Recent Economic Developments

This paper reviews economic developments in Guatemala during 1990–95. In 1993–94, output growth was led by a buoyant services sector while activities in the primary and secondary sectors slowed. Domestic demand grew strongly in 1991–92 owing to a substantial expansion in private investment and an increase in consumption. Growth of domestic demand slowed in 1993–94 because of sluggishness in private fixed capital formation. The rate of inflation fell from 60 percent in 1990 to 11½ percent in 1993–94.


This paper reviews economic developments in Guatemala during 1990–95. In 1993–94, output growth was led by a buoyant services sector while activities in the primary and secondary sectors slowed. Domestic demand grew strongly in 1991–92 owing to a substantial expansion in private investment and an increase in consumption. Growth of domestic demand slowed in 1993–94 because of sluggishness in private fixed capital formation. The rate of inflation fell from 60 percent in 1990 to 11½ percent in 1993–94.

I. Overview

Since the late 1980s the Guatemalan economy registered steady growth, averaging 4 percent a year, which allowed for an increase in per capita income of close to 1 percent a year. In 1993-94 output growth was led by a buoyant services sector while activities in the primary and secondary sectors slowed. Domestic demand grew strongly in 1991-92 due to a substantial expansion in private investment and an increase in consumption. Growth of domestic demand slowed in 1993-94 because of sluggishness in private fixed capital formation, notwithstanding a substantial increase in private consumption in 1994 led by rapid credit expansion. The rate of inflation fell from 60 percent in 1990 to 11 ½ percent in 1993-94. Following a considerable decline in 1990, real wages recovered during 1991-93.

Following strong fiscal measures adopted in 1991-92, the overall position of the combined public sector (including the losses of the Bank of Guatemala) shifted from a deficit of 4.2 percent of GDP in 1990 to near balance in 1992. In particular, public sector savings increased substantially because of a tax reform that broadened the base of the income tax and the value added tax. In 1993-94, the combined public sector deficit averaged 2 ½ percent of GDP because of a substantial decline in tax collections and a weakening of the financial position of the public enterprises. Public sector savings fell markedly in 1993-94, notwithstanding actions to curtail current expenditure. Since 1991, the nonfinancial public sector has more than covered its financing requirement through external borrowing, arrears, floating debt, and placements of bonds in the domestic market and abroad, which allowed for a reduction of its net indebtedness with the domestic banking system.

Starting in late 1989, important steps have been taken to liberalize and reform the financial system, including the elimination of interest rate controls and the introduction of measures aimed at increasing competition and establishing an adequate regulatory and supervisory framework. In 1991-92, the strengthening of the fiscal position created room for credit to the private sector to rise by an average of about 11 percent a year in real terms. The growth of credit to the private sector decelerated to about 5 percent in real terms in 1993 as reserve requirements on commercial bank deposits were raised by 10 percentage points to 36 ½ percent of deposits. In 1994 credit to the private sector rose by about 20 percent in real terms as commercial banks supplemented their deposit base with short-term external borrowing, a substantial amount of open market paper was redeemed during the second half of the year, and reserve requirements were reduced somewhat. After declining markedly in 1990, the ratio of financial savings to GDP recovered in 1991-94.

Following the implementation of adjustment measures in 1991, the external current account deficit narrowed from 3 ½ percent of GDP in 1990 to 2 ½ percent of GDP in 1991, while the overall balance of payments position shifted to a large surplus because of strong inflows of private capital. The external current account deficit widened to 7 ½ percent of GDP in 1992 as credit policy was relaxed and the terms of trade deteriorated, but the tightening of credit policy in 1993 helped to reduce the deficit to 6 ½ percent of GDP in that year. Large capital inflows in 1992-93 more than financed the current account deficit, which allowed for a further strengthening of the international reserve position of the Bank of Guatemala. In 1994, higher export prices led to a further reduction in the external current account deficit to 6 percent of GDP. Inflows of private capital remained strong in 1994, albeit at a lower level than in 1993, which permitted some accumulation of international reserves.

