guatemala: country strategy with the idb (2004-2007)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

GUATEMALA

IDB COUNTRY STRATEGY WITH GUATEMALA

DECEMBER 2004

This document was prepared by the project team consisting of Héctor Morena (RE2/OD3) (Project Team Leader); Ennio Rodríquez (RE2/OD3); Manuel Agosín (RE2/RE2); Ronán Le Berre (RE2/OD3); and Mariana Wettstein (RE2/DO3). Contributions to the team were made by Carolyn Robert (INT/ITD); Carlos Pineda (RE2/EN2); Sergio Ardila (RE2/EN2); Nathalie Alvarado (RE2/SC2); Juana Salazar (RE2/SC2); Carlos Trujillo (RE2/FI2); Mario Umaña (RE2/FI2); William Armstrong (RE2/FI2); Jesús Navarrete (RE2/FI2); Juan Manuel Fernández (RE2/SO2); Emma Naslund-Hadley (RE2/SO2); and Miguel Taborga (CGU). Sara BojorgeSaénz (RE2/OD3), Cecilia Bernedo (RE2/OD3), and Roxana Arias (RE2/OD3) assisted with document production.

CONTENTS EXECUTIVE SUMMARY MATRIX OF THE BANK’S COUNTRY STRATEGY WITH GUATEMALA INTRODUCTION I.

KEY DEVELOPMENT CHALLENGES...................................................................................... 1 A. Context......................................................................................................................... 1 1. Political context................................................................................................... 1 2. Social context ...................................................................................................... 1 3. Economic context................................................................................................ 2 B. Key challenges ............................................................................................................ 3 1. Quicken the pace of sustainable economic growth ........................................... 4 2. Revitalize the Peace Accords to set the stage for a firm and lasting peace...... 9 3. Reduce poverty.................................................................................................. 10 4. Improve government efficiency in producing public goods ........................... 15 C. The government’s program ...................................................................................... 17 D. Macroeconomic outlook 2004-2007 ........................................................................ 18

II. LESSONS LEARNED FROM THE PAST STRATEGY AND PORTFOLIO .................................... 21 A. Strategy 2001-2003................................................................................................... 21 1. Achievements.................................................................................................... 22 2. Lessons learned from the previous strategy..................................................... 23 B. Portfolio ..................................................................................................................... 23 1. Evolution and performance .............................................................................. 23 2. Lessons learned ................................................................................................. 25 3. Current status and role of the portfolio in the new strategy ............................ 25 III. BANK STRATEGY 2004-2007 ............................................................................................ 26 A. Objectives of the strategy ......................................................................................... 26 B. Criteria for strategy formulation............................................................................... 26 C. Strategic objectives ................................................................................................... 27 1. Strategic objective I: Improve the conditions for efficient production and incorporate excluded sectors into the productive process............................... 27 2. Strategic objective II: Strengthen human capital with equity ......................... 32 3. Crosscutting element: Strengthening of governance....................................... 34 D. The operational pillar of the strategy ....................................................................... 35 E. The program: Size, sequence and instruments ........................................................ 35 F. Coordination of international cooperation ............................................................... 37 G. Strategy implementation risks .................................................................................. 39 H. Monitoring the strategy............................................................................................. 39 IV. AGENDA FOR DIALOGUE ................................................................................................... 40

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ANNEXES

Annex I

Bank operating program 2004-2007

ELECTRONIC LINKS TO THE TECHNICAL ANNEXES

Annex II Annex III Annex IV Annex V

Bank instruments for strategy implementation http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510274 Guatemala and the Millennium Development Goals http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510306 Portfolio in execution to support the strategy http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510356

Exposure and credit quality indicators http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=533337 Annex VI Incorporation of OVE recommendations in the EVP http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510362 Annex VII CAFTA Action Plan http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510397 Annex VIII IDB group priorities to promote private investment in Guatemala http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510788 Annex IX Participation by other donors in country strategy areas http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510794 Annex X Strategy indicators http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=533396 Annex XI References http://idbdocs.iadb.org/WSDocs/getDocument.aspx?DOCNUM=510802

ABBREVIATIONS

ADPIC BANGUAT CA CABEI CACM CAFTA CBI CIV CFAA CONAP CPAR DECOPAZ DEOCSA DEORSA ENCOVI EU FIS GANA GDP HDI IDAEH IEMA IETAP IFMS IGSS IMF IUSI LAC MARN MBR MGO MIF MSMES OVE PAN PBL PER

Agreement on Trade-Related Aspects of Intellectual Property Rights Bank of Guatemala Central America Central American Bank for Economic Integration Central American Common Market Central American Free Trade Agreement with the United States Caribbean Basin Initiative Ministry of Communications and Housing Country Financial Accountability Analysis Consejo Nacional de Areas Protegidas [National Protected Areas Council] Country Procurement Assessment Report Desarrollo Comunitario para la Paz [Community Development for Peace] Distribuidora Eléctrica de Occidente [Western Power Distribution Company] Distribuidora Eléctrica de Oriente [Eastern Power Distribution Company] Encuestas Condiciones de Vida [living condition surveys] European Union Fondo de Inversión Social [Social Investment Fund] Gran Alianza Nacional [Great National Alliance] Gross domestic product Human Development Index Instituto de Antropología e Historia de Guatemala [Institute of Anthropology and History of Guatemala] Impuestos a las Empresas Mercantiles y Agropecuarias [taxes on mercantile and agricultural companies] Impuesto extraordinario y temporal de apoyo a los Acuerdos de Paz [special temporary tax to support the Peace Accords] Integrated Financial Management System Instituto Guatemalteco de Seguridad Social International Monetary Fund Impuesto Único Sobre Inmuebles [consolidated property tax] Latin America and the Caribbean Ministry of Environment and National Resources Maya Biosphere Reserve Millennium Development Goals Multilateral Investment Fund Micro, small and medium-sized enterprises Office of Evaluation and Oversight Partido de Avanzada Nacional [National Progress Party] Policy-based loan Public Expenditure Review

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PPP SAT SEGEPLAN SMEs SNIP SWAp UNDP UNE UNS URNG USAID WTO

Puebla-Panama Plan Sistema de Administración Tributaria [Tax Administration System] Secretaría de Planificación y Programación de la Presidencia [Planning and Programming Department of the Office of the President] Small and medium-sized enterprises Sistema Nacional de Inversión Pública [National Public Investment System] Sector-wide approach United Nations Development Programme Unidad Nacional de la Esperanza [National Hope Party] United Nations System Unidad Revolucionaria Nacional Guatemalteca [Guatemalan National Revolutionary Movement] United States Agency for International Development World Trade Organization

EXECUTIVE SUMMARY

The Bank’s country strategy with Guatemala parallels the new 2004-2007 political cycle in the country, which began when President Berger took office after the elections at the end of 2003 that also included congressional and municipal elections.

The initial conditions of the new political cycle that is beginning in Guatemala are defined by a political context which demands that the executive seek consensus with a splintered congress, in a situation in which an intensive campaign against corruption has been launched. The economic context is directed to seeking macroeconomic stability that should be based on strengthening public finances, to which end initial steps have been taken to increase tax revenues, which need to be intensified. In the social context, high poverty levels based on social exclusion, which particularly affect the indigenous and rural population, go hand-in-hand with extreme inequality.

In this context, Guatemala’s main development challenges are: (i) to quicken the pace of sustainable economic growth, particularly by making the most of the opportunities offered by CAFTA; (ii) to revitalize the Peace Accords, setting the stage for a firm and lasting peace; (iii) to reduce poverty; and (iv) to improve government efficiency in producing public goods.

The Bank’s strategy with the country has the central objective of poverty reduction. To achieve it, the program for the period 2004-2007 has established two interrelated strategic objectives: (i) to improve the conditions for efficient production and incorporate excluded sectors into the productive process; and (ii) to strengthen human capital with equity. Also, the strategy includes improvements in the country’s institutions in support of better governance as a cross-cutting issue, which is a necessity for progress in both areas. The Bank seeks to support the government’s strategy, whose focus is the promotion of opportunities for higher economic growth and job creation with broad participation by all sectors, which will reduce poverty levels in a setting of macroeconomic stability.

The importance of the active portfolio for carrying out the strategy makes it necessary to improve loan execution, monitoring, and supervision as intermediate objectives, and to fortify the institutional aspects that will allow for implementation.

The size of the program was defined around two scenarios that reflect the country’s borrowing capacity, its execution capacity, the lending instruments to be used, and financing requirements linked to the financial position of the public sector, in line with the macroeconomic simulations. The base and high scenarios are US$328 million and US$604 million, respectively. The goals that trigger the high scenario are defined by improvements in public sector management and in the execution of the Bank’s portfolio.

The sequence of the strategy focuses substantial efforts initially on achieving improvements in execution of the investment loans in the portfolio and strengthening public sector management, particularly through enhanced social management and support for social investment programs. This initial stage also includes the promotion of citizen security, support for implementing the indigenous peoples strategy, sustainable management of the Lake Amatitlán basin, and protection of the Maya Biosphere Reserve. Subsequently, it plans for a program to support competitiveness and integration, as well as rural electrification, continuation of the reforms in the justice sector, a sector loan for fiscal consolidation, and the institutional strengthening of Congress. The progress in social management will be drawn on to continue advancing social investment programs. A start will also be made on the actions identified in the document on guidelines for IDB group support for the private sector and tourism programs.

The main risks of the strategy have been identified as problems in achieving congressional backing for the reform program; difficulties in consolidating public finances, which could limit the increase in investment and, hence, constrain growth; and the possibility of a natural disaster. The slow recovery of execution capacity for investment programs could also jeopardize the strategy’s objectives. The country strategy includes actions to attenuate the risks in question.

Matrix Page 1 of 4

STRATEGY MATRIX BANK COUNTRY STRATEGY WITH GUATEMALA IDB objective and strategy

Country objective and strategy

Actions of other agencies

IDB actions Ongoing*

Proposed

Performance Indicators IDB Country

Main objective: To support poverty reduction Estimated evolution of macroeconomic variables. GDP growth: 5% 2007. Baseline 2003: 2,1%. Poverty 52% 2007. Baseline 2002: 57%.

Strategic objective I: To improve conditions for efficient production and incorporate excluded sectors into the productive process Finance: WB TC Objective Specific objective Loans Fiscal sector To provide consistent and stable Support consolidation of To promote a macroeconomic MIF macroeconomic management. the Fiscal Pact context that supports economic Salcaja Cooperative competitiveness.

Strategy Build social capital through (remittances) To revive the Fiscal Pact. fiscal reform Strategy To modernize the tax administration system Nonfinancial To support consolidation of the Support for fiscal Media Fiscal Pact: to improve efficiency, (SAT). To increase tax revenues by decentralization and communications evaluation, control and transparency broadening the base and improving financial management collection efficiency. strategy for fiscal of public spending; to boost reform efficiency in the management of public assets and liabilities; and to CFAA and CPAR promote fiscal decentralization. studies (IDB/WB) Reg. remittances and macroeconomic policy Energy: WB, Loans:Highways II Specific objective Objective Loans (47%)Electric inter To improve basic infrastructure in To increase the effectiveness of public CABEI Rural electrification transportation, electricity, and water investment in infrastructure and create a connection CA (100%) Institutional Roads: WB, and sanitation.

Electric interconnection climate conducive to private investment.

CABEI, Japan, Guatemala-Mexico (100%) strengthening and priority actions for Germany Strategy Strategy Drinking water sustainable a. To invest in road maintenance To turn the MCIV into the lead agency, investments (100%) Water and management of the and rehabilitation. with efficient management. To establish an Municipal development sanitation: Lake AmatitlĂĄn basin b. To increase electricity institutional structure for the Highway (95%) Germany coverage in rural areas and Fund. To improve the quality of the road Combating urban poverty TC consolidate sector reform. system, seeking alternatives for financing.

Modernization and (99%). c. To promote physical and To promote regional interconnection plans. institutional structure TC energy integration under the strategy for water Geothermal devp.

To provide universal access to water and Puebla-Panama Plan (PPP). resources PRI sanitation services. To set rates that permit d. To increase water and Expansion plan DEORSA financial sustainability.

PRI sanitation coverage in rural and DEOCSA Geothermal power areas.

MIF plant e. To promote private Support for the concession participation.

Thermal power plant system IIC Strengthening electric Tres RĂ­os power regulations generation

Confirmation of a clear Fiscal deficit (combined increase in the tax ratio with the public sector) 1.5% GDP goal of 12% of GDP. Base 2008. Base 2003: 2% 2004: 10.3%.

GDP. (S) Approval of the municipal tax Start on implementing code.

CFAA/CPAR recommendations.

Increase in the number of municipal governments administering the consolidated property tax (IUSI) in 2006, TBD project team. Base 2004: 105.

90% of the paved road system 90% highways in good in good condition (out of total condition in 2008. Base length) in 2007. IG: 60%. Base 2004: 45% estimated. (S) 2004: 45% estimated.

Increase electricity Poorest quintile with electricity coverage to 90% in 2008. in 2008: 64%. Base 2000: 49%. Base 2002: 85%. (S) 500,000 rural inhabitants with 20% increase in dwellings drinking water solutions and with water in 2008. Base systems operated by 2002: 53%. (MDG) community associations in 2008. Base: 0.

50% of waste collected and disposed of in sanitary landfills in program municipalities in 2007. Base: 30% in 2004.

*Indicators in bold face: high scenario triggers. In parentheses: undisbursed %. IG: intermediate goal. PA: Peace Accords. G: government. S: SEGEPLAN. The indicators for the operations under way have been taken from the project monitoring reports and updated by the retrofitting exercise. The indicators selected for the new operations are preliminary and will be added to as the programs and projects are developed.

Matrix Page 2 of 4 IDB objective and strategy

Country objective and strategy

Actions of other agencies

IDB actions Ongoing*

Proposed

Strategic objective I: To improve conditions for efficient production and incorporate excluded sectors into the productive process Institutional Objective Loans Specific objective Loans To increase and diversify participation capacity: CABEI To make the most of CAFTA Foreign trade (54%) Support for competition and integration opportunities and better position the in international markets.

