca epcp Sources: BESD, IMF and staff estimates

An Inefficient Public Sector

1.8 Guatemala's public sector is highly inefficient. Constraints in the Central Govemment and stateenterprises adversely affect the private sector and its ability to strengthen intemational competitiveness.According to our survey of non-traditional export industries (Annex 2), after security problems, economicpolicy uncertainty and political instability, govenmment regulations and infrastructure deficiencies are ratedas the most severe constraints. Guatemala compares unfavorably to several Latin American countries, interms of management time allocated to compliance with regulatory activities. Customs regulations and thejudicial system are the most cumbersome areas. Poor quality and reliability of infrastructure services islargely explained by the inefficiencies derived from the Govemment's financial, institutional and humanconstraints. Firms report losing at least 10 workdays a year in energy shortages and trying an average of 4times to complete a local call. Half of agricultural firms in the survey lack telephones at their site ofproduction. Guatemala is the least electrified country in the region with only 194 KWh of electricityconsumption per capita, about a third of the average for Latin American lower-to-middle income countries.Heavy overstaffing and fragmented public institutions are paramount in the water sector, which has 40organizations involved in delivering water services (World Bank, 1994).

1.9 A strong savings effort from public enterprises is essential to consolidate the fiscal position, easeinterest rates, modemize infrastructure and stimulate private investment. Public sector enterprises have hada poor operational performance. The surplus of the non-financial public sector-the telephone company(GUATEL), the electricity company (INDE) and the Social Security Institute (IGSS)-decreased from 2.1percent of GDP in 1992 to about 0.3 percent in 1995.+ GUATEL's financial position has had successive deficits in 1993-94 as a result of lower transfers from

the Government, investments in new lines, and high operational costs. The tariff structure crosssubsidizes intemational and domestic calls, which distorts internal costs, and coverage is low (23telephones per 1,000 inhabitants against a regional average of 50). A new legal framework promotingdemonopolization and private participation is required to promote more competitive rates and increasecoverage.

+ INDE's financial position has weakened in recent years, mainly due to the elimination of transfers fromthe Govemment to pay its extemal debt obligations and delays in adjusting electricity rates. Largetransfers from the Govenmment to service its external debt decreased from Q.512 million in 1992 to

Framework for Macroeconomic Sustainability: The Challenges Ahead 5

Q.81 million in 1995 and are budgeted to be eliminated in 1996. Since September 1994, four attemptsto raise electricity tariffs from an average 71 percent to 90-100 percent of long-run marginal costs havebeen impeded by injunctions from the Constitutional Court.

* Low coverage, pension levels and returns are the main challenges faced by IGSS. By law, the CentralGovernment is required to finance 25 percent of total benefits, but between 1988 and 1994, the IGSSaccumulated arrears from the Government of about Q.1.4 billion. A limited administrative reformincreased its operational surplus from 0.3 percent in 1993 to 0.5 percent of GDP in 1994.

A Weak Educational Base

1.10 Public sector weaknesses are also responsible for the weak human capital base, especiallyeducation. Guatemala spends less on education than other Latin American countries, coverage isinsufficient, particularly in rural areas, and there are serious qualitative deficiencies. They constitute atremendous constraint to the employment opportunities of the poor, rural and indigenous populations. Theeducation budget is insufficient and misallocated: of about 2 percent of GDP, barely one-eighth is allocatedto investment and half is allocated to primary and preschool education. Despite recent increases inenrollments at various levels of education, mean years of education and access to schools are among thelowest in Latin America (Figures 1.4-1.5). Although bilingual education has increased at an average rate ofalmost 7 percent since 1986, higher than the 3.4 percent annual increase for primary enrollment, lowschooling remains an enormous challenge in rural and indigenous populations: about 90 percent ofpreschool bilingual students reside in rural areas (World Bank, 1995f).

Figure 1.4 Mean Years of Education, 1987 Figure 1.5 Schooling in Selected LatinAmerican Countnies, 1987

Costa Rica - 7.9 Peru 12.S

Chile, 7.2 Chile 11.3

Peru 6.6 .. 66 Mexico ;111

Bolivia :- .. 6.3 Colombia109B~~~~~~~~~~~~~~~ostva -R :-.:::.-:: -:163...Cmica -.-:.-::.. .-:....... ........ ...... . 9 : : :-.:6: -: :.10

Mexico.. . 5.9 Costa ca 96

Colombia .: 3 5. Bolivia 8.5

El Salvador - - 15.0 El Salvador 7.4

Guatemala 3.5 Guatemala 6.3

) 0 2 0 4.0 6.0 S.0 0 5 10 15So.1- Nebs,. Sssso, ad DOubey (19931 Total Schooling Years S.- Bermsn (1993)

I.11 Faster economic growth will be critical to consolidate peace and reduce poverty. Projections suggestthat if the economy continues to grow at only 4-5 percent a year over the next decade, GDP per capita andpoverty will only show marginal improvement (World Bank, 1995c). To accelerate growth, in addition toensuring a stable macroeconomic framework, the Government would need to deepen the structural reform processby focusing on:=> policies to increase savings and investment, such as speeding-up private sector participation in the

social security system; privatization of public utility companies; continuing efforts to deregulate theeconomy and improve conditions for private sector development (Annex 2); and continuation ofreforms in the financial system to improve the efficiency of financial intermediation and developcapital markets (Annex 3);

=> a major effort to improve Guatemala's human capital base, especially education; and=> agriculture reform to encourage a more efficient use of land and better financial services for small

farners (Chapter III)

6 Chapter I

B. Macroeconomic Vulnerability

1.12 Although the Authorities have succeeded in maintaining relative macroecononic stability in recentyears, the stabilization gains remain vulnerable and the economnic program needs to build credibility (Annex1). Ensuring macroeconomic stability will be essential to accelerate growth, but two factors add urgency tothe challenge:* the fragility of the fiscal position, which leaves little scope for needed social and peace investment.

While the 1996 budget keeps the combined fiscal deficit unchanged at 1 percent of GDP, a strongerfiscal effort is called for, especially to ease interest rate pressures and expand social programs to fulfillcommitments under the peace accords; and

* the weakness of the external position, reflecting the fall in coffee prices, the reversal of capital inflows,partially ineffective credit policies and the transition between Administrations.

1.13 A weak and inelastic tax base has placed the burden of macroeconomic stabilization on the strictcontrol of fiscal expenditures, a managed float exchange rate regime and a tight monetary policy whichtends to keep interest rates high and causes distortions in financial markets. The adoption of a nominalexchange rate anchor was effective in reducing inflation during the early phase of the 1990s stabilizationprocesses. However, the ensuing real exchange rate appreciation contributed to large current accountdeficits. Volatility in private capital flows has also increased external vulnerability.

Closing the Fiscal Gap

1.14 During the 1990s, as a result of successive tax reform reversals, partly motivated by politicalevents, tax collection has been weak. Following a first tax reform effort and strong expenditure cutsadopted in 1991-92, the combined fiscal deficit-including the Central Government, the nonfinancial publicenterprises and the operational losses of the Central Bank-shifted from a deficit of 5.2 percent of GDP in1989 to balance in 1992. Declining tax collections associated with the 1993 political events and aweakening of the financial position of the public enterprises led to its deterioration-2.4 and 2.5 percent ofGDP in 1993-94. In 1995, the combined fiscal deficit improved again to I percent of GDP (Table I. 1) dueto additional tax reform measures, a tightening of expenditure controls, and a better than expectedperformance of the public enterprises. Continuous changes in the fiscal environment have had a negativeeffect on investment and economic efficiency: (i) the resulting overreliance on high interest rates and reserverequirements have constrained private investment; (ii) the need to limit expenditures has led to unplannedcuts in public investment, with considerable adverse effects on social and physical infrastructure programs;and (iii) a large accumulation of bonded and floating domestic debt has developed.

1.15 Revenues are expected to improve in 1996, but the overall fiscal situation remains fragile due to:* a still low tax revenue ratio, 7.6 percent of GDP in 1995 and a projected 8.5 percent in 1996, due to

low tax rates, a narrow tax base with generous exemptions, widespread tax evasion and weak customsand tax administrations;

* increasing budget pressures to finance peace and social expenditures;* a weakenedfinancial position of the public enterprises; and* slowly declining Central Bank losses.

1.16 There are, at least, four fiscal policy concerns associated with peace accords implementation andsocial investment:* The projected domestic financing is insufficient. The Government's 1996 budget to cover peace and

social investment needs is estimated at 3.4 percent of GDP, of which 2 percent of GDP would have tobe financed domestically (Table 1.3). Additional 1996 tax revenues are estimated at less than 1 percentof GDP and leave little scope for budgeted social and peace investment. To help fill the gap, andassuming a 5 percent GDP growth rate, simulations show that real tax revenues should rise 12 percent

Frameworkfor Macroeconomic Sustainability: The ChallengesAhead 7

in 1996 and 7.5 percent thereafter, in order to reach a reasonable target of 12 percent tax revenue ratioby 1999. Such a target would cover not only the projected 1996 combined fiscal deficit of about 1percent and social investment needs of about 2 percent; but, in addition, it would generate a surplusthat would be needed to permit an easing of interest rates.

* Strict control on fiscal expenditures may become more difficult. If domestic resources continue to beconstrained, there will likely be increased pressure to loosen fiscal policy in order to spend on pressingsocial and peace investment needs.

* External support may be more modest and materialize more slowly than hoped. Potential grants,credit and concessional financing available for peace needs is estimated in the range of US$300-500million. However, given the country's poor absorptive capacity, these funds would likely materializeonly slowly, thus generating additional budgetary pressures.

* Expectations about a peace dividend might be exaggerated. Hewitt (1992) estimates Guatemala'smilitary expenditures at about 2 percent of GDP. Defined in terms of military and security-relatedexpenditures that could potentially be shifted to social investment, informal estimates suggest that thepeace dividend could be a modest 0.5-1 percent of GDP. International experience suggests that eventhese small potential peacedividends are very difficult to Table 1.3 Total Public Investment to Social Needs, 1994-1996

capture and to efficiently reallocate (Milon ofOQuezies)RldEsbimate Pogmmmed 61wno

to urgent economic and social MINiSTRY 1994 1995 1996 Domestic Exteml|

needs.Presidec de la Republca 281 7 3761 597.8 404.8 1930

Mhusterio de Defensa Nacional 9 5 7 1 9.5 9.5 0 0

1.17 The operational losses of the Miusteno de Finanzas Publcas 398 2 3878 775.8 690.2 856Mhiusteno de Educacion 58 4 558 87 8 84 9 3.0

Central Bank are declining rather Ministesiode Salud Publca 50.9 1310 3201 172.6 1475

slowly. This is the result of historical MnistecriodeTrabajo 2.6 76 120 120 0.0I ~~~~~~~~Muuistcrio deEcononua 11.3 3 19 46 8 37 8 9 0factors (multiple exchange rate MinstenodeAgncuitus 139.7 150 3 25378 1592 78.6

practices and interest rate controls in Mmisterio de Comunic,Transp,Obras 480.1 790.8 1122.8 7829 3399

the 1980s) and its present open market MuuteriodeEnffglayMnas 5.1 4.7 51 51 0.0

operations. Losses on quetzal- McuslcnodeCuitursyDeportes 13.6 21.7 322 307 1.5

denominated transactions relate to Total mcl Presidenciade is Republica 1451.1 1964.8 3247.7 2389.7 858.0

open market operations with Central % ofGDP 1 96 2 40 3.38 249 0.89B p rg than the Total, excl Pesidencia de la Republica 1169.4 1588.7 2649.9 1984 9 665.0

13ank paper at rates higher than the% ofGDP 1 58 1 94 2.76 2.06 0.69

retums obtained from Government Sou,ces Muusly of Fance and staffestuntes

bonds and other assets. Losses ondollar-denominated transactions reflect the differential between interest earned on the net foreign positionof the Central Bank and interest paid on dollar-denominated debt, including Stabilization Bonds (BESTs).3

As of June 1995, 90 percent of operational losses resulted from quetzal-denominated operations. CentralBank losses declined from 1.5 percent of GDP in 1990 to 1.0 percent in 1995, due to a reduction in theBank's external debt and in the number of open market operations. Up to mid 1995, attempts to reduce theoperational losses led to an intensified use of reserve requirements, mainly remunerated, in substitution ofopen market operations; but this policy was reversed in the second semester once it became clear thatreserve requirements were ineffective (para. 1.20).

1.18 Recommendations. Improving fiscal performance is a precondition for ensuring credibility of theeconomic program, lowering reserve requirements and meeting social and peace-related expenditures. Keytargets such as a balanced fiscal position in 1996, increasing the tax revenue ratio to at least 12 percent ofGDP and eliminating the quasi-fiscal deficit in 1999 should be a priority. Measures to strengthen the fiscalbase must also be part of a wider and longer-term effort to reform and modernize the public sector (ChapterII). In the final analysis, a stronger revenue base will only contribute to growth and improved socialconditions, if it supports a more modern and efficient public sector, capable of efficiently delivering

3 The two BOG tax-free instruments are CENIVACUS and CDs. In June 1995, the spread was 13 percent. The share ofCENIVACUS declined from 67 percent in 1991 to 29 percent in 1994, as forced investment of banks in CENIVACUSdisappeared in the latter year.

8 Chapter I

services which complement private activity and ensures a more equitable distribution of the benefits ofeconomic growth. A stronger fiscal base will require:=> a strong tax collection effort (Chapter I1);=> more efficient public expenditure management (Chapter 11);> a carefully designed and implemented public investment program to support peace, which should clearly

evaluate and incorporate: (i) the priority peace accord projects; (ii) essential and complemnentaryinfrastructure investments; (iii) the implications of additional debt-service entailed by new externally financedprojects; and (iv) counterpart fund needs;

r key actions to increase savings from the rest of the nonfinancial public sector, such as: (i)accelerating the privatization of FEGUA and demonopolizing GUATEL; (ii) approving andimplementing the Law of the Electricity Sector, which would facilitate the creation of a RegulatoryCommission, tariff adjustments and the restructuring of the state electricity companies; and (iii) thedesign and initiation of a comprehensive reform of IGSS, aimed at improving revenue collections andexpediting the collection of arrears from local governments and the private sector; and

=, exploring suggested solutions to the operational losses of the Central Bank. A permanent solution tothese losses requires eliminating the stock of external Central Bank debt in stabilization bonds (BEST)and treasury bills at below market rates. This can only be achieved by a Central Government fiscalsurplus. The funds obtained from the privatization process could also be used to close this gap.

Improving the Effectiveness of Monetary Policy

1.19 Since 1990, macroeconomic stability has relied heavily on monetary policy to offset weaknesses infiscal policy. The main instruments of monetary policy have been open market operations and changes inlegal (non-remunerated) and remunerated (forced investment) reserve requirements.4 In attempting tocontrol the expansion of monetary aggregates, the Central Bank has changed both the interest rate and thematurity of the non-negotiable paper used to conduct open market operations. It introduced its ownnegotiable instruments backed by treasury bonds(CENIVACUS) in 1990 and certificates of deposit(CEDEPES) in 1991. Legal reserve requirements were 100 L6 ..s..ofXh M icy (%)unified in 1990 and remunerated reserve requirements, 100.0

at the average commercial banks deposit rate, were 80.0introduced in 1991. Up to mid-1995, in an attempt tominimize losses, the Central Bank gradually increased 60.o

the use of remunerated reserve requirements (Figure 400 iti 1.6). 4.

1.20 High reserve requirements, however, have lost . Rewr1effectiveness. These raise financial costs to commercial o.o. .banks, increase interest rate spreads and provide a *r! '. q. n '. q.strong incentive for banks to avoid compliance. As a a O F Cal 0g 0 a,result, the private sector has shifted resources from Sowve: M r

commercial banks to unregulated financial institutionsor to financial instruments that are not subject toreserve requirements, leading to a loss of effectiveness of monetary policy and disintermediation. The latteris reflected in: (i) the volatility of effective reserve levels; (ii) the expansion of mortgage bonds, which areexempt from reserve requirements, (iii) an increase in off-balance sheet operations; and (iv) an increase inoff-shore dollar-denominated deposits offered by local commercial banks.

4 The use of rediscount to commercial banks was eliminated in 1991 and, since then, Central Bank credit to financialinstitutions has been limited to the on-lending of foreign loans from multilaterals and the provision of assistance at abovemarket interest rates in case of short-term liquidity problems.

Framework for Macroeconomic Sustainability: The Challenges Ahead 9

* Sharp fluctuations in effective reserve requirementsreflect the long-standing deficiencies of the system e 17L Vola4lli otfRasen'sRequiremets

(Figure 1.7). Reserve requirements have a monthly ATd19 1 -~19 4-d19

maintenance period. Banks are used to offset reserve tdeficiencies at the beginning of the maintenance , .0-period-placing funds at shorter term rates-withexcess demand for required liquidity at the end of the D 2.0u

period. Increased volatility since 1994 (Figure 1.7) .l

and a declining trend in the amount of effective 1i.o-reserve requirement, which dropped from 32 percentin 1993 to 26 percent of deposits in 1995, reflect the o.oreduced effectiveness of this instrument.

* Rapid expansion of mortgage bonds (bonos 0 ,

hipotecarios) exempt from reserve requirements are Source: Bank of Gteniata. dd na dvoto ,,

a serious constraint on the effectiveness of monetary

Figure 1.9 Exchange Rate and Interest Rate Volatility, 1990-95P1gure LS MrIWl B:uls mud ivkW ILuit Acasae Varottit

60.0 *Stmodu,d de-son odotlvo * oa . moving vne 2 rote of l-d ao onlth.3.000E

50.0

2 2000 'tersA*nooLrb

I) ~~~~~~~~~~~~~~~~~~~~~~~~~~~40 0

1.0(X).8 30 0

o us 0.0 Ch C

0 &rgardT Doit200-

~ 1.000>10 0

-2.00X) Exh te.

u a 7 s°fiX<

Bld .. Ad 1pocob t. rote Vt95i M..e do -biho d.t. wed tholieSo5rce: FlnkoftIaiouta, B..do.]2hdy.CENlVAcUs.t1.. Sat Bank ofGuatemala

policy. They represent an uncontrolled monetary expansion of net domestic assets that underminesefforts to tighten credit. Since early 1994, following three years of complex legal struggles and acourt's decision exempting these bonds from legal reserves, mortgage bonds have expanded rapidly,offsetting a steady decline in savings and time deposits,which are subject to reserve requirements (Figure 1.8). Table L4 Average Lending Rates in Central America

* Since 1993, commercial banks have also increasingly (on local currency loans)

resorted to off-balance sheet operations. Two main 1991 1992 1993 19941Dollar-equivalent Lending Rates (in percent per annum)'

instruments have been used: certificates of investment in Costa Rica 253 30.2 199 26.1El Salvador 15 1 87 19 8 18.6

loans to commercial or industrial companies, whose Guatemala 23.7 23 8 195 24.8

resources come from trust accounts offering guaranteed Honduras 194 123 -10 -14.5

fixed returns, and investments in unregulated financial Nicaragua 22.3 22 7 20 5 141

intermediaries (securities exchange houses, insurance CRosa LRending Rate 12(in per1nt3perannu)151

companies and credit card companies). During the 1990s, ElSalvador 168 -3.8 6.4 9.8Guatcniala 23.7 19.4 24.6 24.6

unregulated financial institutions have quickly developed Honduras 140 13.9 4.4 -7.7

and are estimated to hold approximately 6 percent of total Nicaagua 3.6 20.5 23.2 21.4

financial assets (Annex 3). The security market is primarily Rates for 1991 refer to July through December onlyRaes for 1994 refer to January through June only.

a self-regulated money market, but underdeveloped, serving e Ex-post devaluation within next three months is used.

mainly for public debt transactions Some finance and EX-post inflation within next three months is usedmainly for public debt transactions. Some finance andSources: Lachler( 1 995) and staff estimates.

credit card companies gather funds directly from the publicwith no regulation.The rapid development of off-shore banks associated with local commercial banks represents anotherfinancial black-box that lies beyond the reach of monetary policy and bank supervision. As well as

10 Chapter I

circumventing reserve requirements, two powerful incentives for having off-shore banks are their tax-free and unregulated status. Central Bank estimates of off-shore operations are low -an average of10 percent of total assets of the financial system but up to 20 percent for some commercial banks.These figures are below those for other Latin American countries, where assets of some off-shorebanks may be greater than those of their local counterparts.

Flure 1.10 Trend of Real Credit to the Private Sector l____________________ ___________________FIgure 1.11 Net International Reserves to

120.0 1.000 Monetarvfame 1988-1995

110.0 . .. ....... 0.800. ........

100.0 . .. 0.600 - .. .

1 90.0 0.400 ./

W 80.0 0.200 /

-0.2 00. ........ .......60.0 ; .. .... . . . . . l . . . ...

-0.40050.0 ! I . I . . . I I .a

Sotffce: IMr and slikff estimates Source: IMF and staff estimates.

1.21 In the 1990s, attempts to regain control of monetary aggregates have also resulted in high andvolatile interest rates (Figure 1.9), but ineffective in containing domestic credit expansion (Figure 1.10).Clearly, credit availability did not appear as a major constraint to growth. Credit expanded due toincreased access to foreign-currency funds and declining real interest rates from mid 1994. Real interestrates were, however, high by regional standards: e.g. 2.5 times higher than El Salvador in 1994. During1991-94, as expected by increased capital mobility resulting from gradual liberalization of financial

FigLim 112 Pl Effeeve Exdm Rfts* and Figure 1.13 Real Exchange Rate Trend, 1960-95NW&W Fxd=W Pates, 1909L95 ~~~~120

70-- 140 100- ....... f -. .

60 A12 ||v>i 0 G80m

20~~~~~~~~~~~~~~~~~~~~~~~c 0 .............

50 10.0

8 40 8~~~~~.0 1 6

u1xs~rat(detamd) .10 ~~~~~ ~~2.0 20....... .....

0 0.0

0 . . . . .~~ 0. .0 C~

Saore: IM ard staffcttimatc Soe-r: IMF mad Schweigert (1995).

markets, the Guatemalan average dollar-equivalent lending rates and real lending rates for Quetzaloperations were consistently higher (above 20 percent) than those reported for Central America, but lowerthan the over 30 percent for South America and Mexico (Rodriguez, 1994).5

1.22 Up to mid-1994, high real interest rates also encouraged high capital inflows, mainly short-term,helped to rebuild foreign exchange reserves, clear arrears and stabilize the Quetzal. Nevertheless, they alsocomplicated macroeconomic management. Following the balance of payments crisis which led Guatemala

5 In Argentina, including all sources of credit (particularly dollar-indexed operations) and weighting interest ratesaccordingly gives an average dollar-equivalent lending rate close to 21 percent in the same period (Lalchler, 1995).

Frameworkfor Macroeconomic Sustainability: The Challenges Ahead 11

to run into arrears in 1990, the return of private sector confidence resulting from successful stabilizationattempts boosted capital inflows between 1991 and mid-1994. By mid-1994, arrears were almost clearedand international reserves were equivalent to about 3 months of imports or about 90 percent of themonetary base (Figure 1. I 1). Moreover, sterilization policies through purchases of foreign exchange werehelpful in supporting a stable nominal exchange rate between end-1993 and mid-1995 (Figures 1.9 and1.12). However, capital inflows exacerbated real exchange rate appreciation (para. 1.28) and relaxed theforeign exchange constraint contributing to a vulnerable current account deficit (para. 1.30).

1.23 Recommendations. Over the medium term, a definite solution to the problems associated with theloss of control of monetary policy requires lowering nonremunerated reserve requirements, which requires,in turn, a prior substantial strengthening of fiscal policy and a higher degree of autonomy of the CentralBank (and Monetary Board).

1.24 In the short term, however, several measures could be considered to strengthen monetary control:=> pass a bill extending the banks' reserve requirements to financial obligations and enforce penalties

on banks which undercomply with reserve requirements and develop off-balance sheet operations;=' reduce the monthly maintenance period of nonremunerated reserve requirements from one month to

one week, which should decrease volatility in the system. If this cannot happen, banks should besubject to a minimum compliance level of nonremunerated reserve requirements in parallel withimprovements in the fiscal situation;

=> reduce gradually the reserve requirements in accord with improvements in the fiscal accounts.Without this measure, the incentive to evade reserve requirements will continue by means of financialdisintermediation and off-balance sheet operations;

=> establish reserve requirements to foreign exchange deposits, similar to those on domestic deposits,which might help the process of legalizing off-shore operations;

=> incentives for increased dollarization of the economy, such as dollar-denominated Government orCentral Bank instruments, should be avoided because they reduce effectiveness of monetary policy;and

> develop prudential regulanons on finance companies and banks ' open positions in foreign exchange.

1.25 Strengthening the autonomy of the Central Bank is necessary for a country like Guatemala, which has along tradition of price stability and aims to enhance the effectiveness of monetary policy. Under presentconditions, the Central Bank depends on an ad-hoc comunittee, the Monetary Board, which has the final word notonly on monetary policy but on prudential regulations of financial institutions. The Monetary Board is composedof four Govermment representatives: the Ministries of Finance, Agriculture and Economy, and the President of theBank of Guatemala; and four non-Government representatives of the private sector, the San Carlos university, thebanking sector and the unions. The modifications of the legal and institutional framework required to ensure aneffective independence of the Central Bank could include:=> the objectives of the Central Bank should be clearly stated in a new charter. The present charter is too

vague and assigns the Bank far too many objectives. Price stability should be its primary andoverriding objective;

=> the Govemor, Deputy-Govemor and members of the Monetary Board should have fixed mandates longerthan the four years of the President of the Republic, e.g. six years. Monetary Board members should nothave coincident mandates to prevent the incumbent Administration from appointing the majority of members;and

=> the Bank should have complete control over its assets and liabilities. To this end, it is necessary tostrengthen its capital structure by transferring the service of extemal debt it contracted on behalf of theGovernment to the Central Governnent budget and by replacing CENIVACUS with governmentsecurities yielding the same interest rate. These measures would help shift the Central Bank's losses tothe Govemment budget, also making fiscal and monetary policies more transparent.

12 Chapter I

Adjusting to External Imbalances

1.26 Guatemala is an open economy vulnerable to adverse external developments. Export and trade ratios,19.9 percent and 47.1 percent of GDP (Table I. 1) are high and close to those for outward-oriented East Asiancountries, such as Korea (25 percent and 51 percent of GDP). The real exchange rate is slightly nisaligned, thecurrent account deficit remains high, reserves are low and capital inflows are volatile which, coupled with afragile fiscal situation, makes the economy highly vulnerable to political uncertainty and external shocks.

1.27 The management of the nominal exchange rate as a fundamental stabilization device needs to berevisited. Evidence found suggests that the distinction between a managed float and a de facto quasi-fixed rate inthe Guateralan exchange rate regime is irrelevant for the period between the last quarter of 1993 and thirdquarter of 1995 (Figure I.12). In 1994 and 1995, although the amount and number of interventions of the CentralBank as a buyer in the mesa de cambio was smaller and less numerous than as a seller, their average size wasthree times bigger and their tirming clearly aimed to reduce exchange rate fluctuations during brief speculativeattacks against the Quetzal. The approval of an electronic inter-banking auction systern to buy-sell foreignexchange in early 1996 is a positive step toward greater exchange rate flexibility.

1.28 Since 1994, the reversal in capital inflows has prompted a misalignment of the equilibrium real exchangerate (ERER). In contrast to a long-term trend of Quetzal depreciation (Figure 1.13), the real exchange rate hasslightly appreciated since 1990. Following the exchangerate reform, which moved to a "managed float" system FIgum [14 Cuhilt Ini RaitandNM iaxsg s 1%5-95

based on foreign exchange auctions within a narrow band 0low

and direct surrender of export proceedings to the Central 12 90

Bank, the real exchange rate (RER) appreciated by about 120 VS.oJo/\ 80

lao~~~~~~~~~~~~~013 percent from 1990 to 1994 (Figure 1.12). Authorities I/

maintained that this trend was consistent with most RER Q 8.0 6000~~~~~~~~~~~~~~~0

fundamentals, mainly private capital inflows. The S 6.0 400

managed float system was modified in March 1994, 40 30D

eliminating the bands, but the extemal situation has 220.

become vulnerable after capital inflows started reversing in o.o .OAugust 1994, prior to the Mexico cnrsis. Monetary and a a a Xg a

fiscal disequilibria that were only partially corrected in _ _ _ _ _ e _ __ _ 1995 should also have led to an ERER depreciation.Instead, the nomninal and real exchange rate keptappreciating, and exchange rate misalignment-the gap between the RER and the ERER-likely developed untilend-1995. Authorities maintain that the boom in coffee prices and the steady increase in worker remittancesmitigates the present degree of mnisalignment. Notwithstanding, both reasons are only partially valid. The coffeeboom is a transitory shock that will largely disappear in 1996, and the level of private remittances is low(equivalent to about 2.4 percent of GDP) and did not prevent the impressive halving in capital inflows from 14percent of GDP in 1993 to about 7 percent in 1995 (Figure 1.14), so that conditions for an adjustment to presentexchange rate policy might develop.

1.29 In 1995, as a result of declining capital inflows and fiscal reasons (payment of short-term publicdebt), gross international reserves leveled off at about 2 months of imports in December, their lowest levelsince the 1980s. Such a level of reserves is not critical for a managed floating exchange rate regime, butthreatens the policy of adopting a stable nominal exchange rate if the economy is hit by negative externalshocks, lack of credibility in the economic program (Annex 1) or unfavorable political events.

1.30 The current account deficit remains large. During 1992-1994 it ranged between 5.4 and 7.8 percent ofGDP, and in 1995, despite the coffee boom which represented about 2 percent of GDP, it reached 3.9 percent ofGDP. Three factors explain this imbalance: a slight real appreciation of the Quetzal, booming consumer goodimports following the trade liberalization process (Figure I. 15), and credit expansion, which has contributed to a

FrameworkforMacroeconomicSustainability: The ChallengesAhead 13

private import consumption boom - whose share in total imports rose from 21 percent in 1992 to 31 percent in1995.

1.31 The current account deficit is also vulnerable to volatile and declining capitals inflows.* Pnvate capital inflows averaged 6 percent of GDP in 1991-94, or about US$715 a year, in response to high

interest rates. This level of inflows is substanially higher than countries such as Mexico and Argentina, with4.1 percent and 1.4 percent of GDP, and largely financed current account deficits, e.g. almost 96 percent ofthe current account deficit in 1994.

* The volatility of capital inflows is essentially explained by their composition. The largest share,approximately 70 percent in 1994, corresponds to short-term capital. In the same year, using a broaddefinition of capital inflows, private capital represented 52 percent of total capital, remittances 27 percent,official external loans 15 percent and grants about 6 percent (Figure 1.16).

RpMm LI5 Nknodubei Expali mii iqiirt!6 FUR 19W9 10. L16 Trends In Tote] C r lowL 19S-95

3500 60

3000 50 80 0 * f. ,.]UI,.t

| --> g -00

OfJ MCFtS~n OfkCuli-

2500 a 20.0

0

a § # ~~~~~~,.,,,Rinid.b X; .a s; a

Vol. ArItafifnn.

0~~~~~~~~~~~~~~vw NF- nsT

1.32 Recommendations: Bringing the current account down to a sustainable level (3 percent of GDP)requires:

= strengtheningfiscalpolicies;=> regaining control of monetary policy effectiveness;=> greater exchange rate flexibility leading to its real depreciation, thus responding to market forces, and

promoting a rapid expansion of non-traditional exports (Annex 2); and=> keeping speculative capital inflows (short-term) under control and encouraging long-term foreign

investment to reduce the sensitivity of capital inflows to changes in interest rates and political events. Anearly completion of the Peace Agreement, and the ratification of the MIGA Convention and other multilateralinvestment guarantees would be steps in the right direction.

CHAPTER HIPublic Sector Reform

2.1 There is domestic consensus that economic modernization and poverty alleviation requirereforming the way the public sector performs its functions. There is also a risk that the peace process willgenerate pressures to expand the role of the state, leading the Government into areas way beyond its current(extremely limited) implementation capacity. Focusing on peace and poverty alleviation is meaningless inthe absence of measures to strengthen both the Government's service delivery capacity and itsdecentralization strategy. Comprehensive public sector reform should redefine the role of the state,improve its capacity to design and implement public policy, improve the provision of infrastructure,strengthen its financial and human resource management capacity, and increase social spending, with moreeffective targeting and delivery through decentralized institutions. Comprehensive public sector reformshould focus on at least four key areas: (i) tax modernization; (ii) institutional restructuring, includingreorganization of the government functions and civil service modernization; (iii) municipal and social fundsstrengthening; and (iv) privatization of public enterprises (paras. 1.9-1.11).

A. Tax Modernization

2.2 Despite the recent approval of two comprehensive tax reforms and an impressive number (10) ofexternally supported tax administration and customs modernization attempts in the last decade, Guatemalaremains among the countries with the lowest tax-revenue ratios in Latin America (Figure 11.1).' Efforts toimprove the effectiveness of tax administration have failed largely due to:* lack of a clear design of a medium-term reform strategy;* discontinuous support for and poor implementation of tax administration reform; and* an inadequate tax code which discourages tax payer compliance.

Figure 11.1 1995 Tax Revenues in Latin Figure 11.2 1995 VAT Rates in LatinAmerican Countries * American Countries

NIC 20.8 URU 22.0

CHI 20.1 PER 18.0

BOL _ * _ _ _16 4 CHI _. . .418 0

MEX. 16 3 ARG ........... 13 =.8 .0-HON 161 BRA 17.0

URU 1'd0 HON 15 O.

CR( 15.0 MEX _55.0

BRA 14.9 NIC 15.0

ELS _ _ 12.3 BOL ._ 1,4. . 14.0PER 11.1 ELS 13.0

ARG = = 10.7 CRI ,13.0

ECU : ::: 7.9 VEN. 7 12.5

GUA 7.6 (%ofGDP) ECU 10.0 (% Rate)VEN _ 7.2 GUA 7.0

00 5.0 100 150 20.0 25.0 00 5.0 10.0 15.0 200 2501993 data for Bolivia and Brazil. 1994 data for Chile. Peru and Uruguay. H cghest rate

Source: International Monetary Fund

2.3 The tax base is weak because of low rates and widespread evasion. The tax structure does notrequire major changes: Over two-thirds of total tax collections are indirect levies: VAT (36.5 percent),customs (24 percent) and excises (12.5 percent). However, VAT rates are the lowest in Latin America

Extemal donor programs include: IDB/CIAT technical assistance for tax administration in 1984, 1992 and 1995;USAIDIKPMG grant for technical assistance from 1990 to 1994; UNDPIJNCTAD/SIDUNEA grant for customs from1988 to 1991; CGTZ grant for training in budgeting, auditing and tax administration from 1989 to 1991; World Bank/EMLloan on tax administration from 1992 to 1995; TMF technical missions in fiscal policy and tax administration in 1994; anda forthcoming IDB customs administration technical assistance loan.

Public Sector Reform 15

(Figure II.2), and the tax base is weakened by a large number of exemptions, and lax proceduresfacilitating under-reporting and smuggling. For example:* Gross VAT compliance was only about 44 percent of potential revenues between 1992 and 1994,

compared to a Central American average above 50 percent (Gallagher, 1995). There are two keyreasons: (i) VAT collection is highly concentrated on a small number of taxpayers (more than two-thirds is paid by about 650 taxpayers); and (ii) the use of VAT fiscal credits and legal exemptions havebeen much abused (of the approximately 60,000 VAT retums filed in 1993, only 29 percent generateda net tax payment, 27 percent claimed a fiscal credit and 44 percent showed no activity) (Mann, 1995).

+ The customs and income tax evasion 'gaps" fall in the 40-65 percent range (Annex 4 and Shome et al.,1994). Barely less than 1 percent of the population files income tax forms, compared to 24 percent inMexico (Gallagher, 1995 and Artana, 1995). Excessive steps in the customs clearance procedurefacilitate under-reporting, smuggling, and represent a major constraint to exporters.

2.4 Previous reform efforts made some progress, mainly in decentralization and generation of up-to-date tax information systems and databases, but legendary and long-standing deficiencies in taxadministration, customs and the tax code were not properly addressed. These shortcomings include:* poor identification of non-filers and stop-filers;* poor audit program design, implementation and sequential follow-up;* poor use of databases for cross checking, e.g., between income taxes (including VAT claims used as

deductible) and VAT effectively paid, or between customs and VAT data;* low quality and quantity of tax auditors, with

little use of appropriate audit performance Box IL I Tax Agenda Options for 1996-20standards; Short-tem

* lack of a career-path for Ministry of Finance I nitat8 key admistrative reforms (par 2.6).employees, including updated compensation n Reforn the tax code; reduce business liquidationpackages; prooedural time; and strengthen sanctions (fines and

* lax transit and audit/,ispection controls in interest rates for delays in filing).Q Effective enforcement of 1995 reforms to the P=eal

customs; and Code that establish penal responsibility for tax fraud.* an inadequate tax code, including poorly => Reduce from seven to three te alternative ways of

defined and weak penalties and lengthy maling quarterly esfimated income tax payments.business liquidation procedures for tax z Reinstall income and interest tax wiNthlding.defaulting businesses (460 working days at Medium-termdefauting usinsses 460 wrkin daysat ~ An increase in the VAT rate from 10 percent toward themaximum speed). Central American range of 13-15 pereeat.

= Increase the tax on gasoline, among the lowest in2.5 Projected revenues from the present tax Central Anerica.reform, 8.5 percent of GDP in 1996, are => Eliminate most remaining VAT exemptions (including

insufficient to finance badly needed social on imports by eooperatives and guilds), except forinsufficient to finance badly needed soclal exports. Clarify the concept of VAT fiscal credits, limitspending, infrastructure investment and circumstances for their refunds, and ensure timelyadditional spending associated with peace (para. payment.1.16). Guatemala needs to reach a minimum tax => A reduction of te pcrsonal income tax bracts. and therevenue ratio of double digits in 1997 and at least top marginal rate from 30 to 25 percent, ooupled with

limiting the scope for furtier income tax deductions.12 percent in 1999. Steps to expand the tax base, = I a mnimum tax on profussional acvities anda new tax code and radical measures to improve corporate income.tax administration and reduce evasion are = Eliminate income tax exemptions for mnaquila and free-required in the short term. The initial focus trade zones, which contravene GAIT nouns. Eliminateshould be on enforcement, which will require a fiscal credits to forestry.

.. . . => ~~~~~Review thie existing tax revenue. hrn armnements?strong dose of political will and drastic tax paReview th exsti esha i anCatB nets,collection changes. In the medium-term, paticularly to municipalities and San Carlos U-iv&sfty.however, the tax agenda might also consider taxmodifications (Box II. 1).

16 Chapter 11

2.6 Tax administration is very inefficient: while the number of tax administrators per 1,000 inhabitantsis one of the lowest in Latin America (0.15), administration costs per US$ 1,000 of tax collection are among

the highest in the region (US$3.16), an amount 4 times and 1.5 higher than in the US and El Salvador(Gallagher, 1995). There is wide scope .... ... ... ...... ...... . .. ...for reducing tax evasion through a new tax DBor L2 -9St .ingTiAd.tn: T PeruinxModelcode, and strong tax administration and ... .. an. a....n.customs measures, including: FAEu;

* A new tax code approved by Congress In 19i . the Nafina S i0t.4 * of Tax. Ad3inbistInoand effective enforcement of the 1995 (SUNAT) w ated iy Congress- as Van. autoiomoUSreforns to the Penal Code that . . p intituioecebivng-li Ž percent of tota taxestablish penal responsibility for tax us nAlIop bruht qualified professionls,fraud. e in0: iti: e Ssaisexempt from civil service) and monetary

=> Following the Peruvian example, the :esto collection peoace. SUNAT employmmt shakcreation of a Superintendency of Tax from 3000 to 800postons.Administration to replace the * The tax cod wass td, audit prcedures were overhauledand focused on lge :tapayers,: and a comprehensive oversightDireccion General de Rentas Intemas management infation sis: of StNAT's performance was:(DGRI) at the Ministry of Finance developed.should be considered (Box II.2), * The tax ratio doubled fir. 5.4 percen of (GDR in 1990 to 12.aiming to: (i) evaluate and renew perct of GPin1994.:DGRI personnel; (ii) effectively * The number of VAT ativ taxpayers increased from 13,500 in1983 toAPQOOO in19.monitor large taxpayer compliance; LCSOIS

(iii) change the audit strategy, s*t:os;npolitital supp from the Executive and Congress isfocusing on issue-oriented audits; (iv) limdame: a: increase field control activities; and l Ti: enf itiution must to establish its own

(v) increase the audit coverage and l people.nCom.: plementar tax code, tax laws and tax auditing measures arenumber of auditors. l eq: red : - : ':

=> In customs, the creation of a strong A ro: e infirmao system support is necessary for effectiveInternal Affairs Customs Unit, e t.coupled with concessions to theprivate sector of selected services, should be considered. This Unit should enjoy auditing powers.Computerized duty payments at customs should also be available for cross-checking with declarationsand commercial bank forms. Concessions to the private sector of selected customs services, such asmerchandise inspection, container terminal and chemical laboratory operations, at Santo Tomas andPuerto Quetzal, as well as Guatemala City airport might be implemented as pilot projects.

B. Public Sector Constraints

2.7 Although small by international standards (Figure 11.3), the Guatemalan public sector isexceptionally inefficient in its service delivery, management and regulatory functions. Authorized publicemployment covers about 2 percent of the population and 6.4 percent of the labor force. The share of thepublic sector in GDP is not excessive: public expenditures, and public wages and salaries represent about12 percent and 4 percent of GDP compared to Central America averages of above 25 and 6 percent.Evidence of inefficiencies in the way the public sector operates, however, are multiple. Key factors limitingpublic sector efficiency are:* excessive centralization;

* inadequate legal and institutional framework;

* uncontrolled public sector employment and processes;

* poor management of financial and human resources; and

* a wage structure divorced from the labor market and poor labor relations.

Public Sector Reform 17

Excessive Centralization

2.8 Centralization is endemic throughout the Government. Perhaps the most serious manifestation isfound in the controls exercised by the Finance Ministry over the expenditures of other governmentinstitutions, as well as the centralization of decision making within Ministries. There are generalizedcomplains of the operating difficulties that result from the centralization of the budget exercised byFinance, which controls: (i) procurement of goods andpayments for services under a manually processed Figure I1.3 Size of the Guaten.man Civil Service:

Purchase and Payment system that reimburses, on An International Comparison, 1990-91

average, up to ten months after a transaction was U.uguay 867

completed; (ii) the process of choosing which bills topay; and (iii) the real budget assigned to each Ministry, Venezuela 4 648

usually below the amount approved by Congress. Argentina . * 641

Delays and uncertainty on the timing of payments byFinance result in increased costs of services. As Pe,u 340

suppliers are reluctant to do business with the .3....................Ecuador : : ... :.330

Government, those who do assess a surcharge of 20percent or more on the price of items sold. Chile 252

2.9 Budget centralization has a disastrous impact Guatemala4 205 WIDnE lO.OWkU#O

on the execution and transparency of public works: 0 200 400 600 800 1000

e.g., in roads, as the first four months are consumed in Source: World Bank. 1995 figre.

programming controls and the last two are devoted toaudits, the "spending season" is concentrated in the rainy months of May to October, which is the mostdifficult and costly period to undertake maintenance. As Ministries cannot borrow, delays in obtainingaccess to resources results in poor execution levels. Emergency Decrees which then circumvent the regularbiding process result in less than transparent contracting. Centralization of decision making is bestreflected in the time Ministers take to sign legal requirements and by the excessive geographicconcentration of Government services in the capital. At the Ministry of Health, it is estimated that theMinister spends approximately half of his time signing documents, as the stacks of daily forms (with sixcopies) awaiting signatures reach a height of over a foot (Gregory and Perlman, 1995). Even the Presidentof the Republic has to approve each new public sector post. Furthermore, Government offices and servicesare disproportionately concentrated in the capital; whereas essential government permits (drivers licenses,passports, export seals, business licenses) could easily be provided by more accessible local offices staffedby personnel transferred from the capital, or by private service suppliers.