During late 1989-early 1994, Guatemala maintained a managed float system based on foreign exchange auctions and the direct surrender of export receipts. Under that arrangement, the Bank of Guatemala allowed the exchange rate to move within a narrow adjustable band. In March 1994, the surrender requirement for export proceeds was eliminated and a new exchange system based on an interbank market was adopted in which the Central Bank intervenes to avoid large exchange rate fluctuations. During 1990-93 the quetzal appreciated by about 11 percent in real effective terms. In 1994, the quetzal appreciated further by 7 percent in real effective terms. Significant progress has been made in recent years in liberalizing the trade regime. Duties on imports from outside the Central American region have been reduced to a range of 5-20 percent, duties on most imports within the Central American region have been eliminated, and most quantitative restrictions on trade have been phased out.

Guatemala’s outstanding public debt declined from 31 percent of GDP in 1990 to almost 20 percent of GDP (about US$2.2 billion) in 1993. Most of the external arrears outstanding at end-1992 (equivalent to 5 percent of GDP) were cleared in 1993. The external public debt increased to about US$2.4 billion in 1994, partly because of placements of government bonds with foreign banks, but the debt relative to GDP declined further to 19 percent. The share of the medium- and long-term debt in the total public external debt increased from 80 percent in 1990 to about 90 percent in 1994. Bilateral agreements with five Paris Club creditors under the Paris Club Agreed Minute of March 1993 were ratified by the National Assembly in 1994.

II. Expenditure. Production and Prices

During 1990-92, economic activity in Guatemala grew steadily at an average rate of 3.9 percent, peaking at 4.8 percent in 1992 as a result of an exceptional expansion in the construction and utilities sectors (Table 1). Notwithstanding slower growth in most primary and secondary activities and a decline in construction, real GDP continued to expand at about 4 percent in 1993-94 on account of the strength of the services sector (Table 2).

Table 1.

Guatemala: Macroeconomic Indicators

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Source: Bank of Guatemala, Ministry of Finance; and Fund staff estimates.

Including BOG loses.

Relative to the labor force.

Table 2.

Guatemala: Selected National Accounts Aggregates

(Annual percentage change)

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Sources: Statistical Appendix Tables 16,17 and 18.

The inflation rate, which had increased to 60 percent in 1990, declined to 10 percent in 1991, in response to restrained financial policies. Inflation picked up somewhat in 1992, but declined again to 11 ½ percent in 1993 and 1994. Real wages were adversely affected by the rise of inflation in 1990, but recovered somewhat in 1991-93.

1. Domestic expenditure and savings

During 1989-90, output growth was sustained mostly by external demand, a trend that was interrupted in 1991 when domestic expenditure grew at a faster pace than real GDP on account of a large buildup of inventories and a rise in public investment. Domestic demand continued to grow strongly in 1992 due to a substantial expansion in gross domestic investment, which rose to 18 percent of GDP, from 14 percent of GDP in 1990-91. The increase in domestic investment reflected higher private investment in the mining, utilities, and services sectors in response to an improvement in the investment climate, following the Government’s success in reducing inflation during 1991 and the introduction of measures to liberalize trade. Consumption, both public and private, also increased in 1992 spurred by real wage increases in the public sector and a substantial expansion of credit to the private sector.

The growth of domestic expenditure decelerated in 1993 reflecting mainly slower growth in private fixed capital formation and a fall in inventories following a tightening of credit and a rise in real domestic interest rates. Both public and private consumption rose somewhat faster than nominal income, while public investment rose slightly to 2.7 percent of GDP owing to increased spending in telecommunications and road construction. In 1994 there was little change in domestic expenditure in relation to GDP. There was strong growth in private consumption driven by rapid credit expansion to the private sector and a decline in the tax burden. Both public and private fixed capital formation were sluggish, but there was a buildup of inventories in anticipation of continued strong demand in 1995.

Gross national savings rose from 10.1 percent of GDP in 1990 to about 12 percent of GDP in 1991 because of a substantial strengthening of public savings as a result of the adoption of tax measures and restraint in expenditure (Table 3). As a result, the resource gap was reduced from around 4 percent of GDP in 1989 to 3 ½ percent of GDP in 1991. Private savings weakened in 1990 at a time when private investment was rising strongly, which led to a substantial widening of the resource gap to more than 9 percent of GDP. National savings declined further in 1993-94, as a recovery of private savings did not compensate for a deterioration of the savings position of the public sector. However, the drop in investment resulted in a small narrowing of the resource gap to 8.3 percent of GDP in 1993-94.