Restructuring of food TC Border Support for CAFTA compliance country in the global market place. Strategy and agriculture development: To build capacity to negotiate and production (80%) MIF CABEI Strategy implement free trade agreements.

Assistance for CA SMEs with CAFTA market To support the country in Electric To strengthen and create institutions to Market access: complying with CAFTA interconnection CA access requirements USAID Support for e-commerce development conditions and in setting the stage promote and facilitate exports and (100%) investments. to benefit from CAFTA Electric Nonfinancial To promote regional interconnection opportunities; to promote its Support for CAFTA media communications interconnection plans. integration into the Central Guatemala-Mexico strategy/CAFTA action plan/CA-Mexico tariff American Common Market and barriers.

(100%) the Puebla-Panama Plan.

MIF Modernization of customs and border crossings Specific objective Natural resource Loans Objective Loans To expand the sources of sustainable To promote national competitiveness and land manage- Restructuring of food Support for competitiveness and integration growth. with the focus on development drivers: ment: WB, USAID and agriculture Support for the indigenous peoples strategy production (80%) textiles, agroforestry and agroindustry.

Sustainable development of the Maya Strategy Competitiveness: Biosphere Reserve (MBR) Tech. devp.

(95%) To support economic WB, CABEI Strategy Mundo Maya diversification and sustainable To prepare and implement a Petén (51%) TC Local and rural growth, through: consensual policy for rural Upper watersheds Support network of managers/informal sector development: WB, (a) Promotion of the business development.

(100%) evaluation/management MBR CABEI, EU, USAID climate in general and improvement To strengthen the protected areas Lempa River (95%) ecosystems/MBR participation/management MSMEs: CABEI, in rural competitiveness in system and conserve biodiversity.

Petén Inza basin/strengthening local EU particular. governments To consolidate traditional tourist (b)Support for the inclusion of IIC destinations and develop new ones. indigenous peoples through their Line of credit Banco Occidente To develop entrepreneurial capacity incorporation into productive Line of credit Banco Industrial and strengthen microenterprises. development.

MIF (c) Sustainable development of Support business dev. in the interior/strengthen natural resources. competitiveness/Banrural/devp CA agricultural (d) Growth in tourism through the Markets/Textile Training Institute/Gulf of HO Mayan regional circuit. trinational ecotourism route (e) Development of MSMEs. Nonfinancial Private sector guidelines study local competitiveness.

Workshop rural sector policies

BID: Estrategia de País con Guatemala

Performance Indicators IDB

Country

Growth in exports 16% a A 93% and year in 2008. Base 2003: 94% reduction US$2,698.2 million. (S) in time and cost by importing plant and animal products and agricultural inputs in 2007.

Base 2004: 3.5 hours and 474.53 quetzales.

33% coverage GDP growth 4-6% in of ecosystem 2008. Base 2003: 2.1%. (S) and Reduction 10% in the cost biodiversity of starting a business in management 2008. IG: 5% 2007. Base 2008. IG: 2004: 62.8 (% per cap.

31% 2007. income). (WB) Base 2002: 29% countrywide.

Annual increase 15% tourists 2008.

IG: 8% 2006.

Base 2002: 884,000 (5.9%).

At least 125 SMEs increase their net earnings by at least 5%.

Base: as execution progresses.

Country objective and strategy Strategic objective II: strengthen human capital with equity Objective Specific objective To improve the efficiency and progressiveness To achieve the goals of the Peace Accords. To effectively of social spending and protect the spending levels of programs with the greatest impact on manage and coordinate social investment. poverty reduction.

Strategy Strategy To improve coordination by strengthening the To strengthen the lead role of the Ministries of Education Social Cabinet, SEGEPLAN and sector ministries; to execute investments through the and Health.

SNIP; to strengthen management capacity; and To make more efficient use of to establish an impact monitoring and public resources by targeting evaluation system. spending and decentralizing To boost the efficiency of social funds by services. improving coordination, aligning expenditures with a master selection system and directing financial management.

To establish budget items and/or programs to be protected and the amounts to be provided annually, subject to compliance with performance goals.

Specific objective Objective To increase the coverage and quality of social To guarantee equitable access services in the poorest municipalities to basic social services.

To support the design and implementation of the Strategy social component of the government’s Guate To promote participation by Solidaria poverty reduction strategy: civil society organizations in (a) Education. Improve preschool and processes that promote and primary coverage and primary school strengthen the capacity of quality through support for the people living in poverty and Salvemos el Primer Grado Program. extreme poverty, restoring the (b) Health. Reinforce the primary care social and family fabric. model and implement a monitoring To design and implement a and evaluation system. georeferenced public (c) Nutrition. Coordinate programs investment system establishing a comprehensive assistance model.

IDB objective and strategy

Actions of other agencies

Ongoing*

IDB actions Proposed

Loans TC Preparation of the Program to improve poverty reduction the quality of social spending strategy Training program in TC social management Support for the program to improve the quality of social spending Nonfinancial Workshop on local development and investment funds

Education: WB, CABEI, USAID, EU, Germany Health: WB, USAID Social investment: CABEI, EU

Loans Loans Program to improve Program to improve health services II the quality of social (92%) spending Social action project TC Preparation of the FIS II poverty reduction TC strategy Sector diagnosis of education policies and sector mapping.

Program to support primary health care in Tejutla, San Marcos.

Community program to provide health care and development for all.

BID: Estrategia de PaĂ­s con Guatemala

Performance Indicators IDB Country Evidence that the 2007 budget of Spending on education not MSPAS and MINEDUC ties less than 2.5% GDP a budget allocations to targets. year. (PA) Evaluation of at least two social Spending on health not less than 1.3% GDP a programs in Guate Solidaria year. (PA) (Amounts to be municipalities through the defined for protected monitoring and evaluation programs.) system in 2008.

Budget execution in 2005 75% social funds investment is based on criteria agreed with the and 2006 of at least 90% of the total protected Funds board in 2007. IG: 50% amount.

2006. Base 2004: 0.

Increase of 10% in social Percentage increase in social spending that goes to the Guate spending on the poorest Solidaria municipalities in 2007. quintile in 2008. Base 2003: 14.1%.

Base 2004: being defined.

(All the data are for 41 Guate Net primary enrolment Solidaria municipalities) rate 100% 2008. Base Annual increase in net grade one 2000: 84% 2000. coverage of 6% for boys and 7% (S/MDG) girls from 2005 to 2007. Base Infant mortality rate 39 per 2004: 42,536 boys and 39,847 1,000 births 2008. Base girls.

2002: 44 per 1,000 births.

Reduction of 5% in grade 1 and (MDG) 2 repeater rates by 2007. IG: 3%; Maternal mortality 133 per 2006. Base 2003: 1st 27.16% 100,000 births 2008. Base (21,459); 2nd 20% (12,161).

2000: 169 per 100,000 Reduction of 3% in grade 1 and births. (MDG) 2 dropout rates in 2007. Base Reduction of 20% in 2004: 1st 5.7% (4,169); 2nd 4% chronic infant malnutrition (2,432).

2008. Base 2000: 44%.

70% pregnant women with at least 2 prenatal checkups by a medical professional in 2007.

IG: 60% 2006. Base 2004: 25%.

85% children between 12 and 23 months with measles, mumps and rubella vaccinations in 2007.

IG: 75% 2006. Base 2004: 54%.

Matrix Page 4 of 4 IDB objective and strategy

Country objective and strategy

Actions of other agencies

Ongoing*

IDB actions Proposed

Performance Indicators IDB Country

Cross-cutting element: Strengthening governance (Baselines being established) Specific objective:To strengthen Objective:To strengthen the Justice: WB, EU, Spending on Loans: Loans institutions that support the democratic Justice sector Modernization of democratic system, based on the USAID A favorable opinion is issued as to the justice and the system and preserve order and legal and observance of human rights, and to Corruption: USAID reform (20%) Congress legislative technical quality of 50% of Attorney General citizen security and increase efficiency in guarantee the rule of law. is 0.3% GDP a laws.

Improvement justice Municipal the production of public goods and Strategy:To strengthen the justice Citizen security: EU development year. PA administration II 100% of bills are tracked in an up-toservices. system.

Peace and (95%) Citizen security date registry to which the public has Increase of 15% in To propose legislation that makes reconciliation Strategy the Voice and Program to improve the access.

TC a. To improve the Civil Register and discrimination a crime and revise Germany Accountability National agenda quality of social spending 80% of the population in program modernize congress the Criminal Procedure Code.

Index in 2008.

Land zones confirm better access to justice Base 2003: 35.4%. and discussion Support for b. To modernize the justice sector, To strengthen the Indigenous administration: competitiveness and in 2008, measured in terms of services (WB) panels protecting indigenous rights.

Advocate with the Human Rights WB, USAID integration delivered by the judicial system. IG c. To promote citizen security.

Support for Ombudsman’s Office, the Increase of 15% in 2007: 60%. Base: N/A. d. To improve public management on Indigenous Women’s Advocate Public poverty TC the Rule of Law the central and local levels. reduction and the Dept. of Indigenous management: Strengthening the Human Reduction of 30% in violence in index in 2008. program areas in 2008. IG 2007: 15%. Base 2003: 21.6%.

Peoples in the Ministry of Labor. WB Rights Ombudsman’s Support for Base 2004: data being gathered. decentralization Office To formulate a national security (WB) Decentralization: Support for civil registers Increase in the number of municipal and financial policy. To expand and improve the EU, USAID governments administering the IUSI. management National Police Academy.

Nonfinancial CFAA and CPAR studies Base 2004: 105.

To modernize and systemize the (IDB/WB) Approval of the municipal tax code.

Electoral Rolls.

Operationa pillar: To increase the relevante, efficiency, and effectiveness of the strategy and improve the country’s borrowing capacity Increase in the ratio between TC TC International Specific objective:To improve execution Support for donor disbursements and the balance Support for Cooperation of portfolio programs and promote closer coordination available in the period for eligible executing Cabinet in coordination of external financing. investment projects to 25% in 2007. operation and agencies Strategy:To revise the portfolio in Nonfinancial IG: 20% 2005. Base 2004: 18% defining Support for Organizational execution to bring it in line with Bank and cooperation policy. implementation 80% active portfolio in execution strengthening country priorities. and monitoring satisfactory in 2007. IG: 65% 2005. Creation of a To simplify projects designs and make MDGs in LAC Consultation and review Base 2004: 57%.

Project of processes execution more flexible, under the Monitoring 90% active portfolio achieves the framework of Bank policies Workshop on the SWAp development objectives in 2007. IG: Technical Unit. programmatic approach 80% 2005. Base 2004: 74% To strengthen the execution capacity of Projection of for investment executing units. To strengthen the Bank’s disbursements of Definition of sector approach for a coordination Country Office. the eligible loan social area in 2006. Base 2004: 0.

Document on donor To support a sector programmatic portfolio is 20% in mapping and coordination Shorten to 4 days the average time approach that facilitates investment the 2006 budget. between submission of a request to programming and coordination.

Start on the Bank’s Country Office and authorization in 2005. Base 2004:12.9 implementing the To promote dialogue among donors, CFAA/CPAR days. authorities, and civil society recommendations.

BID: Estrategia de País con Guatemala

INTRODUCTION

The Bank’s country strategy with Guatemala parallels the new 2004-2007 political cycle in the country, which began when President Berger took office after elections at the end of 2003 that also included congressional and municipal elections.

Preparation of the present country strategy fits into the Bank’s institutional strategy and incorporates as key components the government’s economic revitalization program, the Peace Accords, the Bank’s country program evaluation in Guatemala 1993-2003, the portfolio review reports, previous programming exercises, and the evaluation of progress toward the Millennium Development Goals. The operating program takes account of the greater fiscal leeway in the macroeconomic program for 2004-2007, the sustainability of Guatemala’s debt, the impact of Bank interventions and its comparative advantages, and the participation of other sources of financing.

The country strategy is based on a series of studies conducted by the Bank in the preparation phase and draws on the analytical work performed by the country and by other agencies and institutions.1 Strategy formulation also involved a series of activities for a broad-based consultation process including: (i) the policy dialogue meeting with the new government in March 2004, at which the policy paper prepared by the Bank was discussed and a preliminary consensus was reached on the development challenges facing the country; (ii) several workshops in which different Bank units and other institutions took part; (iii) meetings with the Office of Evaluation and Oversight (OVE) to share information and ideas on the previous strategy; (iv) review with the authorities of the objectives and priority areas of the strategy; and (v) consultations with Guatemalan civil society on the country strategy completed on 17 December 2004.

During the entire process of formulating the strategy, the Bank has maintained a fluid exchange with the new government authorities, with the IMF, the World Bank and the other donors. From the start of the process of preparing this strategy, the Bank promoted analysis and discussion with civil society. It conducted a preparatory mission for the policy dialogue paper (forerunner of this strategy) in September 2003, which examined the challenges facing the country and the options for addressing them with different sectors of civil society (academia; private sector; political parties; NGOs working on indigenous issues; gender and human rights; national authorities; and churches).

These consultations contributed to identification of the main challenges to be addressed by the Bank. Information was compiled and studies were prepared on subjects for which no adequate diagnostic analysis was available (growth challenges, tax structure, development and rural competitiveness, competitiveness of the port system, administrative regulation and the business climate, and management of social spending).

1

The work done by the Bank is available for consultation on the strategy web page at: http://re2.iadb.org/organization/od3/documentos.cfm. The references are given in Annex XI.

These studies were presented publicly in Guatemala.2 Discussion panels were organized with the participation of representatives from academic institutions, research centers, national and local governments, political parties, Congress, the private sector, the media and NGOs. This document has four sections. The first explains the context in which the new strategy is launched, identifies the development challenges facing the country, and describes the government’s program and the macroeconomic outlook. The second section examines the main outcomes of the previous strategy, portfolio execution and lessons learned, as well as the active portfolio and its links to the new strategy. The third section presents the proposed new strategy—its objectives, strategic areas, the operating program, monitoring and risks. The fourth section presents the agenda for country dialogue. Annex I presents the Bank’s operating program for 2004-2007 and Annex II presents the different instruments that will be used to implement the strategy

2

Tax Structure, presented in the capital and Quetzaltenango in November 2003; Toward More Efficient, Equitable and Transparent Social Spending and The Challenges of Growth, presented in the capital in December 2003 and June 2004,BID: respectively.