Inadequate Legal and Institutional Framework

2.10 Guatemalan public sector institutions and procedures are weak, antiquated, and with inflexiblestructures. These weaknesses arise because: (i) the structure, functions and organization of public sectorentities are rigid, institutionally and geographically centralized, and unresponsive to clients; and (ii) thelegal environment hinders the exercise of management functions and seems excessively skewed toward therights of trade unions. As a result, the bureaucracy is strongly resistant to change, which is reinforced by avariety of legal measures to which interest groups have recourse.

2.11 The organization of the public sector and its institutions is puzzling and could certainly deliver thesame volume of services with a significantly smaller labor force. Organization charts are either difficult toobtain or unreliable and contradictory. In addition to the three branches of Government (Executive,Legislative and Judiciary), there are 30 decentralized entities (commissions, councils, and institutes), 7public enterprises, 3 autonomous institutions and 9 social funds. Among them, there are considerableinstitutional redundancies, duplications and functions that no longer fit modern circumstances. It is urgent

18 Chapter II

to redefine the mission of each institution and clearly delineate its sphere of operations and services within anew legal framework.

2.12 The legal framework in Guatemala is as complex as the number of institutions that administerthem. Chief among these is the 1985 Constitution of the Republic interpreted by the Constitutional Court(CC). This is an independent tribunal appointed for 4-year fixed terms by Congress and which mainlyintervenes through the granting of provisional or full injunctions ("amparos') to thwart the violation ofindividual and political rights by government actions. Sometimes, CC temporary injunctions have lastedtoo long, (e.g., the one on September 1994 electricity tariff adjustments lasted one year).

Uncontrolled Public Sector Employment and Processes

2.13 There is no reliable record of public employment. Official 1995 data estimate a total of 141,266employees, but excludes: (i) about 1,400 contract professionals and 15,027 positions of part time andhourly workers; (ii) data on positions other than categories 011, 022 and 041 under the civil service regime,leaving aside individuals employed under contracts in category 079, for which there is no central record;(iii) multiple positions in education, and (iv) positions in decentralized institutions. Including thesecategories, public sector employment would be in the range of 171,000-205,000 positions (Gregory andPerlman, 1995).

2.14 The Oficina Nacional del Servicio Civil (ONSEC) and the Ministry of Finance do not adequatelycover public employment. ONSEC does not maintain a complete and current roster of all employees, andnot all public employees appear on the payroll processed by Finance. The Government's inability to trackthe status of authorized positions and 079 appointments compromises any attempt to exercise effectivecontrol over employment levels and costs. As a result, the 1992 Government decree freezing publicemployment failed to reduce public employment effectively. There are numerous cases of individualswithdrawn under voluntary retirement programs but rehired by the same or other agency on 079 contracts.

2.15 There is great potential for reducing employment without reducing service delivery. Although thepublic sector is small relative to GDP, there is considerable labor redundancy and low productivity.Redundancy is open or implicit. The former occurs when there are workers with little or nothing to do andresults from the failure of the administration to provide the required inputs (e.g., gasoline for vehicles) orpolitical patronage. Much of the open redundancy seems to appear in the low-skill categories. While theincidence of open redundancy is significant, it is probably less important than implicit redundancy. Implicitredundancy is the product of inefficient organization or management failure. It arises when Governmentpolicy changes lead to the shrinkage of some functions without reducing or eliminating the responsibleunits. Gregory and Perlman (1995) estimate that reviewing the institutional framework, simplifyingprocedures, making greater use of installed computer capacity and raising performance standards mightmake it possible to reduce staffing by as much as half without sacrificing output.

Poor Management of Financial and Human Resources

2.16 Restructuring the public administration also requires an overhaul of the Government's overallfinancial and human management system: accounting, budget, treasury, debt, personnel and procurement.With the exception of auditing, which is located in the office of the Contraloria General de Cuentas, andpersonnel, which is located in ONSEC, all of them are centralized within the Ministry of Finance.Government accounting and auditing are regulated by an outdated and disperse legal framework and suffersevere deficiencies. For its part, the Comptroller's Office has a 4-6 year backlog on its post-authorizationreview of expenditures and must maintain warehouses filled with receipts of accounts awaiting review.Expenditures usually are reviewed long after the person authorizing them has left public service. Effortsshould be made to decentralize financial management systems and transfer accountability to line ministries.

Public Sector Reform 19

2.17 Several reasons account for inefficient financial management (World Bank, I 995d):* the Ministry of Finance has an overwhelming focus on tight daily control over cash spending;* line ministries have little ability to manage their own budgets and implement their programs, as

financial administration is highly centralized in the Ministry of Finance;* financial management is supported by a disperse and obsolete legal framework, inefficient

procedures-most simple tasks and procedures are still performed manually; where automatedinformation networks exist, they are inactivate or not linked; and

* financial management procedures are inadequate and operated by a large number of personnel, many ofwhom lack the training or experience to adequately perform their jobs.

2.18 The management of human resources is extremely weak, due to poor organization, the use of ad-hoc recruitment and selection practices, no control on leaves and absences of public employees, noworkplace performance standards, weaknesses in the exercise of managerial functions, and scarce andinappropriate training. Although both Finance and ONSEC are supposed by lawv to govern recruitment andcreation of positions in the public sector, the procedures are rarely followed by other Ministries. ONSECdoes not maintain a current registry of leaves and absences. Furthermore, there are no performancestandards, or evaluation and incentive systems that can reward performance. The lack of continuity intenure also weakens the top manager's commitment to reform and efficiency, while middle and lowermanagement lack basic managerial skills, motivation and support from upper management in the exerciseof their duties. In addition, considerable duplication exists in training programs offered by INAP, theComptroller's General Office and the Ministry of Finance.

A Wage Structure Divorced from Labor MarketConditions and Poor Labor Relations F IC4CiFm*hwfoSdeted PivAe

ua Pid k 50c*w JOi

2.19 Low and decreasing salary levels in relation to . ---- P.b"'c SxtorEnechic,ia__ Pv S r

the private sector and salary compression prevent 682

Ministries from retaining talented technical andprofessional staff (Figures 11.4-11.5). Low-skilled we'd- 812

wages are estimated to be as much as 100 percenthigher than in the private sector. For high-skills, cie 786

however, the average cash salary (not including fringe 22

benefits in the private sector) is more than twice the Auile 883

highest corresponding salarv in the public sector. nchaic 06

Wage differentials within high and low-skilled 836_ _ow_ledLaborers_ )

categories have shrunk as a result of larger general inrcoiwrekLor

wage increases, general emergency and transport -4__bonuses to lower grades. The proliferation of fringe c nw

benefits has further narrowed wage differentials. The1992 and 1994 bonuses alone-for employees earning _L,a 0

less than Q.800 per month-narrowed the wage 18390structure from a 15:1 to a 7:1 ratio. In addition, since1980, whereas some of the low-skill categories have 0 2000 4000 6C00 8000 IC000 1200

received pay increases in the order of 300 percent, Swve: D1C(1M).those for technicians and professionals have increasedby 155-200 percent (Gregory and Perlman, 1995). The emergency and transport bonuses were unified inearly 1996.

20 Chapter II

2.20 Attempts to offset wage distortions between the> Figure nsRe~~ag Sdecta asCil SwvieJou,

private and public sector have only created further 19ig9r 1 dR199adistortions. In some cases they have created ad-hoc 600

parallel salary scales outside the civil service law, such 1980 Qudzala pcr M>h

as the 079. Attempts to reclassify positions in exchange 500

for higher productivity from unions have taken place, but 400 019-/80

the expected increases in productivity have not 300 IS- /materialized. 2

200

2.21 Distortions in the wage structure are mainly due 100

to poor labor relations in the public sector and the system oof collective bargaining. Collective bargaining is plagued Cr ivc - Tenical - offce Pde anal

by four problems: first, the Govermnent finds it cradelil GadeSeIrday radel

politically difficult to enforce the existing legalframework with respect to strikes, which requires &eGr Prr9

negotiations to be held prior to strikes and penaltiesagainst illegal strikers; second, public employees delivering essential services cannot strike legally, but doso; third, although only 20 employees is the minimum required to create a union, their collective agreementsare extended to all employees and become indefinite rights. and fourth, labor mobility is highly restrictedas a result of the order of "emplazamiento" issued by the Labor Panels ('Tribunales de Trabajo') and theLabor Code. Unless lifted by the Panel, the order freezes the discharge of an employee indefinitely andsuspends disciplinary actions. This inhibits labor mobility and the exercise of basic managerialprerogatives.

2.22 Extra benefits from collective bargaining are onerous. As salaries are not subject to directnegotiation in collective bargaining because they are set by Acuerdos Gubernativos, collective agreementsresult in numerous extra payments such as overtime, bonuses and other costly fringe benefits such as childcare, extra hospitalization payments for births, free or subsidized employee cafeterias, obligatory trainingand scholarships, and reduced work schedules. The 1995 cost of these extra benefits for the Ministry ofCommunications, Roads and Public Works, is about a quarter of the budget allocated for salaries.

C. A Strategy for Restructuring the Public Sector

2.23 Restructuring should aim to increase the efficiency and accountability of the public sector. Theprocess of reform should modify the present institutional and legal framework within which theGovernment operates, modernize financial management and civil service, and improve the compensationstructure and labor relations. It should not be taken as prescriptions, but as a basis for the necessaryprocess of internal dialogue and consensus building on the need for reform.

Central Government Institutional Simplification and Deconcentration

2.24 A comprehensive re-examination of the functional distribution of responsibilities in the publicsector should lead to the simplification of the Central Government (CG) institutional framework. A crucialaspect of this process is that gradual deconcentration measures should be adopted in close correspondencewith the Ministries' capacities to absorb organizational changes, since early and isolated deconcentrationefforts have had little success. Reform experiences in Latin America suggest that:= Early in the process, the Executive should submit the new Law of the Executive Power required by the

1994 constitutional reformn;=> Uniform examination criteria should be defined and applied to current activities of all institutions by

organizational level (e.g., Secretariats, social funds, etc),

Public Sector Reform 21

=> A minimum organizational level should be designed;=> A unique primary responsibility should be assigned to each executing entity in each level of the

organizational structure, thus avoiding unnecessary duplication of tasks; and= Procedures should be reviewed and simplified in line with the new institutional framework.

2.25 A key goal of modernization should be a gradual deconcentration of the CG, aimed at reducingthe excessive concentration of government offices, services and decision-making powers in both theMinistry of Finance (functional deconcentration) and in Guatemala City (territorial deconcentration).Deconcentration should proceed only after the new institutional framework is in place. Several concreteactions are also required. First, an overhaul of the deconcentration program at the Ministry of Educationshould be done, since it has resulted in duplication of functions at regional and department levels, andrenewed centralization in the Ministry. Second, the traditional authoritarian approach to ministerialdecision-making subordinated to the Ministry of Finance could be modified if greater delegation ofauthority is given to other Ministries and to their top professional managers. This also requires a carefulreview of current delegation of authority procedures. Third, selected ministries should be allowed to freelycommit a substantial portion of their authorized budget (e.g., 35 percent per semester), and to secure thefinancing of an optimal distribution of expenditures. This would allow them to make their own spendingdecisions, as defined by the approved budget, and to reduce the price of their purchased goods and services.Should Government revenues fall short, budget cuts could be imposed on the remaining 30 percent of thebudget that has been withheld.

Financial Management and Budgetary Modernization

2.26 Deconcentration to line ministries would require modernizing financial management and theauditing system of the Comptroller General's Office. Under this process:=> the Ministry of Finance and Comptroller General 's Office should function as rector institutions to

regulate and guide the overall financial operations of the Government and assure the integrity ofdeconcentrated operations. To encourage efficiency, savings from reductions in personnel should beshared equally by the respective ministry and Finance;

> once the new organizational structure is in place, and the new units, functions and staJf are in theprocess of being established, line Ministers should assume greater decision-making and operationalcontrol over their budgets, supported by internal financial management units. These units, onceproperly established with trained and qualified staff, and linked by modern information teclmology tothe core agencies, would have responsibility for the initial budget formulation, budget implemcntation,accounting, procurement and cash management; and

=> pilot projects are scheduled to begin in 1996 in the Ministries of Finance, Health, Education and theOffice of the Comptroller General. Successful piloting in these institutions should act to increasedemand from other ministries and institutions for additional deconcentration programs.

Strengthening Civil Service Adninistration

2.27 The civil service reform that is proposed should distinguish betveen short-term requirements andmedium-term solutions to the public sector employment, wages and civil service deficiencies.* In the short-term, there is a need to:

=> amend the Civil Service Law, to enable reforms in the Junta Nacional del Servicio Civil, makeappeals from disciplinary discharges appealable only to ONSEC as is the case for all grievances;and limit appeals of discharge to the Labor Courts to questions of procedure only; and

=> conduct a census of all public employees, once the supporting computer network is installed.* In the medium term, there is a need to:

22 Chapter 11

= reduce redundant workers based on elimination of duplicative units. Once the institutionalframework has been reviewed, and reorganization procedures are underway, it should be possibleto begin the task of tailoring the workforce to the requirements of each unit. The process ofidentification of redundant workers requires a sequential assessment to: (i) review each jobdescription; (ii) define staffing needs; (iii) fill positions internally, with or without additionaltraining, or externally; and (iv) list redundant workers and, depending on their number, propose aseparation or early retirement program;

> decrease the ratio of low-skill (support functions) to high-skill (substantive functions) employees(on average about a third of total public employment). Enforce freezing and shifting of publicemployment by: canceling vacancies, and strictly limiting the contracting of personnel undercategory 079;

=> reinforce control of public sector employment procedures by the human resources administrativeunits of the individual ministries. This includes hiring, recruitment, promotion and training, thusdeveloping a civil service career path;

=> redefine ONSEC's functions from an operational to a normative role, who should define theprocedures for the recruitment and selection of personnel, and:* guarantee the integrity of the merit system in government employment, where appointment of a

Director and top managers for longer than three years and up to six years, should be approvedby an apolitical Civil Service Commission;

* serve as the central repository of all personnel information through a computer network linkingall human resources offices in the public administration; and

* redefine procedures for job classification, as well as a model "Reglamentos Internos";> the Board of the Junta Nacional del Servicio Civil should be the final arbiter of personnel

administration disputes and its members should have similar terms to the Civil ServiceCommission.

Reform of the Public Sector Wage Structure and Labor Relations

2.28 A competitive wage structure reflecting broad labor market conditions should be adopted for thepublic sector. At least, five elements could be considered:o appropriate data collection mechanisms to provide timely and continuous information;

> to the extent possible, monetization of public sector compensation packages;=> consistent standard wage ranges across institutions, instead of a single wage, for each employment

public category (including 079) and as defined by a broad sample of private sector firms;= salary decompression by increasing higher-skill salaries; and> effective financial cost performance evaluation procedures, incentives, intensive management training,

and enhanced management responsibility and accountability should be introduced.

2.29 In line with reform of the civil service and the public sector wage structure, there is a need to focuson improving labor relations in the public sector. Labor relations and the collective bargaining processneed to improve in order to reduce the confrontational climate that has characterized labor negotiations inthe past and seek to constructively involve unions in the modemization process. As part of this processthere is need to strike a more appropriate balance between protection of legitimate labor rights and theenhanced management discretion that will be required to modernize the public sector.

D. Municipal and Social Funds Strengthening

2.30 Although there has been progress in decentralization in recent years-especially in terms ofincreasing revenues for municipalities and strengthening social funds capacity-the results remain severelyconstrained by the Central Government's long-standing cash-flow and inefficiency problems. There is

Public Sector Reform 23

political consensus that municipal and social funds strengthening need to be a central element of statemodernization, especially as part of a wider poverty alleviation, peace consolidation and decentralizationeffort. This is both to ensure greater community involvement and to begin to break up the excessivecentralization of the Central Government which has constrained efforts to modernize the state and theeconomy. This section deals with:* The level of decentralization and its financing+ The role of social funds in the decentralization process, and* The agenda for fiscal decentralization.

The Level of Decentralization and Its Financing

2.31 A decentralization strategy needs to start by defining the appropriate level of decentralization and thefinancing mechanisms that will support it. Municipal and social funds strengthening must be part of a

comprehensive public sector reform program. They shouldincrease opportunities for private sector and community

Figure 11.6 Projected 1996 Financing of participation in order to avoid duplicating public sectorthe Municipal System inefficiencies at the local level. A third aspect, not discussed

Arbitrios13.4% and Other Fees i this report, is a clear definition of the functions and

A ::2: i5.4% responsibilities that will be decentralized.30.7@X.2>2S^22SEg Iusi

VAT Tra2sfsf> Property 2.32 Municipalities are the natural target for fiscal

decentralization. Contrary to regions or departments,

Aporte Conti acional municipalities have constitutionally recognized50.6% administrative and financial autonomy, and the mayor and

the local council are democratically elected. Regions or

Source: Rojas (1995) departments, instead, are not autonomous. Regions are theterritorial basis for the Regional Councils for Urban andRural Development (CRDURs), which began operating in

1986. The heads of the eight CRDURs are appointed by the President. In turn, departments are justterritorial um'ts that do not enjoy autonomy and operate by relative delegation of authority ordeconcentration efforts by the CG. The head of the department is the Governor, who is also appointed bythe President. The Governor and the mayors meet in the Departmental Council (DC), which ensures somedegree of coordination between them, but there is considerable overlap between CRDURs and the DCs.

2.33 Municipalities face serious financial constraints due to the complex set of tools for financingdecentralization, and uncertainty over the time and amount of the revenue-sharing mechanisms, their mainfiscal source. Financing of the Municipal system (Figure 11.6) includes:* general revenue sharing: the Aporte Constitutional (6.6 percent of total 1995 CG current revenue);* specific revenue sharing: a cross subsidy of vehicle taxation and the gasoline tax, and a transfer of

about one third of the 3 percent VAT increase in January 1996 (4 percent of 1995 CG currentrevenue);

* tax sharing arrangements: the IUSI property taxation (0.7 percent of 1995 CG current revenue); and* local levies, such as arbitrios, fees for street lighting, and other services, and betterment levies (1.75

percent of CG current revenue).

2.34 The main difference between Guatemala and other fiscal arrangements for municipal strengtheningin Latin America lies in the extremely low general revenue sharing mechanism: the Aporte Constitucional.This mechanism usually approaches the 15-25 percent range of CG current revenues, while it only reaches6.6 percent in Guatemala (already including the increase of the Aporte from 8 to 10 percent of CG's budgetapproved current income). Although in nominal terms the Aporte has raised CG transfers from less than

24 Chapter II

Q.100 million in 1986 to almost Q.600 million in 1996, it has remained stable in real terms during the lastdecade. It will represent about 0.6 percent of GDP in 1996, a similar amount to 1987-89 levels (Figure11.7).

2.35 A more serious problem with the Aporte and otherrevenue-sharing mechanisms, is the timing of the transfer. Fn7 in uA aA fiscal transfer system requires a high level of 60 a60predictability. During the past three years, themunicipalities were unable to establish serious capital work 50 //50

programs with local contractors due to delays in receiving . 4transfers. In 1994, municipalities received only transfers 1

for two quarters and pending transfers were completed by c/ 3ao 030 O

mid-1995. Up to July 1995, no transfers for the 1995 p &

fiscal year were made. In the short-term, the transfers of _ 200 0.20

the Aporte should be made more predictable and 100 0o10autonomous from cash-flow problems of the CG. In the + +. + + medium term, however, the practice of earmarked funds o o.ooshould be, at least, frozen. Revenues from gasoline and F Oavehicle taxation suffer the same timing problem of the !.isyoWmx

Aporte and, given their cumbersome administrativeprocedures, should be transferred to the municipalities entirely or eliminated, if minor cities do not have thecapacity to levy this surcharge.

2.36 The property tax (IUSI), has the potential for becoming a significant source of local revenues.After the 1994 reform, the IUSI is collected by municipalities according to their administrative capacity. Ifmunicipalities have not yet assumed administration of the property tax and the CG still administers it, the25 percent of the tax goes to the national treasury. If municipalities, instead, have assumed administrationof the IUSI, the 25 percent of tax revenues istransferred to the Municipal Development Fund inthe Central Bank and administered by the Instituto Box 113 Guatemala City and the IUSIde Fomento Municipal (INFOM). Six months after The municipality of Guatemala City increased by 50 percentthe transfer of tax administration was approved by its IUSI tax revenues in 1995 by:law in January 1995, only 7 of 330 municipalities, * Hiring of professional staffto strengthen admninistration.the major ones and located close to or in the * A media campaign linking taxes to city services.Central department, have signed agreements with * Transparently subsidizing impoverished city zones.the CG to administer the IUSI, reflecting the * Expanding and updating the cadastre system.

* Simplifying the tax bill and using a modem accountinglimited management capacity of most system, administered by private firms.

municipalities and, to a lesser extent, unnecessarily * Opening the banking system or augmenting the numbercomplicated steps to reach an intergovernmental of cashiers ( 14 versus 3 the last year) for tax payrnents at

agreement. the Town Hall.* Providing payment incentives and opening a personalized

system of telephone reminders to tax payers.2.37 The Direcci6n General de Catastro y Medium-term ReformsAvaluo de Bienes Inmuebles (DICABI) remains * Develop a country-wide cadastre, rather than usingsolely responsible for valuation of real estate DICABI's (para. 2.37).properties belonging to the decentralized * Adopt a single rate, rather than the present three rates.Organizations of the CG who do not have the * Commnissions should be paid to tax collectors.capacity to administer the IUSI, but itsperformance faces severe deficiencies. DICABI lacks the basic tools to administer the IUSI efficiently. Itscadastre is based on an outdated 'Folio Personal" which adds the sum of property values for everytaxpayer in the country. However, the Folio not only distorts the nature of the property tax as a levy uponassets and not persons, but introduces cumbersome and inefficient administrative complications. In

Public Sector Reform 25

addition, its property registrations and valuations are often inexact, and substantially lower than marketvalues, e.g., DICABI has registered 195,000 properties for Guatemala City, 50,000 less than the Citycadastre.

2.38 As a result of these deficiencies, DICABI estimates tax evasion at 60 percent of potential taxrevenues, and 52 municipalities did not receive income from property taxes in 1994 (Rojas, 1995). Therevenue potential is illustrated by significant increases in IUSI revenues achieved by the 7 municipalitieswhich administer the tax: they accounted for nearly 40 percent of total property tax revenues in 1995.Guatemala City is expected to increase significantly the contribution of IUSI revenues to 25 percent of itstotal revenues in 1996 and this will play a critical demonstration effect (Box 11.3).

The Role of Social Funds

2.39 Fiscal decentralization in Guatemala implies more than mere municipalization. Social funds haveproliferated in a rather disorganized way since 1993, largely in response to the public sector's woefulinability to deliver even basic services. To operate fastand efficiently, three of them are exempted fromregular procurement, civil service and contract rules. Figure 11.8 Programmed Public Investment for

Peace and Development in 1996ADR

2.40 There is ample evidence of overlaps, PRONADE 7% FIS

inefficiencies of scale, and fierce and inappropriate FONAGRO

competition among social funds, and also between themand INFOM. Negative effects include: FOGUAVI

* multiplicity of cumbersome administrative 7%

procedures; FODIGUA

* multiplication of required minimum infrastructureand personnel FONATIERRA ONAPAZ

* increasmg resistance from line ministries whocompete for scarce budget resources;

* unnecessary competition in providing the same 22% So-cc. Ministry of Fmance

service; and* overlap and fragmentation of external funds.

2.41 It is easy to imagine ways the three major social funds, FONAPAZ, FSDC and FIS (Figure II.8)can take advantage of economies of scale by working under the same organizational structure, yetmaximizing their particularities in a Multipurpose Fund or merged parallel structures with remaining funds.While FSDC and FONAPAZ do not have a solid evaluation methodology and follow-up capacity, FISappears to have stronger monitoring and evaluation capacity, but the implementation of its operations isstill too slow.

The Agenda

2.42 An agenda of municipal strengthening and improved efficiency of social funds needs to bedefined, including:=> An appropriate legalframeworkforfiscal decentralization is needed.=> Fiscal decentralization should have a neutral fiscal impact on expenditures. Alternative budgeting

and cash flow estimates within the framework of overall fiscal targets should be designed.=> The complex set of fiscal tools for financing municipal strengthening needs to be replaced by a

comprehensive strategy of local and regional finance. This should include transfer mechanisms that

26 Chapter 11

are clear and predictable, while providing incentives for local authorities and communities to raiseadditional resources, either as complementary financing for projects or cost recovery for services.

= Measures to reform the property tax and to strengthen the institutional capacity of municipalities tocollect it should be adopted. This could include consideration of the following actions:

* increase the IUSI tax rate;* transform IUSI into a local levy, since there is little justification for CG participation when

municipalities have the administrative capacity (and the willingness) to collect it;* targeting a few municipalities using the proposed national cadastre could be piloted,

removing DICABI's cadastral activities gradually as the CG develops its own cadastre;* municipalities could provide horizontal technical assistance on the basis of best practices;* proposals for substituting IUSI by a territorial tax should be carefully examined (para. 3.25).

Increased revenues should permit abolition of most obsolete arbitrios and transfer of resources fromspecific revenue sharing mechanisms to the CG.

= Financial assistance to ensure a minimum level of local administration capacity by municipalitiesand modernization of INFOM is urgently needed This involves training and equipment to improvemanagement and IUSI tax collection capacities.

= An overhaul of present deconcentration processes of the Ministries of Health and Education isrequired, since they are seen as pilot steps toward broader decentralization of public services.

= Social Funds have to be evaluated and the less efficient merged or eliminated. Those which haveproven to be efficient should improve coordination and, probably, specialize further. As a first step, theAporte al Desarrollo Rural fund (ADR) was eliminated in 1996.

=' All forms of interactions with the civil society through privatization and subcontracting schemesshould be encouraged. Attempts to transfer services to the private sector, NGOs or communityorganizations should be coordinated with municipal authorities.

CHAPTER HI II

Agrarian Issues

3.1 Rural development is key for rapid growth, peace consolidation and rural poverty alleviation inGuatemala. Despite a long-term declining share in the economy, agriculture continues to play a dominanteconomic role. It represents one quarter of GDP, over half of total employment and 60 percent of exports.The majority of the population continues to be rural, indigenous and poor, and depends on agriculturalactivities for survival. Land tenure issues continue to be at the root of the 35 year-old armed conflict andrepresent a major challenge to economic modernization.

3.2 As in many of the poorer countries in Latin America, Guatemala's agricultural sector has a sharpdual nature linked to a very unequal land distribution. Duality features both a modem, large farnsubsector, dedicated primarily to export crops and responsible for much of the agricultural output reflectedin GDP, and a traditional, micro and small farm subsistence-oriented subsector, mainly devoted to basicgrains production, and containing the largest proportion of the rural, indigenous and poor population.According to the 1979 census, the most comprehensive source of data on the agrarian structure, some509,000 micro and small sized farms-96 percent of total farm units and 28 percent of farm land-had amean size of 3.3 manzanas (I manzana=0.7 hectares) and were home to some 2.6 million individuals, about44 percent of the total population. Conversely, the 22,800 medium and large farms contained 72 percent offarm land with a mean size of 188 manzanas and employed the bulk of colonos-estimated at 572,000.Moreover, Hough et al. (1982) estimated for about the same period that there were 309,000 landlessindividuals over the age of 20, but had no land of their own and were not permanent farm workers.

3.3 Duality in Guatemala, however, masks a more complex and dynamic reality plagued by myths.For instance, it is commonly asserted that land concentration in large farms is increasing; that large farmsare inherently more export-oriented and productive than small farms; that regions with a predominance oflarge farms, such as the South Coast, are exclusively devoted to agroexport activities; and that seasonallabor exclusively moves from the Western Highlands, with a predominance of small and medium sizefarms, to the export oriented South Coast. Recent evidence shows these are misperceptions:

* Land concentration is slowly reversing in~~~~Figure 111.1 South Coast Land Distributku, 1979some regions, such as the South Coast and 1992(Escuintla, Suchitepequez, and Retalhuleu).A recent CACIF survey found that 100l Fsignificant subdivision of large holdings Less dun MZ

(more than 714 manzanas) to small and so Betweenl44and714

medium sized farms took place between 60 Mom tn 714 mz

1979 and 1992. Large holdings decreasedfrom 49.9 to 33.7 percent of total land ; 40

(Figure III,.1). In the same period, thenumber of micro and small farms doubled 20

from 37,981 to 74,017 farms (representing98 percent of the total number of farms), and 0led to a declining average size of micro and 1979 192 1979 1992

small farms from 7 manzanas to 5.44 Source: CACIF.

manzanas (Schweigert, 1995).

28 Chapter 11I

* The presumed positive associationTable 111.1 Area, Production, Yield, Labor Use and Gross Revenues be lre l olings andohigh

for Principal South Coast Activities,1991-92 between large landholdings and high........... ::::-::: -... . productivity is not supported by

.X. I..%.:.% 10.0.1 ~~empirical evidence. Pasture, thePasture 324 111 5 508Corn 269 10344 64 1530 number one use of South Coast farm(Sesame') 83 662 25 1440 land, uses negligible amounts of labor

Sugar Cane 175 22570 4and generates the lowest gross revenueSorghum 93 2046 2 616Cotton 56 896 119 1060 per manzana in the region (Table(Cotton Seed' ) 1114 8 1645 Ill. 1). Since 1950, national

Coffee 45 495 89 4113Other 96 - - - productivity growth for com, wheat,' Sesame is typically grown as a second crop in corn fields. Area in sesame was rice and some nontraditionalnot directly re.poted and is estirnated here by dividing production by yield.2 Cotton sced for oil is a by-product in cotton production. agncultural exports le vegetables,Source: CACIF which tend to be associated with

small-to medium sized farms, hasexceeded that for coffee and sugar mainly produced in large fanns. A sizable number of nontraditionalexport crops in small and medium size farms also feature high yields, which means a significant netgain in output, employment and income per capita.

* Only about one third of South Coast farm land is devoted to export production. Pasture and comoccupy 56 percent of South Coast farm land and are largely for the domestic market (Table 111. 1). Inaddition, meat and cotton exports, mainly produced in the South Coast, have declined both in volumeand in dollar value since the late 1970s.

* Traditional seasonal labor migration pattems have changed. On the one hand, the end-year demand forlabor from the Western Highlands toward the harvest of cotton, coffee and sugar cane in the SouthCoast has declined due to the de facto disappearance of cotton production in the last decade, fallingfrom 185,000 manzanas in 1980 to less than 13,000 in 1995. On the other hand, sustained growth ofnon-traditional export production has generated significant labor migration toward the WestemHighlands (Fox et al., 1994).

A. Agricultural Growth

3.4 The agricultural growth model experienced in Guatemala prior to 1980 is exhausted. Theagricultural growth rate of 5.1 percent for 1965-80 was among the five highest in the world (World Bank,1992). This extraordinary performance was due to a combination of unique historical events: the openingup of the agricultural frontier, much of it in the South Coast and in the Peten, rising world market pricesfor some traditional exports, and a stable political situation. However, these conditions changeddramatically in the last decade: world prices, with the exception of bananas, declined in the 1980s and early1990s; land expansion ended in the 1 980s as a result of the disappearance of the forest covering 40 percentof the South Coast and a lower, but significant, percentage of the Peten; and, partly due to aggravated ruralpoverty conditions, the armed conflict intensified. As a consequence, agricultural growth stagnated at anaverage of 0.4 percent a year in the 1980s, negative in per capita terms; and only in the 1990s recovered toan average 2.7 percent, slightly below the population growth rate of roughly 3 percent.

3.5 Guatemala has the potential to accelerate its rate of agricultural growth. Following a decade ofstagnation, recovery of agricultural production in the 1990s is due to the impressive performance ofexports, mainly nontraditional and whose production is carried out on small and medium sized familyfarms, and to a more intensive marginal use of land. Among the top six traditional exports, whose output isdominated by large farms, only sugar, bananas, cardamom and, only recently, coffee have avoidedstagnation or outright decline since 1980. Guatemala has became the world's biggest producer/exporter ofcardamom. Cotton has ceased to be an export item and meat exports declined an average of 25 percent a

Agrarian Issues 29

year during 1991-94 because of lower intemational prices and restrictions imposed by Mexico and theUnited States. For their part, non-traditional agricultural products' have almost doubled their share in totalexports and presently generate one-third of agricultural export earnings.

3.6 Despite significant progress achieved in agricultural trade liberalization in the nineties, importantconstraints to faster agricultural development remain and are not susceptible to a quick fix (Annex 5). Toaccelerate agricultural development, it will be necessary not only to consolidate agricultural trade reformand address the leading constraints faced by exporters (Annex 2), but to:r> develop a land market, which makes a more efficient and equitable use of land; and=> develop rural financial markets.

B. Land Tenure

3.7 Land tenure in Guatemala is a typical case of market failure. The ongoing sensitivity of the landissue in Guatemala, the tendency for the distribution of land ownership to determine the allocation of thequality of the land, the vested interests opposed to make the necessary institutional changes to provide asound legal framework of land registration and to pay the land tax, and the absence of long-term financingavailable for rural land purchases indicates the extent to which the rural market has simply failed todevelop. The main problems of land tenure relate to:* an extremely skewed distribution of land;* severe property rights insecurity;* a multiplicity of inappropriate and outdated land tenure regimes; and* ineffective land taxation.

The Failure of State-directed Land Reform

3.8 The presently skewed distribution in the use of land lies at the heart of low average yields foragricultural products, rural poverty and social conflict, and has prompted long-standing discussions aboutland reform in Guatemala. Traditionally defined in the sense of a state-directed redistribution of propertyrights, successful land reforms were credited with playing a role in the post-war economic recovery ofJapan, South Korea and Taiwan. These reforms occurred under exceptional political circumstances, whichare not present in Guatemala. National agricultural output, exports and rural incomes could significantlybe increased by a more equitable and efficient utilization of land and labor resources within the agriculturalsector.

3.9 Four decades of state-directed land reform have failed to make distribution of land more equitableand secure. According to the 1979 agricultural census, only 2.5 percent of Guatemala's 5.3 million farmscontrol 65 percent of the agricultural land (the average farm consists of 200 hectares) whereas only 16percent of the land is cultivated by 88 percent of the smallest farms (with an average farm size of 1.5hectares). INTA, the state agency for land redistribution, has shut down its land distribution operations(paras 3.19-3.23) and is facing reform. Hence, although the 1954 Arbenz land reform had no lastingeffect, the virtually taboo status of the entire subject remains. This taboo has prevented rationaldiscussions of important issues such as the highly imperfect nature of land markets, the inadequate systemof land registration and the ineffectiveness of land taxation.

Nontraditional agriculture products include snow-peas, broccoli, plantain, pineapple, lemon, onion, tomato, cabbage,potato, garlic,sesame,wood products, seafood (aquaculture), flowers and plants.

30 Chapter III

3.10 Extreme inequality in land distribution is a cause for concern from a strictly economic perspective,because a more equitable land distribution can be relevant to efficient resource allocation, for at least threereasons:

* Land quality matters at least as much as landquantity. In Guatemala, the unequal distribution of Table 111.2 Clss I and 11 Land, Land in Farmn and

Land Concentration by Departtmentt

land at the aggregate level understates the true degree (% of departmental area)