Table 3.

Guatemala: Expenditure and Savings

(As percent of GDP at current prices)

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Sources: Statistical Appendix Tables 16, 19 and 49.

Includes Bank of Guatemala losses

External current account balance, as defined in Table 12.

2. Production by sector

During 1990-1994 the services sector consolidated its predominant position in Guatemala’s economy, growing at an average rate of 4.5 percent a year led by the rapid expansion of the financial sector, transport and communications, and government services (Statistical Appendix Table 18). The secondary sector expanded at an average rate of 3.4 percent a year, although growth was uneven because of large fluctuations in construction activity. The primary sector grew by 2.9 percent a year in 1990-94, or at a slower pace than the economy as a whole. In particular, the growth of the primary sector slowed to 2 percent a year in 1993-94 because of the weak performance of agriculture, while mining and petroleum expanded at a very strong pace.

a. Agriculture

Despite its slower rate of growth compared with other sectors, agriculture is still the most important sector of the Guatemalan economy, accounting for about 25 percent of total output and 60 percent of exports. The sector employs more than ¼ of the labor force registered in the social security system, and is a major source of income for a large part of the self-employed population in the rural areas.

Agricultural output increased by 4 percent in 1990, but growth slowed to about 2 ½ percent a year in 1991-94 as the production of traditional agricultural products such as coffee, sugarcane, and sugar, was affected adversely by a decline in international prices (Statistical Appendix Table 20). Output of other agricultural products, such as fruits, vegetables, and flowers has grown rapidly in recent years, and an increasing amount of these items are being exported.

Coffee accounted for about 15 percent of GDP and 20 percent of total export earnings in 1994. Guatemala produces a high quality mild arabic coffee and the industry’s productivity is high because of unique climatic conditions. Output increased by 2.6 percent a year in 1990-93, reflecting the rehabilitation of plantations and improvements in agricultural technology. Coffee production stagnated in 1994 because of the drought that hit Central American countries, but export earnings increased as international prices recovered significantly (See Appendix II).

Sugarcane is the second most important crop in Guatemala, accounting for 11 percent of agricultural output and about 10 percent of export earnings through sugar exports in 1994. Sugarcane production rose in 19901994 in response to strong external demand for sugar in non-U.S. markets (exports of sugar to the U.S. market are restrained by quotas), higher international prices, and weak performance of other major exporters in recent years because of adverse weather conditions. The increase in output over the period was sustained through an expansion of the harvested area and the introduction of new technologies that raised productivity.

Banana production accounted for more than 7 percent of agricultural output and a similar proportion of exports in 1994. Because of the relatively short maturation period of banana plantations, banana output is subject to sharp fluctuations in response to expectations about external demand and international prices, as well as internal conditions. After a period of three years in which output declined because of weak external demand and a fall in domestic consumption, banana production started to increase in 1992, reaching its highest level in 1994. An increase in external demand encouraged an expansion of the harvested area in 1992. Production continued to increase in 1993 driven by domestic consumption, but exports declined by 8 percent as a result of the introduction of quotas by the European Community and labor conflicts at Bananas de Guatemala (BANDEGUA), which is the second largest banana producer. There was a substantial recovery of exports in 1994 in response to a rise in demand from the United States. The increase in exports was made possible by an extension of the harvested area and a decline in domestic consumption.

Cardamom accounts for about 8 percent of agricultural output, and is produced almost exclusively for export. Favorable conditions in the relatively small international market for cardamom in 1990-94 encouraged an expansion of production at an annual average rate of about 6 percent a year.

Cotton production dropped at an average rate of 16 percent a year in 1990-94, continuing a declining trend initiated in the late 1980s. This sharp fall reflected a considerable decline in profitability due to unfavorable international prices and a serious deterioration of the cultivated land because of excessive use of pesticides over the previous decades. As a result of these developments, Guatemala became a cotton-importing country in 1994, in contrast with the situation in 1989, when almost half of the production was exported.