Estrategia de País con Guatemala

I.

KEY DEVELOPMENT CHALLENGES

A.

Context

1.1

The initial conditions of the new political cycle that is beginning in Guatemala are defined by a political, economic, and social context that will influence the new administration’s public management process and, hence, the performance of the proposed new strategy.

1. Political context

1.2

The arrival to the presidency of a candidate from a national alliance (GANA) that is a coalition of three parties without a congressional majority makes it necessary for the executive to maintain broad and active negotiations.3 This will permit it to build consensuses in Congress and with civil society, which are crucial for advancing reforms and maintaining credibility in the fight against corruption, which was one of the main issues in the election campaign.

1.3

Since it took office, the administration has built up its political capital with the progress made in restructuring the army, the fight against corruption, relaunching the Peace Accords, passage of a package of fiscal measures, and the launch of a program for economic and social reactivation. The challenge of handling the demands of former members of Civil Self-Defense Patrols (active during the war) complicates the political situation in the country.

2. Social context

31.1%

30.8% 23%

21.5%

15%

12.9%

W om en

M en

N on in di ge no us

In di ge no us

4.9%

Ru ra l

In Guatemala -the largest economy in Central America-, 57% of Guatemalans are poor and 21.5% live in extreme poverty. Poverty is mainly indigenous and rural: 71.9%

Graph I-1. Extreme poverty

U rb an

1.5

Guatemala has a population that is mainly young, indigenous and rural:4 53% of Guatemalans are under 20, 48% are indigenous, and 54% live in rural areas.

To ta l

1.4

Source: UNS, National Human Development Report 2003 3

The administration won a victory with passage of fiscal reform in Congress despite the fact that the Partido Patriota withdrew from the GANA alliance in May 2004 and the governance pact signed at the beginning of the year with the UNE and PAN parties was weakened.

4

According to the 2002 census.

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of indigenous people are poor, compared to 44% of nonindigenous, while 72.2% of rural inhabitants live in poverty, compared to 28.1% in urban areas.5 Extreme poverty follows the same pattern. Women are much worse off, and only two countries in the western hemisphere have lower gender development indexes (see Figure I-1).

1.6

The uneven income distribution in Guatemala with a Gini coefficient of 58.3, is only exceeded in Latin America by Brazil. While the richest 10% of Guatemalans receive 46.8% of total income, the poorest 20% receive 2.4%.6 About half of this inequality is explained by education, 10% by differences in income between indigenous and nonindigenous people, and about 24% by disparities between urban and rural areas.7 In recent years, remittances have acted as an informal social safety net for a large part of the poor population.

1.7

Extreme poverty and inequality are rooted in the exclusion of specific groups of Guatemalans, whose access to social, economic, and political opportunities has been restricted. In particular, three out of every four indigenous people live in rural areas, which increases the likelihood that they will be poor. Further, 81.4% of indigenous people work in the informal sector, compared to 58.9% of nonindigenous, and they are paid less than half of what the latter group earns; 41.7% of indigenous people are illiterate, compared to 17.6% for nonindigenous.

1.8

Given the inequality and exclusion patterns that prevail in the country, most poverty is chronic and directly linked to the lack of assets in this population segment, including access to education, health care, basic services, infrastructure, housing, and land. To address this situation, the government is devising a policy to promote the incorporation of excluded Guatemalans into the productive process.

3. Economic context

1.9

After three years of prudent macroeconomic management, backed by two consecutive stand-by arrangements with the IMF, Guatemala has made significant progress in consolidating its macroeconomic stability. It has lowered the inflation rate, which remained

Figure I-2. Inflation and the fiscal deficit 1999-2003 Inflation

10.0 8.0 6.0 4.0

Fiscal deficit

2.0 0.0 1999

2000

2001

2002

2003

Source: IDB based on official sources.

5

United Nations System, 2003.

6

A Gini coefficient of zero indicates completely even income distribution; high coefficients indicate highly uneven distribution. World Bank, 2003c.

7

World Bank, 2003a.

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within the range of the IMF program targets through an active monetary policy in a relatively disciplined fiscal framework (see Figure I-2).

1.10

However, an adverse external environment, fiscal adjustment whose main instrument was to reduce capital spending, the political uncertainty generated by the absence of dialogue and consensus between the public and private sectors, and its impact on government management; led to a slowdown in economic activity in 2001-2003. GDP growth averaged 2.2% during this period which, given population growth of about 2.7%, led to a year-on-year drop in per capita income of more than 0.1%.

1.11

From the time it took office, the new administration has been implementing a policy of fiscal austerity while protecting social spending, which produced a surplus in central government accounts through May 2004. However, the public investment program has been delayed due to a series of factors, including the change in government, the delay in approval of the investment program until July, and the scant leeway in the budget established by Congress. Despite the recent passage of measures to increase fiscal revenues, they continue to be insufficient to allow for higher spending while at the same time maintaining the financial soundness of the public sector.

1.12

The appreciation in the exchange rate in recent years, to which the growth in remittances and capital inflows have contributed, has affected the competitiveness of the country’s productive activities. This situation demands a continuation of a mix of fiscal and monetary policy to help promote competitiveness while supporting price stability. The government is currently negotiating a new program with the IMF that will pay special attention to strengthening public finances.

B.

Key challenges

1.13

Guatemala’s progress toward development is linked to efficient management of opportunities in four priority areas: quicken the pace of sustainable growth, consolidate peace, reduce poverty, and improve public management. The challenges in these areas are presented below.

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1. Quicken the pace of sustainable economic growth 1.14

The significant recovery of economic growth experienced in Guatemala during the 1990s (4.2%) has not been enough to propel significant increases in per capita GDP (1.4%), a situation aggravated by the slowdown in growth in the last three years (2001-2003) (see Figure I-3). 8

1.15

Gross fixed capital investments have been below the Central American average,9 permitting only limited incorporation of new technologies into the economy (see Figure I-4).

Growth in capital and employment has been relatively constant, which indicates that the slowdown in GDP since 2001 could also be explained by the sluggishness in external economic activity and by greater inefficiency in productive activities.

This behavior could be partly explained by the investment climate in the country.10

1.16

Figure I-3. Growth in GDP and pcGDP 10

GDP

8

6

4

2

0 1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

-2

pcGDP

-4

-6 Sour ce: Wor ld Bank, WDI 2003 and Bank of Guatemala.

Figure 1-4. Gross fixed investment rates: Guatemala, Central The challenges that Guatemala America, and Latin America and the Caribbean (% of GDP) needs to surmount in order to speed up growth sustainably 25 include: (i) strengthening public 20 finances; (ii) upgrading 15 infrastructure; (iii) making the 10 most of CAFTA opportunities and 5 better positioning itself in the 0 1991-2000 2001-2003 global market place; (iv) spurring LAC Guatemala CA rural development; and Source: IDB based on official sources and ECLAC (v) cushioning the risks of natural disasters. The most relevant aspects of these challenges are described below; addressing them would help to improve the country’s business climate.

8

Annual average.

9

15% in Guatemala, compared to a Central American simple average of 20%.

10

Larraín postulates that this could be in response to the level of incentives faced by private agents, uncertainty associated with the rules of the game, or problems with government bureaucracy. Larraín, Felipe (2004).

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2003

-5-

The business climate in Guatemala From the Bank’s standpoint, the main obstacles that stand in the way of the normal conduct of business in Guatemala are: (i) low levels of citizen security; (ii) high levels of informality in economic activities; (iii) difficult access to credit; (iv) poor quality of public infrastructure services, particularly ports and airports, the high costs of electric power and telecommunications services and low rural coverage; (v) problems with governance, reflected in the poor efficiency of public institutions and corruption; (vi) shortcomings in labor market and human capital; (vii) weaknesses in the legal and institutional framework for the private sector; (viii) inadequate technology and innovation; and (ix) neglect of the development of SMEs. These factors are compounded by the uncertainty generated by the lack of clarity regarding the continuity of fiscal reform and revaluation of the quetzal. One of the centerpieces of the present administration’s economic reactivation program is to improve the business climate.

(i)

Strengthen public finances

1.17

Although implementation of the Fiscal Pact signed in 2000 marks the start of changes in Guatemala’s fiscal policy, tax revenues continue to be insufficient. The ratio of tax revenue to GDP is just 10%, one of the lowest in Latin America. The consequence has been central government primary deficits averaging 0.74% since 1998, which has forced cutbacks in social spending and investments.11

1.18

The Guatemalan tax system is structured like any modern tax system and is based on four taxes: VAT, ISR and IETAP, ISC and DAI.12 Yet this formal structure, while similar to that of the other Central American countries, masks the presence of tax evasion and excessive deductions and exemptions that explain the low receipts.

The yield from the VAT and scant receipts from the direct taxes (ISR and IEMA)13 also reflect the high frequency of zero-rate treatment. At the same time, the large share represented by the VAT in total revenues and the importance of the taxes on fuel and petroleum products, coupled with excessive exemptions and deductions in personal income taxes, make the tax system regressive.14

1.19

Guatemala has the lowest levels of public debt in the region. Since the Peace Accords were signed, the public debt/GDP ratio has risen from 19.5% to 23.2%, which is still among the lowest in Latin America and partly reflects the rise in the central bank’s public debt to sterilize the capital inflows and monetary expansion generated by remittances.

11

Investment spending fell to 1.4% of GDP in 2003.

12

VAT: value added tax. ISR: income tax. IETAP: special, temporary tax to support the Peace Accords. ISC: selective consumption tax. DAI: import duties.

13

Less than 3% of GDP.

14

For more information on Guatemala’s tax structure, see Schenone, O. and Carlos de La Torre (2003).

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1.20

The new administration has made a start on addressing fiscal problems through a proposal for comprehensive fiscal reform. It was only passed in part by Congress, which established countervailing revenue measures to offset the impact of repealing the IEMA.15 More progress is required in this area to implement the Fiscal Pact in its entirety,16 which will make it possible to meet the revenue target of 12% of GDP, compensate for the drop in revenues that will accompany the entry into force of CAFTA, and support the social spending and investments needed to implement the Peace Accords and attain the Millennium Development Goals. (ii)

Upgrade infrastructure

1.21

The development of infrastructure in Guatemala is a core topic on the economic policy agenda. Estimates indicate that the country could add 1.1% a year to its economic growth if its infrastructure had coverage and quality levels that put Guatemala in the same league as the 25% of Latin American countries with the best infrastructure services.17

1.22

The costs of transportation and delays at customs, despite the improvements in customs made recently, are more onerous than tariffs as obstacles to intraregional trade. To reduce the costs of international trade, it is also necessary to boost the productivity of two of the country’s three ports that move a total of 11 million tons a year,18 and upgrade the airport. The advent of CAFTA makes investments and improvements in infrastructure management more urgent.

1.23

Also, 45% of unpaved roads need rehabilitation and it must be ensured that investments in the principal paved road system will boost the capacity to respond to the process of regional integration and higher levels of economic growth, while also providing for sustainable maintenance. More private investment in the sector could be brought about through concessions, an instrument that has been little used so far.

1.24

Electricity sector reform has led to major advances, paving the way for accelerated growth in rural electrification coverage from 53.3% in 1996 to 83% in 2002. A wholesale electricity market has also been set up, giving the sector a way for producers, distributors, and heavy consumers to freely trade electric power. Yet sector reform faces a sustainability challenge in the medium and long term, given the small amount of energy traded on the market. And despite the large share

15

Declared unconstitutional.

16

The Fiscal Pact covers all aspects of fiscal management: revenues, expenditures, deficit, debt, administration, evaluation, and fiscal decentralization.

17

Loayza et al. (2002).

18

Puerto Barrios, operated under a private concession, moves 1.7 million MT a year, and its productivity is four times higher than Puerto Quetzal (5 million) and eight times higher than Puerto Santo Tomas (4.5 million), which are publicly owned.

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represented by renewable energy, no new projects of that kind have been developed. The Renewable Energy Project Incentives Act of November 2003 created fiscal, economic, and administrative incentives to promote such development (hydroelectric, geothermal, solar, wind, and biomass).

1.25

As in most Central American countries, the water and sanitation sector is marked by low coverage, poor service, and deterioration in the physical assets on account of poor maintenance. Coverage has been increasing, but 36% of the public has no access to water service, 20% has access at a distance, and just 44% has household connections.19 Maintenance problems are acute and are associated with rates that do not permit the cost of operating the systems to be recovered. (iii)

Make the most of CAFTA opportunities and better position the country in the global marketplace

1.26

In the last decade, Guatemala’s exports have accounted for about 12% of its GDP, which is relatively low considering the size of its economy. Although exports have been growing continuously over the last 20 years (except in the last three years when they declined), the rates have been very volatile and insufficient to consolidate export-based economic growth. Traditionally, Guatemala’s main export destinations have been the Central American Common Market (CACM) for more than 40% of the total, and the United States with about 27% (not counting in-bond processing).

1.27

Until now, trade relations with the United States have been governed by the World Trade Organization agreements and the Caribbean Basin Initiative (CBI). Under the CBI, the United States grants duty free access to a large number of Guatemalan products, but, since it is a unilateral initiative, Guatemala must comply with conditions set by the United States government. That is why a free trade agreement, which establishes bilateral rules and controls and a dispute resolution mechanism, is a major achievement.

1.28

The agreement was signed in Washington DC last 28 May and must now be ratified by the respective congresses. As a result of the negotiations, more than 90% of exports will be able to enter the United States duty free.

1.29

In light of the above, CAFTA presents the opportunity for a very significant net positive impact on trade, foreign investment, technology transfer, growth, and employment. The size of the potential benefits will chiefly depend on the entrepreneurial efforts and business practices of the private sector. However, the impact of CAFTA will also be facilitated or limited by the policies adopted by the

19

With regard to sanitation, 26% has no service, 15% has sewer connections, and 58% has individual solutions.

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government to enable all of society to benefit from the opportunities. Although the steps that the government needs to take to create a business environment that favors competitiveness are independent of CAFTA, the agreement increases the costs of inaction, although it also increases the potential benefits that would stem from boosting competitiveness and improving the business climate.