of inequality. There is a high positive correlation of . *. K -..0.66 between land concentration and land quality - V-. .- f-t.

~~~1+* S~~~~~~~OUTH COASTindicating that the distribution of land tends to be 'Escuintla 86.7 100.1 92

more concentrated where there is relatively better Suchitepequez 86.2 78.6 94

land (Table 111.2). In the South Coast departments, Retalhuleu 83.0 70.6 91

where land concentration is higher, more than 80 EASTERN/Q"EQJutiapa 45.0 59.3 76

percent of the total area consists of top quality land Santa Roa 32.8 81.3 87

and the proportion of total area used as farm land is Jalapa 18.2 50.0 74

correspondingly high (above 70 percent). In the other Zacapa 13.3 45.2 87Chiquimula 29.8 34.1 72

regions, the percentage of farm land largely exceeds El Progreso 7.0 35.8 82

the percentage of class I and II land, i.e., much Alta Verapaz 6.6 51.0 83

agricultural activity represents inappropriate land Izabal 25.6 27.8 84WESTERN HIGH.

use. San Marcos 20.2 51.8 76

* Large farms do notfavor economies of scale. Where TotonicapLn 19.1 26.9 62

mechanization is possible, machines can largely Quetzaltenango 31.5 68.9 87Guatemala 15.2 55.8 86

substitute for manual labor, but only a few activities Chimaltenango 26.1 55.5 80

in agriculture exhibit economies of scale in El Quichd 8.7 28.6 73

Guatemala: sugarcane, bananas, tea and oil palm Sololi 7.6 28.4 68

(Bmiswager, 1994). Even in these cases, economies SBacaVtepaqu41ez6 5 82Sacateoquez 6.2 52.4 73

of scale arise not from crop production per se, but Huehuetenango 1.3 30.2 70

from processing or shipping which must be NORTHcoordinated with harvesting. The presence of El Pet6 0.5 15.6 69

Overall Guatemala 16.6 37.7 85diseconomies of scale is rather revealed in an inverse 'The anomalous figure for Escuintla is explained by farms counted as

relationship between coffee yields and farm size in being in that department which extend into neighboring departments.

Guatemala: small coffee growers are able to achieve 'Thesimplecorrelationcoefficientbetweenlandquality(col I)andland concentration (col. 2) is .655.

yields that approach three times the national average Sources: Cols. I and 3, Hough et al.(1 992) Col. 2. Schweigert (1995)

(Hough et al.. 1982).* A large ownership unit may contain within it numerous smaller operating units due to tenancy.

However, the size of the land rental market is too small in Guatemala. The 1979 census found thatamong 11.2 percent of all farm land held indirectly, only 2.6 percent was classed as rented whereas thelarger percentage was "other" category, including colonato and municipal land (Hough et al., 1982).Marginal land rentals occur on the South Coast between large landowners and peasants which are tiedin with extensive cattle grazing (Schweigert, 1990). Rent can be paid in cash in advance, or byworking on the field cultivated for the landowner, or on one of the landowner's other fanns.Landowners' reluctance to enter into such contracts is attributed to tenure insecurity. Property rightsto land are perceived as at risk, when a group of campesinos takes longer term possession.

3.11 There are no easy solutions to land tenure problems in Guatemala and they can not be imposedfrom outside. Perhaps no other challenge deserves more analytical work intended to find solutions whichare technically feasible and enjoy a sufficient degree of domestic consensus. Failure of state-directed landreforn points to the need for a different approach based on the development of land markets, such as onepartly based on a market-assisted land purchasing program. Colombia's example only illustrates the

Agrarian Issues 31

complexity of the problem (Box III. 1). An efficient and less concentrated land use might come from amarket-assisted land purchasing program along the following lines:

Box 11 Market-assisted Land Program in Colombia => Land could be purchased with state grants andbank credit. Subsidies for grants would be

Colombia introduced a new land law in 1994 (Law 160) to financed domestically by bonds and foreignshift from a state-directed to a market-assisted anddecentralized system of land distribution. Ihe program grants.will offer a subsidy equivalent to 70 percent of the purchase => Eligible beneficiaries could negotiate directlyprice of a family farm-sized holding plus complementary with land-sellers. Incentives should be providedinvestments to an estimated 69,000 eligible poor persons, for landowners, by paying a large share of thefor a total of one million hectares. Beneficiaries wouldfinance the remaining 30 percent from bank loans. Eligible pnce in cash rather than in bonds.beneficiaries would seek out land and negotiate directly => There would be no government participation inwith owners, although private agencies may act as any land purchase. Government participationintermediaries for a fee. Although not explicitly mentioned would be strictly limited to provide grants, legalby the law, there is also a potential for private developers assistance in titling issues and land disputes widoperating with loan financing to buy up large tracts, buildinfrastructure and subdivide beneficiaries. The program financing for infrastructure needs.will cost an estimated US$800 rmillion, including grants for = There could be a cap on what the Governmentland purchases, titles, complementary infrastructure would offer as a subsidy to land buyers in orderinvestments, institutional strengthening for relevant to pay land owners so as to reduce the cost of theagencies, and marketing technical assistance for ,beneficiaries. The program would be funded with bonds land purchase program.issued to the sellers of the land for 40 to 60 percent of the r Invaded land should be excluded from thecost of land acquisition and the remainder from the federal program.budget and an external loan (Cord, 1996). => Municipal and communal lands (paras. 3.16-

3.18) could also be excluded from the program.-=> The program should target poor households with demonstrated farming experience, a family labor force

and, preferably, female headed.=> Beneficiaries should be allowed to sell their land to eligible persons on the waiting list after some years.z> There should be no restrictions on leasing.

Land Tenure Security

3.12 A tailor-made strategy to achieve a more equitable and efficient land distribution in Guatemalashould, however, be mainly based on the emergence of land (sale and rental) markets that encourage thesubdivision of some large ownership units into smaller and more efficient units. This initiative should besupported by strong public policy intervention essentially addressed to promote recognition of bona fideownership, and enforce property rights and adequate taxation. Land tenure security is fundamental to allthose who possess (legally or informally), or desire to possess land, or make investments on land.

3.13 Land registration in Guatemala is incomplete and flawed and its overhaul would correct someimperfections in the land and credit markets. This is due essentially to an obsolete property registrysystem: a deeds, and not a title, registry system which fails to provide adequate evidence of title to land2

and whose institutional problems have become out-of control (Box 111.2).

2 Under registration of deeds, a registered deed takes priority over an unregistered deed or deeds registered subsequently. Adeed does not constitute title. Based on the correct identification of all land parcels through a cadastral survey, a titlerefers to the evidence of a legal person's right to land and provides tenure security to current owners and also to potentialbuyers and mortgage lenders. When a title is registered in the public register, it guarantees a final judgment by the state,which should provide monetary compensation in the event of loss due to error in the registry. A deed, instead, may containerrors or deliberate fraud and not reveal the existence of other interests such as a mortgage or lease, thus requiring furtherinvestigation to make a judgment.

32 Chapter HI1

3.14 Land tenure use and security distortions effectively reduce labor incomes for small farmers and

landless laborers through restrictions on sales and tenancy, and banking credit biases toward large farmers.

Eliminating distortions provoking land market BoxIIL2 TheGualemalanPropertyRegistry

failures is a priority, including:

=> reform of the land registry system. Guatemala Stories about el Registro are legendary. Guatemala'smust implement a wide reform of the present Registro General de la Propiedad dates from 1877. It is

sometimes referred to as a "modified Torrens" system, butregistry system, with a cadastre, new facilities, it is essentially a registry of deeds (escritura priblica). Thismodem technologies and a high level of is attested to by the maxim "primero en inscripcion,administrative capacity; primnero en derecho" and the fact that "a buyer is obliged to

=> realization of a country-wide cadastral survey, investigate the current legal status of the parcel in then, registry before purchasing (Katz, 1993)". The "Torrens"

in concession to private companies, as the Key reference stems from the fact that the registrar isinstrument for the new registry system. The responsible for errors, but the obligation which the registrarcadastral survey would also be helpful to contract goes up to a maximum of merely Q.1o,ooomunicipalities for taxation purposes; (Hendrix, Moyer and Strochlic, 1992). The Registro has

=> a new Lcaw of land usurpation is required to severe deficiencies:

prevent further invasions. According to the * Physical entry and storage of information is unchangedpresent legal framework, in cases of usurpation, since the 19th century!punishment is against the person found guilty, * Being organized by land parcels (folio real), parcelbut the law does not rectify the situation of the boundaries are not based on a cadastral survey; so thatusurped land, which must be treated by an parcel description in registered deeds need not conform

to actual parcels on the ground. Besides, it isadditional civil trial. The new law should incomplete since some land has never been registereddetermine compensation for damaged parties (tierra baldia) or changes have not been kept up-to-and return the land situation to its former status date.speedilv. * New deeds are often not registered when actually land

transfers occur. As a result, sometimes the current=> development of a sale and rental market. owner differs from the registered owner.

Reforming the registry system would favor * Many individuals wrongly believe mere possession ofcreating a land sale and rental market. Long an escritura pfiblica is equivalent to a title.term leasing could provide better termns than * It is inconvenient, costly and centralized, with offices

purchase. As long as the presence of tenants only in Guatemala and Quetzaltenango, and reportedlydoes not interfere with land also being used as plagued by corruption.

loan collateral, land can be both rented and mortgaged. The rental price of land can reflect its value

strictly as a factor of production, making it more affordable. Smaller tenants can then achieve greater

labor intensity and higher output and yields. Negotiating the specific terms of rental contracts should

be left to the parties. Leases for annual crops should prove the least difficult, but even in the case of

permanent crops, rental arrangements are possible with long-term leases. Fixed cash rent has desirable

features.

3.15 Any efforts to make a modem, up-to-date and complete register system will also confront

numerous problems associated with inappropriate and outdated legal land tenure regimes that exist in

Guatemala in addition to individual private property: communal (private domain) land, municipal (public

domain) land and land adjudicated by the government agency, INTA.

Communal versus Municipal Lands

3.16 There is considerable confusion between communal and municipal lands.

* Communal land is similar to some municipal land in that agricultural land is often held in individual

usufruct, while forest land is managed as common property of the group, but important differencesexist. The principal communal lands are the "parcialidades" in Totonicapan and the "comunidadesindigenas". Each results from a legacy of colonial land grants that have maintained their collective

Agrarian Issues 33

identity. Their degree of openness varies. In some communities, there is no sale or even rental ofcommunal lands to outsiders; while in others there is an active market in the rental and sale of rights tocommunal lands to persons from outside the community. Communal land is subject to property taxand, to the extent access to credit requires a parcel registration (deed) -generally non-existing-possessors of communal land are shut out of the formal credit market.

* Municipal lands are mainly concentrated in the Highlands, the Eastern Region (Oriente) and the North(Peten). When devoted to agricultural use, municipalities often rent land to local residents withcontracts from one to several years, with an extremely low rental fee and virtual lifetime usufruct rightsto their lands (Strochlic, 1994). Municipal land is exempt from the IUSI tax. Given the lack ofinformation surrounding the registration of municipal lands, they also constrain access to formal credit.

3.17 Registering municipal and communal land as individual properties is not synonymous withprivatization, is hampered by the lack of reliable data and may have unfavorable environmental effects. Inthe Oriente region, much municipal land is used for agriculture and is individually held, with the occupantoften paying the municipality a traditional rental fee for a well-defined parcel. There are active sale andsub-rental markets in use rights and the degree of tenure security is sufficiently high that coffee, apermanent crop, is planted. In the Western Highlands, instead, much municipal land is under forest andmanaged as a common property resource. The lack of either reliable and comprehensive data on thenumber and coverage of municipal and communal land (World Bank, 1995a) is another major obstacle fordeveloping a cadastre. The 1979 census documents communal land in individual usufruct, but not inforests and communal forests-data is compiled only for some regions, e.g., seven Western Highlandsdepartments (Elias, 1994). A survey of 47 municipalities finds that 30 percent of municipal land is inforest (Carrera and Contreras, 1994).3 Turning these lands into individual private properties may alsoaccelerate undesirable deforestation.

3.18 Some possible actions to improve tenure security in municipal and communal lands include:

Communal Lands:=> carry out an inventory of communal lands, in line with a new national cadastre;=> develop a simple and decentralized communal boundaries titling and registration system;r define and implement a participatory mechanism for deciding the passage of communal land

into private property if the community wishes to do so, and=> review legislation to facilitate transfer of communal land property into private hands.

Municipal Lands:=> carry out an inventory of municipal lands;=> develop a simple and decentralized municipal titling and registration system;=> create titling and registration districts with an elected board, i.e., a peer committee run not only

by the municipality, but by the community to provide a local checks and balances system;=> wherever possible, privatize municipal land;=:> overhaul the management of municipal land to make its allocation more transparent; and=> eliminate distortions by updating rental fees and limiting usufruct rights periods for renting.

3 In the Guatemalan Constitution, municipalities have rights over their property, but the practical legal status of municipallandholdings is ambiguous. According to Carrera and Contreras (1994), 15 percent of the municipalities claim to haveregistered title to municipal landholdings in the Property Registry, 2.5 percent claim not to know the status of municipallandholdings, 2.5 percent claim there is no supporting documentation, and the remainder mention a variety of otherdocuments, including colonial titles and intemal municipal documents attesting to ownership of those lands.

34 Chapter III

Land Admtinistered by INTA

3.19 INTA, a government agency, administers what in effect are three separate land tenure systems: theprocess of "titulacion supletoria of tierras baldias", the land purchase-sale program calledFONATIERRA, and the land refugees resettlement program under FONAPAZ. In all its land operations,INTA becomes the registered owner and maintains its own registry of beneficiaries which are under itstutelage. The two major forms in which land has been distributed are the "parcelamiento" and the"patrimonio agrario colectivo" (PAC). Land on the parcelamientos is adjudicated on an individual basisand is subject to restrictions on subdivision, rental and sale; but this has not prevented the expansion ofactive parcelamiento rental markets. The prohibition of a land rental market is simply based on the notionthat tenancy is bad. Although "parcelarios" can, in theory, have their parcels inscribed in their own nameat the Property Registry, once land has been paid in full, the majority have still not received definite title totheir land from [NTA (Strochlic, 1994). The situation is no better for the beneficiaries of the PACs. In thePACs, tenure insecurity is exacerbated by the fact that beneficiaries remain under INTA tutelage forever,even after they have completely paid for the land. They can never individualize ownership and run the riskof being expelled for infractions of INTA regulations at any point. They must also get INTA approval forany land transfer, including inheritance. There is no reason for INTA or any successor agency to maintainperpetual rights over land that is adjudicated and fully paid.

3.20 The process of "titulaci6n supletoria de tierras baldias" not registered in the Property Registryprovides, in theory, a way for the squatter to establish ownership rights, but it has been subject to abuses.Land colonization efforts conducted by INTA on tierras baldias allow any occupant of unregistered land toeventually become the registered owner after ten years of continuous uncontested occupation. However, inaddition to the expensive legal costs, a key problem for the occupant is that such land must first beregistered in the name of INTA and then transferred to the occupant. In some cases, INTA's bureaucracyand abuses prevent completion of the second step. This is problematic, since without collateral, holders ofINTA registered parcels are shut out of the formal credit market. In other cases, individuals who neveroccupied land managed to have it registered in their name through titulaci6n supletoria. They were thenable to evict or demand payment from the actual occupants. INTA and the titulaci6n supletoria systemshould be reformed as part of any modernization of the property registry system. INTA should be a clientof the registry rather than becoming a part of the registration process.

3.21 The overall impact of the INTA land distribution program has been modest. From 1954 to 1982,some 50,000 beneficiary families received about 950,000 manzanas, barely amounting to some 16 percentof the almost 6 million manzanas of total farm land enumerated in the 1979 census, and about a similarpercentage of the more than 300,000 landless campesinos estimated for 1980. Between 1982 and 1987,some additional 250,000 manzanas were adjudicated in the North, but it is said that they were given toabsentee owners (with subsidized prices) rather than to campesinos. In the last four years, due to conflictsbetween the Executive and INTA, barely 700 parcels were adjudicated.

3.22 FONATIERRA and FONAPAZ land programs were created to resolve demand for land tenure, bycampesinos as well as by refugees and uprooted populations. Given the low availability of public domainland, the program promotes voluntary purchase-sale private land mechanisms. In practical terms, allcurrent land settlement efforts involve INTA. It appoints FONATIERRA authorities and INTA officialsparticipate in land price negotiations. Once purchased, land is registered in the name of INTA andadjudicated to beneficiaries of the PACs, which are under indefinite INTA tutelage. Recent FONATIERRAand FONAPAZ land purchases are believed to have had a significant impact on raising land prices tounreasonable levels requested by private owners. The subsidy or rent involved in such operations-captured by land sellers-is estimated to be significant: about two-thirds of an equivalent commercial loan

Agrarian Issues 35

payment for the full land price; and the estimated parcelario net annual income is lower than average ruralearnings (Schweigert, 1995). The impact of the FONATIERRA program has also been modest: under itscurrent resettlement program, some 13,000 manzanas have been adjudicated to some 3,000 families.

3.23 Overhaul of the state-directed land programs would require:

=> INTA 's reform., which has been requested by its own beneficiaries (MAGA, 1995). Under a new title-based system, all current occupants of "parcelamientos" would logically receive individual title; andbeneficiaries of PACs land would have their land registered in the name of the group-owners. Decisionon any ex-post individual distribution of property would then be an internal matter for the group toagree on. Once the new property registry is in place, it should gradually systematize and integrateINTA's land register.

=> Phasing out of FONATIERRA and FONAPAZ land distribution sub-programs, after providing titlingto their present beneficiaries. As a transitory step, in the near term, the land purchase programs ofFONATIERRA should be absorbed by a single program administered by FONAPAZ, and their

operations realized without any interference from INTA.> Solving land disputes. Extensive new titling and perhaps even land tribunals will be required to

extinguish competing claims to land and to resolve disputes. Priority should be given to providingtenure security to those who already possess land and to resolving issues involving contested land.

= Eliminating present restrictions on the rental and sale of parcelamientos.

Improving Land Taxation

3.24 The inefficient use of the present land tenure system has renewed debate on taxation of idle land.Administering a tax on idle land effectively and equitably requires three elements: a cadastre of the size,value, ownership status and productive capacity; an updated property tax law; and an efficient taxadministration (Binswager, 1993). However, defining idle land and building-up an efficient taxadministration are difficult tasks to be achieved in practice, and there is no international evidence thatimposing a tax on idle land changes the relative return on alternative uses of a given land parcel (Dillinger,1992). Not only are all three elements absent in Guatemala, but relying on land tax to transform theagrarian structure could be criticized on at least two grounds. On the one hand, it would not necessarilyalter the unequal distribution of wealth. On the other hand, it is not clear why markets should emergewhere they had previously failed. Introducing a tax on idle land is meant to create an incentive forlandowners to eliminate it and thus avoid the tax, but under the present conditions governing the IUSI tax,its administrative costs are high. Besides, INTA has the legal authority to tax the so-called idle land but,short of human and financial resources, has not enforced it.

3.25 Improving land taxation requires considerable retooling and has a low potential for improvingmunicipal finances. The current IUSI tax system has several shortcomings (paras. 2.39-2.41) andcompares unfavorably to a territorial tax as a mean for taxing all land: idle or productive, small, mediumor large. Besides, the current personalized nature of the IUSI is incompatible with the aim ofdecentralization, as many owners have properties in different municipalities. When properly designed, aterritorial tax, instead, does not create disincentives to production or investment. In the medium term, if thecadastre is realized, the territorial tax could be designed to provide incentives for land transfers. Somerecommendations to its functioning are:=> It would require designing an adequate land classification by zones. Zoning should consider regional

differences and be linked to completion of the national cadastre survey. For ease of administration,the fewer the land types recognized the better.

36 Chapter III

=> Specific rates per unit of land area should be based on a simple system of land classification thatrecognizes a few categories of land, e.g., pasture, forest, permanent crops, with lower rates applied formore productive zones -excepting forest, which would promote a more efficient use of the land.

=> Tax collection should be carried out in a decentralized fashion at the municipal level. Periodicinvestigations of use on land classified as forest and verification of tax parcels would only be requiredfrom time to time.

=> Tax revenues should preferentially be used locally for recurrent expenditures, not for investments.

C. Agricultural Credit Box m13 When Land isUsed as a Loan Collateral

3.26 In Guatemala, it has long been recognized that Land is ideally suited to serve as loan collateral. Itthe functioning of agricultural credit markets is has value not only because it is a productive asset, but.determinant to agricultural growth, income distribution also because ownership confers access to credit. It can

exceed its value as factor of production and profitablyand rural poverty, and that land used as collateral serve as collateral for the loan used to finance itsgreatly increases access to bank loans by those who acquisition. Strochlic (1994) reports an example for.own it (Box 111.3). Unfortunately, relevant Guatemala.international evidence suggests that agriculturalentrepreneurs have only limited access to financial farm's colonos, but the t dansfer wasnot recorded in theservices, and that agricultural financial markets are property registry. The heirs of the original ownereither not competitive or highly inefficient: while the became aware that they would be the legally recognizedsupply of formal financial services is limited, some owners, and while they were not iiterested ininformal lenders charge non-competitive risk adjusted reclaiming the land due to its poor quality, they were

interested in maintaining possession of the title, whichrates. Aggregate fairness of credit distribution is also they can use as collateral for other loans."questionable. Past government intervention alsocontributed to create distortions and increase financial in 1990, 27.5 percent of private bank loans tocosts. Government participation can improve agricultural borrowers were guaranteed by a mortgageperformance of agricultural credit markets, but it has to on real property and a further 8.6 percent in part by a

mortgage. For public banks, the figures were 24.5be mainly focused on increasing the outreach and percent by mortgage and a futher 20 percent inTpart bysustainability of formal intermediaries in rural areas, a mortgage (Vogel et al;, 1990).properly designed and implemented. Otherwise, itwould probably be worse than no intervention at all, because any potential improvements in efficiency maybe eroded by the significant administrative costs and moral hazard that tend to characterize governmentinterventions.

3.27 In the last decade, the flow of resources channeled by the formal financial system to theagricultural sector declined in real terms and relative to other economic sectors (Rioseco, 1995). In realterms, formal financing to the agricultural sector halved from Q.1061 million in 1984-86 to Q.515 millionin 1993. In 1994, it recovered slightlyto Q.787 million, due to the activity ofth comm eil, banks and financi Table 111.3 Formal Financial System: Financing the AgriculturalfRural Sectorthe commercial banks and finanicalcompanies (Table 1I1.3). (Millions of 1994 Quetzals)

3.28 The fall in agricultural lending = 948 l9 9 t~l 192*~ provided by the formal financial Commnercial Banks 767 436 279 356 445 276 437

system has been offset by the Financial Companies 58 36 107 81 133 81 227poieato of sem-frma an BANDESA 236 270 230 211 275 158 123

informal lending. The reduction in Total 1061 742 616 648 853 515 787

formal credit between 1984-94 (Q.271 Source: Rioseco (1995).million) was compensated by increased

Agrarian Issues 37

lending from the semi-formal financial system (Q.279 million) (Rioseco, 1995). The most importantintermediaries of the semi-formal financial system are: savings and loan cooperatives, a selected number ofagricultural cooperatives, NGOs and commercial organizations actively engaged in marketing in the ruralareas. Financial services provided by these non-formal agencies have also expanded rapidly and, moreimportantly, reached a higher number of beneficiaries. In 1994, whereas commercial banks and the statebank BANDESA constituted the most important source of loans for the rural population (Q.560 million for9,665 beneficiaries); the semiformal financial system placed Q.279 million, but covering five times morebeneficiaries (52,700).

3.29 Formal credit to the agricultural sector seems to beskewed in favor of large farmers and export activities. On g m Connmerciall3anks andu ANDESA

the one hand, in 1992-94, approximately 90 percent of ComparativeILndirgStmiture(°/i

commercial bank lending resources were channeled sAsAthrough large loans averaging US$125,000 and captured _ AA0bv 38 percent of beneficiaries. Converselv, less than Ipercent of the same lending resources were allocated tosmall loans averaging less than US$1,372 and received bv8 percent of beneficiaries (Figure 11I.2). On the other BANDESA _ Ihand, barely about 14 percent of agricultural credit .allocated went toward basic grains production, the main CournBank BLw1m Qso a

activity of most small farmers, compared to 73 percent for L ess=lvnIQ.

predominantly large farmers in coffee, cattle, poultry, 0 20 40 60 80 100

swine, sugar and cotton production (Rioseco, 1995)., ~~~~~~~~~~~~~~~~~~~~Sxrce: Superire~a deEbco

3.30 BANDESA, the agriculture state bank that has the legal mandate to mobilize savings of and deliveragricultural credit to small farmers, also has offered small farmers limited access to credit. Between 1992and 1994, although 80 percent of the loans approved by BANDESA were less than Q.10,000, theyrepresented only 37 percent of its total lending. After implementing a comprehensive restructuring plan,BANDESA is in the process of simultaneously being liquidated and transforned into a second-tier windowcalled BANRURAL, whose organizational design and ensuing sustainability is presently under review (Box111.4).

3.31 Access of small farmersto the formal financial system is Table 111.4 Formal and Senid-Formal Finaneial Systems

restricted due to their: (i) low (Passive and active interest rates)

incomes and savings; (ii) lack of V ........... ....... ...... .. A i• s'aea Chek SAVVIa fa :i.~

collateral and credit history Commercal -ani. . . ~~~~Commercial Banks

records; (ill) relatively small Average 17.5 25.6 1.9 - 4.1 3.1 - 9.2 4.6 -17.0

amounts of resources demanded; BANDESAa) Own funds 26.0 - 5.3 5.3

(lv) high information and b) Fideicomiso 21.0 - - -

transaction costs for banks in Non-FormalCooperativesh 22.0 - 26.0 9.0 15.6

dealing with large numbers of Genesis Empresarial 30.0 - -

small borrowers; (v) significant FUNDAP 33.0physical distance from the bPeriod December 23-29, 1994physical ditnefo h Year 1994.

banking agencies; (vi) lack of Source: Superintendencia de Bancos.

efficient legal and commercialmechanisms to resolve conflicts and enforce contracts; and (vii) wide presence of ethnic (more than 28languages) and illiteracv barriers. Private banks are understandably reluctant to enter into a long-term

38 Chapter III

creditor relationship if they anticipate that repossession in the event of default will become politicized andimpossible. A debtor with the same expectations has an incentive to default.

3.32 The financial activities of non-formal intermediaries are heterogeneous but not necessarily moreexpensive-they charge similar interest rates (risk adjusted) than the formal financial system (Table 111.4).There is no single model of non-formal financial intermediation, but a wide set of alternatives. Theevidence in Latin America suggests that their impact has been mixed. Sustainability has been a problemand some have caused significant losses to poor depositors, although some of them provide access to asignificant number of beneficiaries. They utilize a wide range of savings schemes on a group or individualbasis and their target populations vary according to their institutional design. Also, their higher operationalrisks have been partially overcome using not only traditional, but also non-traditional guarantees: fiduciary,chattels or deed-based mortgages. In theory, loan default is prevented by close interaction withcommunities and beneficiaries, social and peer pressure groups, penalties (no new loan to a group, if it hasnot repaid its prior obligation in full), and a gradual approach for lending to new borrowers. Little evidenceexists, however, to assess their loan performance.

20eFoiil 4 TheFalure andRestmctufingOf BAJDESA

.In t1he .early 1 990s, BANDESA was insolvent ad ineffcient. It had excessive operatiol costs, lowirecoveryd|. rates, aboed niuyb Ifoftfhe tMiistry of Agricuture: budget:; a did ndt channel itS resources to It Snr l 15npereent Cffits l493 19 n meats weredirected ItoUt poorer.t BANDM's poor performau -e refloeted:

1 it: i :l6ak of a dceadidefnidi . f itsi objyetvs, :especially in t oying it funetion smultaneously as:a baink n asn encyt sferrin: subized resourees(trst:tfinds) to a gh.ost clientele, l:: :r T: as i agenc

}*; La7e nl:tersalmeI 6 refttctedi fin the lak of adequate acconiin administrativepredurest aid maagal: formation system, leg to a duung lity of Lits lending, with marears at about 40 perent: of t tal ollo in

0i 1993. Only 39 out 68O agnci es iare authorized toi acept savings.* ;L*miti ois f...to..av r .forilizg resouces.*W iTShe lakof operatiil :autonomy due to (i) the absence of pro supervsion by its Board(az) Government influence,i

0:ttand (lin) a l iwube of trust thud(24) with different operational policies: : and proedure which also Mincreased itsoerain] o complexity and cis.t Althou ust fundsB were tansferredto BAESA at zero cost, the Governmenthad. to: utilie iatstafers(prtliy derived frm: proeeds of trst funds)to compensate h for theorational lossest ofmanaging thosef ffds As a result, subsidi'ed rates: of inte:estwere substantally below the marlet e.g., 10 percent.for

::: u:tf wif ds^:Vi Vt :: V :::: * lnapp ote physical linfrtructure and office technology.

Since end-I 993, aslpert of the.agripulturall reform, a decision to implement a:restruuing plan was taken. Theplan envisaidd; ttlBDESA would (i): be recaplized; (ii) improve its operational efficeny,; with no interest rateubaidies and.no f.Lher.Centa.overn:ntsubsidies; (ni) comply withBasle-typeprudential .egu1a..o.Is approved lunder

the finani'Al mdeICtion p m; c o(iv) serve 7priarily small finnes. All :ibut the atW objective uder threr..r.. .. pl: hae eei idween1992end: 1994, the reductiof intheflow of BANDESA resources to small

fiarmesfall by 47 percnt,: also more tan,halvng thei number of beneficaries from 20,200 to ,440. To modernize its:o ipea s and expandthe numbe of itsbenes, the Govermnent has now proposed the simuiltaneous liquidation ofAN eSnd th rtoofasecond-tierwidow ith the creation of BANXMMJRA.:

The New Agricultural Credit Agenda

3.33 A new and comprehensive agenda of government participation in the agricultural credit market hasto define its objectives and specify the instruments available. The objectives of Government policy shouldbe to increase the general availability in rural areas of viable, competitively priced, fair and untargeteddeposit and credit services from formal financial intermediaries. This strategy can be complemented by alimited and decentralized support to a few non-formal rural financial intermediaries.

3.34 The instruments available to the government to achieve this strategy are: (i) improvement of thebusiness environment for financial transactions; (ii) implementation of conducive policies toward the

Agrarian Issues 39

sector; and (iii) reform of the government's specialized financial intermediaries. This implies specificactions on the following areas:z enticement of commercial banks into rural areas;> reform of the legal and institutional framework for secured credit transactions;

z approval of a new regulatory framework for non-bank formal financial rural intermediaries('financieras'); and

> divestiture or reform of BANDESA and, in the former case, creation of a viable second-tier financialintermediary -BANRURAL as a separate action (Box 111.5).

BOX IlLS What to Do with BANDESA and BANRURAL

The optimal choice regarding BANDESA night be to shut it down for four reasons: its reputation has beenterminally damaged; the economic cost of closing is muiniial; the political cost of reforming it is fairly close to that ofdivesting it; and part of its functions might be assumed by a new institution: BANRURAL. BANRURAL should aim toincrease small farmers' access to rural credit, expand coverage of rural credit, facilitate institutional strengthening ofparticipatory organizations and provide valuable assistance to the development of sound rural financial systems. The workleading to the establishment of BANRURAL is proceeding, but key issues remnain unresolved, including:

= Stockholders and Capital. Initially, the Bank should have similar capital participation from the government and theprivate organizations (cooperatives and NGOs). No govermment subsidies are required to start its operations. Greaterprecision is required concerning the desirable declining public sector participation and the mechanism to designate ftemembers of the Board and its Chair, with little interference from the Goveunent -it must be autonomous and operateeffectively as a private bank. From a prudential norm point of view, comnnercial banks should be discouraged to holdequity in BANRURAL, as in other banks. When they do so, banks should deduct from their capital the full amount oftheir investments in the equity of other banks to calculate adequacy ratios, but this requires a very good supervisorycapacity that, despite recent reforms, Guatemala still lacks.C Charter. The state's initial participation in BANRTRAL should be reduced or eliminated once it has achieved its initialgoals of increasing lending to agricultural producers under a solid network of rural banking units, an appropriate legalframnework, no subsidies or government guarantees and financially sound operation results. BANRURAL's charter andlegal framnework should include provisions to make its medium-term privatization a simple task not requiring approvalby Congress.

=> Board Composition. A non proportional, borrower-controlled, board is very troubling. It implies the real risk oforganized groups attempting to capture the institution to extract private rents. (Chaves, 1996). Similar schemes havefailed in the region (e.g., Costa Rica's Banco Popular y de Desarrollo Comunal) because of the contradictory incentivesthat result from being simultaneously owner and client of the bank, and from governance rules that allocate boardcontrol in a manner which does not necessarily correspond to the shareholder's participation in equity. The dual roleallows some owners to extract rents at the expense of the intermnediary's financial health, and corporate control favorsthat the rents accrued by the owners tend to be usually larger than the losses they incur as shareholders. As a result: (i)a prohibition (or high limits) to shareholders to borrow from their banks, such as in any other private bank, should beclearly set, and (ii) proposed govemance rules by the Board should imply that profit investors should have a proportional(and not minority) control of the Board.

=> Financial Policies. The Bank must fully comply with current prudential norms of the Bank Supervisory authority andapply market interest rates. No subsidies should be allowed and the previous dichotomy inherited from BANDESAoperations should also be eliminated, including the present consolidation of trust funds in a special fund, hence,elimrinating the distinction between "bank funds" and "trust finds".

> First and Second Tier Operations. Clientele and, to a lesser extent, interest rates would constitute the centraldifference. Only group lenders would have access to the second-tier window. A guarantee scheme should be clearly setfor second-tier operations.

= Benefciaries. Lending ta large borrowers has to be discouraged as the Bank will concentrate on small and mediumsized farners. This imnplies not only operational definitions of large, medium and small farmers and an objective systemto follow-up and monitor its performance with Tespect to its clientele, but the design of credit services unattractive tolarge borrowers (e.g., comparatively high interest rates or limits on the amount of credit).

3.35 Commercial banks are rapidly expanding lending to the main urban centers outside the Departmentof Guatemala. Two out of 4 new banks created in 1993-94 have their headquarters outside GuatemalaCity. Five other banks are also actively expanding their rural operations. This is partly a result of

40 Chapter III

liberalization policies, which have removed distortions and constraints to agricultural credit. Much,however, remains to be done to improve access of small farmers to financial resources. Governmentparticipation should focus on removing non-financial constraints that should result in improved incentivesfor expanding commercial bank lending to rural entrepreneurs. Self sustainable provision of financialservices should follow pilot business practices aimed to overcome the twin traditional opposing arguments:large fixed and asymmetry of information costs (Chaves, 1996), including:=> Following the successful experience of Indonesia and the Philippines, explore the possibility of

promoting the creation of small financial intermediaries, with lower minimum capital requirementsinitially, so as to be consistent with the size of the market they will serve. These financialintermediaries would maintain stricter equity ratios than standard commercial banks.

3.36 The reform of the legal and institutional framework for secured credit transactions involvescreating an environment where property rights-including land rights-are secure, contracting is flexibleand readily enforceable, and hence financial services are able to prosper. Some possible actions are:=> In the absence of an efficient legal procedure for securing a loan by a pledge of movable goods,

fiduciary guarantees are frequently used by commercial banks and chattel or mortgage guarantees areused by BANDESA. Although a recent revision of the banking law authorizes private banks to grantcredit for up to three years without chattel or mortgage guarantees, introducing a uniform codegoverning secured transactions in movable goods (equipment, inventory, consumer goods), andpledges regardless of the nature of the collateral or the type of lender is required.

X Civil law jurisdictions and procedures have also to be reviewed Introducing a mechanism forexpeditious recovery of collateral, with a minimum of court intervention, is also a priority.

3.37 The current prudential regulatory framework for non-bank formal financial rural intermediaries isnot consistent with recent provisions approved for banks under the financial reform, despite the fact thatonly two out of fourteen finance companies operate "independently", i.e. are not connected to commercialbanks (Annex 3). Finance companies are subject to different prudential regulations regarding: capitalrequirements, requirements of loan classification and performance standards, loan-loss reserves, etc.Completion of financial reform requires:

> a specific regulatoryframeworkforfinancial companies; and=> a financial holding law, which updates prudential regulations on a consolidated basis.

TECHNICAL ANNEXES

Annex 1

Stabilization, Structural Adjustment and Credibility

In the 1990s, the move to fiscal and monetary targets-some of them under IMF arrangements(Table Al. lI-and to structural adjustment programs (Box Al. l-such as the Economic ModernizationLoan (EML) with the World Bank and the Financial Reform Loan with the IDB-may be viewed asattempts by authorities to resolve a credibility problem. Have these arrangements helped them to establishcredibility? In answering the question, a first step is to analyze the continuity of IMF arrangements; asecond step is to examine performance under the economic programs, and a third step is to examine thepattem of credibility.

Concerning the first issue, during the 1980s, with only two exceptions, the IMF had no programswith Guatemala, and this certainly was a serious obstacle to establishing credibility. Since end-1992,Guatemalan authorities have been successful in signing 3 successive IMF arrangements. Performance,however, was quite another story and had only limited success.

Table A1.1 Summary of Economic Stabilization Policies 1990-95

1990 Cerezo Terms of trade Several exchange Combined public sector Negative real interest rates. Balance of payenGovernment. deterioratiom rate experiments. deficit at 4.2% of GDP. Significart credit expansionL crisis and

Arears to multilateral Interest rate ceilings hyperinflationl____________ |institutions. eliminated, episode.

1991-92 Serrano Strong capital Daily auction Fiscal anmesty in 1991. Credit tightened up to mid- Strong stabilizationGovernment inflows. floating band. Tax reform in 1992 1992. Intensive use of open program in 1991.

leading to a zero market operations. Real IMF Stand-By wascombined public sector interest rates became positive approved indeficit in this year. by end-1991. December 992 and

internupted in early._______________ . _ _ _ _ _ _ _ _ _ _ _ _ _ _ ._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ .____________________ l 1__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 19 9 3 .

1993-94 De Le6n Serrano's auto- Daily auction Combined fiscal deficit Credit tightened until mid- IMF ShadowGovernment. coup in June floating band with a deteriorating again to 1994 and expansionary Program approved

1993. Strong de facto quasi-fixed 2.7% of GDP in 1994 as thereafler. Reduced stock of in March 1994.capital inflows exchange rate. a consequence of open market paper and Fiscal targets off-up to mid-1994. aborted April tax reform increased use of reserve track in thirdPublic attempt New tax reform requirements. Real interest quater.referendum in is approved in rates deeply declined by end-

______________ January 1994. ___ November 1994. year. l

1994-95 De L'en Boom in coffee Managed float with a Deficit declined to 1.3% Expansionary credit policy IMF ShadowGovernment. prices, the de facto quasi-fixed in 1995. New tax reform until the first quarter and then Program approved

Mexico crisis and exchange rate. is ratified in April. tightened. Reduced stock of in May 1995.reversal of open market paper and Monetary andcapital inflows. increased use of reserve reserve targets of the

requirements. Rise in real Program off-track_______ _______ ________ __________ interest rates. in iV Sg=ne _j

Stabilization Performance

To answer if targets under economic programs have been credible requires empirical methods. Twoindexes for measuring credibility are: average credibility and marginal credibility. Average credibility(AC) is the percent root mean square of error between the monetary or fiscal target announcement and itsrealization. Marginal credibility (MC) is the extent (weight) to which a unit change in the policy target

Al.2

announcement affects the public's expectation (Weber, 1991).' The value of the weight (a) oscillatesbetween 0 and 1, depending on the increasing likelihood of reaching the policy announcement. A fullycredible policy has an estimated a equal to 1. Similarly, if estimated a approaches zero, the policyannouncement is not credible.

We applied those measures to six monetary and fiscal targets set under the Government's economicprograms agreed or not with the IMF-Stand-by or Shadow arrangements-during the last fifteen yearsand the results for AC were the following (Figure A1 .1):

* During the overall 1981-1994 period, most macro targets had no credibility. All but one AC ratio wasabove 50 percent. The only target

Box A1I.1 Guatemala. Main Structural Reforms in the 1990s enjoying a satisfactory degree ofcredibility was the one on Central

Sh:if: :t Trade and Exchange late lberahzatinn. 0 i Government current expenditure (ge);+: sSliiftoamanaged exchange rate regime, w

Tanff reduction toa 5-20pecentrange. which reflects the continuing and effective* Phasing-out ofnost non-tariff barriers. use of strict controls on fiscal spending4 Ratification of membership to the World Trade OrEanization. for stabilization purposes.4 El:imiition of domestic price controls and INDECA'sintervention. * Nevertheless in the 1990s after the

tinhe domestic basic grains marketi0* Pi t Sband for a few agricultural commoditiesg ased onaa system of economic crsis ofthe 1980s was over and

vaiable levies. successive, albeit interrupted, stabilization* Dere glation of petroleum pnces. attempts took place, economic recovery

brought an improved forecast4;; 0:im n a' interest Financial ::: :performance. The targets on net domestic

A. Einiatio ofinteegtrate. Controls.4* Prohiton ofdirectCentalBankcredit tothenonfinancial public assets (nda), international reserves (nfa),

sector. inflation rates (p), and economic growth* Modification of key prudential regulationslregarding market entry, (y) enhanced their credibility significantly

C:itanl :adequacy, loan classificatiors, minimum liquidity with AC below 10 percent. Such positiverequirements, rollover practices, accounting standards and exteal results are evidence of a return of privateaudits.

* REsCtrutring or liquidation of all staX . : ;:l i: isector confidence and underscores the* Strenrgt and reorganization jof the bank sesoy authorty need for continuity of stabilization

and implementation of an early warning system and on-site programs as fundamental for theirsurveillance practices. success.

;* Capital account partially open. *;0 ; +Despite recently improved credibility

Public Enterprise ::: in most macro targets, the Central.* Tariff adiustments and gradual:eliminalion of subsidies in *th Government's fiscal deficit (fd) remains,

electricity sector..: however, with the worst credibility record.* Submission of new legislation supporting private sector Given the contrasting positive results on

participation and demonopolization in the electricity sector. :E : :: E ~~~~~~~~fiscal spending shown above, this IS* FEGUA's.pnivatization attempts. .* iEGUA's pri:at-:ation attempts. clearly due to poor tax revenue

Social Sectors performance arising from deficient tax* icreased social investment for targeted primary education, administration and political events; which

primary health care and scial funds, Dled to the suspension and delay of the4 Prohibition to transfer funds from:primary health care to hospitals. 1992 and 1994 tax reforms* New accounting and auditing procedures for telargest hospitals.

Define root mean-square error (rms)= (l T) (x' - Ex IQ ) where Xta is the monetary/fiscal target announcementt t I

and Ex1 0t is the public's rational expectation approached by an autoregressive process-AR(x)- usually of order 1,

AR( I). Average credibility has also been approached by a mean absolute error. Marginal credibility is measured by the a

parameter estimated in a least-squares regression: xt - Ex,It = c + a(x - Ex IQ ), where c is a constant termand I o

and xt are observable policy outcomes.

A1.3

100 Fieure A1.1 Average Credibilitv Flgure A1.2 Marginal Credibility, 1981-94

fd 1.00

D 0........Tg ..................00 . --- 80-

0.80

~~~~~ 60 ~~~~~~~~~~~~~ge

C 20 - + , / ; Y nda nf. 0.20 y0 I I I *I * 0.400

0 20 40 60 80 100 0 .0 0 20 0.40 0.60 0.80 1.00

Average Credibility, 1981-94 Evaluates the penod 1992.4-1995.2.

The evidence from the analysis of AC is consistent with MC results for the 1981-94 period (FigureAl .2). A natural benchmark for judging MC is 0.5. Below that level, announcements have little impact onthe public's expectations.

* The credibility of a fiscal deficit commitments is nil: its ca is close to 0. Combining this result with ahighly credible a (close to 0.8) for fiscal spending, suggests that targeting fiscal expenditures is anecessary, but not sufficient, condition to a good performance in targeting the fiscal deficit.* There is a sharp contrast between the high credibility of pre-committed price level targeting, whose a isclose to 0.9, to the low credibility of the economic growth target whose a is close to 0. Predictable, thelatter result is associated to the economic crisis of the 1980s, while the former result indicates that theAuthorities had some success with their key anti-inflationary goals.* The performance of net domestic assets and net international reserves targets is average: their as areclose to 0.5.

The Pattern of Credibility

Guatemala is a country building policy credibility. How has credibility evolved recently? HaveIMF arrangements been helpful to establish credibility? To examine recent trends in policy credibilityrequires, first, to define a policy credibility variable and, second, to examine its pattern. After exploringseveral alternatives (Agenor and Taylor, 1994), we chose the approach introduced by Rodriguez (1994)and applied by Lachler (1995). First, we decomposed either the lending spread between dollar-equivalentlending and borrowing domestic interest rates, and the borrowing spread between dollar-equivalentdomestic and US interest rates. Then, thanks to the coexistence in Guatemala of Quetzal deposits withdollar-denominated deposits in off-shore banks created by Guatemalan commercial banks, we decomposedthe borrowing spread into two source of risk: (i) country risk, measured by the spread between off-shoreand US T-bills, and (ii) credibility risk, that is the spread between dollar-equivalent Quetzal deposits andoff-shore deposits, reflecting the difference between expected and actual devaluation. The latter variable isa straightforward measure of the market's credibility in the stabilization program. Most results are self-explanatory, as follows (Table Al.2 and Figure A1.3):

Al.4

+ Credibility matters. Overall, it is the pattem of credibility risk (and not country risk) which determinesthe borrowing spread;

* Political events do explainmajor shifts in credibility. Figure Al.3 Borrowing Spread and Credibility Risk, 1990-95

Following the failure of 12_0

forner President Cerezo's 120BorroweSprea

exchange rate experiences 10.0 . ... .. . .of 1990, credibility in the 8.0 .. .... ..... ....

Serrano Government 6.0 - '

program lasted almost 8 4.0 ....Qua-fued''' Ci.i. ... .

months to get off the20ground, and kept improving o.o Shmnss Stand!Byuntil mid-1992, when 2. Pr Sgnedunt'i m'd when -2.0 ~~~' Auticn XR Tax Refonn Shadow Progrun\ macroeconomic imbalances -4.0 - ENnienb -Off-trek-started to accumulate and -6.0

credibility worsened again. t N, D,

In 1993, President a, > a, a 0

Serrano's auto-coup attempt Sources: Bank of Guatemala and staff estimates * Iraeas neans decbning credibility

increased the risk ofeconomic destabilization. Credibility risk significantly decreased after the referendum of January 1994and kept falling up to September 1994, when the IMF shadow program got off-track. Then, in 1995,particularly after the ratification of the tax reform by Congress in April, credibility in theGovernment's program improved again;

* IMF arrangements or tax reforms do not appear to be a significant factor in explaining major shiftsin credibility trends, but their role seems rather important in sustaining previous trends towardenhanced credibility. In addition, credibility is negatively affected by the market's awareness that theIMF program gets off-track; and

+ As stabilization grounded and credibility risk diminished, the borrowing spread became a decreasinglyless important component than the lending spread in detennining the lending rate (Table 1.5). Hence,operational costs suchas reserve Table A1.2 Main Determinnts of the Interest Rate In Guatemala

requirements, bank | uding Lending Borrowing Borrowing Borrowin S read

administrative costs Year Rate ed Rate Spread CrCe Risk' T-Bill |1990 19.80 6.58 13.22 5.71 -2.46 8.17 7.51and the customer's 1991 23.84 8.48 15.36 9.95 1.44 8.51 5.41

qualification spread, 1992 19.49 9.08 10.41 6.95 -0.21 7.16 3.46have become the most 1993 24.58 11.83 12.75 9.73 2.34 7.39 3.02

1994 22.67 13.04 9.64 5.37 -0.89 6.26 4.27relevant factors at 1995' 20.69 12.97 7.72 2.02 -4.17 6.19 5.70

determining the lending Source: Bank of Guatemala and staff estimates.

rate for Quetzal 'Up to June 1995 only. bMeasure of credibility in the econ.prog. 'Country risk

operations.

Annex 2

Constraints of Non- Traditional Exporters,A Summary of Survey Results

Introduction

This Annex describes the characteristics and problems of the Guatemalan non-traditional exportsector, based on the results of a private sector survey of non-traditional exporters in four key exportsectors. The survey was carried out as background to the Country Economic Memorandum. I

Non-Traditional Exports: Background

Given the limnited size of the domestic economy and the maturity of the traditional export sector,much of Guatemala's future economic growth must come from non-traditional exports. Outside of themaquiladora sector, which is primarily engaged in the assembly of clothing using imported materials, themajority of value added in the sector is domestic. A recent USAID study2 estimates that domestic contentaccounts for 77% of value added in integrated manufacturing and 21% in the maquiladora sector; andwhile no global figure for value added is available in agriculture, sub-sectoral figures suggest that at least80% of value added is domestic. Domestic labor alone accounts for over 34% of valued added in theagricultural sector and 27% of value added in manufacturing. The USAID study also found a high degreeof Guatemalan ownership outside of the maquiladora sector.

The non-traditional export sector has rapidly expanded in the last five years. As a result, non-traditional exports grew at an average rate of 14 percent a year during 1990-94, which raised their share intotal merchandise and non-factor service exports from 47 to 58 percent. Improved export diversificationhas reduced somewhat vulnerability to unfavorable external trade shocks and helped to increase opennessof Guatemalan export industries. Non-traditional exports are mainly destined to the Central AmericanCommon Market, which has recovered in the 1990s, and the United States. The main products arechemicals, food products, clothing, fruit and vegetables, flowers, and fish and seafood.

Sample Characteristics

The survey of Guatemalan exporters was carried out in June-August, 1995 by IDC3 for the WorldBank. The sample pool was derived from the membership of an exporting industry association,GEXPRONT, which represents approximately 75% of all exporting enterprises. Most non-traditionalexporters that do not belong to GEXPRONT are believed to be small and to export only sporadically.

The samnple was stratified by size of enterprise exports and by major sectors of production. Thesize categories were: small-annual exports of less than Q.1.2 million ($205,000); medium-Q.1.2-10million ($1.7 million); and large-over Q.10 million. The sample was originally intended to encompass200 firms, but problems with enterprise response rates and a tight time schedule forced a reduction of thesample to 152 firms. The sample covered four non-traditional export sectors: agriculture, aquaculture(hydrobiologic), garments and manufacturing. This sample is estimated to cover more than one third of thetotal membership of GEXPRONT.

I The survey results were issued as part of the Department'st Economnic Notes series (Note No. 3; January 1996).2The report prepared by Coopers and Lybrand for USAID/Guatemala is entitled: Estudio del Valor Agregado para GruposSelectos de Productos en el Sector Exportador No Tradicional Guatemalteco (September 1993).3The survey was carried out as a joint effort between the Bank, IDC and GEXPRONT. IDC (Corporacion de Inversiones yDesarrollo) is a recently created Guatemalan think-tank. The survey was also advised by Margarita de Sanfeliui.