Basic grains (beans, corn, and rice) accounted for more than 11 percent of agricultural output in 1994, and are mainly produced for domestic consumption. In 1993-94 the crops were affected by adverse weather conditions that resulted in a drop of yields for most grains.

b. Manufacturing

During 1990-94 the manufacturing sector accounted for almost 15 percent of GDP and employed the same proportion of the labor force. Manufacturing production increased at an average rate of 2.7 percent a year over the period. In particular, foodstuffs, beverages, and tobacco (which account for 50 percent of total manufacturing output), registered the highest growth rates within the sector (Statistical Appendix Table 21). Production of textiles, clothing and leather goods remained the second largest activity, accounting for almost 20 percent of manufacturing output, and rising at an average rate of 2.6 percent a year. Production of chemicals, petroleum and rubber products expanded at an average of 2.8 percent a year in 1991-94, following a period of stagnation in 1989-90. Increased external demand contributed to the expansion of the export-oriented subsectors of manufacturing, in particular textiles, chemical products, and foodstuffs.

c. Construction

The construction sector accounted for about 2 percent of GDP in 1994 and employed more than 3 percent of the labor force. After a record expansion of 25 ½ percent in 1992, construction activities declined by about 2 percent a year during 1993-94 because of a contraction in public construction. Private construction continued to expand in 1993-94, although at a slower pace, as a number of projects initiated in previous years came to completion.

d. Energy and petroleum

The mining and petroleum sector grew by almost 10 percent a year in 1990-94, largely because of an increase in the production of crude petroleum from 1.4 million barrels in 1991 to 2.5 million barrels in 1993 (Statistical Appendix Table 22). Because of its high sulfur content, the petroleum produced in Guatemala cannot be refined locally, and about 85 percent is exported to the United States. After averaging 1.1 million barrels in 1990-91, petroleum exports jumped to 2.3 million barrels in 1993, in line with output growth. The crude petroleum that is consumed domestically is mostly used for thermal generation of electricity and asphalt production. Domestic consumption rose significantly in 1994 reflecting increased reliance on thermal generation because of unfavorable weather conditions.

Electricity generation grew at an average rate of more than 9 percent a year during 1990-93, or at a rate twice as high as real GDP growth. However, delays in the adjustment of electricity tariffs during the last two years have had an adverse effect on the sector’s ability to carry out needed investment programs (Statistical Appendix Table 25). In 1994 the hydroelectric subsector was affected by drought and the emergence of a technical problem in a plant, which resulted in power cuts toward the end of the year and a more intensive use of thermal generation (Statistical Appendix Table 24).

e. Services

The services sector accounted for more than one half of total GDP and one third of the labor force in 1994. During 1990-94 the sector grew at an average rate of 4.5 percent a year, mainly on account of a rapid expansion of financial services and transport and communications. This reflected, in part, the expansion of banking offices and branches associated with the financial liberalization and the installation of new telephone lines by the state telecommunications company (GUATEL). As a result of continued strong growth, in 1994 the contribution of the commercial sector to GDP matched that of agriculture.

3. Prices, wages and employment

a. Prices

After peaking at almost 60 percent at the end of 1990, the 12-month rate of inflation (measured by the change in the consumer price index) dropped to 10 percent in December 1991 in response to tighter financial policies (Table 4 and Statistical Appendix Table 26). During 1992 inflation rose to more than 14 percent as a result of large wage increases in the public sector and a relaxation of credit policy. With a tightening of credit policy in 1993, the rate of inflation declined to 11 ½ percent, remaining at that level during 1994.

Table 4.

Guatemala: Consumer Price Indices 1/

(Annual percentage change)

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Source: National Institute of Statistics (INE)

Refers to prices in Guatemala City.

Prices of gasoline were liberalized in January 1994. By the end of 1994 only utility rates and the price of propane sold in cylinders were set by the Government. All other prices are freely determined by market conditions.

b. Wages and employment

Public sector wages as well as minimum wages are set by the Government, while private sector wages are determined mostly through collective bargaining. Real wages in the public and private sectors declined significantly in 1990-91 due to the acceleration of inflation. Average real wages increased by 23 percent (11 percent a year) in the 1992-93 period, following a rise in the minimum wage for some sectors and a substantial increase in nominal wages for public servants. Nevertheless, by end-1993 real wages in all economic sectors, with the exception of agriculture, remained below their 1989 levels (Statistical Appendix Tables 27 and 28). In 1994 the Government approved a new increase in minimum wages for occupations that did not benefit from the previous wage increase, and established a bonus of 100-120 quetzales per month for public sector employees, effective May 1994. 1/

Data on the Guatemalan labor force are based on estimates prepared by the General Economic Planning Office (SEGEPLAN). The labor force was estimated to be in the range of 2.8-3.1 million in 1994 (less than one third of the country’s population). The open unemployment rate is estimated to have declined from 5.5 percent in 1993 to 5.2 percent in 1994. Disguised unemployment was estimated at about 32 percent of the labor force in 1994.