1.30

That is why making the most of CAFTA becomes a sort of guiding thread of the strategy that strings together actions in the fiscal and financial areas, human development, greater competitiveness, and institution-strengthening. Two major challenges are: a. Compliance with commitments made, to benefit fully from the potential of free trade. CAFTA will require that Guatemalan legislation and institutions be modernized and adjusted to modern disciplines and high standards. The top priorities include intellectual property, the labor market, strengthening of sanitary and phytosanitary measures, customs, the professionalization and automation of public management (making it more transparent and combating corruption), and interagency coordination for effective monitoring of compliance with the commitments made and problems that might arise, in order to prevent conflicts and facilitate solutions. b. An economically and socially efficient transition. Here there are challenges in terms of reforms of economic and social policies—in particular, the fiscal adjustments necessary to counterbalance the losses in customs revenues to allow for the necessary increase in public investments in infrastructure and social spending associated with competitiveness. Adjustments are also required in sector and social policies to ensure the economically and socially efficient reconversion of sectors affected by external competition. Adjusting to international competition in agricultural markets is a highly relevant issue for Guatemala.

1.31

Apart from the predominance of CAFTA, Guatemala also faces the challenges of: coping with the impact of the elimination of the export incentives permitted by the WTO; stepping up the process of Central American integration, paying special attention to the advantages offered by the PPP; and making the most of free trade agreements at the CACM and world levels. (iv)

1.32

Spur rural development

Expanding Guatemala’s sources of growth is linked to stepped up participation by the rural economy. It provides more than one third of the economy’s value added and is home to 60% of the population, 75% of indigenous people, and 80% of poverty.

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1.33

Although the agricultural sector is highly important in the economy (accounting for more than 20% of GDP, 40% of jobs, and over 55% of the value of exports),20 its growth has declined during the last decade and stagnated in per capita terms. This has contributed to rural poverty, since the poor largely depend on farming to make a living.

1.34

To bring about a new, inclusive pattern of growth that promotes poverty reduction, sources of rural growth need to be developed that involve other sectors. It is also necessary to promote the inclusion of the excluded population in the productive process through training and access to development opportunities. However, the market economy in rural areas operates with a great deal of friction caused by distortions in the land and labor markets, scant presence of commercial banks, low coverage of infrastructure, and negligible government presence.

1.35

To improve the competitiveness of the rural economy, there are challenges linked to the creation of a dynamic context that enables the factors and inputs markets to operate better, and to the direct promotion of higher productivity in the sector. This is even more so with the entry into force of CAFTA, since benefiting from the opportunities offered by the agreement will largely depend on the competitiveness of the rural sectors and the changes they make to be able to compete. (v)

Cushion the risks of natural disasters

1.36

Guatemala is located in one of the parts of Latin America most prone to natural disasters. More than 2,400 natural disasters21 occurred between 1988 and 2001, causing losses that affected growth and public and private finances, and hit the poorest population hardest.

1.37

Despite recent efforts to include risk reduction in national and municipal planning, Guatemala does not invest enough to reduce its vulnerability to disasters, which has an adverse effect on the perception of country risk. The country needs to develop a financial strategy for risk management and establish a framework to guide public investment that includes environmental sustainability and risk management.

2. Revitalize the Peace Accords to set the stage for a firm and lasting peace

1.38

20 21

The Peace Accords signed in 1996 put an end to 36 years of armed conflict in Guatemala. Although significant progress has been made in their implementation, the reforms linked to them have lost some of their initial momentum since the end of 1998.

Excludes the value added from in-bond processing.

These natural disasters include small events registered at the local level

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1.39

Building a firm and lasting peace in Guatemala requires deep changes in core aspects of the country’s governance and its political and social management. They include the democratic process; the defense; security and justice systems; the fiscal and budget areas; public investment; the construction of a multicultural nation; and modernization of the State. This is an ambitious agenda that calls for prioritization of activities to resume their rapid and effective implementation.

1.40

To make significant headway in implementing the Peace Accords, progress needs to be made in meeting commitments in the following areas:

1.41

(i)

Human rights: Step up the fight against impunity, consolidate the rule of law, carry out the recommendations of the Historical Clarification Commission, particularly related to compensation for victims.

(ii)

Resettlement of the population uprooted by the armed conflict: Promote the full reintegration of displaced populations and the Guatemalan National Revolutionary Movement (URGN).

(iii)

Identity and rights of indigenous peoples (where progress is slowest): Legislate to protect their rights, improve access to justice, promote access to assets and services, and continue education reforms to reflect the country’s linguistic and cultural diversity.

(iv)

Socioeconomic aspects: Comply with the Fiscal Pact, including the goal for tax revenues, implement a rural development policy, target social spending to help reduce inequalities, and make progress in decentralization.

(v)

Demilitarization and strengthening of civil authority: Continue with the restructuring of the armed forces and improve transparency in accountability for their management, and strengthen security forces.

It is also important to update the goals of the Agreements, which have lagged behind the country’s growing needs, a situation that is worsened by taking the minimum goals to be maximums. Those goals, in turn, should be revised in light of Guatemala’s commitments in the Millennium Declaration.

3. Reduce poverty The main challenge facing Guatemala is to significantly reduce poverty. Growth in per capita income of 4% a year—equivalent to more than double the average in the 1990s—would be required to cut extreme poverty by half in 2015.

50 51 52

Inequality (Gini)

1.42

Fi g u r e I- 5 . G r o w t h a n d i n e q u a l i t y re du cti o n co m bi n a ti o n s n e e de d to r e d u c e e x t r e m e p o ve r t y b y 5 0 %

Growth = 1.6% Inequality red. = 10%

53 54 55 56

Growth = 4% Inequality red. = 0

57 58 59

6 0 Guatemala BID: Estrategia de País con 0

1

2

3

4

G r o wt h in in c o m e ( p e r c a p it a % )

Source: Marcano, Luis (2004)

5

- 11 -

However, with a reduction of 10% in inequality, the rate of growth required to bring extreme poverty down by half would be about 1.6% a year.

1.43

Therefore, a combination of growth in per capita GDP and inequality reduction would reduce poverty more quickly (see Figure I-5). To achieve this, a shift in the pattern of growth to more favor the poor would be needed.

1.44

In this context, the State has a central role to play in improving the opportunities for the poor by promoting the accumulation of quality assets, reducing their vulnerability, and encouraging their participation in the economy and society.

Accordingly, the challenges for social policy focus on two large areas: (i) human capital development; and (ii) improvements in the management of social spending. (i)

Human capital development

1.45

Guatemala ranks 121st out of a total of 177 countries in the Human Development Index.22

1.46

Child and maternal mortality are among the highest in the region. Child malnutrition is among the highest in the world, and average schooling for people over 14 (4.3 years) continues to be the second lowest in Latin America after Haiti. Given this situation, Guatemala will have to make additional efforts to meet the Millennium Development Goals (see Figure I-6).23

1.47

Figure I-6. Progress on Millennium Development Goals 83%

7. Access to drinking water

30%

6. Maternal mortality

73%

5. Child mortality

33%

4. Gender equality

43%

3. Net primary enrolment

66%

2. Child malnutrition

0% 1990

1. Extreme poverty

2000-2002

Following is an examination of the Source: IDB based on UNDP data. challenges for developing the country’s human capital on three fronts: education, health care and social safety nets.24

2015

% achieved % outstanding

22

The Human Development Index (HDI) is an indicator of the pool of human capital. Although it does not claim to measure poverty, low rankings in the HDI point to shortfalls in investments in human resources.

23

A breakdown of Guatemala’s performance on the Millennium Development Goals is presented in Annex III.

24

The concept of human development is broad and multidimensional, covering many areas. To target the Bank’s action in the country, the analysis has focused on education, health care, and social safety nets.

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a. Education 1.48

The progress made in recent years has not been enough, coverage of education is still low (net school enrollment is 23% in preschool, 79% in primary school and 25% in secondary school), putting Guatemala among the last countries in Latin America. Major gaps are also present, with lower coverage for girls, the poor, indigenous children, and in rural areas.

1.49

The country has the lowest primary school completion rate in the entire region after Haiti: out of every 100 children who enter primary school, just 37 graduate. School failures are mainly explained by late entry into school and high repeater and dropout rates in the early years25. The situation is worse among indigenous children and children from households in extreme poverty, with 40% of them repeating grade one.

1.50

Meeting the Millennium Development Goal of universal primary education, increasing preschool coverage, and keeping children in the school system longer continue to be the main challenges in the sector. Accordingly, priority should be given to preschool and the first and second grades of primary school to reduce repeater and dropout rates. b. Health care

1.51

Guatemala presents a demographic and epidemiological profile different from the other Central American countries with similar levels of development. Infectious diseases and complications during pregnancy and delivery continue to be serious risks for the health of low-income, rural, and indigenous groups.26 Particularly worrisome is the chronic Including Guatemalan women in development malnutrition that affects 49% of Guatemalan women continue to be Guatemalan children, with the rate underrepresented in public life and encounter being nearly twice as high among limitations on exercising their rights in the indigenous children than among economic and labor spheres. They have less access nonindigenous ones. The main to education and suffer from malnutrition and high cause of child growth delays in maternal mortality rates. Priority actions to support gender equality include: (i) incorporating women’s Guatemala is chronic malnutrition, reproductive health into health policy; mainly in the first two years of life (ii) promoting access by women to credit, training, as a result of prenatal and postnatal and inclusion in the labor market; (iii) promoting growth delays. Child malnutrition is the full exercise of women’s rights to own land, strongly correlated with the housing, and other resources; and (iv) promoting assistance for the victims of domestic violence.

25

“Education in Guatemala” UNESCO 2004

26

This profile is also marked by high population growth and a very young population.

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mother’s education and economic status.27 1.52

Since the Peace Accords were signed, health care coverage has doubled with the expansion targeting the most underprivileged groups through the Integrated Health Care System (SIAS).28 Nonetheless, there are still problems with access and wide disparities in coverage and quality between rural and urban areas. It is estimated that 59% of the population lacks effective access to health care services.29

1.53

One of the main challenges for the sector is to increase the coverage of basic health care services and to improve their quality, particularly in rural zones. These actions should be priorities if the goal is to make headway in reducing preventable premature death from infectious diseases, complications during pregnancy and delivery, and the burden of preventable diseases caused by protein and calorie deficiencies. c. Social safety nets

1.54

Guatemala has 40 social assistance programs executed by different agencies, which cover a wide variety of areas with spending amounting to 3.2% of GDP.30 However, there is no integrated network of assistance, owing to the lack of coordination among agencies, which leads to scattered efforts and overlaps and contributes to problems of targeting. One fourth of people living in extreme poverty and one fifth of the poor do not benefit from programs of any kind.

1.55

The challenge for the country in this area is to establish a coordinated social safety net that targets the main problems faced by the most vulnerable groups. Owing to the levels of malnutrition in Guatemala and their impact on school performance, combating malnutrition should be a national priority and requires a comprehensive strategy that targets pregnant and breastfeeding mothers and children under the age of two.

27

Martorell, R. et al. (2002). This study, which was conducted for USAID, presents an in-depth analysis of malnutrition in Guatemala.

28

Close to 80% of the population is covered for basic care.

29

Have to travel for more than one hour to reach a health care facility (ENCOVI 2000).

30

1.6% went for social security; 0.7% for social welfare (childcare, school meals, grants, subsidies, microcredit, disaster prevention, etc.) and 0.9% for the social funds.

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(ii) 1.56

Improvements in the management of social spending

Guatemala has the lowest level of social spending in Central America,31 far below the level needed to eradicate poverty.32 The problem is worsened by poor targeting, since social spending mainly benefits the population with higher incomes (see Figure I-7).

F igure I-7. Im pa ct of social spend in g by incom e level (% spend ing) 31 28 25 22 19 16 13 10

Q 5

Q 4 Q 3 Q 2 Q 1

Poorest

M iddle class

U pper class

1.57

S o urce: M arcano, L uis (20 04 ) Apart from the scarcity of resources, the following factors contribute to the ineffectiveness of public social-sector management: (i) poor targeting; (ii) weak programming and coordination capacity; (iii) lack of sector leadership by the ministries; (iv) scattered spending, diluted among many uncoordinated executing agencies; and (v) the absence of a monitoring and evaluation system.

1.58

In parallel to social-sector spending, a wide variety of social investment funds exist in Guatemala. In 2002, they managed resources equivalent to 0.9% of GDP. The social funds are very volatile in the sector distribution of spending and work in a diversity of areas; their investments are not sustainable; there are problems with coordination among the funds and with the sector ministries, which leads to overlapping and duplication; and there are no effective monitoring, evaluation, and accountability mechanisms.

1.59

The country’s fiscal constraints caused by insufficient tax revenues make it even more necessary to improve the efficiency, transparency, and equity of social spending and ensure that the different government interventions help to build up human capital and reduce poverty. Progress must be made in implementing a social policy with two clearly defined strategic lines. The first is short-term and is aimed at addressing extreme poverty, associated with social safety nets. The second, to be implemented in parallel, launches actions whose effects will be felt in the medium term. These actions are intended to attack the intergenerational transmission of poverty through interventions in education, health care, and nutrition to develop human capital and promote integration in the economy. New managerial and financial models are required, with efficient and effective ways of delivering

31

The Peace Accords established a minimum level of spending of 2.5% of GDP for education, culture and sports, and science and technology, and 1.3% for public health (including social security), water and sanitation, and the environment. These levels have been met.

32

The minimum annual cost has been estimated as equivalent to 8% of GDP. This calculation, based on average consumption levels of the poor, is hypothetical, since it only includes the cost of raising the poor above the poverty line but omits administrative costs (World Bank, 2003a).

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services, promoting institutional strengthening in the sector and improving the quality of spending.

4. Improve government efficiency in producing public goods 1.60

Consolidating and deepening the democratic system, strengthening the rule of law, and improving government efficiency and transparency in market regulation and in internal operations are fundamental tasks established in the Peace Accords. The intent is to promote investment and produce the public goods needed for economic growth and poverty reduction.