A2.2

Firm Characteristics. The firms in the sample can be characterized by their ownership, age,export experience, and labor force (Figure A2.1 and Table A2. 1). The average age of enterprises was 14

years, but just over half started their operations in theFigure A2.1 Guatemala Sample last 10 years. Firms in manufacturing were, or

by Size and Sector average, the oldest at 21 years, while firms in thegarment sector were the youngest at just 11 years.The youth of this sector reflects the fact that 57%

By Size of enterprises surveyed started operations between1987 and 1989. This was in response to export

26% Small promotion policies developed under the Caribbean3% Basin Initiative (CBI) and the expansion of

commercial relations with Korea in the late 1980s.Overall, firms in the sample had been exporting anaverage of 9 years. It is significant to note,however, that manufacturers began exporting onlyafter an average of 11I years in operation, while

Medium agricultural firms began exporting an average of 241% years after start up.

1 _ __ lFirms in the sample employed an averageBy Sector of 353 workers, of which 78% were pernanent

| anu- cAqua- Agricul- and 22% temporary. Casual laborers were mostManu- culture ture common in the agricultural sector, where only

facturing 5% 36% 50% of employees were permanent. This contrasts1 26% :.:.s:.:.:.: sharply with the garment and manufacturing

sectors, where 91% of employees were permanent.Agricultural firms reported generating totalemployment of some 1,500 per firm, when workersinvolved in production of their inputs were

Clothing included. All the firms in the sample were33% l formally registered. 89% were registered as

sociedades an6nimas (public companies), 7% assole proprietorships, and 3% as limited liability companies. One respondent was unaware of his firm'slegal status.

Patterns of Trade The non-traditional exporters sampled are strongly linked to the US economy.and are substantial users of domestic inputs (Table A2.2). Some 57% of exports from the average firm aredestined to the US, while 45% of purchased inputs are Guatemalan (this excludes labor, so domestic valueadded is substantially higher). The agriculture sector firms in the sample make the highest use of domesticinputs and export the highest percentage of their production. Manufacturing exporters, while purchasingover half of their inputs domestically, also supply half of their production to the domestic market.Aquaculture firms, while importing nearly 69% of their inputs, export more than 84% of their production.Finally, garment sector firms, dominated by maquiladoras, import 80% of their inputs (mostly from the USand Korea), but export nearly 90% of their production.

A2.3

Table A2.1: Sample CharacteristicsChameterlutics Overall St_ o_ Suze

Average Agriculture Aquaculture Garments Manufacturing Small Mediu Large

YearsinOperation 14.3 12.5 14.5 11.0 20.9 10.4 14.9 18.5%started since 1985 53.6 46.3 50.0 75.5 37.5 62.0 56.5 38.5Years of Exporting 9.3 10.6 11.0 7.1 10.0 6.7 8.5 13.8%Exporting since 1985 65.8 54.5 75.0 87.8 52.5 80.0 66.7 46.2Avg. No. of Employeesofwhich: 353 300 237 535 226 121 242 830% Permanent 77.8 49.3 71.3 91.0 91.6 81.8 76.9 77.2%Temporary 22.4 50.7 28.7 9.0 8.4 18.2 23.1 22.8

Table A2.2: Destination of Production and Origin of Inputs (in %)Overal Sector SizeAverage Agriculture Aquaculture Garmnents Manufacturing Small Medium Large

Destination of Production-Guatemala 20.5 8.7 15.6 10.3 50.0 28.5 17.8 14.6-Central America 7.0 3.6 0.6 3.1 17.6 5.4 8.2 7.1-United States 57.4 57.1 76.9 82.8 22.6 52.3 56.7 64.9-Mexico 1.0 1.1 0.0 0.3 2.1 0.2 1.6 1.2-Other 14.1 29.6 6.9 3.5 7.7 13.5 15.8 12.2

Origin of Inputs-Guatemala 45.3 68.0 31.5 18.9 50.2 56.9 78.8 22.5-Central America 2.0 2.5 3.8 1.4 2.4 2.4 5.1 0.4-United States 32.3 19.9 28.5 55.2 27.6 27.6 71.8 17.4-Mexico 3.5 3.4 0.0 2.1 3.6 3.6 3.2 3.5-Other 16.9 6.1 36.3 22.4 13.9 13.9 38.0 9.2% Duties (over CIF costs) 10.0 8.3 11.8 8.5 13.0 10.8 9.9 9.3No. of Days to claim MerchandisefromCustomrs 10.6 12.7 18.8 8.0 10.0 13.0 10.4 8.8

Overview of Results

The top-ranked constraints identified by the exporters sampled are problems of security,economic policy uncertainty, political instability and Government regulations (Table A2.3). Thehighest-ranking constraints for many other countries-high taxes and high interest rates-wereonly moderately constraining to Guatemalan exporters. In certain areas outside of GuatemalaCity, infrastructure limitations also represent important constraints.

Table A2.3 Overall Constraints by Size and Sector(On a scale of I to 5, 1 indicating no constraint and 5 the most severe constraint)

Constraints Sector SizeAgriculture Aquaculture Garments Manufacturing Small Medium Large Overall

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~~~~~~~~~~~Avg.Security 3.53 3.75 3.16 3.27 3.28 3.27 3.59 3.36Economic Policy Uncertainty 3.27 3.38 3.46 3.24 3.30 3.34 3.36 3.33Political Instability 3.22 3.00 3.41 3.21 3.46 3.22 3.08 3.27Government Regulations 3.15 4.00 3.27 3.24 3.12 3.29 3.39 3.26Level ofExchange Rate 2.93 2.75 3.06 3.03 2.94 2.92 3.17 2.99Inefficiency ofthe Judicial System 2.76 3.00 3.16 2.81 2.80 2.89 3.14 2.92Inflation 2.94 2.13 2.83 3.11 3.08 2.82 2.80 2.90Exchange Rate Fluctuations 2.69 2.88 2.96 3.03 2.81 2.94 2.83 2.87Interest Rate (level and fluctuation) 2.95 3.00 2.78 2.78 2.76 3.00 2.71 2.85Taxes 3.04 3.13 2.52 2.89 2.84 2.79 2.92 2.84Infrastructure 2.87 3.13 2.47 2.55 2.50 2.49 3.22 2.67AccesstoFinance 2.15 2.50 2.37 2.16 2.42 2.25 1.97 2.24Sales 2.05 1.75 2.38 2.38 2.37 2.17 2.11 2.22TechnologyandProduction 2.15 2.50 2.22 2.24 2.52 2.08 2.03 2.21Labor 1.91 2.13 2.39 1.97 1.98 2.14 2.17 2.09Acquiring Inputs 1.98 1.50 1.67 2.43 2.29 1.84 1.75 1.97LackofBusiness Services 1.73 1.63 1.92 2.19 1.96 1.81 1.97 1.90Bauc: AllEnte dues 55 8 49 40 50 63 39 152

* Security: Over half of respondents were victims of merchandise robbery in the last two years, mostcommonly during transit of goods.

A2.4

* Economic Policy Uncertainty: Non-traditional exporters found macroeconomic policy uncertainty asa leading constraint. This is also reflected by their concerns over inflation and the level of andfluctuations in the exchange rate.

* Political Instability: Guatemala's political stability was clouded by two issues at the time of thesurvey. First, the peace negotiations between the Govermment and the URNG (Unidad RevolucionariaNacional Guatemalteca) raised hopes for greater security and stability in the future, but their outcomewas uncertain. Second, national elections were upcoming, and the outcome, along with the economicprogram of the new Administration, remained uncertain

* Government Regulations: Managers spend an average of 12% of their time dealing with governmentregulations and, among the group of exporters in this sample, find customs and other import-relatedregulations the most difficult. Customs service isregarded as very slow and disreputable. Export Figure A2 .2 Time Costs of Regulatory Compliancepermits and start-up registration, while not (Average % Management)

considered constraining, are quite time-consuming.Respondents found taxes to be surprisinglyacceptable (relative to many other countries), due Br..l . . . .. .. ..

to a host of tax incentives offercd to non-traditional Uganda . . . .....Cuate ml. ... .. .i . . ..

exporters.* Infrastructure: Although infrastructure overall is Ueug.:

perceived as only a moderate problem, the postal0% 5 10 1 5 20% 25% 30%

service and roads are seen as major constraints,telecommunications and power supply problemsare moderately constraining, especially forproducers located in rural areas.

* Human Resources: Respondents see the quality of human resources as their leading labor constraijtand perceive a need for greater training of operational staff.

* Competitiveness and Trade Agreements: How do exporting firms perceive trade agreements? In thecase of Central American regional integration, most firms (62%) feel it will not influence them,although most manufacturing firms expected to benefit. A majority of firms expect GATT will have noeffect on them, although 40% (led by gaiment firms) see it as beneficial. Finally, NAFTA is mostfa; .iabiy regarded by the exportcrs surveyed, with 50% finding it beneficial.

Major Constraints

At the outset of the questionnaire, sectoral firms were asked their leading problem in doingbusiness. Agricultural and aquaculture firms most commonly cited infrastructure as a constraint, while thegarment sector was more likely than others to cite problems with customs and personnel. However, each ofthese constraints (other than competition, which is generally positive for the overall economy) were offeredwith other constraints for an overall ranking at the end of the survev, and these results suggested thefollowing set of priorities.

Problems of Security. The leading constraint to Guatemalan non-traditional exporters is theproblem of security. For large exporters and for agricultural and aquaculture firms it ranks as a majorconstraint. 51% of firms report having experienced a merchandise robbery over the past two years. Theaverage estimated loss from such robberies was Q.350,000 ($59,830). As a percentage of sales, losses aregreatest for small exporters and for non-manufacturers, amounting to roughly 1.3% of turnover for allfirms, although considerably higher for those suffering major robberies.4 Most of the robberies take placeeither inside the factory (29°/o-but much more common for agricultural firms) or in transport (44°/o-but

4 Estimates are rough, because firm turnover is known only by broad category. The losses to firms as a percentage of theirsales are as follows: small exporters 5.5%, medium exporters 0.6%, large exporters 1.2%; agricultural firms 2.0%, aquaculturefirms 1.4%, garment firms 2.0%, and manufacturing firmns 0.23%.

A2.S

much more common for manufacturing firms). Due to robberies or unexplained losses (Box A2. 1), nearlya quarter of firms have lost contracts at some point. Given the pervasive threat of robbery, firms generallyinvest in security measures, spending an average of Q. 18,000 ($3,077) a month.

Economic Policy Uncertainty. The high ranking of economic policy uncertainty suggests that theGovermment's long-term commitment to macroeconomic stability and economic liberalization is not yetcertain to entrepreneurs. The constraint's ranking may also suggest that the Govemnment could do a betterjob of explaining and implementing its program of economic reforms. Clearly, the high ranking of thesefactors indicate the need to ensure investors have clear "rules of the game" in terms of economic policy (aswell as in detailed laws and regulations), particularly when competing in the international marketplace withother firms that may be facing fewer policy and economic uncertainties. Given that even the leadingconstraints in the survey were ranked only '1noderate', the moderate rankings assigned to the constraints ofinflation, exchange rate fluctuations and (within the financial arena) interest rates, each suggest that fiscaland monetary policies must continue to reduce inflationary pressure.

Box A2.1 The Tail of a Cat Burglar

The manager of a firm manufacturing leather products related an unusual story of theft. After sufferingfrequent disappearances of pieces of leather from the factory, he decided to take a series of securitymeasures. Nonetheless, the disappearances continued. One day, the plaintive wail of a cat emergedfrom a rain gutter above the factory, and the guards went up to fiee it. Tbey were greatly surprised tofind the cat was stuck because a great quantity of leather, which had been tied to its tail, had gottenstuck in the rain gutter. A clever worker had been using the cat to sneak leather out of the factory,where it was retrieved by his accomplice.

Political Instability. The third leading constraint is political instability. The high ranking ofpolitical instability appears to be primarily related to the timning of the survey, as Guatemala was preparingfor general elections (Presidential, Congressional and Municipal), and the Government was involved in adifficult and contentious peace negotiation process with the guerrilla. In addition, there were a number ofunresolved constitutional issues regarding who could run for President. All these factors, understandably,contributed to a rather volatile political environment at the time of the survey.

Government Regulations. Following close behind is the problem of government regulations(Table A2.4). Regulations in general pose a moderate constraint to non-traditional exporters, and a majorconstraint to the small number of aquaculture firms in our sample. While no particular regulation is ratedas a severe constraint, customs and other import regulations are the most difficult area, followed by taxesand tax regulations. Aside from customs and taxes, all other regulations are rated on average as no morethan a minor concern.

Table A2.4 Regulatory Constraints by Size and Sector(On a scale of 1 to 5, 1 indicating no constraint and 5 the most severe constraint)

Constraints Sector SizeAgriculture Aquaculture Garments Manufacturing Small Medium Large Overall

Customns Regulations 2.60 3.63 3.04 2.95 2.74 2.90 3.05 2.89Level of Taxes 2.78 2.00 2.26 2.76 2.34 2.63 2.77 2.57Other Import Permits 2.57 3.00 2.42 2.62 2.47 2.50 2.74 2.56Tax Regulations 2.60 2.25 2.19 2.92 2.28 2.68 2.64 2.53Labor Regulations 1.87 2.50 2.34 2.26 2.10 2.06 2.39 2.15DiscretionofFiscalAuthorities 1.96 2.50 1.85 2.59 1.96 2.12 2.34 2.12Enviromnental Regulations 2.07 3.50 1.41 1.90 1.80 1.78 2.18 1.89Other Regulations 1.78 3.00 1.69 2.06 1.74 1.91 1.97 1.87Obtaining License to Export 1.58 1.75 1.49 1.90 1.71 1.49 1.79 1.64Entry ofForeign Exchange 1.57 2.25 1.39 1.84 1.58 1.65 1.62 1.62Obtaining Export Code 1.33 1.88 1.57 1.52 1.43 1.51 1.51 1.48Base: All Enterprises 55 8 49 40 50 63 39 152

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Overall, the time costs to managers of Guatemalan exporting firms are moderate, and the costs oftheir employees' time quite minor. Respondents report that their senior management spends roughly 12%of their time on regulatory compliance activities and about 1.3% of employee time. The managementcompliance cost is higher for agricultural firms (15% of management time) and lower for garment firms(9%), while the employee compliance cost is highest for manufacturers (2.2%) and lowest for garmentfirms (0.7%/O). The cost in terms of management time, however, compares unfavorably to some LatinAmerican countries, including El Salvador and Uruguay (Figure A2.2), but this may be affected by the factthat only exporting firms were sampled. These firms are involved in obtaining export licenses, andgenerally need to rely more than other firms on importation of inputs. The firms' heavy involvement ininternational trade may bias the results of this survey when compared to more general private sectorsurveys elsewhere. Aside from direct time costs, 77% of firms use a lawyer or other professional to assistthem with taxes and regulations, spending an average of Q.4,000 per month ($684).

Customs regulations imposed a moderate constraint on the sample overall, and a major constrainton the small set of firms in aquaculture. Customs processing appears to be somewhat slow, requiring anaverage of 10.6 days from the time goods arrive until they can be claimed.5 Stories of irregularities anddelays in customs suggest considerable room for improvement (Box A2.2). The value of duty and relatedcosts as a percentage of product value (CIF) was 10%, and was surprisingly consistent across firm size,but was somewhat lower for garment and agricultural firms than for manufacturing and aquaculture firms.

Box A2.2 Dealing with Customs

One of the managers interviewed related an experience when he visited the customs authority toresolve a considerable delay in the release of his merchandise. When confronted with a series of illogicalreasons why his merchandise had not been released, the annoyed manager commented: that there was ahig hAdgree of corruption in that office. The next day, in going to collect his merchandise, he found halfof the disputed merchandise strewn in the street around the customs office, while the other half had beenst cn. :V

Obtaining export permits is not considered an obstacle, and firms report they take an average of 10 hoursto obtain (a bit less for aquaculture firns at 8 hours, more for manufacturers at 13 hours). However, onepermit is required for each shipment, so firms are obtaining an average of around 185 permits per year.

In general, taxes were rated as only a moderate constraint. Nonetheless, manufacturing firms findtax regulations moderately constraining and more constraining than other sectors. 45% of exporters feltthere are aspects of the tax code that discourage exports, and reclaiming the value added tax was cited byabout one third of firms as a disincentive. Firms reported that, in some cases, the Govunmment has takenover two years to refund export credits, creating serious problems of working capital for many companies.To a lesser extent, enterprises mentioned the high rate of the income tax as a disincentive to exports. Therate of duties affected the agricultural and manufacturing sectors more, while the bureaucratic requirementswere of more significance to aquaculture firms.

One reason taxes may not be considered the leading regulatory burden (as is common in othercountries) is that many exporters are eligible for tax benefits: 64% of the sample acknowledged receivingfiscal incentives and 60% benefit from one of the regimes under the export code. It is interesting to notethat larger exporters appear to benefit disproportionately from incentives-70% of large exportersacknowledge getting them, while only 46% of small exporters do so. More generally, tax effort inGuatemala is extremely low. During 1990-94, tax revenues as a share of GDP have averaged only 7.4percent, the lowest in the Region. This may also explain why taxes are not regarded as a major burden.

5 It is difficult to compare this particular figure to those from other country surveys, because of the focus of the sample on firmsthat routinely engage in trade, and hence may be able to negotiate customs procedures unusually well. In a general sample ofSalvadoran enterprises in 1993, the average time was 15 days.

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Of the enterprises registered under the Export Code created by Decree 29-89 (Law for theFormation and Development of Export Activities and Maquilas), 90% are registered under the regime fortemporary admission.6 Interestingly, none of the firmns are registered under the Law 65-89 dealing wvithfree trade zones, as the incentives are not sufficient to offset the high cost of investing in an installation in afree trade zone. In fact, Decree 29-89 offers the same incentives as the free zone except that there are noexchange controls and only a slightly more efficient customs service in the free zone.

In general, respondents did not find the requirements to register a new enterprise as a significantobstacle. The process took an average of 19 weeks from the time the enterprise decided to register until thetime it completed the legal process. The average cost to register was approximately Q. 10,000 ($1,710).Qualifying for benefits under the export code took firms an average of about 5 weeks-less for agriculturalfirns (3 weeks) and more for aquaculture firms (7 weeks).

Table A2.5 KeyConstraints in Several Latin American CountriesConstraints Brazil El Salvador Ecuador Guaternala Mexico Peru Uruguay

Procurement and Sales 1.6 1.8 2 1' 2.9a 32a 2.6Technology and Production 2.4b .6 2 2.2 2.49 3.2b 1.8Finance Costs 3.3 2.6 3.3 3.4 4.3 3Finance Access 1.5 2.2 2.6 2.2 2.5 3.4 1.4Regulation 3.1c 1.8 2.6 3.3 2.4 39 2.2Labor Access 1.8 2.2 2.8 2.1 2.8 2.4Business Services 1.3d 1.4 2.5 1.9 2.4d 1.5Infrastructure 2 2.2 3.2 2.7 2.8 3.1 1.8Inflation 4.4 2.5 3.9 2.9 2.2h 3.4 2.9Political Instability 4.4 2.5 3.9 3.3 3.8 3 5Judicial System 2.le 1.6 3 2.9 2.3High Level of Taxes 4.2 2.1 3.1 2.6 3.4 4 3.8Notes: Interviewees were asked to rank each item on a I to 5 scale with "I" meaning "no obstacle" and "5" meaning "very

serious obstacle. Scores based on less than five cases are in italics.

-- Information not available e Bureaucratic Proceduresa Insufficient Demand f Average of procurement and sales scoredb Access to Inputs g Lack of Industrial Spacec Tax Regulations h This figure reflects both price and politicald Lack of Skilled Technicians

Moderate Constraints

After the leading group of constraints described above, a second tier of 7 constraints follows, eachmoderately constraining but less limiting than the 4 top constraints. The macro-policy related constraintsinclude: the level and fluctuations of the exchange rate and inflation and price instability. Interestingly, thecorrelation coefficient that firms assign between the level of the exchange rate (which many regard asovervalued) and their level of imports is negative, but weak (r= -0.26). This makes sense only when oneobserves that the larger imnporters are also the larger exporters, hence what they lose on the input side ismade up when they sell their goods abroad.7 The other constraints are led by inefficiency of the judicialsystem, suggesting difficulties in enforcing contracts and resolving business disputes and "problems with

6 Under Law 29-89 a distinction is made between four different types of exporters: (i) temporary admission regime, suspendscustoms duties and VAT on raw materials, intermediate inputs and machinery and equipment used in the production orassembly of goods for exports outside the Central American Common Market, and income tax exemption on profits attributableto the export activity. used in the production; (ii) reimbursement of VAT and customs duties regime, which is similar to (i),but does not receive exemption of customs duties and VAT for machinery and equipment; (iii) export of total domestic value-added regime for firms producing exports with no imported components; and (iv) customs duties credit regime, applicable todomestic firms which sell a locally produced input which is subsequently used in an export good.7 Small exporters import an average of 71.5% of their inputs, medium exporters import 82.2% of their inputs, and largeexporters import 85.4% of their inputs.

A2.8

taxes" (discussed above), which is a favorite private sector complaint in most countries, but surprisinglylow when compared to the international rankings (Table A2.5).

Infrastructure. Overall, problems with infrastructure imposed a barely moderate constraint on thefirms in our sample, but within that overall rating, there are distinct and important problems (Table A2.6).In particular, the failure of the postal system and the state of roads impose major constraints on firmsoverall, while telecommunications and power supply difficulties are judged moderate constraints. Firmsoutside of main industrial centers face particular problems with infrastructure: agricultural andaquaculture firms ranked each of the leading infrastructure constraints as more severe than didmanufacturing and garments. Furthermore, a regional breakdown shows that problems of power,telecommunications and roads are most severe in two regions outside of Guatemala City.8

Table A2.6 Infrastructure Constraints by Size and Sector(On a scale of I to 5, 1 indicating no constraint and 5 the most severe constraint)

Constraints: Sector SizeAgriculture AMuaculture Garments Manufacturing Small Medium Large Overall

Postal System 3.67 3.88 3.50 4.26 3.70 3.75 3.92 3.78Roads 4.02 4.63 3.22 3.68 3.64 3.62 3.92 3.70Telecommunications 3.91 3.88 3.04 3.35 3.22 3.46 3.85 3.48PowerShortageandAdmninistration 3.17 3.38 3.08 3.00 3.08 3.18 3.03 3.11Voltage Fluctuations/Frequency Variation 3.02 3.25 2.67 2.80 2.68 2.89 3.05 2.86Local Road Transport 2.78 2.71 2.61 2.50 2.71 2.50 2.80 2.65Water Supply 1.89 1.88 2.43 2.48 2.28 2.05 2.41 2.22Airport/Air Freight 2.38 1.67 1.80 2.25 2.13 2.14 1.92 2.08Industrial Waste Disposal 1.82 1.75 1.90 2.25 1.94 1.92 2.03 1.95Waste WaterDisposal 1.75 2.00 1.90 2.10 1.86 1.70 2.28 1.90Ports/Sea Freight 1.95 2.33 1.72 1.97 1.63 1.83 2.22 1.89Land 1.84 2.75 1.78 1.87 1.80 1.84 2.03 1.87Intemational Road Transport 1.41 1.67 1.59 1.78 1.48 1.54 1.85 1.60Base: AllEnterprises 55 8 49 40 50 63 39 152

Postal services in Guatemala are sufficiently weak that most firms rely on private courier services.Roads appear especially problematic in rural areas, and the small subsample of aquaculture firms rankedthem as a very severe constraint. This is understandable when one considers that only 2,900 kilometers ofGuatemala's 26,000 kilometers of roads are paved. For electric power supply, 96% of firms in the samplerelied on the public utilities EEGSA or INDE. Nonetheless, to compensate for unreliable electricity supply,56% of firms own their own generator, which costs an average of Q.224,000 ($38,291) to purchase (withmuch variance) and Q.47,000 ($8,034) in annual operating costs. Generators are used more by largefirms-while 32% of small firns own them, 80% of large firms do so. Firms report losing an average of 9workdays a year to energy shortages.

Although 99% of the firms surveyed have telephones, 34% have phones only in their offices andlack phones at their site of production.9 For firms in agriculture and aquaculture, over half lack telephonesat their site of production. In addition, 77% of firms consider the number of telephone lines they haveinadequate to the communication needs of their enterprise. Firms find their phones out of service anaverage of 3.4 days per month, and report having to try an average of 3.8 times to complete a local call and2.7 times to complete an international call. Clearly, such conditions limit international competitiveness,forcing firms to rely on expensive generators and radio communications.

In transport, with the exception of roads, constraints are minor. On average, 51 % of exports areby sea, 32% by air and 17% by land. Agricultural enterprises use air and sea transport in equalproportion. On the other hand, the majority of manufacturing sector products are exported by land. This

8 These two regions are Region 11, containing Alta Verapaz and Baja Verapaz (but represented by only two firms in thesample) and Region VI, containing San Marcos, Quetzaltenango, Totonicapan, Solola, Retalhuleu, and Suchitepequez.9 Guatemala has only 98,000 telephones for a population of about 11 million.

A2.9

may in part be explained by the higher proportion of this sector's exports going to Central America(17.6%) and Mexico (2.1%).

Table A2.7 Financial Constraints by Size and Sector(On a scale of 1 to 5, 1 indicating no constraint and 5 the most severe constraint)

Sector SizeConstraints Agriculture Aguaculture Garments Manufacturing Small Medium Large Overall

Level of Interest Rate 3 53 3 13 3 11 332 3.31 3.33 3.31 3.32Frequent Changes in interst rate 3 17 2.88 2 76 2 94 2.98 2 89 3 09 2.97Short Tenrns of Loans 2 62 1 63 2 53 2 30 2 50 2 45 2.40 2.45Guaranties required by Banks or Fin. Institutions 2 25 2.25 2 46 2.00 2 24 2 31 2.18 2.26Requirmnents regrdng Deposit/Loan Track Record 1.96 163 219 2.00 1 90 2.28 1.76 2.03Requirements regardingFinancial docunents 1 89 1.88 204 161 182 195 179 1.87Lack ofConncctionswith Banks 1 87 125 204 1 76 1.86 195 1.71 186Lack of Supplier Credit 1 62 2 00 1 72 2 08 2.06 1 70 1 56 1 79LackofAccess to Non-Bank Lnvestors 1.47 1 63 1 76 1 66 1.81 1.58 1.43 1.62Base: All Enterprises 55 8 49 40 50 63 39 152

Finance. Access to finance is perceived as only a minor constraint, on average, although the leveland frequent fluctuations of interest rates are ranked as moderately constraining (Table A2.7). Firtms in theagricultural sector were especially troubled by interest rates. Firms report paying an average of 22.7% onloans in quetzals, and 9.1% on loans in dollars. For agriculture and manufacturing sector exporters, theshort maturity of loans (i.e., the lack of long-term credit) was also moderately constraining. Notsurprisingly, one of the strongest determinants of a firm's objection to high interest rates was theimportance of bank credit (both domestic and foreign) to its overall financing. The percentage of a firm'sfinance from banks is highly correlated to both the constraint score it assigns to the level of interest ratesand to the score for interest rate fluctuations. However, access to finance and especially long-term financeappears broad-some 64% of surveyed firms reported having received bank loans over the last two years.The preponderance of those loans (60%) was from I to 5 years maturity, and 18% were over 5 years.

The principal source of finance for Guatemalan enterprises, by far, is intemal. On the other hand,small exporters receive an average of 7.9% of financing from foreign banks, medium exporters 3.4% andlarge exporters 8.1%. Table A2.8 relates sources of financing to firm size in terms of employees. It showsthat reliance on commercial credit increases with firm size up to a point, but large firms are able to relymore on altemative sources of finance, including foreign banks, than can medium firms. When financing isinstead categorized by the size of a firm's exports, the only clear and consistent relationship that emerges isthat, the higher the level of a firm's exports, the more reliant it is likely to be on foreign banks for finance.

Table A2.8 Sources of Financin by SizeLocal Other Local Family Family Other

Intemal Commnercia Financial Money Foreign Friends Friends Suppliers % Enterpnses Base AllSources % I Banks % Instit. % Lenders % Banks % Local % Abroad % % Enterprises

Micro(<lOperm emnploy.) 75.00 5.00 15.00 0.00 0 00 0 00 5 00 0.00 0.00 5

Small I(between 10 and 19) 68.93 6.79 6.43 0 00 7 86 0.00 0.00 0.00 0.00 14

Medium(between 20 and 100) 73.14 8.39 1.61 017 3.39 0 68 0 34 1.69 0.59 60Large (>100) 70.63 12.25 3 72 0.15 8 05 0 55 2.62 1 88 0.15 71

Business Services. In general terms, availability of business services is perceived to be no morethan a minor constraint by any category of firms in the sample (Table A2.9). The leading constraints inthis category are lack of training services, lack of quality control and measurement services, lack ofinfornation regarding export markets, lack of information regarding availability of inputs, and lack ofadequate security services. Manufacturing firms in particular feel moderately constrained by lack ofinformation regarding export markets.

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Table A2.9 Constraints Related to Business Services by Size and Sector(On a scale of I to 5, 1 indicating no constraint and 5 the most severe constraint)

7 7TSize 7 7 | 7 T 7 XSectorConstraints Small Medium Large Agriculture Aguaculture Garments Manufacturing Oveall

LackofTrainirtgServices 2.26 2.16 2.41 2.11 2.38 2.22 2.36 2.23LackofQualityControl&Measurement 2.33 2.25 2.15 2.25 2.25 2.04 2.32 2.20LackofInfo.regardingExportMarkets 2.21 2.08 2.12 2.18 1.63 1.86 2.54 2.14Lack of Info. regarding Avail. of Inputs 2.36 2.00 1.97 2.24 1.75 1.84 2.26 2.09LackofadequateSecurityServices 1.94 2.08 2.15 2.24 2.00 1.96 1.89 2.05Lack of Data Processing Services 1.87 1.69 1.79 1.78 2.00 1.67 1.82 1.77Lack of Management Consultants 1.78 1.72 1.53 1.73 1.88 1.55 1.92 1.73LackofLegalServices 1.77 1.78 1.68 1.71 2.00 1.71 1.69 1.72LackofAccouriting& Audit Services 1.79 1.49 1.47 1.45 1.75 1.63 1.56 1.56Base: AllEnterprlses 47 61 35 55 8 49 40 152

Labor and Human Resources. Although issues of wages and labor regulations matter little tomost firms, they identify the lack of skilled labor and the low productivity of labor as moderate constraints(Table A2. 10).

Table A2.10 Labor Constraints by Size and Sector(On a scale of 1 to 5, 1 indicating no constraint and 5 the most severe constraint)

Sector . SizeConstraints Agriculture Aguaculture Garments Manufacturing Small Medium Large Overall

Lack of Skilled Labor 2.53 3.38 3 00 2.87 2.88 2.81 2.73 2.81Low Productivity 2.47 3 25 3 19 2.62 2 83 2.83 2.64 2.78High Rate of Turnover 2 11 2.88 2.92 2.57 2.61 2.52 2.42 2.53Lack of Technicians & Middle Management 2 07 3.13 2.47 2 39 2 52 2 06 2.57 2.34Seasonal Shortage of Unskilled Labor 2 16 2.25 2 79 1.84 2 08 2 46 2.28 2.29I ligh Cost of Labor 2 22 2 63 2.38 2.16 2 35 2.25 2.22 2.28Regulations on Local Labor 1 71 2.75 2 07 1 68 1 73 1.84 2.11 1.87HighRate ofAbsenteeism 1 35 1.38 260 1.62 1 73 1 95 1.72 1.82Regulation on Contracting Foreign Labor 1.24 2.88 1 83 1 59 1.28 1 72 1 83 1.61Union Restrictions 1.02 1.00 128 11 1.02 1.21 1.12 1 13Base: All Enterprises 55 8 49 40 50 63 39 152

Also, low wages may contribute to high labor tumover, most acutely felt among aquaculture andgarment firms. Aquaculture firms also find the lack of technicians and middle management to bemoderately constraining, while garment firms suffer moderately from seasonal shortages of unskilled labor.Absenteeism, estimated to be around 4% of employees per day, is not perceived to be constraining.

To counter the lack of worker skills, 85% of firms interviewed report investing in the training oftheir personnel. In general terms, firms dedicate more resources to training operational and supervisorystaff than to training their management. In all sectors, firms perceived a need for improved training in thearea of production. Firms also identified a need for training in administration and marketing.

In 75% of firms in the sample, employees belonged to no labor organization. In the case of 15% offirms, their existence of '"olidarity groups"-more common in manufacturing and aquaculture-wasfrequent. Labor unions operate in only 3% of enterprises, and in those only 32% of their employeesparticipate. Some 12% of enterprises where there is no union report there have been efforts to organizeworkers. Some 7% of firms reported having experienced a strike in the last five years. Strikes are morecommon in the garment sector, and most took place in 1995.

Competitiveness. Finally, the firms interviewed expressed a great deal of self confidence abouttheir domestic competitiveness with other Guatemalan firms, but are less confident intemationally. 51% ofsurveyed firms regard themselves as industry 'leaders" compared to their domestic competitors and afurther 30% regard themselves as 'above average" Compared to their intemational competitors, however,only 15% identify themselves as a 'leader" although 49% identify themselves as above average.Intemationally, firms are less inclined to identify themselves as leaders in the area of human resources andtechnology than in the areas of capacity and contacts. Yet there are sectoral differences as well-at thenational level, more aquaculture and manufacturing firms regard themselves as competitive (leaders or

A2. 11

above average) than firms in the agriculture and garment sectors, yet at the international level, the oppositeis true (Table A2. 11).

Table A2.11 Perception of Competitiveness in Guatemala(% of enterprises that consider themselves as leaders or average with respect to other enterprises)

Overall Sector SizeAverage Agricllture Aguaculture Garnents Manufacturing Small Medium Large

At the National Level-Globally 81 83 100 69 90 63 85 97- Human Resources 71 76 100 57 80 55 76 86-Techno°ogy 70 77 86 57 74 50 81 79-CCwrent Capacity 75 76 86 68 82 61 75 92-Contacts 84 83 100 81 87 72 89 92

At the Intemational Level- Globally 64 72 50 62 60 50 68 76- Human Resources 56 62 50 5 1 56 40 64 63-Technology 56 61 63 50 55 39 60 68-Current Capacity 58 66 50 57 51 50 59 66-Contacts 69 70 63 84 52 63 69 78

Given the increasing openness of the economy, it is reasonable to ask whether treaties and servicesdesigned to advance free trade are benefiting exporters. In general, the sample finds either no effect or apositive effect of treaties on their international competitiveness. For example, 62% of firms feel thatCentral American regional integration has no influence on them at all. Yet 75% of manufacturing firms,who are the biggest exporters in the region, feel it will have a positive impact on their internationalcompetitiveness. Other firms may simply be unaware of the potential benefits that regional integration canopen (or the competition it will create for them). GATT is seen as beneficial by 40% of firms, and only 6%regard it as detrimental to their competitiveness. Garrnent firms stand out, in that 51% find GATTbeneficial. Finally, 50% of the sampled enterprises regard NAFTA as beneficial, again led ty garmentfirms, of whom almost 60% find it positive. This is somewhat surprising given the concerns expressedthroughout Central America over the potential adverse impact of NAFTA, particularly in terms of tradeand investment diversion effects.

Future Plans. Not surprisingly, 89% of the sampled enterprises have plans to expand over thenext three years. They report investing an average of 41% of their profits into their firms. On average,firms estimate that their exports have doubled since 1991, and they expect a further growth of 65% overthe next three years. Over 70% plan to export to new markets, led by the three non-garment sectors-only42% of the garment firms surveyed plan to find new export markets.

Conclusions

To realize the potential of non-traditional exports in enriching and diversifying the Guatemalaneconomy and creating employment, the Government can directly address some of firms' leading constraints.The guiding vision should be one of creating a secure and low cost environment in which private firms canoperate. The leading constraints perceived by firms are clear, and the ability of the Government to addressthese concerns and reduce the costs of doing business is clear as well. Based on the survey, the steps tothat end are:

* Improve security. The failure to provide this public good has imposed large private costs on firms interms of losses and security measures. These concems are to some extent being addressed byGoverrment. In August 1995, after a number of appeals from businesses and the export tradeassociation GEXPRONT, the Govermment began to implement a security plan in the roads near themain ports-such efforts will need to be maintained and strengthened to effectively combat the loss ofmaterials, contracts and clients resulting from robberies. A stronger role for civilian policing may alsoemerge as a result of the continuing process of democratization and peace.

A2.12

* Increase economic policy certainty. Concerns about economic policy uncertainty can be addressedthrough a clear strategy for private sector and export development. It will be important to activelyinvolve private and export sector business groups in the development and implementation of thisstrategy. A national consensus around a non-partisan private sector development agenda to beimplemented by the next Administration would be an important achievement. In this respect,consultation mechanisms that can strengthen the private-public partnership should be strengthened. Atthe same time, the private sector needs to have a pro-active role in the negotiation and dissemination ofinternational trade agreements.

* To an important extent, short-run concerns over political instability should be ameliorated by thesuccessful conclusion of peace negotiations and democratic elections. Over the longer term, successfulimplementation of the peace accords that emerge from the peace process, as well as continuing effortsto strengthen democratic institutions and processes should considerably enhance perceptions of politicalstability.

* Government regulations clearly merit comprehensive attention, to continue simplifying andstandardizing procedures relating to trade, taxes, and licensing, and to ensure that bureaucrats chargedwith enforcement have the proper training, motivation and discipline. The customs service stands outin terms of the difficulties and delays it creates for firms. A comprehensive customs reform should bea key priority. Efforts to privatize parts of customs administration could be an important element of asound customs reform initiative.

* Macroeconomic stability, while not the leading concern, it does figure importantly in the minds ofexporters as reflected in their concern for the level of and fluctuations in the exchange rate, inflation,and interest rates-hence sound, credible and predictable macroeconomic policies remain a priority.

* And, while it was not a central focus of the survey, concern is high among investors about inefficiencyin the judicial system-quick and just resolution of conflict is vital to efficient contracting and secureinvestment, as well as to attracting foreign investors and trade partners to Guatemala.

* One constraint that should be of concem despite its modest general ranking is infrastructure, becauseof specific regional and sectoral concerns. In the case of the postal service, firms are already resortingto private substitutes, and privatization poses an inviting alternative to reforming the existing publicservice. New approaches with increased private sector participation should also be considered toimprove telephone, power and road services, particularly in underserved rural areas where non-traditional agriculture and aquaculture firms are located.

* A final constraint whose low ranking belies its future importance is the quality of the labor force:human capital will be a growing constraint as exporters seek to upgrade their technology to becomemore competitive in international markets. To be globally competitive, Guatemala will need to investconsiderably more in its education and training systems. The private sector should have the incentivesand develop the capacity to improve labor skills.

Annex 3

Financial Sector Reform1. Background

As of May 1995, the Guatemalan financial system was composed of 34 banks, 15 finance companies,15 insurance companies, 13 "companiias aflanzadoras", and 15 bonded warehouse companies. The system ispredominantly pnvately owned. There are only three state banks, one of which (BANVI) is undergoing a processof "de facto" liquidation, while the other two (BANDESA and CHN) have a combined market share of less 6% oftotal system assets. One of the state-owned banks (CHN) has "specialized sections" that operate in the areas ofinsurance, "fianzas" and bonded warehousing. There is one state-owned finance company (CORFINA), which iscurrently being liquidated. I

As of May 31 st 1995, total assets in financial institutions were distributed as follows:

Table A3.1 Guatemalan Financial System(As of May 31 st, 1995, in millions of US dollars)

Banks Finance Insurance Afianzadora Bonded TOTALcompanies companies companies warehouses

Total assets and contingencies 3,831 650 130 140 19 4,770Relative share 80% 14% 3% 3% 0% 100%As % of GDP. 30% 5% 1% 1% 0% 37%

Note: Insurance companies figures as of March 1995; afianzadora companies' as of December 1994.

In addition to these "formal" financial institutions, three types of unregulated entities operate inGuatemala: (i) securities exchange houses, whose volume of operations is difficult to estimate since thesecurities market is totally self-regulated-no specific legal framework exists as yet, much less asupervisory or regulatory authority; (ii) "financiadoras comerciales" and "credit card companies", whichspecialize in personal and retail banking and are financed primarily by banks although some are known togather funds directly from the public as well; and (iii) offshore banks owned by local bankers, whichprovide banking services in dollar-denominated instruments. The volume of assets held by unregulatedfinancial intermediaries, particularly offshore banks, has proven difficult to estimate.2 Thus, they representa financial "black box" that lies beyond the reach of both monetary policy and bank supervision.

The securities market is quite underdeveloped, serving mainly for transactions of public debtinstruments. Private variable rate instruments are almost nonexistent and fixed rate instrumentsoutstanding, issued by non-financial companies, are estimated at less than US$40-50 million, i.e., less than3% of financial intermediaries' combined loan portfolio. The Appendix describes the current situation ofthe securities market.

Last, there is the Instituto Guatemalteco de Seguridad Social (IGSS), which manages the pensionsystem primarily under a pay-as-you-go scheme and holds assets equivalent to roughly 8-9% of banks'assets (US$250 million as of December 1993).

1 As of May 1995, CORFINA's net worth was negative: -US$456 million.2 In other countries in the region it has been observed that the assets of some offshore banks are equal to, or

even greater than, those of their "local" counterparts.

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2. Recent Legal Reforms of Financial Intermediation and the Remaining Agenda

Box A3.1 Guatemala: Financial Sector Reform

Substantial and fairly irreversible (at least in the short run) reforms designed to liberalize the financial system have beeniaccomplished, and some efforts to strengthen supervision and prudential regulation have beent mdertaken.

:J*rmss servinR to liberalize the funancial sector: procedures for the creation of new banks and ifor caying out bankingmergers,0 as well as for the opening of branches and agencies of national banks and local branches of foreip banks,. havebeen simplified (LD 29-95), new banking activities and services have been introduced.(MB 752-93)1 payment of irterest ondemand deposits is now allowed (MB 500-92); financial intermediaries may invest in financial service compies and alsoin other financial intermediaries (MB 715-93); interest rate controls have been lifted (LD 29-95); reseNre requirement levelshave been reduced (MB 353-94); collateral requirements for medium-term loans have been eliminated: (LD 23-95); andleverage limits have been increased (LD 23-95 and 24-95). Also, the implicit deposit guarantee given by the authority of theMonetary Board to intervene and recapitalize banks has been eliminated (LD 23-95).

Reforms intended to promote safety and soundness of financial institutions: financial intermediaris' transactions withrelated parties, not including shareholders, have been regulated (GA 439-94); new rules on loan classification and theestablishment of loan-loss reserves on the basis of arrears have been introduced (MB 349-94 and. SA 9-94), as well asstandds for loan extensions and renewals (M1 520-92) and for the infonnation required in loan files (MB 567-92) ofborrowers whose loans are or were past-due. Also, a new accounting manual has been adopted which allows for a morerealistic presentation of problem loans and loan-loss reserves in published statistics (SA 13-94) and a registry for externalauditors has been created (MB 572-92). Finally, regulations on disclosure of interest rates and financial information havebeen implemented (MB 571-92 and MB 880-93).