III. Public Finances

1. Institutional framework

Guatemala’s nonfinancial public sector includes the General Government and the nonfinancial public enterprises. The General Government comprises the central government, the municipalities (about 329 in total) and 18 autonomous and semi-autonomous institutions, of which the Social Security Institute (IGSS) and the University of San Carlos are the most important. The nonfinancial public enterprises include 11 entities, the most important being the State Electricity Institute (INDE) and the State Telecommunications Company (GUATEL). During the period 1990-1994 the Central Government accounted for about 72 percent of the revenues of the nonfinancial public sector and 67 percent of expenditures 1/.

The combined public sector includes the operational losses of the Bank of Guatemala (BOG). Initially, the losses emerged from multiple exchange rate practices. More recently, the losses are related mainly to open market operations with central bank paper at rates higher than the returns obtained by the BOG from central government bonds and other assets.

2. Overall trends

During 1990, Guatemala’s public finances registered a substantial improvement as a result of tax measures, expenditure restraint, and a better performance by the nonfinancial public enterprises. The combined public sector shifted to near balance in 1992, from a deficit of 4.2 percent of GDP in 1990 (Table 5). The nonfinancial public sector registered an overall surplus of 1.1 percent of GDP in 1992, as savings increased from 0.5 percent of GDP in 1990 to 3.4 percent of GDP in 1992. 2/ In 1993, a combined public sector deficit of 2.4 percent of GDP emerged because of a weakening of tax collections and an increase in capital expenditures. The nonfinancial public sector overall surplus turned into a deficit of 1.3 percent of GDP in 1993, while savings declined by more than 1 percentage point to 2.1 percent of GDP. The combined public sector deficit increased slightly to 2.7 percent of GDP in 1994 as revenue relative to GDP fell to its lowest level of the period and the overall surplus of the rest of the public sector declined somewhat. Central government expenditure was curtailed to offset in part the drop in revenues. The deficit of the nonfinancial public sector Increased to 1.5 percent of GDP in 1994, as savings declined further to 1.7 percent of GDP.

Table 5.

Guatemala: Operations of the Combined Public Sector

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Source: Table 10 and Statistical Appendix Tables 16 and 29.

During 1990, the improvement in the overall balance of the nonfinancial public sector allowed for a reduction in both external and domestic financing, in particular bank credit. In addition, a beginning was made in 1992 to phase out external arrears accumulated in the preceding two years. The deficit in 1993-94 the deficit was financed by external sources, bonded debt, and floating debt, which allowed for a further reduction of the public sector’s net indebtedness with the banking system. A substantial amount of the arrears were cleared, mostly through refinancing or payment with bonds denominated in quetzales.

3. Central government operations

The financial position of the central government improved substantially during 1990-92 as a result of measures both to Increase tax revenue and to reduce current and capital outlays. Savings of the central government increased by more than 2 percentage points of GDP during the period, and the overall deficit fell from 2.8 percent of GDP in 1990 to 0.9 percent of GDP in 1992 (Table 6).

Table 6.

Guatemala: Summary Central Government Operations

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Sources: Statistical Appendix Tables 16,29 and 30.
Table 7.

Guatemala: Central Government Revenues

(As percent of GDP)

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Sources: Statistical Appendix Tables 16 and 30.
Table 8.

Guatemala: Central Government Expenditures

(As percent of GDP)

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Sources: Statistical Appendix Tables 16 and 30.