Figure I-8. Governance indicators Voter turnout, 1990s LAC Nicaragua Peru Costa Rica Panama Bolivia Mexico Honduras Ecuador Guatemala El Salvador 0

10

20

In Guatemala, support for democracy as a system of government is the weakest in Central America today and below the average for Latin America.33 The stability and effectiveness of the democratic system are limited by: (i) low voter turnout, particularly by women, and inequities in political influence among different social groups; (ii) the weak capacity of political parties to coordinate and consolidate the needs of citizens and different social groups; and (iii) the weak capacity of the legislature to represent citizens in drafting laws and controlling the executive branch. It is therefore necessary to undertake reforms to increase the percentage of citizens who register and vote in elections. Congress’s capacity to represent the citizenry, draft effective laws, and supervise the executive branch also needs to be built up.

40

50

60

70

80

90

100

Rule of law index

0.8

1.61

30

0.6 0.4 0.2 0 CR

PN

BO

ME

PE

ES

Real values

EC

NI

GU

HO

LAC

Expected values

Co sto crimen y vio lencia para Cost of crime and violence for business nego cio s 5.0 4.0 3.0 2.0 1.0 0.0

Confidence in the judicial branch 35 30 25 20 15 10 5 0 CR

PN

HO

ES

BO

NI

ME

GU

PE

EC

LAC

Indice de Efectividad del Go bierno

Government effectiveness index

40

1.62

33

The rule of law is affected by institutional weakness and scant coordination among the institutions in the justice sector, which are still being consolidated. This restricts access and affects the efficiency and quality of the services provided by the sector, particularly for rural and indigenous groups. Confidence in the

30 20 10 0 PN

ME

CR

PE

EC

BO

NI

ES

HO

GU

LA C

Source: Payne et. al (2003); Kaufmann et. al. (2003); World Economic Forum 2002-2003; Latinobarómetro (2003).

According to Latinobarómetro it was 21% in 2003, while the average for Latin America was 28.25%.

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- 16 -

judicial branch is low and is combined with the inefficiency of the legal framework for protecting legal security.34 Insecurity and violence are a cost of doing business (see Figure I-8) and affect the quality of life of the citizenry. An effective body is needed to coordinate the justice sector and define a common strategy for all institutions involved; the institutions must be strengthened with more funding and professional personnel; and the efforts made so far to improve access to justice must be stepped up.

1.63

In the areas of market regulation and economic promotion the State faces the following challenges: (a) the weakness of property rights, which affects the predictability required for investments and contracts; and (b) the lack of public capacity to promote competitive and open markets and to build socioeconomic consensus.

1.64

Basic actions include updating the legislation governing property, safeguards for the rights of creditors, and the use of bank guarantees to carry out business. The supply of basic quasi-public goods for economic development, where the State has a legitimate role to play (scientific research, access to technology, national statistics system, export promotion programs, property registration systems, and training for the workforce) needs to be improved. Transparency in decisions by public officials on contracts and government policies, simplification of the system of administrative regulations for establishing companies, increased capacity of the institutions responsible for regulatory control over privatized public services and environmental services all need to be promoted.

1.65

Lastly, public management is affected by institutional fragmentation that stems from the overlapping of management units and leads to lack of coordination. It is therefore necessary to develop a strategic management plan that includes formulation of plans by each ministry or agency and the establishment of management indicators. In parallel, a system for monitoring government management that can be accessed electronically by legislators and the general public should be designed and implemented. The government procurement system needs to be consolidated and the progress made in tax administration in the SAT should be reinforced. The current administration is introducing major improvements in public management, particularly in budgeting and in implementing systems for monitoring and evaluation of its policies and programs.

1.66

Decentralization becomes a key for strengthening democracy and repairing the social fabric through greater integration and participation. Since the Peace Accords were signed, good progress has been made in this area and, in July 2004, the national policy for decentralization of the executive branch was approved.

34

Guatemala has one of the lowest indexes of effective protection of creditors (Lora, 2003), with scant institutional capacity to protect property rights in practice.

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Therefore, this progress needs to be consolidated and work needs to continue on strengthening local bodies.

C.

The government’s program

1.67

The economic policy of President Berger’s administration, as set out in the economic and social revitalization program known as Vamos Guatemala,35 seeks to create the conditions for placing the country on the path to sustained economic growth. The program is intended to coordinate and manage government actions with the basic goals of social harmony, competitiveness and confidence, to be achieved through three components: Guate Solidaria (poverty reduction), Guate Crece (growth), and Guate Compite (competitiveness).

1.68

Economic activation will be based on boosting the competitiveness of the national productive apparatus and on creating and maintaining a climate of confidence that is conducive to productive investment (Guate Crece and Guate Compite).

1.69

Also, and consistent with the Peace Accords, steps will be taken to promote participation by civil society organizations, strengthen the capacity of individuals and communities, and shore up social investment programs to guarantee equitable access to basic services, particularly for the most vulnerable groups (Guate Solidaria).

1.70

Vamos Guatemala has three main components. The first is integral security, to guarantee public order and security for individuals and their property. The actions are intended to give citizens certainty and confidence in legal and judicial instruments and mechanisms. To reduce the threat represented by street crime and organized crime, innovative actions will be promoted, such as community security and preventive security.

1.71

The second component is modernization of the State, to establish effective, efficient, and transparent institutions. Unrestricted access will be allowed to government information, and institutions will be opened up to oversight and scrutiny by the public and the press. Citizen participation and local development will be promoted for effective decentralization.

1.72

The third contextual component is consistent and stable macroeconomic management, based on the coordination of and between fiscal and monetary policies as well as exchange, trade, and labor policies, whose actions have an impact on productive investment. In the fiscal domain, the commitment to hold the deficit to close to 1% of GDP, as established in the Fiscal Pact, stands out.

35

A presentation on the Vamos Guatemala program is available at: http://www.mineco.gob.gt/mineco/despacho/presentacionvamosguatemala.pps.

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1.73

While awaiting the new legislative measures to boost government revenue under the Fiscal Pact, efforts are being aimed at improving the efficiency, effectiveness, and transparency of public spending. In the field of revenue collection, a strategy is being carried out to advance the efficiency of the SAT so that tax evasion can be reduced.

1.74

In the social component of the Guate Solidaria revitalization program, the planned actions are designed to promote: (i) social development that reduces poverty; (ii) development of productive capacity in rural areas; (iii) a framework to promote responsible social participation; and (iv) greater attention to the Guatemalan migrant population. The objective is for the poorest municipalities to receive social services and build the networks necessary for local development.

1.75

Social development is essential for making economic revitalization sustainable.

Guate Solidaria seeks to coordinate the actions of individuals and institutions which, in a framework of ethnic and gender equity, ensure access to: (i) social protection to manage risks and support vulnerable groups; (ii) education and training; (iii) basic social services; and (iv) projects to increase family income.

1.76

The strategic components in the program are also consistent with the commitment to environmental sustainability, understood as the quest for a balance between meeting human needs and the need to preserve nature through the sustainable use of natural resources and environmental protection. To that end, the environmental component of the Vamos Guatemala program, Guate Verde, is intended to make the actions of the three strategic components viable, so that together with investments in human capital and physical capital, the investments in the natural heritage will contribute to productivity in the long term, consolidate the country’s comparative advantages, and ensure sustainable economic growth, while improving the quality of life of the population.

D.

Macroeconomic outlook 2004-2007

1.77

The macroeconomic outlook for the period during which the strategy will apply revolves around four variables: (i) the fiscal situation; (ii) the external environment; (iii) the internal business climate; and (iv) the entry into force of CAFTA.

1.78

From the macroeconomic standpoint, the strategy provides for two simulations, based on progress in meeting the fiscal challenge. The conservative simulation assumes that tax revenue will not reach the goal of 12% of GDP and that the fiscal gap will be closed through spending cuts. The optimistic simulation assumes that the new administration is capable of implementing fiscal measures in the first part of its mandate and of achieving the 12% goal toward the end of its term in office. In both simulations, it is assumed that CAFTA will enter into effect in 2005, disciplined monetary policy continues, and financial reform is consolidated. In the optimistic simulation, a program under the IMF stand-by facility is completed.

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1.79

In the conservative simulation, a gradual reduction in the fiscal deficit from 2% of GDP in 2004 to 1% of GDP in 2007 is assumed, through cuts in public investment.

Social spending is maintained marginally above 5% of GDP, which is the minimum established in the Peace Accords. Spending on infrastructure and social investment is not sufficient to change the pattern of economic growth to make it more sustainable and pro-poor. The current account deteriorates since domestic savings do not rise, which increases the vulnerability of the economy and pushes up interest rates, discouraging investment. In this context, the country cannot fully tap the benefits of CAFTA. As a result, economic growth in 2007 does not exceed 3.5%.

1.80

In the optimistic simulation, the additional fiscal revenue allows increases in social spending (to 6% of GDP in 2007) and public investments, maintaining the same deficit reduction profile as in the conservative simulation. The growth rate increases to 5.5% by the end of the period, based on the first dividends from the investments in physical and human infrastructure that were made due to the additional revenues.

This context of fiscal discipline, coupled with investments in infrastructure and human development, promotes domestic private investment and foreign direct investment, consolidating faster growth.

1.81

In both simulations, it is assumed that the authorities prefer to finance the fiscal deficit through foreign borrowing. With a foreign debt of 14% of GDP and a total public debt of 23% of GDP in 2004, Guatemala has no problem with debt sustainability. This situation is confirmed through an analysis based on a series of stress tests.36 A combination of serious shocks affecting the current account, real GDP growth and the exchange rate would increase Guatemala’s foreign debt to 43% of GDP in 2009. The total public sector debt remains below 25% of GDP in the conservative simulation and will stay below 30% of GDP regardless of which individual stress test is applied.

Table 1. Macroeconomic outlook 2004-2007

Macroeconomic indicators

Conservative simulation

Optimistic simulation

2000

2001

2002

2003

2004 proj.

2005 proj.

2006 proj.

2007 proj.

2004 proj.

2005 proj.

2006 proj.

2007 proj.

3.6

2.2

2.2

2.1

2.6

3.0

3.2

3.5

2.6

3.5

4.2

5.0

End-of-year inflation (growth rate) 4.9 8.9 Tax burden (% GDP) 9.4 9.7 Social spending (% GDP) 5.0 5.5 Government current savings (% GDP) 1.6 1.5 Capital expenditures (% GDP) 3.7 4.1 Central government deficit (% GDP) -2.4 -2.4 Public sector deficit (% GDP) -2.2 -2.3 Current account (% GDP) -5.4 -6.0 International reserves (months of imports) 3.6 4.0 Gross financial needs, public sector (% GDP) Multilateral agency financing (% GDP) IDB financing (% GDP) Other sources of financing (% GDP) Source: IDB based on data from the Bank of Guatemala.

6.3 10.6 5.1 2.7 3.6 -0.3 -0.8 -5.3 3.7

5.7 10.7 5.3 1.7 4.1 -2.3 -2.0 -4.3 4.2 2.9 1.9 0.2 1.0

7.0 9.7 4.9 1.5 3.3 -2.1 -1.8 -4.2 4.2 2.7 1.9 0.4 0.7

6.0 10.4 5.0 2.0 3.9 -1.8 -1.5 -4.0 4.0 3.0 0.9 0.3 2.1

6.0 10.7 5.1 2.2 3.7 -1.5 -1.3 -4.0 3.9 2.6 1.5 0.5 2.0

6.0 10.9 5.2 2.3 3.3 -1.0 -0.8 -4.0 3.8 2.1 1.0 0.3 1.8

7.0 9.7 4.9 1.5 3.3 -2.1 -1.8 -4.2 4.2 2.7 1.9 0.4 0.7

6.0 10.5 5.1 2.1 3.9 -1.8 -1.5 -3.9 4.3 3.0 0.9 0.3 2.1

5.5 12.0 5.9 3.0 4.5 -1.5 -1.3 -3.7 4.3 2.6 1.5 0.6 2.0

5.0 12.5 6.1 3.4 4.4 -1.0 -0.8 -3.7 4.3 2.1 1.0 0.4 1.8

GDP (growth rate)

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1.82

Thus, the Government of Guatemala could forego multilateral sources of financing, given its relatively stable macroeconomic environment, very strong reserve position due in part to substantial remittances currently above 11% of GDP, and access to international bond markets on fairly good terms. In the country’s programming, borrowing from abroad will be limited to financing the fiscal deficit. In these circumstances the macroeconomic simulations reveal that the government has sufficient borrowing capacity for the high scenario of loan programming.

Consequently, its borrowing capacity does not depend on macroeconomic policy shifts.

1.83

Given this set of circumstances and the agreement between the social and growth objectives of the new administration and of the Bank, the best way to promote policies that benefit the poorest of the poor while promoting economic growth is through the right combination of financial and nonfinancial instruments, whereby the government agrees to work with the Bank toward shared development objectives.

36

See tables 13 and 14 of the IMF Staff Report 2004.

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II. LESSONS LEARNED FROM THE PAST STRATEGY AND PORTFOLIO A.

Strategy 2001-2003

2.1

The Bank’s country strategy with Guatemala for 2001-2003 had the core objective of reducing poverty, which it proposed to achieve through actions along three strategic lines: (i) to promote sustainable economic growth, macroeconomic stability, and competitiveness; (ii) to support equity, social protection, and human capital development; and (iii) to advance modernization of the State and strengthen governance. The strategy was in line with the Peace Accords, and was closely related to the priorities of the government’s plan37 and the Bank’s institutional strategy, thereby assuring its relevance.

2.2

The strategy proposed a base scenario of US$565 million that included one sector loan, 17 investment loans, and significant support through 21 technical-cooperation and MIF operations. The high scenario, for US$999 million, included eight additional operations, whose implementation depended on policy decisions for each operation. The extent to which the two scenarios could be implemented also depended on fiscal reforms to achieve the target tax ratio of 12% of GDP. There was also a portfolio of 27 loans with an undisbursed balance of more than US$470 million, with four operations beginning disbursements and five awaiting signature.

2.3

Although the proposed strategy was relevant for covering the challenges facing the country, the proposed potential areas of intervention turned out to be overly optimistic and the large number of projects already in execution or in the pipeline predetermined that the Bank’s action would focus on multiple sectors.