Reforms in the legal framework of financial institutions' suPervision and surveillance: The Organic Law ;of Banco deGuaternala has been reformed with respect to the legal status, powers, budget and other issues: concerning the:Superintendency of Banks (LD 12-95). "Functional' independence has been granted to the Superintendency of Banks, underthe "general direction" of the Monetary Board (on which representatives of both the banking and corporate sectors sit). TheSuperintendency of Banks has the authority to issue instructions designed to stop irregular or illegal~ operations which canbe appealed before the Monetary Board; it can also request (through ithe Monetary Board) the issuance of new regulations,although it can issue by itself regulations relating to accounting rules and asset valuation methods. With the priorlapprovalof the Board, it can also issue regulations relating to disclosure of financial information and to disclosure of the cost ofcredit and other services provided by financial institutions.. Fines are imposed exclusively by the gMinistry of Economy;penal provisions contained in the Banking Law establish only fines, not prison terms, for illegal acts in financial activities.

The Superintendent of Banks is appointed to a four-year term by the Monetary Board (before the reform he was appointedby. the President) and can be removed by a 3/4 majority of the same body if he is proven to have been responsible: forfraudulent or illegal behavior. Directors, officers and employees and external auditors of financial institutions are prohibitedfrom becoming Superintendent of Banks or high-ranking officials at the Superintendency, However, financial institutions'shareholders may be appointed to the position of Superintendent or to other high-ranking positions at the Superintendencyof Banks, and the only requirement in such cases is that they must inform the Monetary Board of the fact that they ownshares in such institutions.

Since 1989, a financial sector reform program has been promoting increased competition amongfinancial institutions (in terms of both the number of participants and the scope of services offered) and theelimination of distortions with respect to price setting (interest rates) and resource allocation. Most of thesereforms have been introduced through reforms to the Banking Law and the Banco de Guatemala's OrganicLaw, as well as the Commercial and Civil Codes and others. Since 1992 the process has been supported bycomplementary efforts under an Economic Modernization Loan from the World Bank and a FinancialModernization Loan from the Inter-American Development Bank. Previously, the financial system wassubject to interest rate controls and forced lending to prescribed economic sectors, as well as complexprocedures for market entry and an implicit deposit guarantee stemming from the authority given to theMonetary Board (which acts as Banco de Guatemala's Board of Directors) to intervene and recapitalizeproblem banks. Also, financial institutions were known to be connected to agricultural, commercial andindustrial conglomerates through relations of both ownership and "direction", i.e. the determination ofbusiness policy.

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Roughly forty to fifty new regulatory measures at different levels (laws, governmental accords,resolutions of the Monetary Board and the Superintendency of Banks) were issued between 1989 and June1995. As mentioned, substantial progress has been made toward financial sector liberalization in the areasof entry, interest rates and scope of operations, as well as in leverage limits and loan collateralrequirements. Financial intermediation in foreign currency-denominated instruments (in broader terms, theopening of the capital account), was also to be addressed by the monetary authorities at the time the presentreport was being written. As part of the financial reform process, efforts intended to strengthen the areas ofprudential regulation and supervision have been made, although significant room for improvement in theseareas still remains.

2.1 Reforms Serving to Liberalize the Financial Sector: Remaining agenda

Interest rates: Loan agreements that are contracted at a variable rate leave the extent of suchvariability to the bank's discretion instead of specifying a given "reference" rate; frequently, vaguereferences are made to "market conditions". Some type of reference rate should be published periodically byeither a public or private entity in order to give both parties an objective standard for interest rate variation.Currently, borrowers are not only subject to the risks implicit in a variable rate of interest, but also to thelender's discretion as to when and how will such variability be applied. This allows for great flexibility onthe part of the bank in terms of managing its funding costs and interest income, and would even allow it to"ignore" short-term interest rate fluctuations. On the other hand, it creates a significant uncertainty on thepart of the borrower and might even, in some cases, be seen as justifying one-sided rate variability.

Liquidity management and check clearing: Even though the procedures for reserve requirementcomputation have been improved recently, wild fluctuations in the level of such deposits at Banco deGuatemala still occur. This complicates the management of monetary policy since such fluctuations must,in tum, be dealt with through open market operations. A related topic, the check clearing process, has beenunder evaluation for quite some time by the authorities, although no reforms have been made as yet. Animproved check clearing procedure and more conservative liquidity management could be attained throughthe privatization of the check clearing house (currently under Banco de Guatemala's management), withcomplementary regulations on withdrawals from reserve requirement deposit accounts 3.

Loan collateral: Collateral should be requested on the basis of the riskiness and amount of the loan,not on the basis of the term of the loan; however, recent reforms have extended to three years the maximumtern of uncollateralized loans. The soundness of financial intermediaries would be strengthened if a risk-based approach were adopted in future legislation, instead of such a term-based approach. In the meantime,the Superintendency should establish special valuation criteria for large uncollateralized medium-term, andtherefore inherently riskier, loans.

Capital adequacy: In order to bring Guatemalan norms fully into line with international standards,some adjustments might be in order with respect to the way in which certain specific transactions areweighted for capital requirement purposes (checks in the process of collection, contingent liabilities,deferred expenses and others) and also concering the way in which capital adequacy ratios are calculatedwhen banks are part of a financial group. Consolidation of financial statements may not be the best solutionfor the treatment of financial groups, in particular when different types of financial activities are beingconducted by the members of a financial group. Until a "financial holding companies" law is created,

3 Volatility of reserve requirement deposits is very high. In the month of June 1995, for example, banks'combined position went from US$-19 million (June lst) to US$47 million (June 22). These fluctuations havetwo collateral effects: (i) thev influence short-term interest rates; and (ii) increase the activity of the openmarket desk at Banco de Guatemala.

A3.4

investments made by banks in shares of other financial companies should be deducted from their ownprimary capital in order to rule out the possibility of "double leveraging".

Financial intermediation in foreign currency-denominated instruments: The Monetary Law andBanco de Guatemala's Organic Law do not allow interrnediation in foreign currency-denominatedinstruments. The Monetary Board is preparing to send to the National Assembly the respective request forlegislative action. In order to prevent distortions, it would be convenient that the same level of reserverequirements be imposed to local and foreign currency-denominated deposits.

Although this would be an important initial step in dealing with the issue of offshore banks, it isunlikely that such business will "voluntarily" shrink and eventually disappear. Two other powerfulincentives for having offshore banks will always remain: freedom from taxes and freedom from prudentialregulations (capital requirements, lending limits, reserve requirements, ef.c ). Recently, two countries havehad to deal, very differently, with the issue of offshore banks: Venezuela, where offshore deposits whererecognized and honored by the Government, as mandated by the law issued during the crisis of BancoLatino (January, 1994), and Bolivia, where owners and managers of an offshore bank have been detained atthe request of the Superintendency of Banks (August, 1995) and currently await trial on fraud charges,after its local "counterpart" bank was sold due to a liquidity crisis. These two cases exemplify the only twoalternatives that seem to exist to deal with the issue of offshore banks.

2.2 Reforms Intended to Strengthen the Soundness of Financial Institutions: Remaining Agenda

Related parties: The Banking Law does not consider bank owners to be related parties vis-a-vis thebank. It assumes that they have no influence on lending or other business decisions unless they actuallyserve as directors and/or executives. Modem banking legislation, however, generally places a limit on theamount of credit that may be extended to all related parties, particularly owners, in order to ensure thatsufficient "unencumbered" capital is available to protect depositors' funds and to serve as an incentive toapply sound banking policies and procedures.

Loan classification and the establishment of loan-loss reserves: The Banking Law does notestablish lending limits for conglomerates (only individual borrowers) or for banks' shareholders.Therefore, there is a need to systematize the different criteria that, "in the judgment of the Superintendent",would make a loan doubtful so that his staff will have clear guidelines for loan valuation, thereby reducingthe likelihood of subjective rulings being issued-or of rulings not being made at all-at the discretion ofstaff at less senior levels. As far as the general evaluation criteria are concerned, it would be advisable toestablish that all loans-and not only those that are insufficiently collateralized-should be analyzed interms of the borrower's repayment capacity.

Loan extensions and renewals: Because they establish that only loans granted to borrowers whosepayments have repeatedly been in arrears must be analyzed when an extension or renewal is granted,current regulations have hardly any impact. Repayment capacity should be analyzed in all cases.

Minimum standards for information in loan files: Information should be up to date in all loan files,and not only in the files on unsecured loans which have repeatedly been past-due, as stipulated by thecurrent regulation.

External audits: Periodic "attestation" (monitored by the Superintendency) of external auditors'reports, would shed light on the quality and thoroughness of external audits being performed.

Off-balance sheet operations: Some banks and finance companies "guarantee" a fixed return orcontinuous liquidity on certain trust accounts or "comisiones de confianza", through which the account-

A3.5

holder's funds are "invested" in loans to commercial or industrial companies. Such guarantees determinethat, instead of being a simple administrator of the funds, the bank assumes the same responsibility for thetimely return of such funds that is assumed with a regular bank deposit. For all purposes (prudential andmonetary), off-balance sheet operations with these characteristics should be treated just like regularliabilities.

2.3 Reforms of the Legal Framework of Supervision and Surveillance: Remaining Agenda

Loan portfolio information: The Superintendency does not have an information system that wouldallow it to continuously monitor the quality of the banks' loan portfolios as well as the accuracy ofclassifications issued by them and the extent of loan-loss reserves that have been established.

Authority to impose fines: The Superintendency of Banks should have the authority to imposefines to financial institutions, for violations to prudential norms, timely remittance of information, andothers. Under the current model of "functional independence", these could be appealed before the MonetaryBoard.

Independence of the Superintendency: The recent reform of the Banking Law establishing thatbank owners are no longer prohibited from becoming Superintendent of Banks or high-ranking officers atthe Superintendency creates a situation which is rather unique by international standards. Mechanisms toprevent conflicts of interest in the event that a person who owns shares in a bank is appointed to theSuperintendency would need to be devised.

3. The Impact of Financial Sector Reform

As can be seen from the material presented in the previous section, most of the legal and regulatoryreforms were implemented during the last six to twelve months. Therefore, it is still too early to see anyappreciable results. In this section we will nevertheless analyze the current situation in the financial sector andendeavor to identify, whenever possible, the impact of financial reforns.

3.1 Market Entry and Exit and Market Share

In the period from October 1990 to November 1994, fourteen new banks and ten new finance companiesstarted operations, most of them even before the introduction of regulations easing market entry. Only three banksand four finance companies were eligible to use the new procedures for easing entry approved by the MonetaryBoard in early 1994 and contained in the 1995 reform of the Banking Law. Minimum capital requirements arecurrently under review. As of May 1995, paid-in capital of two banks that opened during 1994 barely exceededUS$1.3 million, while that of the two banks which opened during 1995 is currently US$2.6 million and US$6.1million.

Market share is fairly evenly distributed in the banking system. The largest bank holds only 10% of totalbanks' assets; the largest six hold less than 50%. The finance company sector is more concentrated, with thelargest accounting for 23% of the market and the next largest holding an 18.5% share.

Finance companies, which have different capital requirements as well as a different scope of operationsand are subject to different prudential regulations, have grown by 335%, while banks have grown by 140%.Some of the institutions in both the banking and the finance company sectors are fairly small. As of May 1995,eight banks and two finance companies had a market share of less than 1% of total sector assets, even thoughsome of these institutions have been in operation for more than one year.

A3.6

Although no financial interrnedianes (other than the state-owned BANVI and CORFINA, currentlyunder "de facto" liquidation) have been closed since the early 1970s, financial reforms recently adopted couldpush towards market restructuring in at least three ways: (i) the elimination of Legislative Decree 7-72, whichcreated an implicit deposit guarantee, mnay lead to a migration of deposits to larger, more robust institutions4; (ii)the adoption of the Basle Committee's solvency standards allows for the expansion of banks' volume ofoperations with their present capital base; and (iii) it has become easier to carry out bank mergers.

Table A3.2 Market Shares of Guatemala's Main Financial Intermediaries(Assets in US$ rnillions)

December 1990 May 1995Total assets Market share Total assets Market share

BANKS 1,410 100.0% 3,392 100.0%Industrial 185 13.1% 324 9.5%de Occidente 184 13.0% 304 9.0%GCranai & Toxvnson 126 8.9% 298 8.8%de Exportacion 54 3.8% 208 6.1%del Cafe 75 5.3% 197 5.8%Agricola Mercantil 88 6.2% 151 4.4%Other banks 698 49.7% 1,910 56.4%FINANCE COMPANIES 131 100.0% 571 100.0%Fisa 34 26.2% 131 22.9%Fiasa 36 27.9% 106 18.5%Fipasa 11 8.5% 59 10.4%Figsa 20 15.2% 48 8.3%Other finance companies 30 22.2% 227 60.1%

3.2 Market Structure

Most of the financial sector is organized in the form of "financial groups". Only two out of fourteenprivately-owned finance companies, and five out of fifteen bonded warehouse companies, operate"independently", i.e., are not connected to banks. At least four insurance companies are connected to banks, andthe institutions involved here include the three largest banks.

Securities exchange houses are frequently part of financial groups, as are credit card companies andcommercial "financiadoras", both of which specialize in retail and personal banking. Although banks are nowallowed to do business in all of these areas, under the legal framework introduced by financial sector reformsmost groups still maintain their banks as legally separate companies, even though in practice they pursue acommon business strategy and in some cases operate under the same managerial staff. It is still uncertain whetherthese activities will be gradually consolidated into the banks' operations, or if they will continue to be formallytreated as separate businesses. Since in some cases they already share infrastructure, the relevant groups mayalready be exploiting economies of scale.

3.3 Financial Deepening and Sources of Funding

As of May 31st 1995, banks' and finance companies' combined assets were equivalent to approximately30% of GDP. Almost 80% of total funding is accounted for by deposits, bonds and "pagares" (IOUs orpromissory notes) placed among the general public (23% of GDP), as can be seen in Table A3 .3.

4 In their advertising, larger banks are openly using the elimination of the 7-72 Decree to attract depositors andinvestors.

A3.7

Curiously, time deposits represent a mere five percent of banks' total funding and barely seven percent oftotal deposits. While this structure implies that banks' funding is basically short-term, since both demand andsavings deposits are payable at sight, it also gives banks great flexibility in terms of managing their funding costs,at least in the short run. Finance companies are not allowed to offer deposit services, although in practice they doso by issuing "pagares" with an implicit or explicit on-demand repurchase guarantee.

Since bonds and "pagares" issued by banks are exempt from reserve requirements, they have beengrowing at a fast rate (almost 200% in 1994 and 80% in the first five months of 1995), while deposit growth hasbeen modest (20% in 1994) or nonexistent (-2% in the first five months of 1995). Even though as of May 1995they represented only 8% of total funding, they are expected to continue increasing over the next few moriths.Bonds and pagares issued by finance companies, which are not subject to reserve requirements but to less strict"liquidity" requirements, grew in turn by 40% in 1994 and by 4% in the first five months of 1995. Maturities ofbonds and "pagares" range from one to even up to than 10 years.

Table A3.3 Sources of Funding of Financial Intermediaries(As of May 31 st, 1995, in US$ millions)

BANKS FINANCE COMPANIES a/ TOTAL bIAmount % Amount % Amount %

TOTAL ASSETS 3,392 100 571 100 3,811 100Sources of funding:DIRECT LLABILITIES 3,093 91 526 92 3,467 91Demand deposits 840 25 0 0 840 22Savings deposits 1,362 40 0 0 1,362 36Time deposits 174 5 0 0 174 4Bonds and "pagares" 273 8 469 82 590 16Loans firom financial institutions 200 6 47 8 247 6Other liabilities 244 7 10 2 254 7OWNERS' NET WORTH 299 9 45 8 344 9

CONTINGENT LIABILITIES 438 79. 517

LEVERAGE (total liabilities/net worth) 11.8 13.4 11.3a/ Excluding CORFINA

W Net of cross-transactions (obligaciones fmancieras) for an equivalent of US$ 152 million

Most of the loans obtained from financial institutions, which represent 6% of banks' total fimding, aredollar-denominated short-term loans extended by foreign banks, primarily to finance export and pre-exporttransactions involving sugar, coffee and other traditional export products. The outstanding volmne of loans of thistype grew rapidly in 1993-1994, from a little more than US$50 mnillion in December 1992 to around US$250million in December 1994. As of May 1995 these loans had decreased to US$200 million, probably due to acertain "tequila" effect, which, however, is not expected to last long.

Owners' net worth represents roughly 9% of total funding. Leverage levels are, therefore, quitereasonable, which is probably due to the fact that capital adequacy standards in Guatemala's 1946 Banldng Lawwere even more conservative than today's Basle Committee standards. Total liabilities, including contingenciessuch as letters of credit and guarantees, have stayed within the range of 11-12 times the amount of owners' networth. It is expected that leverage ratios will increase in the future, since standards sinilar to those reconmmendedby the Basle Conittee are coming into effect starting in June 1995.

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3.4 Deposit Structure

As of December of 1994, individual bank deposit balances were fairly small. Accourts with a balance inexcess of US$100,000 represented less than 34% of total deposits. One half of total funding was accounted forby savings and demand deposits of less than US$35,000.

Recent legal reforms give small deposits (up to US$1,700) preferential treatment in case of a bank'sliquidation. As of December 1994, such deposits totaled roughly US$364 milHion, 15% of the aggregate depositvolume, and accounts in this category represented 93% of the total number of deposit accounts. This comnitmnentto preferential treatmnent of snall depositors is not equivalent, however, to a deposit guarantee, since it is honoredwith the bank's own resources, not fiscal resources of the Banco de Guatemala.

Table A3.4 Deposit Structure at Banks: Breakdown by Size

December 1990 December 1994Accounts Amount Accounts Amount

Number % US$ % Number % US$ %(OOOs) (mill.) (OOOs) (mill.)

More than Q.500,000 a/ 0.9 0 307 30 2.7 0 831 34Between Q.200,000 and 1.7 0 100 10 4.9 0 235 10Q500,000Between Q0O,000 and 70.7 5 414 40 164.4 7 977 41Q200,000Between Ql,000 and Q10,000 279.5 19 177 17 487.6 20 291 12Less than Ql,000 1,108.7 76 34 3 1,722.2 73 73 3TOTAL 1,461.5 100 1,032 100 2,381.8 100 2,407 100

a/ Represents US$97,000 at end-1990 and US$87,000 at end-1994

3.5 Asset Structure and Asset Quality

Financial institutions are fairly liquid. Roughly 32% of total assets, as of May 31st, 1995, wereaccounted for by liquid assets (cash and due from banks) and by short-term investments (securities issued byBanco de Guatemala, the Governnent and financial institutions).

Table A3.5 Asset Structure of Financial Intermediaries(As of May 31, 1995, in US$ millions)

Banks Finance companies a/ TOTAL b/Amount % Amount % Amount %

TOTAL ASSETS 3,392 100 571 100 3,811 100Liquid assets 549 16 57 10 606 16Short-term investments 715 21 56 10 619 16Loan portfolio 1,746 52 401 70 2,147 56Other assets 382 11 57 10 439 12

CONTINGENT ASSETS 438 79 517a/ Excluding CORFINA, which has a negative net worth of US$456 million.b/ Net of cross-transactions (obligaciones financieras) for an equivalent of US$152 million.

The loan portfolio represents 56% of total assets-its quality and key characteristics are described in thefollowing sections.

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3.6 Distribution of Credit: Public vs. Private Sector

As of May 31st, 1995, total credit granted by flnancial irmediaries to the public sector amounted toroughly US$880 million, both through deposit accounts held at Banco de Guatemala and through holdings ofsecurities issued by Banco de Guatemala (Cenivacus and CDPs) and the Central Government

Table A3.6 Deposits and Investment in Public Sector Institutions(As of 5/31/95, in USS millions)

Govenmment'sBanco de Guatemala securities TOTALDeposits Securities

Banks 199 391 281 871Finance companies 2 3 4 9

Deposits held by banks at Banco de Guatemala, as well as a portion of investments in securities issuedby it, are held in compliance with reserve requirement regulations. As of May 31st, 1995, required reservesamounted to US$300 million, of which 70% (US$210 million) was held in Banco de Guatenala's insumentsand 30% (US$90 million) was held in cash in banks' own vaults.

On the same date, credit outstanding to the private sector was for an amount equivalent to US$2,147million. Almost 90% was accounted for by loans granted in Guatemala City, although part of this lending went tomedium-sized and large agricultural and agroindustrial finns which operate in rural areas. Roughly 40% of loansgranted in 1994 financed commercial activities, while the share used for this purpose was less than 30% in 1990.The rest were extended to manufacturing (17%), construction (10%), the agriculture sector (90/o) and for otherpurposes.

The available statistics shed little light on the size distribution of loans. They show merely that 85% ofthe loans granted in 1994 were for amounts in excess of US$17,000; this percentage has held quite steady since1990.

3.7 Loan Portfolio

3.7.1 Growth and quality

Credit extended to private-sector firms and individuals stood at US$2,147 million at the end of May1995. It increased at an average annual rate of 23% during the past four years, and at an annualized rate of 28%in the first five months of 1995:

As of May 1995, 12% of banks' and finance companies' aggregate loan portfolio was in arrears, upfrom 3% in December of 1994. It should be noted, however, that this increase reflects new accounting standardsintroduced in January 1995 via an inproved accounting nanual issued as part of the financial nmoernizationprograms. It provides for more realistic disclosure of the non-performing portfolio: the current portion of a loanpartially in arrears is now also considered to be non-performng, while until 1994 only the past-due portion wasregarded as non-performing. An even greater improvement would be to register a non-performing loan as suchfrom the first day it is past-due instead of from the thitieth day-a procedure which is still in effect, having beentaken over unchanged in the new accounting manual.

The new accounting manual also allows for loan-loss reserves to be disclosed in the monthly statisticalbulletin published by the Superintendency.

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These new standards show that loan-loss reserves have been decreasing as a percentage of total loansand also as a percentage of non-perforning loans. As of May 31st, 1995, loan-loss reserves covered only 5% ofthe non-performing loan portfolio.

Table A3.7 Banks and Finance Companies Loan Growth and Quality(in US$ millions)

Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 May-95Loan portfolio 841 998 1,345 1,470 1,918 2,147Loan loss reserves 8 8 10 11 13 13Non-performing loans 59 48 51 57 63 258Growth rate of loan portfolio -22% a/ 19% 35% 9% 30% 28% (annualzd)Non-performing loans/total loans 7% 5% 4% 4% 3% 12%Loan-loss reserves/total loans 1% 0.8% 0.7% 0.7% 0.7% 0.6%Loan-loss reserves/ non-performing loans 14% 17% 20% 19% 21% 5%

a/ The sharp decrease in the loan portfolio, in U.S. dollar terms, was due to a 34% devaluation of the Quetzal, fromQ3.39/US$

in December 1989, to Q5.13/US$ in December 1990

3.7.2 Loan Tenns and Guarantees

The loan portfolios of Guatemalan banks are essentially short-term and most loans are backed bypersonal guarantees (signature of fiduciary loans). Eighty percent of loans granted in 1994 were contracted at aterm of up to one year, and 65% were uncollateralized, i.e., backed by personal guarartees only. Financecompanies' portfolios have the same guarantee structure (70% uncollateralized), although the average maturity oftheir outstanding loans is much longer (75% are for more than one year). Even though loan contracts establishshort terms, they are often renewed, wiuch means that actual financing is medium- to long-term. TheSuperintendency of Banks has estimated that the average term over which a bank loan is actually repaid is aroundthree years.

Up until the reforms of May 1995, the Banking Law established that loans with a term of more than oneyear had to have a real guarantee, not jlSt a personal guarantee. It has become common practice for banks(finance companies are not subject to this rule) to extend medium-term financing via short-term contracts so as toavoid having to require the provision of real guarantees. The recent reform of the Banking Law, which hasincreased to three years the maximum term of loans that are backed by personal guarantees, is likely to promotemore transparent contracting, thereby increasing the average term of loans. The reform of the Banking Law alsoestablished that mortgage loans could be granted for amounts of up to 80% of the value of the collateral, insteadof 50%, as was previously stipulated. The impact of this change is yet to be seen in banks' books; quiteaggressive marketing is already being seen, which makes an increase in home financing likely, at least for themiddle- and upper-income markets.

As far as risk management is concerned, the issue of large uncollateralized loans (for amounts of, say,more than 5% of a bank's net worth), remains to be addressed.

3.7.3 Loan Portfolio Evaluation

It is not yet clear how the new regulation on loan evaluation and the constitution of loan-loss reservesintroduced by the Superintendency of Banks in July 1994 will imnpact banks. Two partial evaluations havealready been made. The first evaluation, which was carried out in September 1994, involved 50% of the loanportfolio and the second one, made in March 1995, involved 60%. By 1997, loan classification must cover theentire portfolio.

A3.11

Loans are to be classified m five categories on the basis of collateral and, if applicable, the length of tmefor which they have been m arrears. Uncollateralized loans in arrears for more than one, three, six and twelvemonths are to be provisioned at levels of 5%, 20%, 50% and 100%, respectively. At present, infbrmation is notprovided on a periodic basis to the Superintendency on the composition and status of the loan portfolio offinancial internediaries, and this is information which would be indispensable for monitoring loan classificationand valuation procedures. So far, banks and finance companies have been unable or unwilling to send theSuperintendency information on their outstanding loans which is sufficiently detailed to enable it to propertymonitor their portfolios (as established in Superintendency's Circular 2197 of 09-29-94). Ackieving fullcompliance with this information request should definitely be a priority if the Superintendency is to have themeans to properly follow-up on the quality of loan portfolios.

On the other hand, banks could nevertheless avoid creating loan-loss reserves by renewing loans (atthree-year instead of one-year intervals) before they become past-due. If they did so, the real "teeth" in the loanevaluation process would be the Superintendent's authority (article 21 of the Banking Law) to order the creationof additional loan-loss reserves when, in his judgment, the recovery of a loan is doubtful. Even though financialintermediaries may appeal the Superintendent's decisions before the Monetary Board, such decisions should befinal. To the extent that the Superintendency actually exercises such authonty, and assuming it is not overruled bythe Monetary Board, loan loss provisions of financial intermediaries (which currently stand at less than onepercent of total loan portfolio and five percent of non-performing loans) would be expected to increase in the nearfuture. Also, it is important to remember that since no legal restrictions or prudential regulations exist regardingdirect or indirect lending to bank owners or regarding limits on lending to economic "groups", these types of riskswould only be addressed through the Superintendent's authority to order the establishment of additional loan-lossreserves for doubtful loans.

In the second half of July, 1995, asset valuation reports, which included instructions to establish loan-loss reserves both on the basis of loan classification and of the Superintendent's authority to instruct additionalreserves, were sent out to several banks. Such reserves should be reflected on banks' financial statements at theend of August or September, unless successfully appealed to the Superintendent himself or to the MonetaryBoard.

3.8 Interest-rate policy and behavior

Interest-rate controls were eliminated by the Monetary Board in 1989 (its discretionary powers gave itthe right to do so), and by Legislative Decree 29-95 in 1995. Disclosure by banks and finance companies of thelevel of interest rates has become widespread since 1992. The Superintendency of Banks publishes weeldystatistics on the weighted average of both marginal lending and marginal deposit rates.

Stabilization efforts undertaken in the form of monetary-policy measures have significantly influencedthe level of interest rates and the banking system's policies regarding resource allocation. Between 1990 and mid-1995, liquid assets and investments in public debt stayed in the range of 300/o-45% of total assets; the oanportfolio stayed in the 40-55% range. Nominal interest income on earning assets (loans and securities) fluctuatedbetween 18% and 23%, while interest expense for cost-bearing liabilities ranged between 7% and 15% during thesame period.

In real terms, funding costs of banks were negative for the most of the period 1990 -mid-1995 (exceptfor 1991), while average income on earning assets fluctuated between -24% and almost 12%.

Finance companies have a similar average interest income, but their average interest expense is 3-4percentage points higher, which means that their interest margin is lower. They get most of their funding through

A3.12

IOUs (pagares), which offer an interest rate similar to those paid on time deposits issued by banks. Banks,however, get most of their fimding from savings and demand deposits.

AVERAGE INTEREST INCOME AND EXPENSE LEVELS IN THE BANKING SYSTEM1995

1990 1991 1992 1993 a/ 1994 Jan-mayAverageincomeoneamningassets 21.0% 23.1% 19.1% 23.0% 20.5% 18.1%Average expense on cost-bearing liabilities / 12.9% 14.6% 10.8% 11.5% 8.6% 6.9%Spread(nominal) 8.1% 8.5% 8.3% 11.5% 11.9% 11.2%

hiflation rate 59.8% 10.0% 14.2% 11.6% 11.6%Inflation-adjusted rates c/:Average income on interest-earning assets -24% 11.9% 4.3% 10.2% 7.9%Average expense on cost-bearing liabilities -29% 4.2% -3.0% -0.1% -2.7%Spread (real) 5% 7.7% 7.3% 10.3% 10.6%

a/ 1993, 1994 and 1995 data, include demand deposits as a cost-bearing liability.bl Interest expense divided by cost-bearing liabilities.g/ Inflation-adjusted rates are calculated as follows: (I+non-adjusted rate/I+inflation rate)-I.

Banks' spreads, as calculated above, are relatively high and even showed an increase during the period1990 - mid-1995. These figures, however, are distorted to some extent by the inclusion of demand deposits ascost-bearing liabilities from 1993 on, taking into account the fact that the prohibition against paying interest ondemand deposit accounts was eliminated in October of 1992.J The next section presents a series of spreadscalculated on the basis of the entire asset-liability and income-expense structure which give a better picture of theoverall financial situation and price structure.

3.9 Profitability

Bank profitability has been dropping over the past five years, mainly due to an increase in theabsolute and relative level of administrative expenses. Using nine key indicators which are sequentiallylinked, Table A3.8 analyzes bank profitability through a Return on Equity (ROE) Decomposition analysis.6

Retum on equty dropped from an average of 29% in 1990-1991 to an average of 22% in 1993-1994.Even though leverage increased during 1990-1994, it was not sufficient to make up for a decrease in the return onassets. This decline in the return on assets, from 2.3% in 1990 to 1.7% in 1994, can be explained almost entirelyby the reduction in the profit margin from 30.5% in 1990 to 22.9% in 1994. All income and asset structureindicators, including the interest rate spread (which has averaged around 9.1 %), remained fairly constant.

Administrative expenses increased from 4.8% of total assets in 1990 to 5.5% in 1994, which explainsthe drop in the profit margin. The other element which could explain such a decline, namely the level of incometax, in fact decreased during this period, falling from 0.5% of total assets in 1990 to 0.2% in 19947, thus partiallyoffsetting the increase in administrative expenses.

5 Not all banks pay interest on demand deposits, and most of the ones that do offer a lower interest rate than thatpaid on savings and time deposits. If, for purposes of comparison, demand deposits were included in the 1990-1992 data, nominal spreads for the years 1990-mid-1995 would stand at 11.1%, 11.6%, 10.5%, 12.7%, 11.9%and 11.2%.

6 The model allows one to explain variations in return on equity through eight different ratios. ROE is theproduct of leverage times return on assets; in turn, ROA is the product of profit margin times asset utilization,which is in turn the product of asset structure and asset return. Finally, asset return is the product of theincome structure (interest vs. operating income) and the interest rate spread.

7 In nominal terms, income tax paid by banks (according to published financial statements) rose from Q33.8million in 1990 to Q44.8 million in 1992, dropping to Q31.4 million in 1993 and rising again to Q37.9

A3.13

Table A3.8 Profitability Analysis of Banking Instutons: ROE Decompoition

1990 1991 1992 1993 1994% Return on equity (net income/net worth) 27.5 31.4 26.5 22.7 21.7Leverage (assets/net worth) l1.8 12.1 13.3 13.1 12.8% Return on assets (net incomelassets) 2.3 2.6 2.0 1.7 1.7% Profit margin (net income/gross income) 30.5 32.5 26.9 23.2 22.9% Asset utilization (gross income/assets) 7.7 7.9 7.4 7.5 7.4% Asset stucture (interest-earming assetstassets) 66.9 69.2 68.7 66.0 68.0% Asset return (gross income/interest-eaning assts) 11.4 11.5 10.8 11.3 10.9% Income structure (gross income/net interest income) 121.7 125.6 131.8 117.4 117.2% Spread (net interest income/interest-eaming assets) 9.4 9.1 8.2 9.6 9.3Average equity 572 761 956 1,165 1,437Average assets 6,744 9,254 12,681 15,236 18,380Average interest- earning assets 4,511 6,404 8,711 10,056 12,498Net income 157 239 253 264 313Gross income 515 736 941 1,137 1,368Net interest income 424 584 714 969 1,161

3.10 Foreign Exchange Position

Due to the heavy influx of foreign bank financing in 1993-1994, foreign currency-deaninated financinghas increased significantly. As of May 1995, foreign-eominated liabilites of banks and finance companies wereequivalent to US$225 nillion and US$1 8 million, respectively (6.6% and 3.1 % of total liabilities).

In order to cover their exchange-rate risk banks and finance companes have been incorporating dollar-indexation clauses in their short-term export loans. In addition to this, current regulations allow financialintermediaries to hold a long position in foreign exchange, for an amaont equivalent to 25% of their paid-incapital and reserves. As of May 31, 1995, the overall foreign exchange position of banks and finance companieswas as follows:

Table A3.9 Foreign Exchange Position Of Financial Intennediaries(USS millions)

FinanceBanks companies Total

Cash and due from banks 59 1 60Investments 13 4 17Loans 186 16 202TOTAL ASSETS 258 21 279

Loans from foreign fmancial institutions 189 17 206Other liabilities 36 1 37TOTAL LIABILlTIES 225 18 243

NET POSMON (LONG) 33 3 36

Not counting dollar-indexed loans (so as to differntate exchange-rate risk from convertibility risk),banks and finance companies showed a short position of US$166 million, an amont equivalent to 55% of theircombined net worth.

million in 1994. In dollar terms (at end-of-year exchange rates), these amounts are equivalent to USS6.6million, US$8.4 million, US$5.4 million and US$6.6 million, respectively.

A3.14

It would be advisable to: (i) penmit fmancial intrwdiation in forign curmmy-denminatedinstmlents, wich could promnoe an incwrase in savings smce postive rea rates would likely be paid on deposits;and (ii) issue a regulation establishing that banks cannot hold short posiions and limig long positons towhatever amount is oonsidered appropriate by the montary auhorit -from the point of view of prudentialregulations, there is less need for rules that would limit the long positions. In ay case, financial inennedaion inforeign currency-denomnated istrumets is supposed to be allowed soon.

Annex 4

Agricultural Trade Liberalization Policies in Guatemala

Box A5.1 Main Agricultural Trade Reforms in the 19Os Introduction

Custom Tariffs Prior to the 1990s, agricultural* Narrowing of tariff ceilings to 5-20%. policy, based on import-substitution and an

Nan-tariff BarriersElimination of most import and export licenses: anti-export bias, protected domestic

* Basic Gtains. Replacement of import licenses with production and reflected the dual nature oftemporay price bands for yellow corn, nce sorghum and the sector. On the one hand, largesoybeans. Price bands were removed in October 1995. producers were assumed to be involved inElimination of import licenses for wheat. Trade of beans .a.k.and white corn is free of import and export license marketing of traditional agriculturalrequiremnents. exports. On the other hand, public policy

* Oilseeds. Elimination of license for cDttonseed and of was explicitly aimed at reaching self-export registration for sesame seed. Replacement of sufficiency with small and mediumimport registration of sesame seed with certificate of producers, whose function was to supplyquality in exporting country. b

* Industrial Products. Elimination of export license for basic grains for the domestic market. Incardamom, export registration for kenaf and rosella, and order to support domestic-farm prices, itimport license for kenaf seeds. was necessary to insulate them from the

* UIvestock products. Elimination of export license for world market through INDECA, the publiccattle on the hoof, import license for animal fats and. + + > . ~~~~~~~agncultural sector agency which intervenednimport registration for animTnal products, subproducts and aproducts for animal feed, m the market, had storage capacity and

* Agricultural inputs. Elimination of import licenses for administered quantitative restrictionsfertilizers, pesticides and herbicides. imposed on domestic trade. INDECA's

* Others. Replacement with sanitary certificates of import role was not as effective in supportinglicenses for flower bulbs and coffee seeds. Replacementwith export registration of export licenses of plant roots, pnces, mawuly because most domestlctree ferns and orchids. prices were usually higher than world

Export Taxes prices (MAGA, 1995), as in administering* Elimination of the 1% tax on coffee exports and of tax trade licenses-selected imports were

on meat exports (US$ 0.02 per pound). allowed only in years of poor local harvest,Foreign Exchange Controls

* Elimination of compulsory surrendering of export dollar whereas exports disposed of bumper cropsproceedings to the Central Bank. when storage capacity was exhausted.

INDECA High tariff protection, export taxes, foreign* Lifting of all agricultural price controls. exchange controls and subsidized credit to* Elimination of fiscal transfers to support INDECA's small producers through Banco de

grains market intervention operations. Desarrollo Rural (BANDESA)* Leasing to the private sector of basic grains storage colen this scheme.

facilities. complemented this scheme.BANDESA

* Elimination of fiscal transfers from the Government. As in many Latin American* Adjustment of deposit and lending rates to market rates. countries, trade liberalization in* Institutional restructuring and propoa for dsvestiture. I Guatemalan agriculture went ahead of the

GATT Uruguay Round Agreement, making

A4.2

substantial progress in reducing its tariff rates, eliminating most non-tariff barriers (NTBs)',moving toward equivalent tariffication of former import restrictions, removing export licenses andtaxes, ending domestic price and foreign currency exchange controls, eliminating transfers toINDECA and BANDESA, and adopting significant institutional changes such as the de factoliquidation of INDECA and the restructuring/divestiture of BANDESA (Box A5. 1).

The ResultsFlne A5.1 NnitnaI 1993 Rates of Protection

Tariff reduction and simplification to a (SinTle % avjge of imts and e-orts)

five-tier regime preceded and accompanied tRq

agricultural trade reform. From 1987 to 1994, the Wa 14.

unweighted average of nominal tariff rates in theagricultural sector went down from 21.3 percentto 8.5 percent. Tariff dispersion (standard SaIWCbl 121

deviation) also decreased from 18.6 to 9.6 (Annex 11.0

4). As a result, in terms of nominal rates of =5protection (NRPs), Guatemala has became amoderate protector in Latin American terms,compared to extreme protector countries such as 0.0 100. 20.0 30.0 40.0 50.0 60O

the Dominican Republic, Colombia and even u WidBa*k(1995) mdstaffesinm.

Chile (Figure A5.1). This statement, however,deserves qualification: although NRPs are the simplest and intuitively most revealing indicator topresent the pattern of trade policies over time, they do not consider price distortions due to NTBs,technical barriers and price interventions like producer subsidies. No post-reform estimates ofeffective rates of protection (ERPs) or agricultural producer subsidies (PSs) are available forGuatemala. Notwithstanding, to the extent that import licenses, direct taxation, fiscal transfers andforeign exchange controls of export proceeds have been eliminated, and that price interventions-through INDECA, and subsidized credit-through BANDESA have been phased out; this Figum A5.2 World and Domestic Com Pricessuggests that ERPs should have followed a 0.125similar trend to NRPs.

e 0.105 (3.10 Even though the welfare effects of the K

trade liberalization on consumers is not examined oin this study, its overall impact between 1990-94on basic grains producers was mixed: ,* The introduction of temporary variable Z 0

import levies (price bands) on yellow corn,rice and sorghum was intended to prevent 0.045local prices fromwide swings in international 00 0 ; 00 aO\ 0fprices and to approach the basic tariff rate to Sowce: Schveigeit(1995).

a constant 20 percent. In practice, however,results were less positive than expected (Figures A5.2 and A5.3): (i) domestic prices still

1 Remaining import quotas for agricultural products are for sugar, basic grains (yellow corn, rice,sorghum, wheat and beans), chicken parts and, seasonally, apples, pears and grapes. Afterelimination of price bands in October ,1995, rice imports are subject to quotas, whereas yellow corn,sorghum and soybeans imports are subject to a equivalent tariff. Chicken imports are subject to aspecial regime.

A4.3

feature large swings; and (ii) the differential between domestic and world prices of yellow comand rice increased from 1992, despite declining international prices, thus producing a welfareshift toward food producers from food consumers.

* In terms of harvested area and yields, com had no major change, despite the tendency in realprices to increase; but rice had a significant decline in harvested area, compensated by yieldimprovements.

* In the case of wheat, which is relevant since it was not covered by the price band policy, tradeliberalization brought domestic prices more closely into line with falling world market prices(Figure A5.4). This also led to a decline in the real price of wheat and to a reduction inharvested area.

Figure A5.3 Worid and Domestic Rice Prices Figure A5.4 Worid and Domestic Wheat Prices0.430 0.145

0.380 ,.5

~0.330Wol rices~)

0.280 XO5X

0.230 0.065

00 0

ON, 0.060.130 DmsiPia .6

0.080 0.04500 0 t \0 00 0

00 00 00 00 (71 (71 ON 00 00 00 00 ON ON oN

Source: Schwigert (1995). Source: Schweigert (1995).

Tax exemptions to nontraditional exporters, equivalent to an estimated accumulated fiscalloss of about 1-1.5 percent of GDP, remain as the single most important implicit producer-subsidy.It is estimated that three out of five agrobusiness exporters make use of 'temporary" dutyexemption benefits. They have been subject to abuses and their legal framework is outdated:among the four tax exemption regimes considered under Law 29-89 for non-traditional exporters,one of them has the preference of about 90 percent of firms, which makes the remaining 3 regimesof little relevance.

Future Agenda

Consolidation of agricultural trade liberalization is a necessary, but not sufficient,condition for faster agricultural growth. It requires addressing five important challenges: (i) theslight decline of real domestic-farm prices, which might lead to a renewed pressure for protectionfor import-competing products, (ii) completing tariffication of the former NTBs-mainly of basicgrains, (iii) eliminating tax exemptions; (iv) making the use of technical-sanitary and phyto-sanitary-barriers more transparent; and (v) improving the use of safeguards in the context ofextending trade preferences under the Uruguay Round and regional free trade agreements.

Real farm prices (RFPs) in domestic markets have declined slightly during the tradeliberalization period (Figure A5.5), but in contrast to most Latin American countries, the declinewas larger during the pre-reform years rather than during the reform period of 1991-94 (WorldBank, 1995b). RFP are defined as the domestic farm prices adjusted by the domestic consumerprice index (CPI). In dollar terms and for good i, RFPi=ep$ ,/CPI, where e is the nominal exchange

A4.4

rate and ps j.is the international price of good i in dollars. It is a variable that directly measuresthe exchange rate incentive/disincentive given to domestic producers isolated from any pricedistortion originating from tariffs, licenses, quotas or subsidies. The main factors underlying theslight decline in real domestic farm prices were: tariff reductions (Box A5.1 and Annex 4), thedecline in international prices in the 1980s, and the exchange rate appreciation (mainly due toforeign capital inflows) observed during the 1990s.

* With the exception of banana and cardamom, all international prices of traditional exportsstagnated between 1989 and 1994 (Figure A5.6). This stopped a long-term trend: indices ofdollar prices, each with a value of unity for the 1980 base year, had the following estimatedvalues for 1994: coffee, 0.43; sugar, 0.70; cotton, 0.63; banana, 0.68; cardamom, 0.27; andbeef 0.50 (Schweigert, 1995). Only recently, since 1995, coffee and sugar prices haveimproved

* Real appreciation of the exchange rateF1gureA55 USandRlPlicsofTraditionaIExports contributed to the fall in real prices

175 __ (Chapter 1, Figure 1.13). In the 1990s,(gAegcipnrt Qtild-e) it resulted from the quasi-fixed

150 exchange rate policy used as anti-° 125 . inflationary device (Chapter I).