Deficiencies in tax administration and political difficulties reduced tax collections in 1993, which weakened central government savings and increased the overall deficit to 1.9 percent of GDP. Tax collections deteriorated further in 1994 as a result of continued problems in tax administration and the elimination of income tax withholdings by a court ruling. However, a substantial reduction in the ratio of current expenditure to GDP enabled the overall deficit to remain unchanged at 1.9 percent of GDP in 1994.

a. Central government revenue

Central government revenues averaged 7.0 percent of GDP in 1990-94, of which 84 percent were derived from tax receipts. Nontax receipts were mostly associated with transfers from the nonfinancial public enterprises, in particular GUATEL. 1/ Surpluses from the Petroleum Compensation Fund also were an important source of revenue until 1992. 2/

Total revenue increased from 7.9 percent of GDP in 1990 to 9 percent of GDP in 1991 as tax receipts increased somewhat following a tax amnesty, a one-time 2 percent tax on exports was introduced, and revenues from the Petroleum Compensation Fund increased substantially.

In 1992, central government revenue rose further to 10 percent of GDP, as the tax ratio reached a peak of 8.4 percent of GDP. The improvement in tax revenue was attributable in part to the impact of the tax reform approved in the first semester of the year. The reform included: (i) a broadening of the base of the value added tax (VAT) to include petroleum products and food; (ii) a simplification of the income tax, including a further reduction of the tax brackets for individuals from 16 to 3 and the unification of the tax rate for corporations; iii) a reduction of the maximum income tax rate for individuals and corporations from 34 to 25 percent; (iv) an increase in the excise tax on petroleum products; (v) the elimination of a 3 percent stamp duty on bank credits; and (vi) a reduction in the dispersion of import tariff rates. Additional measures also were adopted in the area of tax administration.

Total revenues fell to 9 percent of GDP in 1993 as tax collections dropped to 7.9 percent of GDP and the surplus of the Petroleum Compensation Fund almost disappeared. Tax collections were affected adversely by the reduction in the maximum income tax rates implemented in 1992, a decline in revenue from import taxes, deficiencies in tax administration, and political developments. In 1994 total revenue fell to 7.6 percent of GDP as tax receipts dropped to 6.8 percent of GDP, the- lowest rate in the recent six years. Deficiencies in tax administration and the Constitutional Court’s decision to suspend income tax withholdings affected tax collections. In addition, income tax collections were affected by the full year impact of the reduction in the corporate income tax rate approved in 1992. Tax collections dropped in almost all tax categories, but the decline was particularly pronounced in the case of the income tax, which fell by 0.7 percentage points of GDP to 1.1 percent of GDP.

In November 1994, the Assembly approved a new tax reform aimed at strengthening tax revenues. The main elements of the reform were: (i) an increase in the income tax rate for corporations and in the maximum rate for individuals from 25 to 30 percent; (ii) the introduction of a 1.5 percent tax on the assets of corporations (net of depreciation); (iii) the obligation to withhold tax on gross income from some activities, including interest income; (iv) the elimination of some VAT exemptions and of the right to obtain a refund of the VAT credit, except for exporters; and (v) an increase in the VAT rate from 7 to 10 percent to become effective one month after the signing of peace accords with former guerrilla groups or on January 1, 1996, whichever is earlier. In addition, the Assembly approved legislation establishing penal responsibility for tax evasion. In March-April 1995 the Constitutional Court suspended the tax withholdings on gross income, the tax on assets, and some elements of the new legislation establishing penal responsibility for tax evasion. To compensate for the revenue loss, the Assembly approved separate legislation to reinstate the tax on interest income and established a tax on assets net of credit obligations and other liabilities (for details refer to Appendix III).

b. Central government expenditure

During the period 1990-94, central government expenditure averaged 10 percent of GDP, of which 81 percent was current expenditure, mostly on wages and salaries and transfers. According to the 1986. Constitution, about 19 percent of central government ordinary revenue must be transferred to local governments and other decentralized agencies (e.g. San Carlos University and the Judiciary). 1/ Since 1993, the Government has increased outlays on social programs, as well as on peace-related projects through specialized funds. Expenditures in the social areas fell below 4 percent of GDP in 1991, but increased to an average of 4.3 percent during 1992-94. Military outlays dropped from 1.2 percent of GDP in 1990 to 1 percent of GDP in 1994.

Total expenditure fell from 10.6 percent of GDP in 1990 to 9.1 percent of GDP in 1991. In 1992, expenditures increased to 10.7 percent of GDP, mainly as a result of a recovery in public sector wages and an increase in transfers to public enterprises. Total expenditures remained at 10.7 percent of GDP in 1993, as the reduction in current expenditures was offset by an increase in capital outlays, including transfers to the Social Investment Fund (FIS), the National Fund for Peace (FONAPAZ), and the National Fund for Land (FONATIERRA).