2.4

Implementation of the strategy under the proposed program was adversely affected by: (i) the Bank’s delay in approving the strategy and the discontinuity in the dialogue, given the considerable time taken by the government to define its priorities; (ii) an adverse external environment with a lengthy recession that affected public investment; (iii) an unfavorable internal climate, given the distancing between the government and the private sector, which made it impossible to raise the tax ratio to the planned goal and led to significant budget restrictions; (iv) frequent changes in government authorities38 and problems of coordination among the different agencies; and (v) a slow and declining pace of portfolio execution, for the above reasons and others to be examined in the next section, in which the Bank’s actions also played a part.

37

Economic policy matrix 2000-2004, Government of Guatemala.

38

This was particularly serious in the case of the Ministry of Agriculture, which had five ministers during the period.

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2.5

In this context, and although the government had a legislative majority, operations for just 66% of the tentative amount in the low scenario for the Bank’s three-year program (US$441 million) were approved.

1. Achievements

2.6

The above considerations meant that the strategy’s objectives were partially attained. The concrete and relevant impacts of the Bank’s action in Guatemala include the fact that the country was able to maintain its macroeconomic stability through the 2001 fiscal reform, which raised the tax burden above the historical 10% of GDP, and the signature of a stand-by arrangement with the IMF. Under the financial sector loan, progress was made in sector reform through actions to modernize the legal framework and enhance oversight and regulatory capacity.

Although it is too early to measure the impact of these changes, the perception of oversight and the capacity to manage system risks has improved. Progress was also made in the regulatory framework for MSMEs that facilitates the expansion of financial services for the sector, while backing growth in the supply of business development services, modernization of the customs system, and the automation of export formalities. Support was also provided for the legalization of more than 45,000 hectares of productive land. Restoration of the cultural heritage in Petén and the development of tourism services continued.

2.7

In the social sphere, although there was backsliding on some of the achievements of the 1990s,39 given that extreme poverty rose between 2000 and 2002 from 15.7% to 21.5%,40 progress was made in key indicators, such as the expansion of coverage of education and health care services and their extension to rural areas, and a reduction in school dropout and repeater rates and in infant mortality. Although the strategy planned for the sector could not be implemented completely, the Bank played an important role, since the fiscal reform made it possible to comply with the social spending levels established in the Peace Accords, and the catalyzing effect of the meetings of the Advisory Group made it possible to temporarily reestablish the dialogue and proceed with measures to implement the accords. In education, sector reform was supported through the development and introduction of a new basic national curriculum, the promotion of bilingual intercultural education, and support for the preschool education program. The change in the government’s strategy made it impossible to move ahead with phase II of the Bank’s program, which was part of a comprehensive strategy for the sector.

39

Calculations by OVE for its 1993-2003 Country Program Evaluation are more optimistic about the headway made in poverty reduction in the1990s, reporting a reduction in extreme poverty of 39.7% between 1989 and 2000, for progress of 80% toward this Millennium Development Goal.

40

General poverty rose from 56.1% to 57%.

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2.8

The Bank’s actions have also been relevant in promoting social investment in rural areas, which has made for expansion in the coverage of basic public services, while simultaneously promoting community work and organization. Through Community Development for Peace (DECOPAZ), close to 2,300 projects were financed in the areas hardest hit by the internal conflict, strengthening the communities. With support from the FIS social investment fund, a participatory management model is being implemented in a coordinated manner with 35 municipalities.

2.9

Lastly, to promote modernization of the State and governance, the Bank has been contributing to better access to justice by starting up justice administration centers and opening or renovating premises for justices of the peace and district prosecutors in areas affected by the conflict and geographically remote areas. In the last 18 months, 18,162 cases have been taken up and more than half of them resolved.

2.10

With regard to the instruments used, the financial sector loan proved to be a very effective tool by promoting the adoption of key reforms and bolstering public finance at a critical time. The technical-cooperation projects played a relevant role as a complement to operations, allowing projects to mature, keeping issues that are relevant for the country active, and preparing the ground for future operations.

Great synergy was achieved by underpinning loan operations with MIF projects.

2. Lessons learned from the previous strategy

2.11

The following lessons can be drawn from an analysis of the previous strategy and its implementation: (i) interventions should be targeted to a limited number of areas and actions; (ii) the strategy should be approved within the government’s first year in office, it being fundamental to maintain a fluid and regular dialogue between the government and the Bank and involve the legislature and civil society more actively; (iii) the evaluability of the strategy should be improved by establishing appropriate indicators and monitoring their implementation jointly with the portfolio review missions; and (iv) the sector loans, time-slice operations, MIF operations, and projects with communities, especially excluded groups, have produced good results, and therefore those processes should continue, making the Figure II-1. IDB disbursements 1996-2003 necessary adjustments.

250,000

B.

Total

Portfolio

200,000

1. Evolution and performance 2.12

During the period of the 2001-2003 country strategy, the portfolio (measured in terms of funds to be disbursed) grew by 13% to US$531 million. The number of projects remained relatively stable, falling

150,000 100,000

Investment

50,000 0

1996 1997 1998 1999 2000 2001 2002 2003 Source: IDB.

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from 22 to 20. Annual disbursements were very volatile (see Figure II-1), which is explained by the disbursements of the financial sector loan, but with a steady drop in disbursements of the investment loans.41 Over the period, the Bank’s cumulative net flow with Guatemala was just US$66 million.

2.13

In addition to the factors already mentioned, an analysis of implementation of the previous strategy points to other factors that affected portfolio performance, including delays in legislative approval of operations and in the fulfillment of eligibility criteria. The complexity of the projects, changes in the government’s priorities, administrative and management problems at the Country Office,42 the lack of coordination inside government and among donors, and the weakness of executing units (which see a total staff turnover with the beginning of each new period, corresponding to the election cycle) all had a negative effect.

2.14

The performance indicators for the portfolio deteriorated toward the end of the previous country strategy period. The number of problem projects rose from one to five (reaching 23.2% of the available balance), which reflects the difficulties in execution but is also the result of an improvement in the quality of the evaluation of the performance indicators. This situation was accompanied by certain administrative difficulties in portfolio management encountered by the IDB’s Country Office in Guatemala, which has led to strengthening the office and reviewing processes and procedures with a view to simplifying them to make them more effective.

2.15

Despite these difficulties, Bank financing continued to account for a large share of total public investment during the country strategy period, representing on average 13% of investments, which is similar to the percentage that applied during the 1996-2000 country strategy.

Table 2. Age of the portfolio and performance indicators, 1999-2003 Age of the portfolio Over 5 years

Year

5 years or less

No. of Amount Balance No. of Amount Balance projects % % projects % % 1999 5 9.7 4 18 90.3 96.2 2000

Problem projects No. of projects 1/23

Amount Balance % % 3.7 7.2

Unsatisfactory projects No. of projects 0/23

Amount Balance % % 0 0

6

10.7

15

18

89.3

96.2

2/24

3.2

4.3

5/24

21

7.1

2001 8 2002 5 2003 4 Source: IDB

28 17 14.5

7 5 2

14 15 16

72 83 85.5

92.6 95 98

2/22 1/20 5/20

28% 72% 13.6

16.2% nd 23.2

1/22 1/20 5/20

53.6 23.9 30

5.50% nd 27.5

41

The drop in investment loans mirrored a trend in the disbursements of other multilateral institutions.

42

Decisive steps were taken, which included changes in international staff and disciplinary measures when warranted.

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2. Lessons learned 2.16

Some lessons learned for the present strategy are to: (i) support the execution of operations with technical and administrative strengthening of the executing agencies, avoiding the creation of temporary parallel structures that change with the political cycle; (ii) in coordination with the government, support the executing agencies in seeking consensus with Congress and civil society to improve the feasibility of legislative approval of the loans and their execution; (iii) accelerate and facilitate the implementation of operations, reducing the conditions precedent to the first disbursement by meeting them prior to approval of the loan; (iv) synchronize the portfolio with the budget headroom generated by the macroeconomic framework, simplifying procedures and reducing transaction costs; and (v) strengthen the Country Office administratively and make a start on process reengineering, with a view to simplifying procedures for loan execution.

3. Current status and role of the portfolio in the new strategy

2.17

The active portfolio43 includes 20 loans, with US$397 million to be disbursed, 50% of which corresponds to seven projects approved in the last three years (two whose contracts have not yet been signed). Nine projects are in alert status44 and two are classified as problem projects. Five small projects are under way for US$1.4 million, 20 MIF technical-cooperation operations for US$20.4 million, 37 technical-cooperation projects for US$11.5 million, two IIC projects for US$16 million, and one loan from the Private Sector Department for US$25 million. The programs in the active portfolio, which are listed in Annex IV, are linked to the objectives of the Bank’s new strategy in the country and are consistent with the priorities set by the new administration.

2.18

During the sector missions in the first half of 2004 and the 2004 portfolio review mission, the active portfolio was studied in detail with the government. It was concluded that the portfolio generally coincided with the government’s priorities. A detailed plan of action was agreed on, to adjust specific aspects of the portfolio and enhance execution. As a result of this process, the labor market program was cancelled, components of the health sector loan are being modified, and the list of works in phase II of the road program is being coordinated to lighten execution and bring them into line with the new government’s priorities. The retrofitting exercise will also make it possible to continue to improve measurement of project impact and compliance with the objectives.

43

At 31 August 2004.

44

Just three of the projects in alert status correspond to the 2001-2003 strategy.

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2.19

The Bank will support the government in building up its execution capacity and will promote the simplification of program execution under the framework of Bank policies and in coordination with the programs of other sources of financing. These actions will reestablish the capacity to execute the investment loans in the portfolio, provided that the Country Office is strengthened to enable it to respond rapidly in the process of reactivating the portfolio.

III. BANK STRATEGY 2004-2007

A.

Objectives of the strategy

3.1

The Bank’s country strategy with Guatemala 2004-2007 has the central objective of reducing poverty by supporting the government’s efforts to achieve higher economic growth and to create jobs. This is a basic condition for building a firm and lasting peace that will allow for full participation by the population in the process of economic and social development.

3.2

Considering the relationship between growth and poverty reduction, the short-term objective of the country strategy focuses on heightening the impact of Bank action to support sustainable economic growth that is broad based, led by diversification of the economy and the inclusion of all population groups in the productive process.

3.3

The country strategy focuses the Bank’s program on two interrelated strategic objectives: (i) to improve the conditions for efficient production and to incorporate excluded sectors into the productive process; and (ii) to increase human capital with equity. Also, the strategy includes improvements in the country’s institutions to support stronger governance45 as a cross-cutting issue that is a necessity for progress in both areas.46

3.4

The importance of the active portfolio for achieving the strategy objectives calls for an operational pillar that focuses on aspects of program execution and impact. This pillar defines specific operating targets linked to improvements in execution, monitoring, and supervision of loans. These targets are midterm objectives of the strategy. Activities to improve the institutions in charge of execution are defined in parallel.

B.

Criteria for strategy formulation

3.5

The strategy has been formulated on the basis of the following criteria:

45

Although with modest goals for the impact of the proposed operations on improving the country’s governance.

46

The conceptual framework for this strategy is document GN-1894-7, Strategy on poverty reduction and promotion of social equity. See paragraph 3.3 in particular.

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C.

•

It supports the country’s macroeconomic stability, since it is consistent with the macroeconomic program and promotes compliance with the spending and investment targets set in the Peace Accords, which are required to make headway in the country’s development. It also takes account of the Bank’s exposure in the country, which is described in Annex V.

•

It focuses on government priority areas in which the Bank has comparative advantages and coordinates its actions with other sources of financing for the country, thereby helping to increase the efficiency of the public investment and resource allocation process.

•

It attaches high priority to the active portfolio, by tailoring its size and implementation to the country’s financing requirements. At the same time, it supports institutional strengthening for execution.

•

It supports the design of programmatic approaches in the road system, the social sectors, and decentralization, in order to heighten the impact of investments and achieve the simplification needed to speed up execution of the programs in the portfolio.

•

It selects instruments and establishes their sequence so that: (i) the impact of the Bank’s actions in the priority sectors is higher; (ii) the synergies of the Bank’s different windows are tapped; and (iii) the program corresponds to the country’s borrowing capacity and its institutional realities, particularly the fiduciary capacity of the public sector.

•

It provides for a midterm review to evaluate implementation of the strategy and to make the adjustments needed to achieve its objectives.

•

It promotes increased coordination and harmonization of international cooperation, supporting the development of sector-wide approaches under the Peace Accords.

•

It incorporates the recommendations of the Bank’s Country Program Evaluation – Guatemala 1993-2003, whose relationship to the proposed new strategy is explained in Annex VI, and in the Evaluability Assessment Comments – Bank Strategy for Guatemala, also prepared by OVE.

Strategic objectives 1. Strategic objective I: Improve the conditions for efficient production and incorporate excluded sectors into the productive process

3.6

A sustainable acceleration in growth is linked to an increase in productivity in the production of goods and services. To support this process, as part of the business

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climate initiative signed with the country in 2004, the Bank’s actions will be directed to improving the conditions for efficient production by achieving the following specific objectives: (a) promote a macroeconomic context that supports the economy’s competitiveness; (b) upgrade basic infrastructure in roads, electricity, and water and sanitation; (c) make the most of CAFTA opportunities and better position the country in the global marketplace; and (d) expand the sources of sustainable growth and participation in the economy by the excluded population.

3.7

A document will be prepared in the last quarter of 2004 setting priorities for IDB group support for private sector development. The document will contain an analysis of constraints on investment, which will draw on baseline studies and consultations with the business sector and the country’s authorities. The findings will be used to set the action priorities of the different IDB group units that provide direct support for the private sector, and the main specific themes to be included in the business climate initiative will be identified.

3.8

The actions included in this strategy to achieve the proposed specific objectives are described below. a. Promote a macroeconomic context that supports the economy’s competitiveness

3.9

The strategy will help to strengthen the public sector’s financial position, so that it can generate a fiscal and monetary policy mix that is consistent with price stability, while simultaneously promoting competitiveness.

3.10

The Bank will support consolidation of the Fiscal Pact, backing a deeper tax reform to efficiently generate the revenue needed to finance social spending and investments. The reform also covers public spending, with a view to improving its efficiency, evaluation, control, and transparency through the modernization and strengthening of the budgeting process, more effective management of public assets and liabilities, and progress in fiscal decentralization.