0 . '. Consolidation of agricultural tradeel -0 -. liberalization should involve:

75 7-

(A~agericeinUS Farm Prices5o ~recapturing real (and nominal)

co 00 00 00 o g exchange rate flexibility, accompanied_ _ _ _ _ _hby tight monetary and fiscal policies.

Sauce: SCIAeigat (1995). EN-we*htedag p-. This will probably do more toencourage new agricultural investment

and exports, than discrete and large changes of the nominal exchange rate.promoting a participative group organization for purposes of marketing output, as well as forprovision of inputs, may help small and medium producers to get better farm prices.

Tariff Reform= Guatemala should aim to gradually reduce its current five-tier tariff regime to a two-tier tariff

regime. In concert with the rest of Central America, this would facilitate customs taxcollection, preparation of future regional trade agreements and prevention of unnecessary tradedistortions. The new tariff regime should be complemented by regional agreements in the rulesof origin (to prevent 'triangulation problems'), antidumping regulations, and use of safeguards(including tariff rates quotas for sensitive agricultural products as in NAFTA); due to thepotential multiplication of trade preferences under bilateral or regional free trade agreements.

=> Wide differences in tariff rates for so-called 'basket" classifications should be avoided in thenew tariff schedule, because they distort the cost structure and favor corruption practices atcustoms. Various milk products, for example, carry a duty of 5 percent; but productsbelonging to "the rest" in the same category have a tariff of 20 percent.

Reform of NTBs= Remaining export licenses should be eliminated.

A4.5

=T Tariffication of agricultural imports previously subject to NTBs, mainly basic grains, mustbe carefully reviewed it. The prevalence of a sort of 'dirty' tariffication -the presence of a

tariff equivalent accompanied by

Flgure AS.6 Producer Pricem of Major Export Crops quotas, more frequent use of3500 - 90 safeguards, and sanitary and phyto-

300 c s0X*=" -so sanitary rules-- restricts imports3000 . and should be eliminated. Besides,2500 70 there is no reason whatsoever for

i060o returning to price bands in the2000 50 medium term.

1500 40 => Guatemala should consider setting

- 1000 cofe 30 a consistent, nondiscriminatory,cam 20 and transparent WTO-based

Soo SU(Qb{Ej 10 system of product testing and0 - 0 certification of sanitary and phyto-1939 1990 1991 1992 1993 1994 sanitary standards. Private

Source: IW participation in these services wouldbe desirable.

Export Incentives=- A single tax incentive regime is desirable. Introducing a simple and automatic duty draw-back

system for exporters (CIEN, 1996) is an adequate substitute to the presently complex,numerous and perhaps expensive (tariffs, income and VAT) tax incentive regimes to exporters.

I

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STA TISTICAL APPENDIX

I .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

STATISTICAL APPENDIX

I POPULATION

1.1. Population by Sex and Area, 1960-2000

2. NATIONAL ACCOUNTS

2.1 Gross Domestic Product by Expenditure, 1980-1995(Millions of 1958 Q2etzales)

2.2. Gross Domestic Product by Expenditure, 1980-1995(Real Growth Rates)

2.3. Gross Domestic Product by Expenditure, 1980-1995(Millions of Current Quetzales)

2.4 Gross Domestic Product by Expenditure, 1980-1995(' of Current GDP)

2.5 Gross Domestic Product by Sector, 1980-1995(Millions of 1958 Quelzales)

2.6 Gross Domestic Product by Sector, 1980-1995(Real Growth Rates)

3. EXTERNAL SECTOR

3.1 Balance of Payments, 1980-1995(Millions of USS)

3.2 Exports of Goods, fob, 1980-1995(Millions of US$)

3.3 Imports of Goods, cif, 1980-1995(Millions of US$)

3.4 Extemal Debt, Debt Service and Net Disbursements, 1980-1995(Millions of US$)

4. PRICES

4.1 Consumer Price Index, 1980-1995(1990=100)

4.2 Nominal Exchange Rate, 1988-1995

(Monthly average, bid market operations up to Feb. 1995, mesa de cambiosthereafter)

4.3 Real Effective and Nominal Exchange Rates, 1988-1995(Quarterly rates)

5. PUBLIC SECTOR

5.1 Consolidated Nonfinancial Public Sector Operations, 1980-1994(Millions of Current Quetzales)

5.2 Central Government Operations, 1980-1994(lo of Current GDP)

6. MONETARY SECTOR

6.1 CENIVACUS interest rates, 1988-1995(Monthly 182-day rates used by Bank of Guatemala for open market operations)

6.2 Reserve Requirements, Apr. 1 to Sep. 30, 1993 to 1995(Daily balance of reserve requirements)

6.3 Domestic Credit to the Private and Public Sectors, 1989-1995(Millions of Current Quetzales))

6.4 Instruments of Monetary Policy, Dec. 1992 to Dec. 1995(Monthly percentage structure)

6.5 Net International Reserves and Reserve Money, 1988Q4 to 1995Q4(End-quarter stock, Millions of Current Quetzales)

6.6 Mortgage Bonds and Time and Savings Deposits(End-week stocks, Millions of Current Quetzales)

6.7 Interest Rates in US dollars Applied by Offshore Banks, Jan. 1990 to Jul. 1995.

Table 1.1Guatemala: Population Distribution by Sex and Area, 1960-2000

(In Thousands)Growth-.

Year Total Rate Male Female . Urban % Rural /

1960 3963.6 2007.8 50.7 1955.8 49.3 1216.8 30.7 2746.8 69.31961 4078.8 2.9 2066.4 50.7 2012.4 49.3 1276.7 31.3 2802.1 68.71962 4196.8 2.9 2126.3 50.7 2070.5 49.3 1343.0 32.0 2853.8 68.01963 4317.8 2.9 2187.7 50.7 2130.1 49.3 1411.9 32.7 2905.9 67.31964 4441.6 2.9 2250.5 50.7 2191.1 49.3 1483.5 33.4 2958.1 66.6

1965 4568.4 2.9 2314.8 50.7 2253.6 49.3 1535.0 33.6 3033.4 66.41966 4697.7 2.8 2380.2 50.7 2317.5 49.3 1592.5 33.9 3105.2 66.11967 4829.5 2.8 2446.9 50.7 2382.6 49.3 1646.9 34.1 3182.6 65.91968 4964.5 2.8 2515.2 50.7 2449.3 49.3 1707.8 34.4 3256.7 65.61969 5103.1 2.8 2585.3 50.7 2517.8 49.3 1770.8 34.7 3332.3 65.3

1970 5246.2 2.8 2657.7 50.7 2588.5 49.3 1830.9 34.9 3415.3 65.11971 5393.3 2.8 2732.1 50.7 2661.2 49.3 1898.4 35.2 3494.9 64.81972 5544.0 2.8 2808.4 50.7 2735.6 49.3 1968.1 35.5 3575.9 64.51973 5698.8 2.8 2886.7 50.7 2812.1 49.3 2034.5 35.7 3664.3 64.31974 5858.1 2.8 2967.3 50.7 2890.8 49.3 2120.6 36.2 3737.5 63.8

1975 6023.1 2.8 3050.4 50.6 2972.7 49.4 2216.5 36.8 3806.6 63.21976 6191.4 2.8 3135.5 50.6 3055.9 49.4 2309.4 37.3 3882.0 62.71977 6364.5 2.8 3222.8 50.6 3141.7 49.4 2405.8 37.8 3958.7 62.21978 6542.5 2.8 3312.4 50.6 3230.1 49.4 2512.3 38.4 4030.2 61.61979 6726.4 2.8 3405.0 50.6 3321.4 49.4 2616.6 38.9 4109.8 61.1

1980 6916.8 2.8 3500.8 50.6 3416.0 49.4 2574.3 37.2 4342.5 62.81981 7113.4 2.8 3599.6 50.6 3513.8 49.4 2652.8 37.3 4460.6 62.71982 7315.5 2.8 3701.2 50.6 3614.3 49.4 2733.6 37.4 4581.9 62.61983 7523.9 2.8 3805.9 50.6 3718.1 49.4 2816.9 37.4 4707.0 62.61984 7739.6 2.9 3914.2 50.6 3825.4 49.4 2902.8 37.5 4836.9 62.5

1985 7963.4 2.9 4026.6 50.6 3936.7 49.4 2991.2 37.6 4972.1 62.41986 8195.1 2.9 4143.1 50.6 4052.0 49.4 3085.6 37.7 5109.5 62.31987 8434.3 2.9 4263.3 50.5 4171.1 49.5 3183.7 37.7 5250.6 62.31988 8681.1 2.9 4387.3 50.5 4293.8 49.5 3285.5 37.8 5395.5 62.21989 8935.4 2.9 4515.1 50.5 4420.3 49.5 3391.2 38.0 5544.2 62.0

1990 9197.3 2.9 4646.7 50.5 4550.6 49.5 3500.9 38.1 5696.4 61.91991 9467.1 2.9 4782.3 50.5 4684.8 49.5 3614.4 38.2 5852.7 61.81992 9744.7 2.9 4921.9 50.5 4822.9 49.5 3731.8 38.3 6013.0 61.71993 10029.8 2.9 5065.2 50.5 4964.6 49.5 3853.1 38.4 6176.8 61.61994 10322.1 2.9 5212.1 50.5 5110.0 49.5 3978.4 38.5 6343.7 61.5

1995 10621.2 2.9 5362.5 50.5 5258.7 49.5 4107.9 38.7 6513.3 61.32000 12221.7 2.8 6167.1 50.5 6054.6 49.5 4816.7 39.4 7405.0 60.6Source: SEGEPLAN and Bank Staff Estimates.

Table 2.1Guatemala: Gres Domestic Product by Expeadiure(Mlillom of 1958 Quetzales)

.1980 : 1981 1982 1983 1984 1985 1.956 1987 *1983,

Consumption 2541.6 2583.5 2509.4 2477.5 2508.5 2496.2 2526.7 2632.7 2743.1Privnte 2318.9 2350.8 2279.7 2247.7 2272.5 2265.6 2283.8 2372.8 2470.1Public 222.7 232.6 229.7 229.9 236.0 230.6 243.0 259.9 273.0

Gross DomestiC Investnent 355.4 409.9 331.3 275.3 292.1 236.0 236.6 313.5 310.2Fixed 372.6 401.6 357.6 258.3 234.9 220.1 228.6 266.1 299.8

Private 223.9 202.0 191.6 152.3 155.8 160.5 166.7 187.6 211.3Public 14B.7 199.5 159.0 106.0 79.1 59.6 61.S 75.6 S8.6

Increase in Stocks -17.2 8.3 -26.3 17.0 57.1 15.9 8.0 47.3 10.4

Gross Domestic Expenditure 2897.0 2993.4 2840.7 2752.8 2800.6 2732.2 2763.3 2946.2 3053.3

Resource Balance 209.9 134.2 175.9 186.8 153.0 203.7 176.9 93.2 109.6Exports of Goods & NFS 651.1 557.3 510.2 454.7 440.2 454.0 390.5 414.0 437.3Imports of GoodshNFS 441.2 423.1 334.3 267.9 287.2 250.3 213.6 315.8 327.7

GDP at Market Prices 3106.9 3127.6 3016.6 2939.6 2953.5 2936.0 2940.2 3044.4 3162.9

Akmo tems:Population (OOs)' 6916.8 7113.4 7315.5 7523.9 7739.6 7963.4 8195.1 8434.3 8681.1GDP per capita (1958 Q.) 449.2 439.7 412.4 390.7 381.6 368.7 358.8 361.0 364.3Gross DomesticSavings (1958 Q.) 565.3 544.1 507.2 462.1 445.1 439.7 413.5 411.7 419.7ImportElasticity(GNFS) -6.2 5.9 7.8 15.2 21.6 -102.3 13.5 1.0ICoCR 3.3 3.4 0.2 192 13.7 18.9

1980-91 population figures are from SEGEPLAN; 1992-95 are Bank estimates.The ICOR is calculated as a three year moving average.

Source: IMF (except where noted).

Table 2.2Guatemala: Grou Domestic Product by Expenditure(Reel Growth Rates)

1980 1981 1982 1983 1984 1955 1986 1987 1968

Consumption 1.6 -2.9 -1.3 1.3 -0.5 1.2 4.2 4.2Private 1.4 -3.0 -1.4 1.1 -0.3 0.8 3.9 4.1Public 4.5 -1.3 0.1 2.7 -2.3 5.3 7.0 5.0

Gross Domestic Investment 15.3 -19.2 -16.9 6.1 -19.2 0.3 32.5 -1.0Fixed 7.8 -11.0 -27.3 -9.0 -6.3 3.8 16.4 12.7

Private 1.8 -18.1 -1.7 25.8 -17.2 -0.9 34.4 -5.7Public 34.2 -20.3 -33.3 -25.4 -24.7 3.7 27.1 12.7

Gross Domestic Expenditure 3.3 -5.1 -3.1 1.7 -2.4 1.1 6.6 3.6

Resource Balance -36.1 31.1 6.2 -18.1 33.2 -13.2 44.5 11.6Exponsof Goods&NFS -14.4 .8.5 -10.9 -3.2 3.1 -14.0 6.0 5.6ImportsofGoods &NFS -4.1 -21.0 -19.9 7.2 -12.9 -14.7 47.8 3.8

GDP at Market Prices 0.7 -3.5 -2.6 0.5 -0.6 0.1 3.5 3.9

Memo /tcmt:Population (00s) 2.8 2.8 2.8 2.9 2.9 2.9 2.9 2.9GDP per Capita -2.1 -6.2 -5.3 -2.3 -3.4 -2.7 0.6 0.9Source: Table 2.1

(cont.) Table 2.1Guatemala: Gross Domestic Product by Expenditure

(Millions of 1958 Quetzales)1989 1990 I991 1992 1993 1994 1995 preL

2827.6 2898.7 3003.3 3157.3 3293.8 3455.3 3632.5 Consumption2544.2 2606.1 2706.1 2842.9 2959.4 3102.8 3264.3 Private283.4 292.6 297.7 314.4 339.4 352.5 368.2 Public

311.3 307.0 376.9 488.4 460.5 459.2 486.6 Gross Domestic Investment318.3 285.9 296.8 385.2 411.S 396.5 426.8 Fixed220.5 197.9 211.6 269.9 300.6 290.1 315.4 Private98.3 83.0 85.2 115.3 111.2 106.4 111.4 Public-7.5 21.1 S0.1 103.2 48.7 62.7 59.8 Increase inStocks

3138.9 3205.7 3380.7 3645.7 3759.3 3914.5 4119.1 Gross Domestic Expenditure

148.6 183.4 132.8 37.9 69.0 66.5 55.3 Resource Balance495.4 527.7 502.0 543.9 596.3 625.1 675.5 Exports of Goods & NFS346.8 344.3 369.2 506.0 527.3 558.6 620.2 Imports of Goods & NFS

3237.5 3389.1 3513.5 3683.6 3328.3 39B1.0 4174.4 GDP at Market Prices

Memo items:8935.4 9197.3 9466.0 9743.0 10029.7 10322.0 10621.2 Population(000s)'367.9 368.5 371.2 378.1 381.7 385.7 393.0 GDPpercapita(1958 Q.)459.9 490.4 509.7 526.3 529.5 525.7 541.9 Gross Domestic Savings (1958 Q

1.5 -0.2 2.0 7.6 1.1 1.5 2.3 Import Elasticity (GNFS)2.3 2.6 2.6 2.4 2.2 2.4 2.5 ICOR2

(coe.) Table 2.2Guatemala: Gross Domestic Product by Expenditure

(Real growth rates)19_ 9 1990 1991 1992 1993 1994prel. 199est.

3.1 2.5 3.6 5.1 4.5 4.7 5.1 Consumption3.0 2.4 3.3 5.1 4.1 4.8 5.2 Private3.8 3.2 1.7 5.6 8.0 3.9 4.5 Public

0.4 -1.4 22.8 29.6 -5.7 -0.3 6.0 Gross Domestic Investment6.3 -10.3 3.8 29.8 6.9 -3.7 7.6 Fixed*3.9 2.8 33.2 27.9 -6.4 1.0 6.4 Private11.0 -10.5 -3.2 35.3 -3.5 -4.3 4.7 Public

2.8 2.1 5.5 7.8 3.1 4.1 5.2 Gross Domestic Expenditure

35.6 23.4 -27.6 -71.4 81.9 -3.6 -16.3 Resource Balance13.3 6.5 -4.9 3.3 9.6 4.8 3.1 Exports or Goods & NFS5.8 -0.7 7.2 37.0 4.2 5.9 11.0 Itnpons of Goods & NFS

3.9 3.1 3.7 4.3 3.9 4.0 4.9 GDP at Market Prices

Memo items:2.9 2.9 2.9 2.9 2.9 2.9 2.9 Population (000s)1.0 0.2 0.7 1.9 1.0 1.0 1.9 GDP per Capita

Table 2.3Guatemab: Gross Domestic Product by Expeoditure(Million of Current Quetzales)

1980 . . 1 1 1933 19J4 1985 1916 ..1987

Consumption 6843.3 7702.0 7824.4 8188.6 8531.8 10073.4 13970.6 16388.3Private 6216.8 7022.0 7148.9 7500.7 7855.9 9295.9 12346.7 14989.2Public 626.S 680.0 675.5 637.9 725.9 777.4 1123.9 1399.6

Gross Domestic Investment 1251.0 1466.1 1232.3 1002.6 1095.9 1285.5 1636.5 2463.7Fixed 1294.5 1443.1 1303.9 950.3 912.4 1224.9 1593.2 2138.3

Private 826.5 763.1 772.9 594.5 634.0 986.4 1290.1 1716.1Public 468.0 675.0 536.0 355.3 278.4 233.5 303.1 472.2

Increase in Stocks -43.5 23.0 -76.1 52.3 133.5 60.5 43.3 275.4

Gross Domestic Expenditure 3094.3 9168.1 9057.2 9191.2 9677.7 11353.3 15607.1 18852.5

Resource Balance -215.7 -560.5 .340.6 -141.2 -207.4 -178.9 231.0 *1141.5ExpottsofGoods&NFS 1747.6 1471.0 128.7 1175.8 1256.2 2063.0 2542.1 2307.0ImportsofGoods&NFS 1963.3 2031.5 1629.3 1317.0 1463.6 2246.9 2311.1 3948.5

GDPatMarketPnces 7373.6 3607.6 3716.6 9050.0 9470.3 11180.0 15838.1 17711.1

Net Factor Income From Abroad' -70.5 -103.0 -121.0 -113.0 -206.8 -330.8 -436.2 -472.4

GNP at Market Prices 7808.1 8504.6 S595.6 8937.0 9263.5 10849.2 15401.9 17238.6

Memo irems:Gross Domestic Savinp 1035.3 905.6 892.2 861.4 388.5 1106.6 1867.5 1322.2

NetCufwentTTnsfers 108.6 39.5 61.9 29.8 23.0 18.9 95.7 167.3OrossNational Savinps 1073.4 392.1 833.1 773.2 709.7 794.7 1527.0 1017.1Source: Bank of Guatemala. 1995 are World Bank estimates.' Up to 1990 using what is of lcually reported in the National Accounts. 1991-93 taking net factor Incomez RMSM BOP coNet current tansfers 1980-6 are converted at a IQJUSS rate. From 1986-92 converting USS private tmnsfers from BOP at avg banking exchange rate.

Table 2.4Guatemala: Gross Domestic Product by Expenditure(As % of Current GDP)

1980 1981 1982 1933 1984 1915 1986 1987

Consumption 86.9 89.5 39.8 90.5 90.6 90.1 88.2 92.5Private 73.9 81.6 32.0 82.9 83.0 33.1 S1.1 34.6Public 8.0 7.9 7.7 7.6 7.7 7.0 7.1 7.9

GrossDomesticlnvestment 15.9 17.0 14.1 11.1 11.6 11.5 10.3 13.9Fixed 16.4 16.8 15.0 10.5 9.6 11.0 10.1 12.4

Private 10.5 3.9 8.9 6.6 6.7 8.8 8.1 9.7Public 5.9 7.8 6.1 3.9 2.9 2.1 1.9 2.7

Increast in Stocks -0.6 0.3 -0.9 0.6 1.9 0.5 0.3 1.6

Gross Domestic Expenditure 102.7 106.5 103.9 101.6 102.2 101.6 98.5 106.4

ResourceBalance -2.7 -6.5 *3.9 -1.6 -2.2 -1.6 1.5 -6.4ExportofGoods& NFS 22.2 17.1 14.8 13.0 13.3 13.5 16.1 15.3Import of Goods & NFS 24.9 23.6 18.7 14.6 15.5 20.1 14.6 22.3

GDP at Market Prices 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Net Factor Income From Abroad -0.9 -1.2 -1.4 -1.2 -2.2 -3.0 -2.8 -2.7

GNP at Market Prices 99.1 98.8 93.6 93.8 97.8 97.0 97.2 97.3

Memo Itms:GtossDomesticSavings 13.1 10.5 10.2 9.5 9.4 9.9 11.8 7.5Net Current Transfers 1.4 1.0 0.7 0.3 0.3 0.2 0.6 0.9Gross National Savings 13.6 10.4 9.6 3.6 7.5 7.1 9.6 5.7Source: Table 2.3

(coat.) Table 2.3Guatemala: Gros Domestc Product by Expenditure

(Millions of Current Quetuales)198S 1989 1990 1991 1992 1993 1994 1995 puL

18928.8 21707.3 31016.0 42407.0 49380.6 58315.9 61400.9 77657.4 Consumption17289.0 19837.4 28692.1 39693.0 45899.1 54164.5 63893.0 72588.8 Private1639.8 1869.9 2323.9 2714.0 3481.5 4151.4 4507.9 5068.7 Public

2814.5 3201.0 4668.2 6761.9 9893.2 11079.6 11570.0 13232.4 Gros Domestic Investment2747.2 3254.9 4454.9 5759.9 8445.2 10334.5 10571.8 12251.5 Fixed2156.9 2500.3 3522.9 4736.0 6322.8 8539.1 8711.6 10154.3 Private590.3 754.6 932.0 1023.9 1622.4 1745.4 1860.3 2097.2 Public67.3 -53.9 213.3 1002.0 1448.0 745.1 998.2 981.0 Increase in Stocks

21743.3 24908.3 35684.2 49168.9 59273.8 69395.5 79971.0 90889.9 Gross Domestic Expenditure

-119S.3 -1223.7 -1367.0 -1867.2 -5288.3 -5152.3 -5398.8 4996.6 Resource Balance3308.5 4099.2 6775.9 8349.0 9482.7 11612.8 13172.5 17039.6 ExportofGoods&NFS4506.8 5322.9 8142.9 10216.2 14771.0 16765.1 1571.4 22036.2 ImportofGoods &NFS

20545.1 23684.6 34317.2 47301.7 53985.5 64243.2 74572.1 85893.3 GDP at Market Prices

471.1 -543.5 -827.6 -877.5 -876.5 4S54.1 -856.1 -817.5 Net Factor Income From Abroad'

20073.9 23141.1 33489.6 46424.2 53109.0 63389.1 73716.0 35075.8 GNPuaMarketPrices

Memo items:1616.3 1977.3 3301.2 4894.7 4604.9 5927.3 6171.2 8235.8 Gross Domestic Savings258.0 425.5 801.6 1106.4 1497.9 1754.9 2238.8 2888.2 Net Current Transfers2

1403.2 1859.4 3275.2 5123.5 5226.3 6828.1 7553.9 10306.5 Gross Nationad Savings

(cont.) Table 24Guatemala: Grow Doenstic Product by Expenditure

(As % of Curmet GDP)1983 1989 1990 191 1992 I993 1994 1995

92.1 91.7 90.4 89.7 91.5 90.8 91.7 90.4 Consumption84.2 83.8 83.6 83.9 85.0 84.3 85.7 84.5 Private8.0 7.9 6.8 5.7 6.4 6.5 6.0 5.9 Public

13.7 13.5 13.6 14.3 18.3 17.2 15.5 15.4 Gross Domestic Investment13.4 13.7 13.0 12.2 15.6 16.1 14.2 14.3 Fixed10.5 10.6 10.3 10.0 12.6 13.4 11.7 11.8 Private2.9 3.2 2.7 2.2 3.0 2.7 2.5 2.4 Public0.3 -0.2 0.6 2.1 2.7 1.2 1.3 1.1 IncreaseinStocks

105.8 105.2 104.0 103.9 109.8 108.0 107.2 105.8 Gross Domestic Expenditure

-5.8 -5.2 4.0 -3.9 -9.8 -8.0 -7.2 -5.8 Resource Balance16.1 17.3 19.7 17.7 17.6 18.1 17.7 19.3 ExportorGoods& NFS21.9 22.5 23.7 21.6 27.4 26.1 24.9 25.7 ImportorGoods& NFS

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 GDPat Mark-et Prices

-2.3 -2.3 -2.4 -1.9 -1.6 - -1.3 -1.1 -1.0 Net Factor Income From Abroad'

97.7 97.7 97.6 98.1 98.4 98.7 98.9 99.0 GNP at MarketPrices

AMemo item:7.9 8.3 9.6 10.3 8.5 9.2 8.3 9.6 Gross Domestic Savings1.3 1.8 2.3 2.3 2.8 2.7 3.0 3.4 Net Current Trmnsfers2

6.3 7.9 9.5 10.8 9.7 10.6 10.1 12.0 Gross National Savings

Table 2.5Guatemala: Gros Domestic Product by Sector(Miem et 1955 Quetzles)

19.3. .V80 .- 1981 192 : 19S3 . 1934 1935. 19t6 I9S7 M. 198

GDPutMarketPrices 3106.9 3127.6 3016.6 2939.6 2953.5 2936.0 2939.3 3044.4 3162.9

Primary Production . 736.8 790.8 768.7 754.3 764.1 765.7 761.4 790.9 326.2Agriculture 772.0 781.4 753.0 744.9 756.5 759.2 752.9 732.4 817.6Mining 14.8 9.4 10.7 9.4 7.6 6.5 3.5 8.5 3.7

Secondary Production 668.4 670.7 630.0 593.3 576.7 570.8 582.2 604.2 629.9Manufactuing 517.3 501.2 475.1 466.0 468.4 464.8 467.3 477.4 487.9Construction 97.9 116.5 103.0 75.8 54.3 49.7 51.3 5S.7 67.9Utilities 53.2 53.0 51.9 51.5 54.0 56.3 63.1 63.1 74.1

Services 1651.7 1666.1 1617.9 1592.0 1612.7 1599.5 1596.2 1649.3 1706.7Trnsport andCommunications 215.8 211.2 201.2 199.7 206.3 209.8 210.6 220.8 230.4Commerce 839.1 344.1 797.2 764.4 773.1 746.9 730.3 752.8 776.2Banking. Insuance ndRealEstate 106.7 108.8 109.7 107.3 105.7 108.1 111.1 114.9 121.4Housing 138.1 141.7 145.4 149.2 151.9 154.9 158.2 161.1 164.2PublicAdministation andDefense 163.0 170.1 176.7 185.1 138.8 192.2 199.4 210.2 213.5Pewnal Servik 139.0 190.0 187.3 136.3 136.3 137.6 186.1 139.5 195.9

Memo: Total Industry 683.2 680.1 640.7 602.7 534.3 577.3 590.7 612.7 633.6Source: IMF

Table 2.6Guatemala: Gros Dometic Product by Sector(Real Growth Rate)

19J0 1931 l9U 1933 1984 1935 1986 1937 1938

GDPt Market Prkes 0.7 -3.5 -2.6 0.5 -0.6 0.1 3.6 3.9

Primaty Production 0.5 -2.8 -1.9 1.3 0.2 *0.6 3.9 4.5Agriculture 1.2 -3.0 -1.7 1.6 0.4 -0.8 3.9 4.5Mining -36.5 13.3 -12.1 -19.1 *14.5 30.8 0.0 2.0

Secondary Production 0.3 -6.1 -5.8 -2.8 -1.0 2.0 3.8 4.3Manufacturing -3.1 -5.2 -1.9 0.5 -0.8 0.6 2.1 2.2Construction 19.0 -11.6 -26.4 -23.4 -8.5 3.2 14.4 15.6Utilities -0.4 -2.1 -0.3 4.9 4.3 12.1 7.9 3.9

Senices 0.9 -2.9 -1.6 1.3 -0.8 -0.2 3.3 3.5Transport and Communications -2.1 -4.3 -0.7 3.3 1.7 0.4 4.8 4.4Commerce 0.6 -5.6 -4.1 1.1 -3.4 -2.2 3.0 3.1Banking. Insurance and Real Estate 2.0 0.3 -2.2 -1.5 2.3 2.3 3.4 5.7Housing 2.6 2.6 2.6 1.8 1.9 2.1 1.8 1.9Public Administration and Defense 4.4 3.9 4.3 2.0 1.8 3.7 5.4 4.0Personal Services 0.5 -1.2 -0.3 0.3 0.4 -0.8 1.8 3.4

Mkemo: Total Industry -0.5 -5.3 -5.9 -3.1 -1.2 2.3 3.7 4.2Sorme: Table 2.5

(conL) Table 2.5Guatemala: Gross Domestic Product by Sector

(Millions or 19581 Quetzales)1939 1990 1991 1992 1993 1994 prel. 1995 est.

3286.9 3388.5 3513.3 3681.6 3826.9 39S1.3 4180.4 GDPat MarketPrices

851.5 815.5 913.3 943.2 963.3 988.5 1021.6 Primary Production

842.6 877.0 904.4 931.2 951.5 974.8 1006.8 Agriculture3.9 8.5 8.9 12.0 11.8 13.7 14.8 Mining

651.9 661.4 678.6 721.1 748.5 766.6 799.4 Secondary Production

499.0 509.2 522.3 538.4 555.4 571.1 590.0 Manufacturing73.0 67.6 68.4 83.1 83.4 79.3 85.2 Construction79.9 84.6 88.0 99.6 109.7 116.2 124.2 Utilities

1783.5 I841.6 1921.4 2017.3 2115.1 2226.2 2359.4 Services254.3 269.9 285.9 308.9 321.6 339.3 360.1 Transport&communication803.0 816.0 850.2 888.4 924.6 972.9 1041.1 Commerce127.1 139.0 149.0 158.5 170.6 184.3 198.5 Banking,lnsurance& Real Estate

167.7 171.5 175.5 179.7 185.0 188.8 197.0 Housing228.6 237.5 248.4 262.9 287.5 305.5 318.6 Public Administration &Defense202.8 207.7 212.5 218.8 225.8 235.4 244.1 Personal Services

660.8 669.9 687.5 733.1 760.3 780.3 814.2 Memo: Total Industry

(cout.) Table 2.6Guatemala: Gross Domestic Product by Sector

(Real Growth Rates)1989 1990 1991 1992 1993 J994 preL 1995 esL

3.9 3A1 3.7 4.8 3.9 4.0 5.0 GDP at Market Prices

3.1 4.0 3.1 3.3 2.1 2.6 3.3 Primary Production3.1 4.1 3.1 3.0 2.2 2.4 3.3 Agriculture2.7 -4.5 4.7 34.8 -1.7 16.1 8.0 Mining

3.5 1.5 2.6 6.3 3.8 2.4 4.3 Secondary Production2.3 2.0 2.6 3.1 3.2 2.S 3.3 Manufacturing7.5 -7.4 1.1 21.5 0.4 -4.9 7.4 Construction7.8 5.8 4.0 13.3 10.1 5.9 6.9 Utilities

4.5 3.3 4.3 5.0 4.8 5.3 6.0 Services10.4 6.1 5.9 8.1 4.1 5.5 6.1 Transport & communication3.5 1.6 4.2 4.5 4.1 5.2 7.0 Commerce4.6 9.4 7.2 6.4 7.6 8.0 7.7 Banking, Insurance & Real Estate2.2 2.3 2.3 2.4 2.9 2.1 4.3 Housing4.6 3.9 4 6 5.9 9.3 6.3 4.3 Public Administration & Defense3.5 2.4 2.3 2.9 3.2 4.3 3.7 Personal Services

3.5 1.4 2.6 6.6 3.7 2.6 4.3 Memo: Total Industry

Table 3.1Guatemala: Balance of Payments(MlllOe os f USS)

(. ns .f -) -:.: .-1980 1981 1982-.. IM 184 1985 1986'- 1987

ExportsofGoods&NFS 1747.5 1446.1 1277.9 1171.9 1228.2 1214.1 1166.4 1136.4Merchandise(FOB) 1519.3 1291.3 1170.4 1091.7 1132.2 1112.1 1043.4 977.8Non-Factor Services 227.7 154.8 107.5 80.2 96.0 102.0 123.0 151.5

ImportsofGoods&NFS 1962.6 2023.0 1625.2 1313.0 1427.1 1257.0 1046.5 1592.1Merchandise (FOB) 1471.9 1540.0 1214.2 1056.0 11s2.1 1077.0 376.5 1333.1Non-Factor Services 490.7 483.0 341.0 257.0 245.0 130.0 170.0 259.0

Resource Balance -215.1 -576.9 -347.3 -141.1 -198.9 -42.9 119.9 -455.8TradeBalance 47.9 -248.7 -113.8 35.7 -49.9 35.1 166.9 -355.3

Net Factor Income -70.6 .110.6 -124.7 -116.9 -210.4 -170.5 -216.6 -179.0Factor Receipts 76.8 55.2 23.5 29.1 29.6 29.5 33.4 31.0Factor Payments 147.4 165.8 148.2 146.0 240.0 200.0 250.0 210.0Interest on ST debt 8.0 8.0 7.0 4.0 6.0 6.0 6.0 8.0Interest on MLT debt and IMF 59.6 63.4 82.8 95.9 104.6 126.7 166.4 160.7Dividend repatriation 43.7 48.8 44.2 40.6 31.4 21.5 40.7 28.0Otherfactorpayments 36.1 45.6 14.2 5.5 48.0 45.8 36.9 13.3

Net Current Transfers 109.8 90.9 62.6 30.6 28.6 19.7 51.0 66.9

Current Account Balance -175.9 .596.6 -409.4 -227.4 -330.7 -193.7 -45.7 -567.9

Long-Term Capital Inflows 244.1 406.3 349.7 290.2 148.2 133.1 60.0 254.1Direct Investment 95.4 109.9 77.6 44.9 40.0 63.0 69.0 91.0Ofricial Capital Grants 0.0 0.0 0.0 0.0 0.0 0.0 24.5 126.0Net MLT Loans (DRS data) 92.4 279.7 278.7 211.0 84.4 59.0 35.0 -64.0

Disbursements 170.0 344.3 337.4 314.0 254.4 294.0 175.0 85.0Repaymentst 77.6 64.6 58.7 103.0 170.0 235.0 140.0 149.0

Other LTlnflows, Nete 56.3 17.2 -6.6 34.3 23.8 11.1 -63.5 101.1

Other Items (Net9 -387.1 -157.9 32.1 -34.1 250.2 60.5 98.4 270.1

Changes in net reserves 318.7 343.0 28.0 -29.0 *17.5 -1.4 -113.0 43.7

Memo Items:Stock ofCentral Bank reserves 530.2 132.2 154.2 183.2 200.7 202.1 315.1 271.4Current account deficit (% of GDP) 2.2 6.9 4.7 2.5 4.0 1.7 0.5 8.0GDP in million of USS 7878.6 8607.6 8716.6 9050.0 9470.3 11130.0 3447.0 7084.4Exchange rate (Quetzals/USS) 1.0 1.0 1.0 1.0 1.0 1.0 1.9 2.5Reserves in months of imports 4.3 1.4 1.4 2.1 2.0 2.3 4.3 2.4

'On accrual basis, i.e.: including debt service arrears.3 Includes stabilization bonds, debt relief and debt rescheduling.'Includes errors & omissions, net short termn capital and capital n.e.i..'Refers to changes In net oMcial resrves.Sources: IMF and World Bank.

(cent.) Table 3.1

Guatemala: Balance of Payments(Millios of USS)

1911 1989 1990 1991 . 1992 1993 1994 1995 preL

1281.6 1448.3 159J.9 1688.3 1812.8 2016.5 2286.6 2821.0 Exports ofGoods&NFS1086.6 1152.5 1246.6 1291.4 1379.7 1461.7 1686.6 2155.6 Merchandise(FOB)195.0 295.8 352.3 389.9 503.1 554.8 600.0 665.4 Non-Factor Services

1730.0 1368.9 1392.0 2030.0 2844.9 2970.3 3224.2 3727.4 Imports of Goods & NFS1413.0 1426.9 1425.0 1673.0 2327.8 2333.3 2542.3 3020.7 Merchandis (FOB)317.0 442.0 464.0 357.0 517.1 536.5 681.4 706.7 Non-Factor Services

-441.4 .420.6 -293.1 -341.7 -962.1 .953.1 -937.6 -906.4 Resource Balance-326.4 -274.4 -181.4 -374.6 -948.1 -922.1 -856.2 -865.1 Trade Balance

-179.3 -165.3 -136.3 -115.4 -144.4 -105.1 .137.7 -169.2 Net Factor Income25.7 31.0 21.2 63.9 69.5 62.6 41.7 46.4 Factor Receipts

208.0 196.3 157.5 179.3 213.9 167.7 179.4 215.6 Factor Payments11.0 14.0 16.0 14.0 9.0 18.0 23.0 27.0 Intereston ST debt

114.9 118.4 93.6 11S.1 161.8 94.2 94.4 126.1 Interest on MLT debt and IMF29.4 44.9 23.7 25.3 16.4 28.8 39.3 30.2 Dividend repatriation52.7 19.0 24.2 21.9 26.7 26.7 22.2 32.3 Other factor payments

9S.5 151.1 173.7 220.0 239.7 311.4 386.0 495.4 Net CurrentTrnsfers

-5292 -434.8 -250.7 -237.1 -816.3 -747.5 -689.3 -510.2 Current Account Balance

267.3 190.3 37.3 -23.3 223.1 178.2 443.0 234.8 Long-Term Capital Inflow9.2 30.0 63.4 -157.9 151.1 223.3 361.6 240.6 Direct Investment

125.0 27.5 30.8 39.7 51.0 51.9 62.4 57.4 Ofricial Capital Grants60.0 -6.0 -143.0 -25.0 -104.0 -204.0 24.0 -63.2 Net LT Loans (DRS data)

203.0 164.0 164.0 165.0 220.0 145.0 251.0 121.8 Disbursements143.0 170.0 307.0 190.0 324.0 349.0 227.0 185.0 Repayments'-13.9 39.3 136.6 119.9 125.0 102.0 0.0 0.0 Other LT Inflows

145.3 156.4 253.1 415.3 566.6 774.9 301.1 138.1 Other Items (Net)

129.4 87.6 .95.2 -554.9 27.1 -205.6 .59.1 157.3 Changes in net reserves

Memo itemts:142.0 54.4 149.6 704.5 677.4 S83.0 942.8 785.5 Stock of Central Bank reserves

6.7 5.2 3.3 2.5 7.3 6.6 5.4 3.9 Current account deficit (% of GDP)7842.8 8410.4 7650.2 9406.0 10440.9 11399.9 12357.3 14733.0 GDP in million of USS

2.6 2.3 4.5 5.0 5.2 5.6 5.1 5.8 Exchange rate (Quetzals/USS)1.2 0.5 1.3 5.1 3.5 4.4 4.4 3.1 Reserves in months of imports

Table 3.2Exports of Goods, fob(Value In millions of USS; volume In thousands of qulatals unit value In USS per _ulotal)

1980 1981 - .1982. .. 19833 1984 1985 1986 1987 .1988

Traditiond Exports 853.1 726.7 691.6 660.0 706.1 724.6 730.3 575.6 642.6

CoffeeValue 463.9 325.3 374.6 308.8 360.6 451.5 502.4 354.5 386.9Volume 2790.1 2731.1 3324.8 2583.8 2842.2 4041.1 2957.2 3216.6 3233.0Unit value 166.3 119.1 112.7 119.5 126.9 111.7 169.9 110.2 119.7

CottonValue 166.1 173.4 94.9 67.4 72.3 73.1 24.3 16.2 36.9Volume 2935.7 2678.7 1729.0 1210.4 1154.1 1253.6 674.4 350.3 636.5Unit value 56.6 64.7 54.9 55.7 62.6 58.3 36.0 46.3 58.0

BananasValue 45.4 57.1 71.3 53.5 54.9 70.9 73.3 74.5 76.4Volume 8638.1 7797.7 7495.8 5429.3 5789.6 7062.6 7332.0 7372.0 6897.7Unit value 5.3 7.3 9.5 9.9 9.5 10.0 10.0 10.1 11.1

SugarValue 69.3 85.2 43.7 95.3 71.3 46.4 51.8 51.4 78.0Volume 4609.9 4338.2 3988.1 8540.6 6090.6 6158.2 7962.3 6408.9 8614.6Unit value 15.0 19.6 11.0 11.2 11.7 7.5 6.5 8.0 9.1

MeatValue 29.1 29.3 16.3 15.6 12.7 10.0 4.3 14.5 14.8Volume 241.9 283.4 173.7 190.7 185.3 200.5 63.4 194.6 201.9Unit value 120.2 103.4 96.5 81.8 68.5 49.9 67.8 74.5 73.2

CardamonValue 55.6 34.3 44.2 59.4 100.3 60.7 47.3 45.1 37.6Volume 108.8 95.8 131.0 170.4 160.3 144.4 177.8 240.4 278.6Unit value 511.0 358.2 337.7 348.6 625.8 420.3 268.0 187.6 135.1

PetroleumValue 23.7 22.1 46.1 60.0 34.0 12.0 26.9 19.4 12.0

Volume' 781.5 661.7 1546.0 2206.3 1248.2 458.3 1783.0 1300.0 874.6Unitvalue 30.4 33.4 29.8 27.2 27.2 26.2 15.1 14.9 13.7

Nontraditionals 666.7 564.6 478.8 431.7 426.1 387.5 313.1 402.2 444.0oJw Maquila .. . .. .. .. .. .. .. 13.3o/wv Central America 236.4otw Others 194.3

TOTAL EXPORTS' 1519.8 1291.3 1170.4 1091.7 1132.2 1112.1 1043.4 977.8 1086.6

Memo:Shares in total exportsTraditional 56.1 56.3 59.1 60.5 62.4 65.2 70.0 58.9 59.1Nontraditionals 43.9 43.7 40.9 39.5 37.6 34.3 30.0 41.1 40.9o/w Maquila .. .. .. .. .. .. .. .. 1.2Thousands of barrels.

2 Total Exports" 1990-95 have been adjusted to include maquila exports.Source: Bank of Guatemala

(conL) Table 3.2Esports of Goods, fob

(Value in mllions of USS; volume in thousands of qulntals; unit value In USS per guinta1959 M9O 1991 1992 199 1994 199Sprul.

653.6 665.3 606.2 566.9 606.6 710.7 1046.3 Traditional Export,

Coffee380.0 316.0 280.3 252.9 276.1 346.1 575.9 Value

4001.3 4226.2 3684.0 4330.9 4883.5 4280.0 4824.7 Volume95.0 74.8 76.2 58.4 56.5 80.9 119.4 Unit value

Cotton27.7 24.9 21.5 0.5 0.8 n.a. n.a. Value

546.3 432.4 378.9 10.8 14.3 Volume50.6 57.6 56.7 46.3 56.1 Unit value

Bananas£7.2 86.2 80.1 110.9 96.0 119.5 145.9 Value

7923.4 7825.9 7325.4 9298.9 8570.9 10755.3 12854.2 Volume11.0 11.0 10.9 11.9 11.2 11.1 11.4 Unitvalue

Sugar

92.1 152.9 141.1 136.5 153.1 172.4 246.1 Value8700.9 12365.0 14602.2 15287.0 15835.0 16495.3 21062.3 Volume

10.6 12.4 9.7 8.9 9.7 10.5 11.7 Unit value

Meat24.5 30.9 25.8 13.3 15.3 3.3 4.9 Value

334.6 418.2 398.4 219.8 234.6 123.1 73.8 Volume73.4 73.9 64.8 60.5 65.2 67.4 66.4 Unit value

Cardamon27.5 34.4 37.8 32.8 38.1 42.2 40.7 Value

228.6 249.5 305.6 294.6 311.1 291.3 306.1 Volume120.3 137.8 123.7 111.3 122.5 144.9 133.0 Unit value

Petroleum14.6 20.0 19.1 20.0 27.2 22.2 32.8 Value

1110.0 1298.4 1063.3 1520.0 2311.9 2166.1 2586.3 Volume'13.2 16.0 18.0 13.2 11.8 10.2 12.7 Unitvalue

498.9 581.3 692.2 812.8 855.1 975.9 1109.3 Nontradidonals26.4 36.1 63.4 96.1 105.5 136.4 166.5 o/w Maquila

248.8 288.2 324.0 395.4 417.8 475.0 565.4 o/w Central America223.7 257.1 299.8 321.3 331.8 364.5 377.4 o/w Othe

1152.5 1246.6 1298.4 1379.7 1461.7 1686.6 2155.6 TOTAL EXPORTS'

Memo:Shares in total expors

56.7 53.4 46.7 41.1 41.5 42.1 48.5 Trditional43.3 46.6 53.3 58.9 58.5 57.9 51.S Nontraditionals2.3 2.9 5.3 7.0 7.2 8.1 7.7 oAv Maguila

Table 3.3Imports of Goods, cif(In Millions of USS)

1980 1981 1982 1983 1984 1985 1986 1987

Durable 85.4 76.9 52.7 46.0 54.7 58.3 35.2 70.1Non-durables 207.5 235.0 231.7 189.3 209.1 166.6 123.8 184.5Oil & Lubricants 199.3 182.8 149.6 255.0 300.1 267.7 93.8 194.5Intermediate Goods 733.6 792.9 633.8 468.8 511.6 478.2 493.9 582.6Construction Materia 92.5 98.7 77.3 59.9 56.4 50.4 38.8 72.7Capital Goods 280.0 287.1 242.9 115.3 146.6 153.8 174.0 342.7

TOTAL IWPORTS 1598.2 1673.4 1387.9 1134.3 1278.4 1175.0 959.5 1447.0

1988 1989 1990 1991 1992 1993 1994 1995prel.

Durable 74.6 82.2 106.7 100.5 199.7 232.2 271.8 318.5Non-durables 207.1 231.1 210.4 263.8 342.1 451.5 556.5 607.0Oil&Lubricants 192.8 211.8 280.4 311.3 342.0 315.3 306.6 413.4Intermediate Goods 640.7 678.0 645.2 745.5 909.7 845.6 944.7 1121.9Construction Materia 91.0 85.6 86.8 78.7 117.2 81.4 78.3 83.0Cdpital Goods 345.9 352.3 319.3 351.4 620.7 673.3 623.5 748.7

TOTAL IMPORTS 1552.1 1641.0 1648.8 1851.2 2531.4 2599.3 2781.4 3292.5

Source: Banco de Guatemala

Table 3.4External Debt, Debt Service and Net DisbunemenLs(Millions ofUSS)

.1980 1981 1982 1983 19J4 1985 .1916 1987

1. DebtOutjtandinn(disbursed onlvl 1165.8 1264.2 1541.5 1903.0 23S5.4 2655.5 2792.4 2792.0Public and Publicly-guaranteed 548.8 806.5 1148.3 1389.7 1950.0 2169.1 2293.9 2337.9

Bilateral 183.4 306.8 489.8 558.4 602.9 643.9 728.1 755.3Multilateral 350.3 432.4 511.6 538.5 550.7 704.4 820.7 190.6

IBRD 143.8 171.3 186.1 192.5 I50.5 225.3 276.7 330.0IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PrivateCreditors 15.1 67.3 146.9 292.8 796.4 320.8 745.1 692.0Bonds 0.0 0.0 0.0 0.0 467.6 431.7 471.6 449.SCommercial Banks 14.2 67.3 146.4 256.1 248.7 255.8 218.1 206.2Others 0.0 0.0 0.5 36.7 80.1 83.3 55.4 36.3Suppliers 0.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PrivateNon-guaranteed 282.0 210.0 168.0 154.0 105.0 106.0 119.0 116.1

Medium-and long-term debt 830.8 1016.5 1316.3 1543.7 2055.0 2275.1 2412.9 2454.0Short-term debt 335.0 136.4 119.7 119.2 150.5 264.9 309.5 275.9IMFCredit 0.0 111.3 105.5 140.1 149.9 115.5 70.0 59.1

2. Debt Arrersm 0.0 0.0 0.0 0.3 16.4 61.5 109.3 237.1Amortization 0.0 0.0 0.0 0.3 6.7 22.4 51.8 157.1Interest Payments 0.0 0.0 0.0 0.0 9.7 39.1 57.S 80.0

3. Disbukiements 204.0 258.4 324.7 354.0 295.5 379.4 233.8 33.7PublicandPublicly-guaranteed 137.6 280.6 338.7 312.9 249.5 289.4 183.3 86.8

Bilateral 47.7 127.6 196.5 89.0 73.4 72.1 96.1 42.3Multilateral 77.1 99.0 99.2 52.8 77.3 138.0 69.3 27.6

IBRD 39.0 34.6 22.3 20.4 7.9 48.6 17.0 11.7IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private Creditors 12.8 54.0 43.0 171.1 93.8 79.3 17.9 16.4Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Commercial Banks 12.8 54.0 42.5 134.5 36.1 45.2 2.8 0.1Others 0.0 0.0 0.5 36.6 57.7 34.1 15.1 16.3Suppliers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private Non-guaranteed 32.4 63.7 2.7 0.7 4.3 5.0 15.0 0.0

Medium- and long-term debt 170.0 344.3 341.4 313.6 254.3 294.4 198.3 36.6Short-term (net flows) 34.0 -198.6 -16.7 -0.5 21.6 85.0 40.5 -53.1IMF Purchases 0.0 112.7 0.0 40.9 19.6 0.0 0.0 0.0

4 Amortization 77.6 64.6 58.6 S8.6 162.2 201.5 211.5 175.4Public and Publicly-guaranteed 15.2 22.5 43.7 70.7 109.9 149.9 152.0 152.1

Bilateral 0.6 4.3 13.4 19.9 25.6 43.9 26.4 19.1Multilaterml 11.7 16.4 20.1 25.7 26.4 27.0 32.0 58.I

IBRD 3.6 7.1 8.1 13.9 13.6 13.1 17.5 22.3IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private Creditors 2.9 1.8 10.2 25.1 57.9 79.0 93.6 74.9Bonds 0.0 0.0 0.0 0.0 0.0 10.0 10.1 22.0Commercial Banks 1.4 0.9 10.2 24.7 43.6 38.1 40.5 17.5Others 0.0 0.0 0.0 0.4 14.3 30.9 43.0 35.4Suppliers 1.5 0.9 0.0 0.0 0.0 0.0 0.0 0.0

Private Non-guaranteed 62.4 42.1 14.9 17.9 52.3 3.1 3.2 2.9

Medium- and long-tern debt 77.6 64.6 58.6 88.6 162.2 153.0 1552 155.0IMF Repurchases 0.0 0.0 0.0 0.0 0.0 43.5 56.3 20.4

(coat)

Tabk 3.4 (eont.)External Debt, Debt Service and Net Disbursements

(Millions of USS)1988 1989 1990 1991 1992 1-993 1994 199Sel-

2636.7 2633.2 2832.6 2815.3 2740.0 2947.7 2672.9 2623.7 1. Debt Outstandinff(disbursed only)2141.9 2120.5 2240.1 2234.4 2105.8 2300.9 2118.5 2098.2 Public and Publidy-guaranteed815.3 805.1 849.1 891.8 847.9 1127.0 1014.1 1011.0 Bilateral191.7 905.7 988.1 950.2 886.4 836.2 832.3 785.3 Multilateral280.1 260.5 292.9 278.9 212.6 178.1 215.8 194.2 IBRD

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IDA434.9 409.7 402.9 392.4 371.5 337.7 272.1 301.9 Private Creditors228.9 200.4 189.6 175.5 158.1 144.3 214.3 259.9 Bonds178.8 168.9 161.6 165.0 163.9 148.9 34.1 23.2 Commercial Banks27.2 40.5 51.6 51.9 49.5 44.5 23.7 18.9 Others

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Supplien113.0 122.8 126.9 126.9 141.1 182.7 99.5 74.4 Private Non-guamnteed

2254.9 2243.3 2367.0 2361.3 2246.9 2483.6 2218.0 2172.6 Medium- and long-term debt293.8 316.9 399.0 390.0 462.3 464.1 454.9 451.1 Short-term debt88.0 73.0 66.6 64.0 30.8 0.0 0.0 0.0 IMF Credit

222.9 273.3 395.5 424.8 393.1 146.4 33.0 16.7 ,6 DebtArrear128.5 159.4 203.4 241.6 206.8 123.2 19.1 6.6 Amortization94.4 113.9 192.1 183.2 186.3 23.2 13.9 10.1 Interest Payments

274.9 184.5 168.8 165.6 290.2 310.2 276.0 162.8 2-Disbursemntn s214.2 160.9 157.9 162.6 191.0 83.6 276.0 162.8 Public and Publicly-guamnteed96.3 31.S 61.6 74.5 59.1 41.3 53.6 48.7 Bilateral

105.1 85.3 68.2 69.7 95.2 28.8 118.3 52.3 Multilatera6.7 14.3 16.5 4.4 49.4 1.1 83.2 17.7 IBRD0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IDA

12.8 43.8 28.1 11.4 36.7 13.5 104.1 61.8 PrivateCreditors0.0 0.0 0.0 0.0 1.8 0.0 88.9 59.3 Bonds1.5 21.4 14.0 16.4 31.9 7.2 9.5 1.6 Comnercial Banks

11.3 22.4 14.1 2.0 3.0 6.3 5.7 1.0 Others0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 SuppIeIS0.0 12.8 7.1 3.0 30.0 61.6 0.0 0.0 Private Non-guaranteed

214.2 173.7 165.0 165.6 221.0 145.2 276.0 162.8 Medium-and long-term debt0.5 10.8 3.8 0.0 69.2 165.0 0.0 0.0 Short-term (net nlows)

60.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IMF Purchases

247.2 171.7 101.7 157.2 346.1 189.4 236.7 208.2 3. Am riLzation215.9 156.0 86.9 151.4 298.8 138.1 214.7 183.1 Public and Publicly-guaranteed

38.8 47.5 21.2 13.6 98.4 17.7 61.1 51.8 Bilateral62.5 58.0 27.6 109.0 144.8 83.2 104.5 99.3 Multilateral29.0 26.8 5.3 21.2 107.4 39.8 45.4 39.3 IBRD

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IDA114.6 50.5 38.1 28.8 55.6 37.2 49.1 32.0 Privte Creditors69.1 8.4 10.8 14.1 19.8 13.7 13.7 13.7 Bonds25.8 32.6 23.0 13.0 33.9 22.0 21.6 12.5 Commercial Banks19.7 9.5 4.3 1.7 1.9 1.5 13.8 5.8 Others0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Suppliers3.1 3.0 3.0 3.0 15.8 20.0 22.0 25.1 Private Non-guaranteed

219.0 159.0 89.9 154.4 314.6 158.1 236.7 208.2 Medium- and long-termdebt28.2 12.7 11.8 2.8 31.5 31.3 0.0 0.0 IMFRepurchases

Table 34 (cout.)Lxtral Debt. Debt Service and Net Disbursements(Millons of USS)

-1980 1981 1982 1983 1914 1985 1966 1987S Notflhbubnmeits 126.4 193.8 266.1 265.4 133.3 177.9 27.3 -141.7

Public nd PublicJy-guaranteed 122.4 2S8.1 295.0 242.2 139.6 139.5 31.3 -65.3BDlateral 47.1 123.3 133.1 69.1 52.8 23.2 69.7 23.7Muldlaterml 65.4 82.6 79.1 27.1 50.9 111.0 37.3 -30.5

IBRD 35.4 27.5 14.7 6.5 .5.7 35.5 -0.5 -10.6IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private Creditors 9.9 52.2 32.1 146.0 35.9 0.3 -75.7 -58.5Bonds 0.0 0.0 0.0 0.0 0.0 .10.0 -10.1 -22.0Commercial Banks 11.4 53.1 32.3 109.S -7.5 7.1 -37.7 -17.4Othen 0.0 0.0 0.5 36.2 43.4 3.2 -27.9 -19.1Suppliers -1.5 -0.9 0.0 0.0 0.0 0.0 0.0 0.0

Private Non-guaranteed -30.0 21.6 -12.2 -17.2 -47.5 1.9 11.3 -2.9

Medium- andlong-term debt 92.4 279.7 282.8 225.0 92.1 141.4 43.1 -68.2Short-termdebt 34.0 -193.6 -16.7 -0.5 21.6 15.0 40.5 -53.1IMF Credit 0.0 112.7 0.0 40.9 19.6 -48.5 -56.3 -20.4

6. InterestPayments 67.3 71.7 33.3 93.7 101.2 122.1 162.6 164.1Public and Publicly-guaanteed 29.6 37.7 53.7 75.6 t4.1 107.0 148.3 148.4

Bilateal 9.0 12.4 16.7 13.3 18.3 21.1 27.7 24.7Multilateral 20.4 13.5 26.8 31.4 30.0 32.3 46.9 57.7

IBRD 11.0 9.3 14.1 13.0 12.4 11.3 21.5 23.1IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private Creditors 0.2 6.8 15.2 25.9 35.3 53.6 73.7 66.0Bonds 0.0 0.0 0.0 0.0 0.0 13.3 41.6 45.4Commercial Banks 0.1 6.8 15.1 24.3 30.4 26.9 25.7 17.6Others 0.0 0.0 0.1 1.1 5.4 7.9 6.4 3.0Supplier 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Prvate Non-guanteed 30.0 25.1 13.1 13.7 11.2 9.2 8.5 7.9

Medium- and long-term debt 59.6 63.5 76.3 89.3 95.3 116.2 156.8 156.3Short-tem debt 7.7 8.2 6.5 4.4 5.9 5.9 5.3 7.SIMF Chargea 0.0 0.0 6.5 6.3 9.9 11.0 3.5 4.9

7 Total DebtService 144.9 136.3 141.9 112.3 263.4 323.6 374.1 339.5Public and Publicly-guaranteed 44.8 60.2 102.4 146.3 194.0 256.9 300.3 300.5

Bllatea 9.6 16.7 30.1 38.2 43.9 65.0 54.1 43.3Muldlatetal 32.1 34.9 46.9 57.1 56.4 59.3 73.9 115.8

IBRD 14.6 16.4 22.2 26.9 26.0 24.4 39.0 45.4IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private Creditors 3.1 8.6 25.4 51.0 93.7 132.6 167.3 140.9Bonds 0.0 0.0 0.0 0.0 0.0 23.8 51.7 67.4Commercial Banks 1.5 7.7 25.3 49.5 74.0 65.0 66.2 35.1Others 0.0 0.0 0.1 1.5 19.7 38.3 49.4 33.4Suppliers 1.6 0.9 0.0 0.0 0.0 0.0 0.0 0.0

PrivateNon-guaranteed 92.4 67.9 33.0 31.6 63.5 12.3 11.7 10.8

Medium-andlong-term debt 137.2 128.1 135.4 177.9 257.5 269.2 312.0 311.3Short-term debt 7.7 8.2 6.5 4.4 5.9 5.9 5.8 7.8IMF Credit 0.0 0.0 6.5 6.3 9.9 59.5 64.8 25.3

I Debt Service Due 144.3 136.3 148.4 139.0 273.3 433.4 857.8 731.2Amortizton (LT) 77.6 64.6 53.6 t3.5 162.3 12.6 174.6 179.4Interest Payments (LT) 59.5 63.5 76.3 89.3 95.2 161.0 375.0 350.3Amortization (ST) 0.0 0.0 0.0 0.0 0.0 43.5 56.3 20.4lnteestPayments(ST) 7.7 8.2 13.0 11.2 15.1 16.9 14.3 12.7Adjustnent to Amortization Not Paid 0.0 0.0 0.0 0.0 0.0 29.6 19.4 24.4Adjustment to Inteesu Not Paid 0.0 0.0 0.0 0.0 0.0 44.8 213.2 194.0

Source: Wodd Bank

Table 3.4 (coat)External Debt Debt Service and Net Dlsburseme.ts

(Millons of USS)1988 1989 1990 19I1 1992M 1993. 1994 , 9Sest.27.7 12.8 67.1 8.4 -55.9 120.8 39.3 *45.4 4. Net DisburseMents-1.7 4.9 71.0 11.2 -107.8 -54.5 61.3 -20.3 Public and Publicly-guanteed57.5 -15.7 40.4 60.9 -39.3 23.6 -7.5 -3.1 Bilateral42.6 27.3 40.6 -39.3 -49.6 -54.4 13.8 -47.0 Multilateral-22.3 -12.5 11.2 -16.8 -58.0 -38.7 37.8 *21.6 1BRD

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IDA-101.S -6.7 -10.0 -10.4 -1I.9 -23.7 55.0 29.8 Private Creditors-69.1 -8.4 -10.8 -14.1 -18.0 -13.7 75.2 45.6 Bonds-24.3 -11.2 -9.0 3.4 -2.0 -14.8 -12.1 -10.9 Commercial Banks-8.4 12.9 9.5 0.3 1.1 4.8 -8.1 -4.1 Others0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Suppliers

-3.1 9.8 4.1 0.0 14.2 41.6 -22.0 -25.1 Private Non-guaranteed

-4.8 14.7 75.1 11.2 -93.6 -12.9 39.3 -45.4 Medium- and long-term debt0.5 10.8 3.8 0.0 69.2 165.0 0.0 0.0 Short-term debt

32.0 -12.7 -11.8 -2.8 -31.5 -31.3 0.0 0.0 IMF Repurchases

122.3 125.0 103.4 126.0 167.5 110.9 111.2 10S.3 4. Interest Payments105.9 105.5 77.4 102.2 150.5 36.0 105.1 103.8 Public and Publicly-guaranteed20.2 17.4 18.7 19.4 39.0 14.9 34.3 33.5 Bilateral56.0 55.6 33.2 53.1 39.7 51.6 48.7 48.2 Multilateral22.7 21.0 3.5 9.4 52.6 16.1 13.5 16.1 IBRD0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IDA

29.7 32.5 25.5 24.7 21.8 19.5 22.1 22.1 Private Creditors9.0 15.9 17.6 13.0 16.3 14.3 16.8 IS.3 Bonds

17.2 14.5 5.4 5.3 4.2 3.4 2.6 1.7 Commercial Banks3.5 2.1 2.5 1.4 1.2 1.3 2.7 2.0 Others0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Suppliers5.6 5.6 9.8 9.8 7.7 7.0 6.1 5.0 Private Non-guaranteed

111.5 111.1 37.2 112.0 153.2 93.0 111.2 108.8 Medlum- andlong-ermdebt11.3 13.9 16.2 14.0 9.3 17.9 0.0 0.0 Shott-termdebt3.6 7.0 7.2 5.6 3.8 1.2 0.0 0.0 IMF Charges

370.0 296.7 205.1 283.2 513.6 300.3 347.9 317.0 5 Total Debt Service321.3 261.5 164.3 253.6 449.3 224.1 319.8 2S6.9 Public and Publicly-guaranteed59.0 64.9 39.9 33.0 137.4 32.6 95.4 35.3 Bilateral

118.5 113.6 60.8 167.1 234.5 134.8 153.2 147.5 Multilateral51.7 47.8 8.8 30.6 160.0 55.9 58.9 55.4 IBRD0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IDA

144.3 83.0 63.6 53.5 77.4 56.7 71.2 54.1 Private Creditors78.1 24.3 23.4 32.1 36.1 28.5 30.5 32.0 Bonds43.0 47.1 28.4 18.3 38.1 25.4 24.2 14.2 Commercial Banks23.2 11.6 6.8 3.1 3.1 2.8 16.5 7,8 Others0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Suppliers8.7 8.6 12.8 12.8 23.5 27.0 23.1 30.1 PrivateNon-guaranteed

330.5 270.1 177.1 266.4 472.3 251.1 347.9 317.0 Medium- and long-term debt11.3 13.9 16.2 14.0 9.3 17.9 0.0 0.0 Short-term debt31.8 19.7 19.0 8.4 35.3 32.5 0.0 0.0 IMF Credit

399.7 354.0 931.2 43S.4 540.3 1073.1 341.0 317.0 7 Debt Service Due232.0 180.3 307.0 190.0 324.4 349.0 236.3 203.2 Amortization (LI)111.5 115.0 229.6 174.3 160.1 23S.0 111.2 103.S InterestPayments(LT)23.2 12.7 11.8 2.3 31.5 31.3 0.0 0.0 Amortization (ST)14.9 20.9 23.4 19.6 13.1 19.1 0.0 0.0 InterestPayments(ST)13.0 21.2 217.1 35.5 9.7 190.1 0.0 0.0 AdjustmenttoAmontiationNotPald0.1 3.9 142.3 62.7 2.0 194.9 0.0 0.0 AdjustmenttolnteretstNotPaid

Table 4.1Guatemala: Consumer Price Index (1990-100)1

1980 1981 ::1982 1983 1984 - 1985S 1986 1987

January 25.13 28.11 29.03 28.89 30.71 32.99 44.58 55.47February 25.19 28.17 29.12 28.89 30.88 32.93 45.33 55.87

March 25.08 28.43 29.15 28.89 31.03 32.93 46.94 56.65April 25.13 28.48 28.89 28.89 31.43 33.51 49.37 56.36May 25.80 29.18 29.55 29.99 31.32 34.67 50.27 57.03June 26.09 29.15 29.35 30.74 30.97 36.17 51.83 57.23July 26.14 29.29 29.29 31.34 31.29 38.08 53.30 57.55

August 26.23 29.35 29.15 32.24 30.85 39.72 53.93 57.78September 26.61 29.35 28.43 31.60 30.94 39.72 53.88 57.86

October 26.61 29.26 28.86 31.20 32.10 41.34 54.66 58.09November 26.98 29.55 29.15 30.71 32.67 42.24 54.40 58.64December 27.07 29.41 28.83 31.26 32.88 43.22 54.31 59.77Avg. Year 26.00 28.98 29.07 30.39 31.42 37.29 51.07 57.36

-1988 1989 1990 1991 1992 1993 1994 1995

January 60.72 67.22 80.89 130.75 137.80 156.78 173.82 190.03February 61.27 67.60 82.65 130.03 138.87 157.76 175.47 189.39

March 61.56 68.09 85.83 129.42 140.92 158.97 176.48 190.32April 61.65 68.73 89.32 131.04 142.74 161.37 178.56 191.76May 61.50 69.07 94.75 132.40 144.18 163.16 179.98 195.46June 62.28 69.51 98.51 133.61 145.74 166.63 180.52 197.05July 64.42 69.91 102.70 134.68 149.01 166.69 181.36 197.48

August 65.49 71.09 103.51 135.52 149.01 165.73 183.53 198.67September 65.81 71.79 107.67 134.19 150.13 165.01 184.77 199.79

October 65.87 73.12 111.51 134.25 150.54 165.97 186.39 202.60November 65.95 75.37 117.00 134.94 153.57 168.13 189.05 205.25December 66.33 78.23 125.67 137.19 156.03 170.18 189.91 206.26Avg. Year 63.57 70.81 100.00 133.17 146.54 163.87 181.65 197.01National-based index

Souirce: IMF

Table 4.2Guatemala: Nominal Exchange Rates'

1988-- 1989 1990 1991 1992 1993 1994 1995

January 2.207 2.705 3.595 5.078 5.070 5.260 5.834 5.737February 2.212 2.705 3.820 5.110 5.140 5.329 5.822 5.734

March 2.210 2.705 3.954 5.021 5.088 5.407 5.824 5.695April 2.211 2.705 4.234 4.959 5.024 5.472 5.816 5.737May 2.213 2.705 4.274 4.894 4.982 5.534 5.743 5.764June 2.700 2.705 4.305 4.968 5.061 5.611 5.740 5.755July 2.700 2.705 4.669 5.032 5.126 5.675 5.732 5.768

August 2.700 2.780 4.544 5.058 5.205 5.749 5.543 5.806September 2.700 2.780 5.725 5.015 5.268 5.819 5.794 5.888

October 2.700 2.780 5.442 5.085 5.277 5.829 5.778 5.956November 2.700 3.401 4.806 5.044 5.274 5.821 5.700 5.999December 2.700 3.424 5.015 5.031 5.289 5.762 5.686 5.935

Source: Banco de GuatemalaBid market operations (Mercado de Licitaciones-Venta Publica de Divisas) up to Feb 1995.Iherafter, based on Mesa de Camnbios.

Table 4.3Guatemala: Real Effective and

Nominal Exchange Rates (Quetzales/USS)~REEK BREER. No lal

YrI/Qrt. - (QIU) (US ):S/Q) Eich.Rate1

1989:1 136.377 73.326 2.7001989:2 133.088 75.138 2.7001989:3 134.072 74.587 2.7531989:4 145.915 68.533 3.1321990:1 164.737 60.703 3.7861990:2 164.255 60.881 4.2711990:3 171.016 58.474 4.7941990:4 161.938 61.752 5.0931991:1 147.295 67.891 5.0541991:2 137.431 72.764 4.9481991:3 t38.754 72.070 5.0301991:4 142.637 70.108 5.0911992:1 146.291 68.357 5.2811992:2 137.189 72.892 5.0511992:3 142.086 70.380 5.2241992:4 138.404 72.252 5.3171993:1 135225 73.951 5.3581993:2 138.955 71.966 5.5671993:3 137.918 72.507 5.7771993:4 137.682 72.631 5.8381994:1 133.485 74.915 5.8501994:2 130.002 76.922 5.7551994:3 130.579 76.582 5.7101994:4 128.684 77.710 5.6881995:1 129.217 77.389 5.7161995:2 131.160 76.243 5.7411995:3 129.806 77.038 5.8211995:4 129.192 77.404 5.963

Source: IMF

Table 1Guatemala: Conuolidated Operasions of the Nonfinancial Public Sectort(Milions of Quetzales)

1980 1981 1982 1983 .1984 19S5 1986 1987

1. Csr.tS Government

Cmnctn1Jwnc 747.3 740.6 730.3 7022 689.9 865.0 1406.5 1658.7Taxes and other revenue 721.7 691.1 679.3 629.1 634.3 760.4 1210.7 1517.2

Tax Rcvenue 6S6.1 658.6 632.7 551.5 536.1 679.5 1102.2 1396.5Direct taxes 104.3 115.0 109.7 109.0 120.2 126.2 186.1 272.8

Corporate Income tax 70.6 84.9 13.5 82.4 81.6 72.2 118.5 180.4Personal income tax 26.1 22.1 18.7 1.6 29.6 35.8 51.2 70.3Property tax 7.6 8.0 7.5 8.0 9.0 18.2 16.4 22.1

Indirecttaxes 581.8 543.6 523.0 442.5 415.9 553.3 916.1 1123.7Taxes on Domestic Transactions 316.3 366.1 389.8 331.3 301.7 414.4 539.1 700.1

Value added tax 2 - - -- 44.5 142.9 214.8 308.3 411.7Excise tax 97.0 90.0 89.1 86.0 108.4 128.7 138.7 173.0Stamp tax 200.3 261.0 284.8 182.2 32.5 55.5 71.7 91.6Others 19.0 15.1 15.9 18.6 17.9 15.4 20.4 23.8

Taxes on Internatlonal Trade 265.5 177.5 133.2 111.2 114.2 138.9 377.0 423.6Imports 111.9 105.2 80.5 67.4 80.7 78.5 136.2 273.1Exports 149.7 68.2 48.7 39.8 28.4 9.9 213.1 150.5Othertaxes 3.9 4.1 4.0 4.0 5.1 50.5 27.7 -

Nontax revenue 35.6 40.2 46.6 77.6 98.2 80.9 108.5 120.7

Tranufas from: 25.6 41.8 51.0 73.1 55.6 104.6 195.8 141.5Rest of general govemrment 0.4 0.5 0.5 0.5 - 4.6 15.5 7.7Nonfnancial publ.enterprises 2.3 1.5 4.0 11.6 16.0 19.8 33.2 54.3Privat sector' 22.9 39.8 46.5 61.0 39.6 80.2 147.1 79.5

CurrentiExnenditure 654.1 727.6 675.3 705.0 764.8 837.7 1406.5 1715.2Wages and salaries 351.4 386.3 373.8 391.0 413.5 452.2 625.6 736.3Gloods and services 138.8 157.7 141.6 127.2 150.1 162.8 278.1 344.5Interst 44.6 56.3 74.3 74.4 82.8 76.6 207.5 244.9Transfers to: 119.3 127.3 85.6 112.4 118.4 146.1 295.3 389.5Rest of general government 62.9 66.3 53.9 53.5 51.0 65.6 144.6 242.5Nonfinancial publ.enterprises 1.2 1.2 .. .. .. 0.2 4.6 0.0Private sector 50.7 55.1 27.7 55.1 63.7 75.6 134.0 138.6Abroad 4.5 4.7 4.0 3.8 3.7 4.7 12.1 8.4

Current Account Balance 93.2 13.0 55.0 -2.8 -74.9 27.3 0.0 -56.5

Capltal Recelpts 0.3 0.8 0.2 0.6 0.2 0.7 0.2 0.5

Canital Expenditure 435.6 622.3 449.6 315.3 269.5 230.6 298.3 377.6Fixedcapitalfonnation 217.0 301.6 233.6 162.3 162.8 131.3 147.1 170.7Other capital expenditure 6.5 10.0 0.2 0.2 7.9 .. 8.8Tmnsfersto: 212.1 310.7 215.8 152.8 98.8 99.3 151.2 198.1Restofgeneralgovemment 23.8 19.4 28.4 28.5 33.1 19.2 95.4 180.2Nonfinancial publ. enterpriscs 171.7 284.3 181.8 124.3 62.1 78.6 44.8 15.4Financial Internediaies 8.2 7.0 5.6 .. 3.6 .. 10.9 2.2Privatesector 8.4 .. .. .. .. 1.5 0.1 0.3

ivenwl Dcfckji -342.1 -608.5 -394.4 -317.5 .344.2 .202.6 -298.1 -433.6Grants 0.4 1.0 0.5 1.2 0.1 0.9 60.1 198.1Forign financing (net) 92.9 102.1 79.2 87.6 25.7 63.2 78.3 88.3Intenal financing (net) 248.8 505.4 314.7 228.7 318.4 138.5 159.7 147.5Chane In arrears 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Table 5.1 (cont)Guatemala: Consolidated Operations of the Nonfnanlcial Public Sector'(MilIions or Quetzales)

1980 1981 1982 1983 1984 1985 1986 1987

11. Rest of General Government

CurrenLt Revenue 239.3 264.6 258.0 253.8 258.2 288.4 404.6 546.9Taxrevenue 29.4 31.6 31.9 32.7 33.4 34.8 42.7 50.4Nontax revenue 140.58 160.7 165.7 161.82 166.66 178.4 208.3 250.2Transfers from: 69.3 72.3 60.4 59.3 58.1 75.2 153.6 246.3Central government 62.9 66.3 53.9 53.5 51.0 65.6 144.6 242.5Private sector 2.7 2.7 2.4 3.6 4A 7.6 5.1 3.6NonflnancIal publ.enterprises - - - 0.1 0.1 1.9 0.3 0.1Financial intermediaries 3.6 3.3 4.1 2.1 2.6 - 3.4 -Abroad 0.1 - - - 0.1 0.2 0.1

Current Expenditure 177.4 197.1 200.9 198.2 211.6 235.0 303.0 381.2Wagesandsalaries 98.7 108.1 114.9 111.4 115.5 127.7 164.0 201.7Goods and services 43.4 54.1 48.7 42.9 45.2 45.6 55.4 78.4Interest 2.1 2.0 1.8 1.7 2.2 3.0 3.2 3.1Transfers to: 33.2 32.9 35.5 42.2 48.7 58.7 80.4 98.0

Central govemment 0.4 0.5 0.5 0.5 -- 4.6 15.5 7.7Private sector 32.5 32.1 34.4 41.4 48.5 53.7 64.5 90.0Financial intermediaries - - - - - 0.4 - -Abroad 0.3 0.3 0.6 0.3 0.2 0.4 0.3

CurrentAccount Balance 61.9 67.5 57.1 55.6 46.6 53.4 101.6 165.7

Cagital Receipts from Central Govt 23.8 19.4 28.4 28.5 33.1 192 95.4 180.2

Capital Expepditure 60.3 73.1 52.5 36.9 38.4 28.3 36.4 104.5Fixed capital formation 60.3 73.1 50.8 36.8 38.3 27.0 36.4 104.0Transfers to private sector - - 1.7 0.1 0. I - - 05Transfer to financial intermnediaries - - - - - 1.3 - -

Overall Sumrlus or Deficit (-1 25.4 13.8 33.0 47.2 41.3 44.3 160.6 191.3Foreign financing (net) 0.4 5.6 4.7 4.7 6.4 3.8 1.3 -2.4lnternal financing (net) -25.8 -l9.4 -37.7 -51.9 -47.7 -48.1 .161.9 -188.9

Ill. Total General Govemment

C nuffent Re 923.3 938.4 933.9 902.0 897.1 1083.2 1651.0 1955.4Taxesandotherrevenue 891.7 891.1 876.9 823.6 834.4 973.6 1461.7 1817.8Transfers from: 31.6 47.3 57.0 78.4 62.7 109.6 189.3 137.6Nonfinancial public enterprises 2.3 1.5 4.0 11.7 16.1 21.7 33.5 54.4Financial intermediaries 3.6 3.3 4.1 2.1 2.6 -- 3.4 --Private sector 25.6 42.5 48.9 64.6 44.0 87.8 152.2 83.1Abroad 0.1 - - - - 0.1 0.2 0.1

Currnt E=Dditure 768.2 857.9 821.8 849.2 925.4 1002.5 1549.4 1846.2Wages and salaries 450.1 494.4 488.7 502.4 529.0 579.9 789.6 938.0Goods and services 182.2 211.S 190.3 170.1 195.3 208.4 333.5 422.9Interest 46.7 58.3 16.1 76.1 85.0 79.6 210.7 248.0Transfersto: 89.2 93.4 66.7 100.6 116.1 134.6 215.6 237.3Nonfinancial public enterprises 1.2 1.2 .. .. .. 0.2 4.6 0.0Private sector 83.2 87.2 62.1 96.5 112.2 129.3 198.5 228.6Financial Intemediaries - - - - - 0.4 - -Abroad 4.8 5.0 4.6 4.1 3.9 4.7 12.5 8.7

(couL) Table 5.1Guatemala: Consolidated Operadons of the Nonfinancial Public Sectorl

(Millions of Quetzales)198S 1989 1990 1991 1992 1993 1994 prel.

1, Central Government

2126.2 2237.6 2712.6 4266.0 5483.0 5744.5 5681.7 Current Revenue1952.6 2035.0 2561.3 3696.5 4745.5 5281.5 5354.3 Taxes andother revenue1811.0 1862.8 2360.2 3469.6 4511.6 5026.5 5054.2 TaxRevenue448.7 451.7 551.7 1085.0 1080.9 1225.7 903.5 Directtaxes319.5 335.4 481.5 901.2 817.3 1029.3 610.1 Corporate income tax

94.4 70.9 25.5 139.2 201.7 153.1 236.1 Personal income tax34.8 45.4 44.7 44.6 61.9 43.3 57.3 Property tax

1362.3 1411.1 1808.5 2384.6 3430.7 3800.8 4150.7 Indirecttaxes871.8 950.6 1276.3 1720.6 2282.5 2666.9 2944.5 Taxes on Domestic Transactions495.8 558.1 791.4 1038.8 1423.4 1679.0 1861.8 ValueaddedtaxZ177.0 190.9 248.9 401.4 573.4 682.3 755.1 Excise tax104.0 116.3 139.0 180.3 165.9 152.3 162.8 Stamptax95.0 85.3 97.0 100.1 119.8 153.3 164.S Others

490.5 460.5 532.2 664.0 1148.2 1133.9 1206.2 Taxes on International Trade387.7 406.1 527.6 662.1 1147.4 1133.9 1206.2 Imports102.8 54.4 4.6 1.9 0.3 0.0 0.0 Exports

- - - - - - - Othertaxes141.6 172.2 201.6 226.9 233.9 255.0 300.1 Nontax revenue

173.6 202.6 150.8 569.5 737.5 463.0 327.4 Transfers fromn:21.3 41.5 58.1 16.6 23.3 22.1 53.4 Rest of general government54.4 60.4 59.9 11.4 190.5 389.1 206.0 Nonfinancial publ.enterprises97.9 100.7 32.8 541.5 523.2 51.8 68.0 Privatesector?

2086.0 2457.2 3034.1 3572.8 4800.2 5347.8 5347.3 Cunent Expeitum854.0 959.4 1087.3 1308.6 1758.2 2117.1 2353.7 Wages and salaies446.0 511.1 651.0 641.4 873.9 894.6 818.5 Goods and services301.9 398.5 515.9 548.7 531.8 634.8 846.2 Interest484.1 588.2 779.9 1074.1 1636.3 1701.3 1328.9 Transfers to:230.9 256.4 248.4 419.4 531.2 633.6 643.2 Rest of general govemment

0.7 0.0 0.0 306.7 609.0 518.3 55.7 Nonfinancial publ.enterprises236.8 316.5 517A 336.1 472.9 504.6 575.0 Private sector

15.7 15.3 14.1 11.9 23.2 44.8 55.0 Abroad

40.2 -219.6 -321.5 693.2 682.8 396.7 334.4 Current Account Balance

0.1 0.0 0.0 0.0 0.0 0.0 0.0 Capital Receipt

583.9 762.2 603.7 736.2 956.4 1443.7 1727.6 Capital Expenditure272.9 320.0 339.7 413. 576.2 628.5 707.2 Fixed capital formation49.2 86.6 58.6 105.7 69.5 298.7 296.4 Other capital expenditure

261.8 355.6 205.4 216.7 310.7 516.5 724.0 Transfers to:133.4 163.9 157.7 202.5 303.7 501.9 688.0 Rest of general govemrnment81.3 159.2 32.9 2.0 1.0 0.3 0.0 Nonfinancial publ. enterprises8.0 26.3 12.6 9.7 0.0 1.1 0.0 Financial intermediaries

39.1 6.2 2.2 2.5 6.0 13.2 36.0 Private sector

-543.6 -981.8 -925.2 -43.0 -273.6 -1047.0 -1393.2 OverallDerfiit.fl217.0 198.1 90.2 0.0 260.3 14.9 74.5 Grants152.5 133.7 195.4 201.2 288.9 1069.2 1451.1 Foreign financing (net)174.1 609.2 500.7 .244.5 -194.4 293.1 -288.4 Intemal financing (net)

0.0 41.3 138.9 86.3 -81.2 -330.2 156.1 Changein arrears

Table 5.1 (cont.)Guatemala: Consolidated Operations of the Nonflnancial Public Sector'

(Millio of Quetales)1988 1989 1990 1991 1992 1993 1994 prel.