3.11

The entire process will be supported with the policy-based loan to support fiscal consolidation, technical assistance for the design of a communications strategy on fiscal reform, and three technical-cooperation projects currently in execution47 to design the reforms and build consensus. Two studies will be central for execution of the strategy: evaluation of the fiduciary capacity of the public sector and evaluation of government procurement and contracting processes. The findings of

47

The technical-cooperation projects are: Support for consolidation of the Fiscal Pact, Building social capital through fiscal reform, and Support for financial decentralization and management.

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these studies will lay the groundwork for the use of more flexible investment loan instruments.

3.12

In parallel, improvements in the financial intermediation of remittances will be supported, and channeling those resources into investments will be promoted through a MIF technical-cooperation project and a nonfinancial product.48 b. Upgrade basic infrastructure in transportation, electricity, and water and sanitation

3.13

The country strategy will support a reduction in the logistical costs of doing business in the country and improve access by rural dwellers to public services. To do so, it will focus on achieving the following objectives: (i) directing road system investments into the maintenance and rehabilitation of secondary and tertiary roads; (ii) expanding electricity coverage in rural areas and consolidating reform in the electricity sector by strengthening regulation; (iii) promoting physical and energy integration of Central America under the Puebla-Panama Plan (PPP); (iv) increasing the coverage of water and sanitation services in rural areas; and (v) promoting private participation in infrastructure through concessions and investments.

3.14

With the portfolio operations under way, support will be provided for expanding coverage of the transportation, electricity, and water and sanitations sectors,49 and highway and energy integration. These interventions will be supplemented by a rural electrification program, institutional strengthening and priority actions for sustainable management of the Lake Amatitlán basin, and a technical-cooperation project on the modernization and institutional structure strategy for water resources in Guatemala. PRI also has two operations planned: Amatitlán geothermal power plant and a thermal power plant; and the Corporation, one: Tres Ríos electric power generation. The Bank is also supporting the government’s efforts in the area of renewable energies through technical-cooperation project ATN/PD-8135-GU with the National Institute of Electrification (INDE) and the Ministry of Energy and Mines (MEM) for a series of geothermal energy initiatives.

48

Salcaja Cooperative and a study on the regulation of remittances and macroeconomic policy.

49

Road rehabilitation and modernization, phase II; Central American electric interconnection and electric interconnection between Guatemala and Mexico; potable water investment program; municipal development; comprehensive program to combat urban poverty; geothermal development (TC) DEORSA and DEOCSA expansion plan (PRI); support for the concession system (MIF) and strengthening for the electricity sector regulatory body (MIF).

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c. Make the most of CAFTA opportunities and better position the country in the global marketplace 3.15

The country strategy will support the country in seizing the opportunities offered by CAFTA (Annex VII presents a detailed action plan for Bank support for Guatemala under CAFTA) and promote Guatemalan integration under the Central American Common Market (CACM) and its participation in the Puebla-Panama Plan, in order to deepen its presence in the different markets.

3.16

With programs in the portfolio in the early stages of execution, support will be provided for institutional strengthening to implement the trade agreements, for the modernization of export services, and for physical and energy integration in Central America (mentioned in the preceding section).50 The strategy also includes a technical-cooperation project to Support compliance with the CAFTA conditions; two MIF operations: Support for the development of e-commerce and Assistance for Central American SMEs with CAFTA market access requirements, which is a regional project; and the nonfinancial products: support for the CAFTA communications strategy, a CAFTA action plan, and a study of CA-Mexico tariff barriers. One key instrument supporting the benefits resulting from CAFTA opportunities will be the loan to support competitiveness and integration, which will combine actions for competitiveness with economic integration under the framework of the CACM and other trade agreements signed by Guatemala. d. Expand the sources of sustainable growth

3.17

To support diversification of the Guatemalan economy, the country strategy will focus on support for the development of sectors of the economy that will spur sustainable economic growth in areas where there is greater density of natural and human resources and historical and cultural heritage. This will boost the country’s rural competitiveness and open up opportunities for integration of the rural population—particularly indigenous groups—into the economy.

3.18

The country strategy will support: (i) the promotion of the business climate in general and, in particular, greater rural competitiveness; (ii) the integration of indigenous peoples through their incorporation into productive development; (iii) the sustainable development of natural and cultural resources, with particular attention to the Maya Biosphere Reserve and watersheds; (iv) the development of the tourism sector by leveraging economies of scale that will derive from the Mayan regional circuit; and (v) the development of MSMEs, which will promote an increase in the productive assets of the lower-income population.

50

Program to support foreign trade; Program to support the reconversion of agrifood production; Central American electricity interconnection and electricity interconnection between Guatemala and Mexico; and Modernization of customs and border crossings (CAFTA).

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3.19

The active portfolio will be used for the sustainable development of rural areas, given its focus on watersheds, restructuring of agricultural production, the incorporation of technology into productive processes, and support for SMEs.51 The strategy includes actions along this line with new programs to support competitiveness and integration, based on the results of studies on the business climate initiative included in the strategy; sustainable development of the Maya Biosphere Reserve (MBR), including a GEF project for the management of ecosystems in the MBR; and the Mayan route tourist circuit. Technical-cooperation projects will be carried out in relation to support for the Network of Management Groups’, evaluation of the informal sector, participation and social integration in the MBR, management of the Lake Petén Inza basin, strengthening of the Ministry of the Environment, and strengthening of the National Protected Areas Council (CONAP). The Corporation will provide two lines of credit: one for Banco Occidente and the other for Banco Industrial. There will also be a series of MIF operations.52

3.20

A program to support the indigenous peoples strategy is proposed to promote the integration of the indigenous population in the development process by building up their managerial and productive capacity.

3.21

As support for these activities, the following nonfinancial products have been planned: a study on local competitiveness, a document on guidelines for the private sector to be developed under the business climate initiative, and a workshop on rural sector policies.

3.22

Under the business climate initiative, the Bank is preparing, in consultation with the business sector and government authorities, a document on IDB group priorities for private sector development in Guatemala. The document contains guidelines for overcoming constraints on private sector investment and will evaluate the alternatives for private sector promotion and a possible course of action to be undertaken by PRI, the IIC, the MIF, SDS, and RE2.

3.23

In addition to support for competitiveness through the financing of infrastructure and integration, the action of IDB group units that support the private sector will be chiefly directed to increasing the number of entrepreneurs and businesses in the formal sector with access to credit in the different parts of the country, which will include the following core elements: (i) support for the Network of Management

51

Program to support restructuring of food and agriculture production, technology development program, sustainable development in Petén, natural resources in upper watersheds, sustainable management for the Lempa River, and nine MIF operations for microenterprise and small business.

52

Support for business development in the interior, strengthening of competitiveness of Banrural, and three regional operations: development of CA agricultural insurance markets, support for the Textile Training Institute, and the trinational ecotourism route in the Gulf of Honduras.

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Groups;53 (ii) establishment of a national system for entrepreneurial support; (iii) strengthening the legal framework for the growth of MSMEs; and (iv) promotion of competitiveness in rural areas (see Annex VIII).

2. Strategic objective II: Strengthen human capital with equity 3.24

To support the equitable development of human capital in Guatemala, this strategy plans to achieve two specific objectives: (a) to improve the efficiency of social spending and protect spending on programs with the greatest impact on poverty reduction; and (b) to improve the coverage and quality of social services in the poorest municipios.

3.25

The strategy for attaining these specific objectives is described below. a. Improve the efficiency and progressiveness of social spending and protect spending on programs with the greatest impact on poverty reduction

3.26

The Bank will supplement improvements in public-sector financial management in the social sectors by: (i) improving sector coordination through strengthening of the Social Cabinet, the Planning and Programming Department of the Office of the President (SEGEPLAN), and the sector ministries; (ii) making social investments through the National Investment System; (iii) heightening the efficiency of the social funds by establishing a single board to coordinate them and directing its financial management;54 (iv) strengthening management capacity in the social sectors; and (v) establishing a system to monitor and evaluate the impact of social programs.

3.27

In parallel with meeting the social spending targets set in the Peace Accords, it is necessary to protect and boost spending on programs with the greatest impact on poverty reduction. Therefore, support will be provided for defining social spending priorities in the budget and linking that spending to performance targets. b. Improve the coverage and quality of social services in the poorest municipios

3.28

The Bank will support the government’s efforts to target its actions to the poorest population segments, promoting equitable access to basic social services by supporting the social-sector component of the government’s poverty-reduction program, Guate Solidaria. The purpose of the program is to reduce extreme poverty

53

This is a program recently launched by the government to promote the productive projects of small producers in remote areas.

54

Gradual incorporation of the funds into the integrated financial management system (IFMS) and the National Public Investment System (SNIP).

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by implementing a comprehensive intervention strategy that is geographically targeted to the 110 municipalities with the highest food and social vulnerability.

3.29

To support achievement of the Millennium Development Goals in education, health care, and nutrition, the Bank’s actions will focus on preschool and primary education, since this is the most important asset to which the poor have access and because of its favorable indirect impact on health, nutrition and other social indicators, with special attention to girls. It will also support basic mother and child health services in rural areas and nutrition for pregnant and breast-feeding women and for children.

3.30

The strategy supports government programs already under way. First, actions will be targeted by making priority use of the Guate Solidaria criteria. The improvements in education coverage and quality will be brought about through support for Ministry of Education’s Salvemos el Primer Grado program.55 In health, the primary care model will be extended and strengthened, with emphasis on prevention and health promotion. In nutrition, the strategy will consist of coordinating programs through the Frente Contra el Hambre, establishing a comprehensive assistance model based on a system to monitor food and nutritional insecurity; and support for the Creciendo Bien program, which includes the distribution of micronutrients and a calorie component and will complement the actions of other donors in this field.56

3.31

To provide effective support for reform in the social sectors that will bring about improvements in efficiency, targeting, coverage, and quality of the services, the country strategy will support an on-going reform of the social sectors, to be implemented in two stages. In the first stage, the program to improve the quality of social spending is a sector operation whose design and implementation is being strengthened with technical-cooperation projects under way and in preparation. A workshop on local development and investment funds will support greater efficiency in social management and the protection of social spending. The active portfolio will reinforce progress toward the health sector goals.57

3.32

In the second stage, the progress made in the first stage will be used to support a second stage of the Social Investment Fund (FIS) and a social action project, to make effective use of the greater fiscal leeway and more flexible instruments.

55

The objective of this program is to reduce repeater and dropout rates in the early years of primary school. It includes training for teachers, the provision of mini-libraries, and awareness campaigns for parents and teachers.

56

This is a self-managed model that promotes nutritional security and is run by women. The program has been operating for several years in Guatemala. This year the government decided to support and extend it, with technical assistance from UNICEF.

57

Improvement of health care services, phase II

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3. Crosscutting element: Strengthening of governance 3.33

To make headway in the two strategic areas proposed, Guatemala needs to make significant progress in strengthening the institutions that support the democratic system and preserve law and order, and legal and citizen security. In addition to developing and implementing a broad strategy for institutional development that covers the three branches of government, to bolster efficiency in the production of public goods and services, the country strategy will support strengthening of the democratic system and the rule of law. In particular, it will also promote dialogue and intercultural mediation between government and society for the formulation of public policies.

3.34

Accordingly, the program includes: (i) support for deepening of the democratic process by improving the civil registry of individuals and the voters’ rolls, and modernizing and strengthening the National Congress; (ii) support for strengthening and modernization of the justice sector, with particular attention to the rights of indigenous people; (iii) the promotion of citizen security and coexistence; and (iv) improvement in public management at the central and local levels by reinforcing the decentralization process through support for the transfer of responsibilities, modernization of local public administration, improvement in the managerial capacity of municipal governments, building the capacity of civil society, and promoting local economic development.

3.35

The programs under way will strengthen the justice sector and municipal development.58 They will be complemented with new programs on support for the justice sector, phase II, modernization of Congress, and a citizen security program; and two technical-cooperation programs on institutional strengthening of the Human Rights Ombudsman’s Office and support for the civil registries. The strategy will back the strengthening of public management, particularly fiduciary and contracting capacity, the budgeting process—linking the allocation of resources to results—and monitoring and evaluation capacity. This will be done through the technical-cooperation operation on support for poverty reduction, which is being restructured, the new program on improvement of the quality of social spending, and two nonfinancial products that will be developed together with the World Bank: the Country Financial Accountability Analysis and the Country Procurement Assessment Report. The Public Expenditure Review being prepared by the World Bank will be another important input. Lastly, the government’s capacity to effectively regulate markets and promote economic activity will be strengthened through the support for competitiveness and integration operation.

58

Reform of the justice sector, Municipal development, and two technical-cooperation projects, Support for financial decentralization and management and Strengthening of citizen security.

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D.

The operational pillar of the strategy

3.36

The objectives of the country strategy include improvement in the relevance, efficiency and effectiveness of Bank action and in the country’s borrowing capacity. To bring this about, execution of the programs in the portfolio will be improved and coordination of external financing will be heightened.

3.37

A complete review of the active portfolio has begun, as mentioned earlier, to bring its details into line with the priorities of the country strategy and the country. Work will be done to simplify project designs, make their execution more flexible, and support programmatic approaches that facilitate investment programming and coordination under Bank policies. In parallel, the executing agencies are being strengthened through a recently approved technical-cooperation program, and the Country Office will be supported in team work and greater operational effectiveness and efficiency through organizational strengthening, consultation, and process review exercises.

3.38

Lastly, to better coordinate external cooperation, through the technical-cooperation operation to support executing agencies, the Bank is assisting the government in setting up a project monitoring technical unit that will support the international cooperation office being established in the Ministry of Finance. The regional technical-cooperation operation on support for the implementation and monitoring of the Millennium Development Goals in Latin America and the Caribbean has already been approved, a technical-cooperation operation to support donor coordination will be processed and, if the government requests, support will be provided for a new meeting of the Advisory Group, for which a nonfinancial product (donor map) will be prepared as an input.

3.39

These actions constitute key elements for making progress in implementing the country strategy and defining the operational indicators that govern its scenarios.

Progress will be reviewed periodically in the annual updates of the strategy and in the midterm review.

E.