11. Rest of General Govement'

648.0 766.3 834.5 1225.1 1501.7 1561.2 1906.2 Curunt Reven48.2 55.2 49.6 96.5 104.8 125.7 128.1 Tax revenue

360.9 442.9 506.8 676.8 816.1 1010.2 1303.3 Nontax revenue231.9 268.2 278.1 451.1 580.3 425.3 474.8 Transfers from:230.9 256.4 248.4 419.4 531.2 375.9 414.2 Central goveninent

7.6 11.6 15.7 14.0 21.6 22.5 36.5 Privatesctor- 0.0 2.3 1.2 7.0 6.1 6.7 Nonfinancial publ.enterprbses- - 11.6 16.7 21.0 20.7 17.4 Financial internediaules

0.4 0.2 -- 0.5 - 0.1 0.0 Abroad

485.2 617.4 802.3 889.7 1202.9 1382.5 1568.1 Current Exyenditure253.3 303.8 337.4 377.3 520.7 655.2 756.8 Wages and salaries110.1 145.4 183.8 237.4 315.7 416.6 437.4 Goodsandservices

2.7 2.3 3.0 3.0 11.7 12.6 13.3 Interest118.6 165.9 278.1 272.0 354.8 298.1 360.6 Tansfers to:21.6 41.5 58.1 16.6 23.8 22.1 53.4 Centra govemment96.3 124.1 218.9 252.3 314.3 266.7 293.0 Private sector

- - - 2.4 16.3 9.0 13.8 Financial intermediaries0.7 0.3 1.1 0.7 0.4 0.3 0.4 Abroad

162.8 148.9 32.2 335.4 298.8 178.7 338.1 Current Account Balance

133.4 164.0 163.1 211.7 316.9 475.4 437.4 Canital RecelRts fron Centrm Go1vt

163.3 171.1 198.8 230.0 474.6 494.9 483.8 EixLenditr163.3 171.1 198.5 229.8 473.8 494.9 483.8 Fixed capit fbnnation

- - - 0.2 - - - Transfen to private sector- - 0.3 -- 0.8 - *- Transfr to flnancial lntrmediaries

132.9 141.8 -3.5 317.1 141.1 159.2 291.7 Overal Su[plusorDeflcit M- - - - - - Foreign financing (net)

-132.9 -141.8 3.5 -317.1 -141.1 -159.2 -291.7 Internal flnancing (net)

111. Total General Government

2522.0 2706.0 3240.6 5055.1 6429.7 6907.7 7120.3 CntRnLB nue2361.7 2533.1 3118.2 4469.8 5666.4 6417.4 6785.7 Taxes and other revenue

160.3 172.9 122.4 585.3 763.3 490.3 334.6 Transfers from:54.4 60.4 62.2 12.6 197.5 395.2 212.7 Nonfinancial public enterprises

- - 11.6 16.7 21.0 20.7 17.4 Financial intermediaries105.5 112.3 48.5 555.5 544.3 74.3 104.5 Private sector

0.4 0.2 -- 0.5 - 0.1 0.0 Abroad

2318.7 2776.7 3529.9 4026.5 5448.3 6074.6 6218.3 Current Exoenditure1107.8 1263.2 1424.7 1685.9 2278.9 2772.3 3110.5 Wages and salaries556.1 656.5 834.8 878.8 1189.6 1311.2 1255.9 Goods and services304.6 400.8 518.9 551.7 543.5 647.4 859.5 Interest350.2 456.2 751.5 910.1 1436.1 1343.7 992.9 Trnsfers to:

0.7 0.0 0.0 306.7 609.0 518.3 55.7 Nonfinancial public enterprises333.1 440.6 736.3 588.4 787.2 771.3 868.0 Private sector

- - -- 2.4 16.3 9 13.8 Financial lntermediaries16.4 15.6 15.2 12.6 23.6 45.1 55.4 Abroad

Table .1 (cont)Guatemala: Conseodated Operations of the Nonfinancial Public Sector(114111.ons of Quetzaes)

1980 1981 1982 1983 1984 1985 1986 1987

CurentAccountBalance 155.1 80.5 112.1 52.8 -28.3 80.7 101.6 109.2

CoilBAW R 0.3 0.8 0.2 0.6 0.2 0.7 0.2 0.5

CaulMl Fx=ditlw 472.1 676.0 473.7 323.7 274.8 238.8 239.3 301.9Fixed capital formatlon 277.3 374.7 284.4 199.1 201.1 158.3 183.5 274.7Tramsfrs to: 188.3 291.3 189.1 124.4 65.8 80.5 55.8 18.4Nonfinancial public entefprises 171.7 284.3 181.8 124.3 62.1 78.6 44.8 15.4Financial intermediris 8.2 7.0 5.6 0.0 3.6 0.4 10.9 2.2Privatesector 8.4 0.0 1.7 0.1 0.1 1.5 0.1 0.8

Other capital expenditure 6.5 10.0 0.2 0.2 7.9 .. .. 8.8

Overall 5urplus or deficit M-1 *316.7 -594.7 -361.4 -270.3 -302.9 -157.4 137.5 192.2Foreignfinancing(net) 93.7 107.7 83.9 92.3 32.1 81.0 44.8 15.4Intem financing (net) 223.0 487.0 277.5 178.0 270.8 76.4 10.9 2.2

111. Nonfinancial Public Entemrrises5

C0ao Rev0m 210.0 224.9 207.8 216.8 295.6 325.6 399.9 464.4Sales of goods and services 198.7 217.0 205.4 213.5 293.9 324.5 395.2 464.3Transer from: 2.1 1.2 0.2 0.0 0.1 0.8 4.7 0.1Cenbralgovemnment 1.2 1.2 - - - 0.2 4.6 -Rest of general govemrnent - - - - - 0.4 - -PrivateSector 0.9 - 0.2 - 0.1 0.2 0.1 0.1

Oder current revenue 9.2 6.7 2.2 3.3 1.6 0.3 - -

*=t nE x_zditue 192.1 208.4 176.3 170.5 234.8 242.3 300.9 368.6Waes and salaries 42.9 50.3 47.7 48.3 66.0 73.5 114.2 145.8Coods andservices 123.5 136.5 97.7 86.8 126.1 128.3 104.2 122.7Iterest 17.3 13.5 22.1 20.8 25.1 15.0 46.3 44.8Trsfers to: 8.4 3.1 8.8 14.6 17.6 25.5 36.2 55.3

Central govemrment 2.3 1.5 4.0 11.6 16.0 19.8 33.2 54.3Rest of general government - - - 0.1 0.1 1.9 0.3 0.1Private Sector 6.0 1.5 4.7 2.8 1.3 2.9 1.9 0.9Abroad 0.1 0.1 0.1 0.1 0.2 0.9 0.8 -

Current Account Balance 17.9 16.5 31.5 46.3 60.8 83.3 99.0 95.8

CakaLRn igts 173.2 291.9 197.0 132.0 67.3 82.0 51.7 55.7Transfen from

CentralGovemmnent 171.7 284.3 181.3 124.3 62.1 78.6 44.8 15AOther Capital 1.5 7.6 15.2 7.7 5.2 3.4 6.9 40.3

Cnital Expenditure 197.5 302.3 258.0 203.4 140.1 155.6 138.7 129.9Fixed capital formation 190.7 300.3 251.6 190.9 140.1 153.0 126.2 97.9Trusfers to private sector 6.3 2.0 6.4 - - - - -Oder capital expenditure - - - 12.5 - 2.6 12.5 32.0

Overall smumisor deficit (4 -6.4 6.1 -29.5 -25.1 12.5 9.7 21.1 54.4Foreign financing (net) 1.0 1.1 23.6 31.7 -11.5 -60.9 8.5 11.0Interna financing (net) 5.4 -7.2 5.9 -6.6 -1.0 51.2 -29.6 -65.4

Tablt 5.1 (coaL)Guatemala: Consolidated Operations of the Nonfinancial Public Sector

(Millions Of Quetzalea)1988 1989 1990 1991 1992 1993 1994 prel.

203.3 -70.7 -289.3 1028.6 9S1.6 833.1 901.5 Current Account Balance

0.1 0.1 5.4 9.2 13.2 10.7 5.7 CaniataReipts

613.8 769.4 644.5 766.1 1142.8 1445.7 1537.2 CAnital Expenditure436.2 491.1 533.2 643.6 1050.0 1123.4 1191.0 Fixed capital formation128.4 191.7 47.7 16.8 23.3 23.6 49.8 Transfers to:31.3 159.2 32.9 2.0 1.0 0.3 0.0 Nonfinancial public enterprises8.0 26.3 12.6 12.1 16.3 10.1 13.8 Financial intermediaries

39.1 6.2 2.2 2.7 6.0 13.2 36.0 Private sector49.2 86.6 58.6 105.7 69.5 298.7 296.4 Other capital expenditure

410.4 840.0 928.4 -271.7 148.0 601.9 630.0 Overall surplus or deficit (-A81.3 159.2 32.9 2.0 1.0 0.3 0.0 Foreign financing (net)8.0 26.3 12.6 9.7 0.0 1.1 0.0 Intemal financing (net)

111. Nonfinancial Public EnteMnrises3

489.5 620.6 1099.0 1603.0 2166.9 2274.0 1973.4 Current Revenue483.7 620.6 1099.0 1328.7 1594.7 189.7 1923.9 Sales of goods and services

0.8 0.0 0.0 274.3 572.2 384.3 49.5 Transfers from:0.7 - - 269.7 555.9 374.3 35.7 Central govemment

- 2.4 16.3 9.0 13.8 Rest of general govemment0.1 - - 2.2 - 1.0 - Private Sector

- - - - - - - Other current revenue

488.6 499.8 643.4 837.4 1314.4 1490.6 1395.1 Current Exnenditure169.1 189.5 215.3 258.2 317.0 415.4 480.4 Wages and salaries151.5 169.7 239.2 367.8 548.1 432.2 491.8 Goods and services98.S 63.3 97.0 114.7 217.8 206.1 176.2 Interest69.5 77.3 91.8 96.7 231.5 436.9 246.7 Transfers to:54.4 60.4 59.9 11.4 190.5 389.1 206.0 Central govemment

- 0.0 2.3 1.2 7.0 6.1 6.7 Rest of general govemment14.8 16.4 29.2 83.3 33.7 41.6 33.6 Private Sector0.3 0.5 0.4 0.8 0.3 0.1 0.4 Abroad

0.9 120.8 455.6 765.6 852.5 783.4 578.3 Current Account Balance

89.4 159.2 32.9 2.0 5.6 60.0 37.0 Capital ReceiltsTransfers from

81.3 159.2 32.9 2.0 1.0 0.3 -- Central Government1.1 - - -- 4.6 59.7 37.0 Other Capital

159A 239.5 544.7 533.2 266.4 629.3 608.2 Canital Expenditure158.4 211.0 356.6 481.2 266.4 627.7 608.2 Fixed capital formation

1.0 - - - -- - Transfers to private sector- 28.5 188.1 52.0 -- 1.6 -Other capital expenditure

-69.1 40.5 -56.2 234.4 591.7 214.1 7.1 Overall surplus or deficit -1-10.4 74.8 13.4 13.4 13.4 13.4 -- Foreign financing (net)79.5 -115.3 42.8 -247.8 -605.1 -227.5 - Internal financing (net)

Table 5.I (coat.)Guatemala: Consolidated Operatons of the Nonfinancial Public Sector(Millions ofQuetzales)

1980 1981 1982 1983 1984 1985 1986 1987

IV. Consolidated Nonfinancial Public Sector

J;t Revenue 963.4 973.3 9923 972.0 984.5 1184.7 1794.4 2096.9Current account surplus of non-financial public enterprisesnet of trnfers and interest 41.5 36.9 62.2 31.7 103.4 123.0 176.8 195.3

Taxes and other revenue 891.7 391.1 876.9 323.6 834.4 973.6 1461.7 1817.8Cumnt transfers 30.2 45.8 53.2 66.7 46.7 83.1 155.9 833Financial intemediaries 3.6 3.3 4.1 2.1 2.6 - 3.4 -Privatesector 26.5 42.5 49.1 64.6 44.1 8S.0 152.3 83.2Abroad 0.1 - - - - 0.1 0.2 0.1

Current Expenditure 790.4 876.3 848.7 872.9 952.0 1021.1 1593.8 1891.9Wages and salaries 450.1 494A 488.7 502.4 529.0 579.9 789.6 938.0Goods and services 182.2 211.8 190.3 170.1 195.3 208.4 333.5 422.9Interest 64.0 76.8 93.2 96.9 110.1 94.6 257.0 292.3Transfenrto: 94.1 93.3 71.5 103.5 117.6 138.2 213.7 233.2

Privatesector 89.2 88.7 66.8 99.3 113.5 132.2 200.4 229.5Financial Lntezmediaries - - - - - 0.4 - -Abroad 4.9 5.1 4.7 4.2 4.1 5.6 13.3 8.7

CurrentAccountBalancc 173.0 97.0 143.6 99.1 32.5 163.6 200.6 20S.0

Caitlu Receioa 1.8 8.4 15.4 3.3 5.4 4.1 7.1 40.3

caphial EsxKn& 497.9 694.0 549.9 402.8 352.8 316.7 333.2 416.4Fixed capital fonnaion 468.0 675.0 536.0 390.0 341.2 311.3 309.7 372.6Other capital expenditure 6.5 10 0.2 12.7 7.9 2.6 12.5 40.8Transfier to: 23.4 9.0 13.7 0.1 3.7 2.8 11.0 3.0

Financial intermediaries 8.2 7.0 5.6 0.0 3.6 1.3 10.9 2.2rivate sector 15.2 2.0 S.l 0.1 0.1 1.5 0.1 0.3

Abroad _ _ _ _ _ _

Net Lending' 26.3 30.1 16.6 13.7 7.4 - -33 4.2

Oveall SuM,lus or Deficit f-) .296.3 -558.5 -374.3 -281.7 -307.5 -149.0 -123.3 -166.4Grants 0.4 1.0 0.5 1.2 0.1 0.9 60.1 193.1Foreign financing (net) 94.3 108.8 107.5 124.0 20.6 6.1 8B.1 96.9lntemna financing (net) 201.6 448.7 266.3 156.5 236.8 142.0 -19.4 -128.6All expenditures are on accrual basis (gastos caussdos). A classification on cash basis Is not available.

2 Includes VAT on domestic sales and imports1 Includes die Petroleum Compensation Fund up to 1992.4 Includes local governments. IGSS, and decentralized agencies.

Includes INDECA, GNT, EPN. FEGUA, AVIATECA, EPQ, GUATEL, INDE, PROLAC, ZOLIC. and EMPEGUA.Net lending for reconstruction trust funds; includes statistical discrepancy from 1986 onwards.

Source: Ministry of Finance and IMF estimates.

Table 5.1 (cOot.)Guatemala: Consolidated Operations of the Nonfinancial Public Sector

(Millions of Quetzales)

1988 1989 1990 1991 1992 1993 1994 prel.

IV. Consolidated Nonfinancial Public Sector

2635.8 2907.0 3811.2 5730.7 6940.8 7534.9 7841.9 Current RevenueCurrent account surplus of non-financial public enterprises

168.1 261.4 644.5 702.7 729.6 1042.1 951.7 netoftransfers and interest2361.7 2533.1 3118.2 4469.8 5666.4 6417.4 6785.7 Taxesandotherrevenue

106.0 112.5 48.5 558.2 544.8 75.4 104.5 Current transfers-- - - - .-- -- - Financial intemediaries

105.6 112.3 48.5 557.7 544.8 75.3 104.5 Private sector0.4 0.2 -- 0.5 -- 0.1 0.0 Abroad

2431.6 2856.9 3656.5 3953.2 5127.7 6196.8 6608.5 CurrentExpenditure1107.8 1263.2 1424.7 1685.9 2278.9 2772.3 3110.5 Wages and salaries556.1 656.5 834.8 878.8 1189.6 1311.2 1255.9 Goods and services403.1 464.1 615.9 666.4 761.3 853.5 1035.7 Interest364.6 473.1 781.1 722.1 897.9 1259.8 1206.4 Transfers to:347.9 457.0 765.5 671.7 820.9 1070.6 1130.6 Private sector

- - _- 37.0 53.1 144.0 20.0 Financial Intermediaries

16.7 16.1 15.6 13.4 23.9 45.2 55.8 Abroad

204.2 50.1 154.7 1777.4 1813.1 1338.1 1233.4 CurrentAccountBalance

8.2 0.0 5.4 9.2 17.8 70.4 42.8 Capital Recips

691.9 849.7 1156.6 1294.9 1392.7 2102.8 2388.0 Capital Exnenditure

594.6 702.1 894.8 1124.8 1316.4 1751.1 1799.2 Fixed capital formnation

49.2 115.1 246.7 157.7 69.5 300.3 296.4 Other capital expenditure

43.1 32.5 15.1 12.4 6.8 51.4 292.4 Transfers to:3.0 26.3 12.9 9.7 0.8 1.1 0.0 Financial intermediaries

40.1 6.2 2.2 2.7 6.0 50.3 292.4 Private sector_. -- --- -. _ --- Abroad

12.7 -136.1 279.0 -601.0 142.7 -161.2 -23.0 Nct Lending'

-466.8 -935.7 -717.5 .109.2 580.9 -855.5 -1134.8 Overall SuMius or Deficit (-I217.0 198.1 90.2 0.0 260.3 14.9 74.5 Grants142.1 208.5 208.8 214.6 302.3 1082.6 1451.1 Foreign financing (net)107.7 529.1 418.5 -105.4 -1143.5 -242.0 -390.8 Intemal financing (net)

Table 5.2Guatemala: Central Government Operations(% of Current GDP)

1980: 1981 1982 1983 .1984 1985 1986 -: 1987

Cuffent Reve,nue 9.5 8.6 8.4 7.8 7.3 7.7 S.9 9.4Taxes and other revenue 9.2 8.1 7.8 7.0 6.7 6.8 7.6 8.6

Tax Revenue 8.7 7.7 7.3 6.1 5.7 6.1 7.0 7.9Direct taxes 1.3 1.3 1.3 1.2 1.3 1.1 1.2 1.5

Corporate income tax 0.9 1.0 1.0 0.9 0.9 0.6 0.7 1.0Personal income tax 0.3 0.3 0.2 0.2 0.3 0.3 0.3 0.4Property tax 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1

Indirect taxes 7.4 6.3 6.0 4.9 4.4 4.9 5.8 6.3Taxes on Domestic Transactions 4.0 4.3 4.5 3.7 3.2 3.7 3.4 4.0

Value added tax - - -- 0.5 1.5 1.9 1.9 2.3Excise tax 1.2 1.0 1.0 1.0 1.1 1.2 0.9 1.0Stamp tax 2.5 3.0 3.3 2.0 0.3 0.5 0.5 0.5Others 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1

Taxes on Intemational Trade 3.4 2.1 1.5 1.2 1.2 1.2 2.4 2.4Imports 1.4 1.2 0.9 0.7 0.9 0.7 0.9 1.5Exports 1.9 0.8 0.6 0.4 0.3 0.1 1.3 0.8Other taxes 0.0 0.0 0.0 0.0 0.1 0.5 0.2 -

Nontax revenue 0.5 0.5 0.5 0.9 1.0 0.7 0.7 0.7

Transfers from: 0.3 0.5 0.6 0.8 0.6 0.9 1.2 0.8Rest of general govemment 0.0 0.0 0.0 0.0 - 0.0 0.1 0.0Nonfinancial publ.enterprises 0.0 0.0 0.0 0.1 0.2 0.2 0.2 0.3Private sector, 0.3 0.5 0.5 0.7 0.4 0.7 0.9 0.4

Current Exenditure 8.3 8.5 7.7 7.8 8.1 7.5 8.9 9.7Wages and salaries 4.5 4.5 4.3 4.3 4.4 4.0 3.9 4.2Goods and services 1.8 1.8 1.6 1.4 1.6 1.5 1.8 1.9Interest 0.6 0.7 0.9 0.8 0.9 0.7 1.3 1.4Transfers to: 1.5 1.5 1.0 1.2 1.3 1.3 1.9 2.2

Rest of general govemment 0.8 0.8 0.6 0.6 0.5 0.6 0.9 1.4Nonfinancial publ.enterprises 0.0 0.0 -- - - 0.0 0.0 0.0Private sector 0.6 0.6 0.3 0.6 0.7 0.7 0.8 0.8Abroad 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.0

Current Account Balance 1.2 0.2 0.6 0.0 -0.8 0.2 0.0 -0.3

Capital Receips 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Canital Expenditure 5.5 7.2 5.2 3.5 2.8 2.1 1.9 2.1Fixed capital formation 2.8 3.5 2.7 1.8 1.7 1.2 0.9 1.0Other capital expenditure 0.1 0.1 0.0 0.0 0.1 - - 0.0Transfers to: 2.7 3.6 2.5 1.7 1.0 0.9 1.0 1.1Rest of general government 0.3 0.2 0.3 0.3 0.3 0.2 0.6 1.0Nonfinancial publ. enterprises 2.2 3.3 2.1 1.4 0.7 0.7 0.3 0.1Financial intermediaries 0.1 0.1 0.1 -- 0.0 - 0.1 0.0Private sector 0.1 - - -- - 0.0 0.0 0.0

Qverall Deficit *4.3 -7.1 -4.5 -3.5 -3.6 -1.8 -1.9 -2.4Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.4 1.1Foreign financing (net) 1.2 1.2 0.9 1.0 0.3 0.6 0.5 0.5Intemal financing (net) 3.2 5.9 3.6 2.5 3.4 1.2 1.0 0.8Change in arrears 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Includes VAT on domestic sales and imports.

2 Includes the Petroleum Compensation Fund up to 1992.Source: Table 5.1

Table 5.2 (cont.)Guatemala: Central Government Operations

(% of Current GDP)1988 1989 1990 1991 1992 1993 1994 prel.

10.3 9.4 7.9 9.0 10.2 8.9 7.6 CuroJt Revcnue9.5 8.6 7.5 7.8 8.8 8.2 7.2 Taxes and other revenue8.8 7.9 6.9 7.3 8.4 7.8 6.8 Tax Revenue2.2 1.9 1.6 2.3 2.0 1.9 1.2 Direct taxes1.6 1.4 1.4 1.9 1.5 1.6 0.8 Corporate income tax0.5 0.3 0.1 0.3 0.4 0.2 0.3 Personal income tax0.2 0.2 0.1 0.1 0.1 0.1 0.1 Property tax6.6 6.0 5.3 5.0 6.4 5.9 5.6 Indirect taxes4.2 4.0 3.7 3.6 4.2 4.2 3.9 Taxes on Domestic Transactions2.4 2.4 2.3 2.2 2.6 2.6 2.5 Value added tax30.9 0.8 0.7 0.8 1.1 1.1 1.0 Excise tax0.5 0.5 0.4 0.4 0.3 0.2 0.2 Stamp tax0.5 0.4 0.3 0.2 0.2 0.2 0.2 Others2.4 1.9 1.6 1.4 2.1 1.8 1.6 Taxes on Intemational Trade1.9 1.7 1.5 1.4 2.1 1.8 1.6 Imports0.5 0.2 0.0 0.0 0.0 0.0 0.0 Exports

-- -- - - . - . - Other taxes0.7 0.7 0.6 0.5 0.4 0.4 0.4 Nontax revenue

0.8 0.9 0.4 1.2 1.4 0.7 0.4 Transfers from:0.1 0.2 0.2 0.0 0.0 0.0 0.1 Rest of general govemment0.3 0.3 0.2 0.0 0.4 0.6 0.3 Nonfinancial publ.enterprises0.5 0.4 0.1 1.1 1.0 0.1 0.1 Private sector2

10.2 10.4 8.8 7.6 8.9 8.3 7.2 Current Expenditure4.2 4.1 3.2 2.8 3.3 3.3 3.2 Wages and salaries2.2 2.2 1.9 1.4 1.6 1.4 1.1 Goods and services1.5 1.7 1.5 1.2 1.0 1.0 1.1 Interest2.4 2.5 2.3 2.3 3.0 2.6 1.8 Transfers to:1.1 1.1 0.7 0.9 1.0 1.0 0.9 Rest of general government0.0 0.0 0.0 0.6 1.1 0.8 0.1 Nonfinancial publ.enterprises1.2 1.3 1.5 0.7 0.9 0.8 0.8 Privale sector0.1 0.1 0.0 0.0 0.0 0.1 0.1 Abroad

0.2 -0.9 -0.9 1.5 1.3 0.6 0.4 Current Account Balance

0.0 0.0 0.0 0.0 0.0 0.0 0.0 CaDital Receipts.

2.8 3.2 1.8 1.6 1.8 2.2 2.3 Canital Exnenditure1.3 1.4 1.0 0.9 1.1 1.0 0.9 Fixed capital forrnation0.2 0.4 0.2 0.2 0.1 0.5 0.4 Other capital expenditure1.3 1.5 0.6 0.5 0.6 0.8 1.0 Transfers to:0.6 0.7 0.5 0.4 0.6 0.8 0.9 Rest of general govemment0.4 0.7 0.1 0.0 0.0 0.0 0.0 Nonfinancial publ. enterprises0.0 0.1 0.0 0.0 0.0 0.0 0.0 Financial intermediaries0.2 0.0 0.0 0.0 0.0 0.0 0.0 Private sector

-2.6 -4.1 -2.7 -0.1 -0.5 .1.6 -1.9 Overall Deficift 1.1 0.8 0.3 0.0 0.5 0.0 0.1 Grants0.7 0.6 0.6 0.4 0.5 1.7 1.9 Foreign financing (net)0.8 2.6 1.5 -0.5 -0.4 0.5 -0.4 Internal financing (net)0.0 0.2 0.4 0.2 -0.2 .0.5 0.2 Change in arrears

Table 6.1Guatemala: CENIVACUS Interest Rates'

1988 1989 -1990 - 1991. 1992 1993 1994 1995

January 11.5 11.50 14.00 33.49 13.48 17.00 23.00 15.35February 11.50 11.50 24.50 33.49 10.95 20.50 22.03 15.35

March 11.50 12.00 24.50 33.13 11.00 20.40 18.10 17.86April 11.50 12.00 24.50 26.96 10.33 21.21 18.25 18.31May 11.50 12.00 18.50 23.79 10.98 21.20 17.94 18.54June 11.50 12.00 18.50 21.96 10.98 21.19 17.18 19.10July 11.50 12.00 18.50 22.33 11.74 24.23 17.01 19.26

August 11.50 14.00 21.34 22.36 14.01 23.20 11.58 19.10September 11.50 14.00 34.48 0 15.00 23.17 9.77 19.61

October 11.50 14.00 32.99 13.41 16.00 23.12 9.76 19.94November 11.50 14.00 33.49 16.07 17.00 23.15 9.76 20.69December 11.50 14.00 33.49 14.37 17.00 23.15 9.76 22.24

Source: Banco de Guatemala182-day rate used by BANGUAT for open market operations. 9 1-day rate during Aug. 1989-Jul.90

Table 6.2Guatemala: Daily Balance of Reserve Requirements (Mn Quetzales)

1993 1994 1995 1993 1994 - *199501-Apr 10398.8 11168.1 12626.2 01-Jul 10488.9 12409.3 12457.602-Apr 10355.5 11167.8 12625.9 02-Jul 10412.8 12423.7 12459.603-Apr 10340.0 11167.7 12477.1 03-Jul 10493.7 12423.2 12495.004-Apr 10339.9 11302.5 12528.3 04-Jul 10493.8 12308.9 12570.505-Apr 10335.9 11337.3 12524.1 05-Jul 10503.5 12305.0 12622.206-Apr 10314.3 11316.0 12462.7 06-Jul 10509.6 12389.1 12642.007-Apr 10435.6 11293.6 12415.3 07-Jul 10510.3 12506.8 12643.508-Apr 10434.4 11334.6 12400.7 08-Jul 10508.1 12585.7 12583.109-Apr 10437.6 11326.5 12400.4 09-Jul 10447.3 12587.4 12582.910-Apr 10437.4 11325.9 12434.9 10-Jul 10438.3 12587.0 12533.711-Apr 10437.2 11345.3 12162.6 11-Jul 10435.1 12530.1 12529.512-Apr 10547.0 11399.2 12119.5 12-Jul 10481.1 12515.5 12601.713-Apr 10511.9 11407.0 12125.5 13-Jul 10448.5 12595.8 12329.514-Apr 10540.7 11439.8 12104.2 14-Jul 10408.0 12658.5 12345.215-Apr 10570.9 11671.4 12106.9 15-Jul 10291.3 12524.5 12299.216-Apr 10690.1 11652.2 12106.6 16-Jul 10344.3 12495.2 12299.717-Apr 10681.2 11651.8 12189.5 17-Jul 10343.7 12494.8 12023.018-Apr 10681.0 11750.2 12248.4 18-Jul 10343.1 12505.0 12089.719-Apr 10677.0 11790.7 12229.9 19-Jul 10443.0 12398.7 12113.320-Apr 10564.8 11780.1 12129.9 20-Jul 10417.9 12485.7 12077.221-Apr 10693.5 11755.6 12030.9 21-Jul 10354.4 12326.7 12052.122-Apr 10640.7 11855.7 12021.0 22-Jul 10399.4 12276.0 12026.223-Apr 10611.9 11866.5 12020.7 23-Jul 10252.0 12258.6 12026.724-Apr 10601.5 11860.3 11936.0 24-Jul 10240.9 12258.2 12107.025-Apr 10601.2 11796.1 11995.9 25-Jul 10240.4 12338.7 12041.226-Apr 10683.8 11863.1 12047.6 26-Jul 10324.9 12591.0 12042.527-Apr 10599.7 11917.4 12047.6 27-Jul 10335.7 12700.5 12521.528-Apr 10525.9 11811.4 11939.7 28-Jul 10378.3 12762.3 12409.029-Apr 10594.4 11885.3 12165.1 29-Jul 10345.7 12710.3 12375.230-Apr 10846.6 12112.2 12780.7 30-Jul 10333.1 12698.3 12374.701-May 10878.9 11762.9 12023.5 31-Jul 10304.8 13061.9 13171.802-May 10878.8 11706.5 12050.5 01-Aug 10331.9 12362.4 12080.203-May 10678.0 11701.4 12182.4 02-Aug 10234.5 12456.3 12088.404-May 10681.9 11764.0 12193.7 03-Aug 10291.5 12534.6 12180.805-May 10670.4 11691.4 12115.4 04-Aug 10276.6 12502.5 12121.706-May 10624.2 11815.8 12114.3 05-Aug 10271.8 12479.1 12103.507-May 10584.6 11807.7 12114.1 06-Aug 10174.7 12454.4 12104.408-May 10506.5 11807.6 12186.9 07-Aug 10104.6 12454.1 12368.209-May 10508.4 11860.1 12372.1 08-Aug 10104.3 12770.8 12291.510-May 10521.3 12072.4 12443.7 09-Aug 10302.3 13005.2 12329.411-May 10501.1 12194.8 12387.4 10-Aug 10378.2 12975.5 12210.012-May 10561.6 12259.1 12398.1 1 1-Aug 10366.1 13047.6 12154.213-May 10612.2 12197.3 12370.1 12-Aug 10387.4 13014.8 12138.614-May 10622.4 12169.9 12370.0 13-Aug 10344.9 12988.7 12139.415-May 10508.8 12169.2 12331.6 14-Aug 10346.6 12988.2 12204.816-May 10509.4 12286.4 12371.6 15-Aug 10333.3 13021.8 12197.8 (cont.)

Table 6.2 (cont.)Guatemala: Daily Balance of Reserve Requirements (Mn Quetzales)

1993 1994 1995 1993 1994 199517-May 10570.9 12290.7 12349.0 16-Aug 10361.0 13121.5 12203.618-May 10542.2 12104.2 12401.0 17-Aug 10420.6 13122.2 12297.219-May 10581.3 12167.9 12266.0 18-Aug 10432.1 13137.4 12243.820-May 10577.1 11935.1 12253.1 19-Aug 10354.8 13155.8 12228.221-May 10619.4 11923.3 12252.7 20-Aug 10328.7 13128.2 12228.422-May 10608.2 11923.2 12177.6 21-Aug 10320.5 13127.8 12356.823-May 10607.3 11958.0 12244.9 22-Aug 10330.7 13221.8 12400.024-May 10642.7 11923.9 12273.2 23-Aug 10387.3 12956.0 12379.725-May 10578.0 11969.8 12234.6 24-Aug 10312.4 12951.7 12426.526-May 10577.3 11924.6 12389.8 25-Aug 10308.1 13145.2 12371.327-May 10487.8 11853.3 12377.4 26-Aug 10314.1 13145.1 12352.128-May 10448.2 11843.7 12377.3 27-Aug 10203.0 13131.7 12352.829-May 10430.6 11843.3 12318.3 28-Aug 10227.8 13131.3 12735.930-May 10430.3 11864.9 12419.2 29-Aug 10230.6 12980.8 12617.331-May 10578.0 12535.9 12822.7 30-Aug 10330.3 13092.5 12653.301-Jun 10520.4 11982.9 12316.6 31-Aug 10573.4 13476.2 13455.602-Jun 10448.9 11942.7 12092.8 01-Set 10570.0 12884.1 12095.003-Jun 10420.1 11901.9 12079.2 02-Set 10391.9 12937.1 11931.704-Jun 10318.6 11895.1 12079.0 03-Set 10384.0 12921.4 11932.105-Jun 10295.2 11894.6 12082.0 04-Set 10373.7 12921.2 12084.206-Jun 10294.9 11960.3 12119.5 05-Set 10390.5 12978.5 11974.607-Jun 10400.5 12043.2 12052.8 06-Set 10341.6 13030.2 11958.908-Jun 10406.5 12085.4 12085.8 07-Set 10371.9 13057.2 11945.209-Jun 10406.0 12215.7 12076.6 08-Set 10387.8 13296.6 11782.910-Jun 10383.2 12015.1 12033.7 09-Set 10398.4 13218.0 11759.71 1-Jun 10434.9 12206.9 12033.6 10-Set 10408.2 13204.9 11780.312-Jun 10428.8 12008.8 12014.0 11-Set 10378.1 13204.6 11840.113-Jun 10426.0 12094.5 12111.0 12-Set 10275.7 13274.8 11880.814-Jun 10392.0 12164.2 12076.8 13-Set 10487.1 13207.3 11887.415-Jun 10367.9 12166.8 12013.7 14-Set 10481.1 13184.2 11786.316-Jun 10361.0 12238.5 11919.9 15-Set 10449.7 13179.7 11776.517-Jun 10348.8 12296.7 11901.1 16-Set 10390.1 13098.5 11785.418-Jun 10402.7 12280.5 11893.4 17-Set 10401.8 13049.5 11785.219-Jun 10381.1 12280.3 12214.7 18-Set 10454.7 13049.1 11929.720-Jun 10391.1 12242.5 12350.6 19-Set 10438.3 13150.7 11950.921-Jun 10380.0 12310.5 12184.7 20-Set 10503.3 12885.9 12064.722-Jun 10372.5 12298.0 12117.3 21-Set 10508.6 12652.9 12127.023-Jun 10370.7 12288.1 12280.6 22-Set 10488.5 12454.6 12249.024-Jun 10328.6 12252.2 12213.6 23-Set 10488.6 12369.6 12225.525-Jun 10321.5 12240.4 12214.0 24-Set 10572.7 12357.0 12226.226-Jun 10310.1 12240.2 12343.7 25-Set 10555.1 12356.5 12312.827-Jun 10309.9 12332.0 12534.9 26-Set 10554.6 12392.6 12451.728-Jun 10387.5 12098.2 12456.0 27-Set 10564.7 12323.0 12651.929-Jun 10507.3 12320.7 12408.2 28-Set 10582.0 12217.4 12751.030-Jun 10740.9 12404.3 13167.2 29-Set 10604.1 12129.5 12472.5

30-Set 10592.6 13001.9 12903.6Sozrce: Bank of Guatemala.

Table 6.3Guatemala: Credit to the Public and Private Sectors

(Millions of Quetzales)Claims on Claims on Claims on Claims on Total Domestic CP[

Yr/Qrt Centr. Govt. (net) Local Gov Priv Sect Other BI Credit (89q4s100)1989:1 881 6 3277 63 4227 89.501989:2 944 6 3307 65 4321 91.441989:3 835 6 3383 65 4288 93.861989:4 1044 5 3427 67 4544 100.001990:1 1107 5 3827 86 5025 109.991990:2 1136 5 3932 100 5173 124.641990:3 927 5 4040 92 5064 138.441990:4 1075 4 4300 75 5454 156.221991:1 548 4 4367 74 4994 172.111991:2 388 0 4484 89 4960 175.131991:3 210 0 4702 114 5026 178.361991:4 653 0 5011 154 5817 179.241992:1 494 0 4988 151 5633 184.191992:2 444 0 5248 143 5835 190.841992:3 648 0 6204 251 7104 197.671992:4 566 0 6625 284 7475 202.961993:1 116 0 6582 269 6967 208.861993:2 674 0 6787 269 7730 216.641993:3 528 0 7091 250 7869 219.411993:4 408 3 7434 245 8091 222.431994:1 609 0 7308 235 8152 231.911994:2 618 0 7626 229 8473 237.771994:3 1009 2 8001 203 9215 242.441994:4 1590 2 9157 188 10937 249.361995:1 N.A N.A 9519 N.A N.A 251.301995:2 N.A N.A 9749 N.A N.A 257.711995:3 N.A N.A 9953 N.A N.A 263.711995:4 N.A N.A 10735 N.A N.A 271.52Souirce: IMF

Table 6.4Guatemala: Instruments of Monetary Policy

Millions of Quetzales Structure (%)ega Obligatory Open Mkt Legal Obligatory Open Mkt

Yr/Mo Reserves Investments Operations Total Reserves Investments Operations Total1992:12 1550.3 663.9 3136.4 5350.6 29.0 12.4 58.6 100.01993:1 2037.0 677.1 2552.3 5266.4 38.7 12.9 48.5 100.01993:2 2030.7 682.9 2735.3 5448.9 37.3 12.5 50.2 100.01993:3 2143.6 839.2 2801.5 5784.3 37.1 14.5 48.4 100.01993:4 2026.1 1012.8 3101.4 6140.3 33.0 16.5 50.5 100.01993:5 2112.7 1003.3 2978.2 6094.2 34.7 16.5 48.9 100.01993:6 2217.7 1247.1 2654.2 6119.0 36.2 20.4 43.4 100.01993:7 2256.8 1295.2 2543.7 6095.7 37.0 21.2 41.7 100.01993:8 1953.5 1395.2 2675.5 6024.2 32.4 23.2 44.4 100.01993:9 2077.2 1415.7 2967.9 6460.8 32.2 21.9 45.9 100.01993:10 1917.3 1460.2 2848.3 6225.9 30.8 23.5 45.8 100.01993:11 2015.5 1552.3 2773.0 6340.8 31.8 24.5 43.7 100.01993:12 2151.6 1568.2 2948.5 6668.3 32.3 23.5 44.2 100.01994:1 2249.2 1615.9 2987.5 6852.6 32.8 23.6 43.6 100.01994:2 2268.2 1686.4 3340.8 7295.4 31.1 23.1 45.8 100.01994:3 1960.2 1736.4 3403.4 7100.0 27.6 24.5 47.9 100.01994:4 2092.0 1758.3 3451.5 7301.8 28.7 24.1 47.3 100.01994:5 2139.8 1829.7 3460.7 7430.2 28.8 24.6 46.6 100.01994:6 2138.2 1843.5 3449.0 7430.7 28.8 24.8 46.4 100.01994:7 2190.6 2118.0 3154.4 7463.0 29.4 28.4 42.3 100.01994:8 1923.1 2415.4 3062.6 7401.1 26.0 32.6 41.4 100.01994:9 1551.6 2516.9 3057.5 7126.0 21.8 35.3 42.9 100.01994:10 1643.8 2407.6 2971.2 7022.6 23.4 34.3 42.3 100.01994:11 1492.0 2365.2 2974.6 6831.8 21.8 34.6 43.5 100.01994:12 1769.1 2365.2 2687.3 6821.6 25.9 34.7 39.4 100.01995:1 1710.7 2563.7 2449.7 6724.1 25.4 38.1 36.4 100.01995:2 1778.6 2450.6 2183.2 6412.4 27.7 38.2 34.0 100.01995:3 1515.0 2511.0 2196.3 6222.3 24.3 40.4 35.3 100.01995:4 1791.8 2370.5 1861.8 6024.1 29.7 39.4 30.9 100.01995:5 1465.4 2412.3 1922.8 5800.5 25.3 41.6 33.1 100.01995:6 1864.4 2356.3 1808.0 6028.7 30.9 39.1 30.0 100.01995:7 1713.3 2374.2 1989.3 6076.8 28.2 39.1 32.7 100.01995:8 1551.8 2403.1 2314.6 6269.5 24.8 38.3 36.9 100.01995:9 1587.6 2322.7 2373.8 6284.1 25.3 37.0 37.8 100.01995:10 1997.3 2296.1 2053.1 6346.5 31.5 36.2 32.4 100.01995:11 1577.8 2262.8 2202.3 6042.9 26.1 37.4 36.4 100.01995:12 1708.8 2293.2 2067.8 6069.8 28.2 37.8 34.1 100.0Source: IMF

Table 6.5Guatemala: Net International Reserves and Reserve Money

Net IntL NetIntl,- Nominal ReserveReserves ReserYes Exch. Rate Money

YrJQrt - Q.Mn USS Mn End of Per Q.Me1988:4 -7.0 -2.6 2.71 1932.71989:4 -306.7 -90.2 3.40 2301.81990:1 .491.2 -123.3 3.98 2213.71990:2 -434.8 -100.4 4.33 2365.31990:3 -478.3 -88.6 5.40 2454.31990:4 7.0 1.4 5.01 3079.71991:1 539.5 107.7 5.01 3187.21991:2 1495.3 300.4 4.98 3084.91991:3 1764.6 347.8 5.07 3126.51991:4 2805.1 556.2 5.04 3946.21992:1 2637.8 518.8 5.08 3888.21992:2 2163.8 422.5 5.12 3851.61992:3 1486.4 279.3 5.32 4039.51992:4 2800.7 531 5.27 4263.21993:1 3241.8 592.3 5.47 4732.51993:2 2944.9 518.8 5.68 4806.91993:3 3460.1 588.6 5.88 4639.01993:4 4283.5 736.6 5.82 5255.31994:1 4698.5 808.3 5.81 5082.31994:2 4621.3 807.6 5.72 5047.91994:3 4400.6 757.3 5.81 4546.31994:4 4498.5 796.4 5.65 5494.31995:1 3680.5 644.2 5.71 5182.61995:2 3627.0 629.8 5.76 5024.31995:3 3842.8 649.4 5.92 5334.91995:4 3876.4 641.6 6.04 5825.4

Source: IMF

Includes currency in circulation, deposits of the deposit moneybanks, and deposits of other residents, apart from the centralgovernment, with the monetary authorities.

Table 6.6Guatemala: Stocks of Mortgage Bonds

and Time and Savings Deposits(Millions of Quetzales)

Time andMortgage Savings

Bonds* Deposits31 -Dec-94 0.851 9.30626-Jan-95 0.855 8.7732-Feb-95 0.870 8.7109-Feb-95 0.885 8.734

16-Feb-95 0.924 8.63323-Feb-95 0.987 8.4762-Mar-95 0.943 8.4229-Mar-95 1.069 8.669

16-Mar-95 1.155 8.63823-Mar-95 1.202 8.74630-Mar-95 1.238 8.721

6-Apr-95 1.256 8.46913-Apr-95 1.321 8.22820-Apr-95 1.408 8.24627-Apr-95 1.461 8.2124-May-95 1.478 8.251

1 1-May-95 1.486 8.21118-May-95 1.499 8.17925-May-95 1.522 8.18101-Jun-95 1.599 8.28808-Jun-95 1.654 8.07315-Jun-95 1.733 8.07222-Jun-95 1.798 8.13829-Jun-95 1.845 8.40006-Jul-95 1.899 8.39113-Jul-95 1.970 8.15620-Jul-95 2.046 8.09427-Jul-95 2.103 8.26803-Aug-95 2.136 8.16710-Aug-95 2.179 8.07017-Aug-95 2.202 8.17724-Aug-95 2.276 8.17531-Aug-95 2.215 8.84207-Sep-95 2.373 7.92414-Sep-95 2.567 7.90521-Sep-95 2.605 7.95228-Sep-95 2.834 8.20305-Oct-95 2.907 7.79812-Oct-95 2.910 7.85219-Oct-95 2.927 7.652Source: Bank of Guatemala

Table 6.7Guatemala: Interest Rates in US dollars

Applied by Offshore BanksAverage Rate Average Rate

Earned Paid

Jan-90 9.26% 8.62%Feb-90 9.26% 8.62%Mar-90 9.26% 8.62%Apr-90 8.98% 7.51%May-90 8.98% 7.51%Jun-90 8.98% 7.52%Jul-90 8.65% 7.41%Aug-90 8.65% 7.41%Sep-90 9.38% 7.30%Oct-90 10.58% 8.06%Nov-90 9.70% 7.15%Dec-90 10.05% 7.05%Jan-91 11.05% 6.72%Feb-91 11.46% 6.62%Mar-91 11.21% 6.67%Apr-91 11.15% 6.73%May-91 11.05% 6.80%Jun-91 10.82% 6.72%Jul-91 10.76% 6.71%

Aug-91 10.58% 6.69%Sep-91 10.47% 6.64%Oct-91 10.31% 6.55%Nov-91 10.28% 6.49%Dec-91 10.35% 6.43%Jan-92 10.05% 6.54%Feb-92 9.94% 5.40%Mar-92 9.73% 5.17%Apr-92 9.41% 5.15%May-92 9.24% 5.1l%Jun-92 9.27% 5.06%Jul-92 9.29% 5.02%Aug-92 9.21% 4.98%Sep-92 8.91% 4.98%Oct-92 8.92% 4.96%Nov-92 8.97% 4.93%Dec-92 9.40% 4.92%Jan-93 8.99% 4.54%Feb-93 9.27% 4.59%Mar-93 9.73% 5.17%Apr-93 9.41% 5.15%May-93 9.24% 5.11%Jun-93 9.27% 5.06%Jul-93 9.29% 5.02%Aug-93 9.21% 4.98%Sep-93 8.91% 4.98%

Table 6.7 (cont.)

Average Rate Average RateEarned Paid

Oct-93 8.92% 4.96%Nov-93 9.15% 5.05%Dec-93 9.15% 5.06%Jan-94 9.61% 4.72%Feb-94 9.59% 4.73%Mar-94 9.59% 4.93%Apr-94 9.45% 5.07%May-94 9.38% 5.12%Jun-94 9.42% 5.19%Jul-94 9,41% 5.27%Aug-94 9.41% 5.34%Sep-94 9.46% 5.40%Oct-94 9.51% 5.42%Nov-94 9.62% 5.46%Dec-94 9.72% 5.49%Jan-95 10.04% 5.80%Feb-95 10.46%o 5.85%Mar-95 10.54% 5.95%Apr-95 10.68% 6.09%May-95 10.77Ye 6.13%Jun-95 10.74% 6.19°/Jul-95 10.69% 6.23%

Source: Financiea Centrica

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