The program: Size, sequence and instruments a. Size and sequence. The country strategy program has two scenarios:

3.40

The base scenario, which totals US$328 million, corresponds to a financial situation in the public sector with little leeway for new investments, since investments will largely be taken by the loans in the active portfolio. This scenario provides for programs linked to key issues for the country that have been stressed by the government as priorities. Initially, the strategy includes support for social spending, which will be restricted by the limited fiscal leeway, while also improving its management and progressiveness; and the promotion of citizen security. Given their priority, financing for the enhancement of social spending and

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citizen security will be subsidized by using the entire US$99.2 million available for Guatemala in the period 2004-2005 from the Intermediate Financing Facility (IFF).

Subsequently, support will be provided for the indigenous peoples strategy, sustainable management of the Lake Amatitlán basin, sustainable development of the Maya Biosphere Reserve, and a new stage of the Social Investment Fund, as well as a rural electrification program. The rural electrification program (US$70 million) was included in the 2003-2004 country strategy update. It is expected that the US$100-million loan to improve the quality of social spending will be approved in 2004. New operations in the base scenario beginning in 2005 will amount to US$158 million.

3.41

In parallel, support will be provided for a series of actions to bolster public sector management, optimizing financial management by: developing the capacity to monitor and evaluate policies, programs and projects; supporting the definition of a clear and coordinated policy for external cooperation; and improving the execution of the investment loans in the Bank’s portfolio.

3.42

The high scenario, which includes the low scenario plus US$276 million in new operations for a total of US$604 million, is basically the product of an increase in the country’s borrowing capacity as a result of improvements in public sector management, and of a portfolio whose execution has improved and whose faster pace of disbursements is consistent with the goals of the macroeconomic program.

This scenario includes operations to support competitiveness and integration; the continuation of the justice sector reform program; a sector loan to support fiscal consolidation; modernization of Congress; and tourism development. Building on the advances in social management, a new investment program has been planned in the sector. In parallel, a start will be made on the actions identified in the document on guidelines for IDB group support for the private sector. Annex I presents a breakdown of the lending scenarios.

3.43

The high scenario will be contingent on the following institutional and disbursement targets being met: •

Establishment of the International Cooperation Cabinet and definition of cooperation policy. This will enable Cabinet Council coordination of external financing, helping to set priorities so that these resources can be allocated more efficiently.

•

Establishment and startup of the Project Monitoring Technical Unit. This Unit at the Ministry of Public Finance will support the International Cooperation Cabinet by monitoring project execution and strengthening project executing units. The objective is to provide a rapid, flexible response that enhances the performance of operations financed with external resources.

The Bank will support this unit through a technical-cooperation program.

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•

Projected disbursements for 2006 amount to 20% of the undisbursed balance of the Bank’s portfolio of eligible loans, and are reflected in the government’s general budget for fiscal 2006. This would indicate an effective average portfolio execution time of five years and a substantial improvement in the country’s borrowing capacity, nearly doubling the current pace of disbursements.

3.44

Approval of the fiscal sector loan will also be conditional on verifying a clear trend toward an increase in the tax ratio with the objective of bringing it up to 12% of GDP.

3.45

As Annex V shows, the flow of Bank resources to Guatemala in the base scenario is US$119 million in average annual disbursements for 2004-2007. Given the sizeable principal and interest repayments facing Guatemala, the net flow with the country will be negative during that period. The high scenario of loan approvals would have no effect in 2004-2005, but would have a substantial positive impact in 2006-2007 when disbursements would average US$187 million and a strong positive net flow of resources would resume. b. Instruments

3.46

This strategy proposes the intensive use of a range of instruments and modalities at the Bank’s disposal, both financial (investment loans, policy-based loans, multiphase loans, technical-cooperation operations) and nonfinancial (studies, technical support, and workshops), supported by the actions of the Private Sector Group (PRI, MIF and PES). The use of more flexible lending instruments will be encouraged, such as performance-driven loans (PDLs) and sector-wide approaches (SWAps), as the process of building institutional capacity and coordination with other donors progresses. Annexes I and II list the different instruments and mechanisms that have been tentatively proposed. As the Bank incorporates new policies and practices that expand the use of resources in investment loans, the design of new operations could be made more flexible and the portfolio could be reviewed to introduce greater flexibility.

3.47

The country strategy taps the complementarity and synergies of the Bank’s instruments to support efficient implementation that will achieve the planned objectives. Emphasis will be placed on making the institutional progress that is necessary for the introduction of more flexible lending instruments for the timely use of resources. Technical-cooperation resources will be used to achieve the necessary institutional development.

F.

Coordination of international cooperation

3.48

External cooperation in Guatemala is fragmented into more than 500 projects in execution with five multilateral agencies and 16 bilateral ones. This situation puts

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pressure on institutional capacity for execution and dilutes externally-financed public investments, with the consequent lessening of their impact.

3.49

International cooperation activities are also highly dispersed, with 80% of donors financing operations in six or more sectors. In turn, nearly all sectors have four or more agencies participating, with the education sector being an extreme case with 15. The sector distribution of external participation at present and in the future program is outlined in Table 3, and Annex IX presents a detailed description of international cooperation in the country strategy areas.

3.50

The country strategy will promote closer coordination of external financing through a dialogue among the agencies, the authorities, and civil society. The Bank promotes donor coordination efforts by taking part in quarterly meetings of the Cabinet Council with international cooperation agencies, and in the dialogue group of donors working in Guatemala. It will also promote strengthening of the sector dialogue forums, so that they can define strategies to serve as the basis for sectorwide approaches. Cooperation with other donors will also be promoted on specific projects, in areas where the government has decided to work with more than one. In parallel, the strategy will promote improvements in public management that will boost the impact of public investments and pave the way for the use of more flexible lending and cooperation instruments.

IDB World Bank IMF CABEI United Nation System Bilateral

Areas with some involvement/work Source: Meeting of the Advisory Group, May 2003.

BID: Estrategia de PaĂ­s con Guatemala

High-emphasis areas

Democracy

Judicial reform

Modernization of the State

Environmental protection

Governance

Housing

Rural development / agricultural production

Water and sanitation

Health and population

Education

Social safety nets

Poverty reduction

Tourism

Energy, oil and gas

Business environment / competitiveness

Trade and integration

Transportation and infrastructure

Economic development and competitiveness

Financial markets

Area

Macroeconomic/fiscal stability

Table 3. International cooperation in Guatemala. Main areas of work

- 39 -

G.

Strategy implementation risks

3.51

The main risks of the strategy are in three areas: political, economic, and execution capacity.

3.52

In the political sphere, the difficulties in obtaining the support of a splintered Congress for advances on reforms needed to address the challenges facing the country could jeopardize the objectives of the country strategy. To mitigate this risk, the strategy supports implementation of the Peace Accords in all spheres. It also supports dialogue and consensus building by contributing to technical strengthening and greater efficiency in the executive branch and Congress.

3.53

The macroeconomic context is another source of risk. The limited development of a tax compliance culture in the country and the government’s minority in Congress could stand in the way of continued progress on fiscal reform. Unless that progress is made, the fiscal leeway needed to spend more on investments in the social sectors and infrastructure, leading to a new pattern of growth, will not exist. The country strategy pays special attention to this area, gearing the technical-cooperation program to support the design of the reforms and seeking the consensus and alliances needed for their approval.

3.54

A considerable ongoing risk in Guatemala is environmental, given the possibility of natural disasters. A disaster could jeopardize implementation of the strategy, making it necessary to redirect the portfolio and to rework the proposed new operations to address the emergency. Although preventive actions in this area are limited, disasters can be mitigated on the Bank’s side through the rapid response capacity it has demonstrated in this area. Also, since the strategy considers it necessary to reduce the vulnerability of the country and the very poor through a financial risk management plan, this area has been made a priority on the agenda for dialogue with the government.

3.55

Slow recovery of execution capacity for the investment programs could also threaten progress towards the strategy’s objectives, as well as the relevance of Bank actions in the country. To attenuate this risk, as mentioned earlier, a portfolio review has begun with a view to supporting faster execution, including the necessary flexibility to develop programmatic approaches to execution. This will be accompanied by an intensive institution-building program to improve execution and will include simplification and strengthening of the Bank’s procedures in the Country Office.

H.

Monitoring the strategy

3.56

To monitor fulfillment of the strategy’s objectives and facilitate the evaluation process, performance indicators have been defined for each of the specific objectives, which were identified in agreement with the government. These

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indicators, which are set out in the Bank’s Strategy Matrix and in Annex X, are intended to measure the quantity and quality of the outcomes of the Bank’s actions.

3.57

The indicators are as direct as possible, objective and, to the extent feasible, quantitative. They are based on timely data produced at given intervals, reasonable in cost, and highly reliable.59

3.58

Once the strategy is approved, a performance monitoring plan will be prepared together with the government that will serve as the basis for the annual updates of the strategy and for the midterm review.

IV. AGENDA FOR DIALOGUE

4.1

59

The Bank’s country strategy with Guatemala will intensify dialogue on the topics on its development agenda. The most relevant are: •

Consolidation of the Fiscal Pact by implementing its components, managing public spending, and improving financial management.

•

Progress on implementing the Peace Accords, support for the productive capacity and business management of indigenous peoples and compensation for the victims of the armed conflict, design and implementation of a rural development policy, clear definition of decentralization policy, and inclusion of the gender dimension in public policies.

•

Execution of the loan portfolio with a view to continuing the Bank’s and the country’s joint efforts to increase borrowing capacity and the relevance of Bank action. Institutional aspects linked to improvements in execution will also be reviewed.

•

Strengthening of coordination and harmonization of international cooperation, including programmatic approaches, the advisory group, and monitoring.

•

Strategy for implementing CAFTA and the transition to free trade.

•

Guidelines for IDB group support for the private sector and the action plan to support its contribution to economic growth, including actions to promote social entrepreneurship and private investment.

The indicators for the operations under way have been taken from the project monitoring reports and updated by the retrofitting exercise. The indicators selected for the new operations are preliminary and will be added to as the programs and projects are developed.

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•

Development of a policy for natural disaster mitigation, with a fundamental financial risk management component.

•

Plan for monitoring the strategy.

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Annex I Page 1 of 4

BANK OPERATING PROGRAM 2004-2007 LENDING PROGRAM Project

Scenario Base

2004 Improving the quality of social spending (PBL)

High

100.0 100.0

100.0 100.0

50.0

50.0

21.0

21.0

10.0 50.0 27.0

10.0 50.0 27.0

158.0

158.0

70.0

Subtotal 2006

70.0

100.0 70.0 50.0 24.0 12.0 256.0

Subtotal 2007

-

20.0 70.0 90.0

TOTAL 2004-2007

328.0

604.0

Subtotal 2004 2005 Support for the indigenous peoples strategy (SWAp o PDL) Institutional strengthening and priority actions for sustainable management of the Lake AmatitlĂĄn basin (investment) MBR-Mirador (multiphase) FIS II (investment) Citizen security

Subtotal 2005 2006 Sector loan to support fiscal consolidation (PBL) Rural electrification program (timeslice) Support for competitiveness and integration Program to improve the administration of justice II (multiphase) Modernization of Congress (investment) 2007 Mundo Maya (investment) Social action project (PDL or SWAp)

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Annex I Page 2 of 4

PRIVATE SECTOR GROUP 2005 (US$ MILLIONS) Project

Amount

PRI Amatitlán geothermal power plant project/PRI Thermal power plant project

Total PRI

22.0 25.0 47.0

Total IIC

8.0 13.0 10.0 31.0

IIC Electric power generation. Tres Ríos Line of credit, Banco Occidente Line of credit, Banco Industrial

MIF Salcaja Cooperative (remittances) Assistance for Central American SMEs with CAFTA market access requirements (regional) Support for the development of e-commerce Support for business development in the interior Strengthening the competitiveness of Banrural Support for developing agricultural insurance markets in Central America (regional) Textile Training Institute project (regional)

0.40 2.45 0.45 nd nd 2.10

Total MIF

2.00 7.4

Total PES

0.45 1.25 0.45 2.15

PES Support for small farmers for access to the international market Promotion of the Rural Entrepreneurs Association Support for Maya de Café small producers

Nd: Not determined

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Annex I Page 3 of 4

TECHNICAL-COOPERATION PROGRAM (US$ THOUSANDS) Number

V.

VI. AMOUNT

NAME

Area 1. To improve conditions for efficient production and incorporate excluded sectors into the productive process Support for compliance with the CAFTA conditions

450

Support for the Network of Management Groups

150

Support for the private sector

150

Informal sector evaluation and policies

250

Modernization and institutional structure strategy for water resources

250

Management of MBR ecosystems (GEF/IDB including PDB for US$500) GU-T1013

GU-T1014

Participation and social inclusion in the Maya Biosphere Reserve

5,000 61

Management of the Lake Petén Inza basin

150

Strengthening of the Ministry of Environment and Natural Resources

300

Strengthening of local governments IDAEH-CONAP

150

Area 2. To increase human capital with equity GU-T1006

Support for improvement of the quality of social spending

350

GU-T1011

Mapping of the education sector and education policies

1.500

Support for primary health care in Tejuela, San Marcos

150

The community providing health and development for all

144

Area 3. To strengthen governance TC0201028 GU-T1007

Support for civil registries

110

Institutional strengthening for the Human Rights Ombudsman’s Office

149

Support for donor coordination

150 TOTAL

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9,464

Annex I Page 4 of 4

NONFINANCIAL PRODUCTS AND ANALYSIS Studies and documents

Year

Unit responsible

Regulation of remittances and macroeconomic policy

2005

OD3

Country Financial Accountability Analysis (CFAA, IDB/WB)

2005

SC2

Country Procurement Assessment Report (CPAR, IDB/WB) CAFTA and the rural economy

2005 2005

SC2 EN2

CAFTA action plan

2005

OD3

CA-Mexico tariff barriers

2005

OD3

Guidelines for IDB group support for the private sector

2004

FI2

Study on local competitiveness Document on mapping and donor coordination

2006 2005

FI2 OD3

2005 2005

SC2-RE2 INT

Workshop on rural sector policies

2005

EN2

Workshop on the program approach (SWAp) for investment coordination

2005

OD3

Workshop on compared local development and FIS experiences

2006

EN2-SO2

Technical support Fiscal reform communications strategy Social communications strategy on CAFTA Workshops

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