In 1994 expenditures were limited to the amounts contemplated in the 1993 budget as the President vetoed the 1994 budget approved by the Assembly. Expenditure cuts were imposed on almost all categories, excluding fixed capital formation and capital transfers. The reduction was more noticeable in goods and services and current transfers (the latter declined as a result of the Government’s decision to stop servicing INDE’s external debt). Total expenditures fell by 1.2 percentage points of GDP in 1994, and almost offset the drop in total revenues.

4. Rest of the public sector

The rest of the nonfinancial public sector recorded a surplus of 0.5 percent of GDP a year during the period 1990-94, with the exception of 1992, when the surplus jumped to 2.1 percent of GDP. The increase in 1992 was explained by a substantial improvement in the financial position of the Guatemalan Social Security Institute (IGSS) and higher transfers from the central government to the public enterprises. The surplus of the rest of the nonfinancial public sector declined substantially in 1993 because of lower transfers from the central government, higher capital expenditures by the public enterprises, and a decline in the surplus of the IGSS. Preliminary estimates for 1994 suggest that the financial position of the rest of the nonfinancial public sector weakened further, mostly because of a reduction of the surplus of the public enterprises.

The IGSS administers health and maternity insurance and disability and pension programs. IGSS covers certain regions and less than 30 percent of the labor force. Central government employees and pensioners are covered only by the health and maternity insurance. In addition, the central government by law is expected to finance 25 percent of total benefit operations of the IGSS during the year. Since 1988, however, the Central Government has accumulated arrears of about Q 1,400 million in respect to transfers and contributions. During 1990-93 IGSS’s overall surplus remained at around 0.3 percent of GDP, as higher capital outlays in relation to GDP were compensated by higher contributions (Statistical Appendix Table 29). In 1994, IGSS initiated administrative reforms aimed at improving revenue collections and expediting the collection of arrears from local governments and the private sector. As a result, contributions increased by 0.2 percentage points of GDP to 1.5 percent of GDP, increasing the overall surplus to 0.5 percent of GDP.

INDE’s financial position weakened in recent years because of delays in the adjustment of electricity tariffs, which have declined below the longrun marginal cost of generating electricity. The weakening financial position and high debt service payments have forced INDE to postpone certain needed investments in recent years. In addition, large transfers from the central government were required to service its external debt. During 1994, drought and a technical problem in a hydroelectric plant forced INDE to reduce sales of energy somewhat and to increase the use of thermo-electrical plants, which resulted in substantially higher outlays on fuel. As a result, INDE’s operating surplus declined by about a half to 0.3 percent of GDP. In addition, investment plans were cutback as transfers from the central government were reduced sharply, and INDE’s overall surplus fell from 0.6 percent of GDP in 1993 to 0.2 percent of GDP in 1994.

GUATEL’s tariff structure contemplates a cross-subsidy scheme by which lower domestic tariffs are financed with profits from international calls. In the last two years, increasing competition has reduced GUATEL’s participation in the international market, forcing a reduction in international tariffs by end-1994. In 1993, GUATEL’s overall balance shifted from a surplus of 0.1 percent of GDP to a deficit of 0.4 percent of GDP as a result of advanced transfers to the Central Government and a pick up in capital expenditures related to the expansion of telephone lines. During 1994, GUATEL’s overall deficit declined to 0.1 percent of GDP as lower revenues were more than offset by lower transfers to the Central Government. During 1993-94, domestic resources and external loans contributed to finance the expansion of capacity.

IV. Financial Intermediation

1. Institutional framework

As of end-1994, Guatemala’s regulated financial system consisted of the monetary authority–Bank of Guatemala (BOG) and the Securities Regulation Fund–, 30 commercial and development banks (three state-owned), 14 finance companies (one state-owned), 15 warehouse credit companies (one state-owned), and three foreign exchange houses. The Monetary Board formulates monetary, credit, and exchange rate policies. 1/ The BOG is the executive branch of the Monetary Board, while the Securities Regulation Fund trades in government securities. The supervision of the regulated financial system, including the BOG, is the responsibility of the Superintendency of Banks. In addition to the regulated financial intermediaries, it is estimated that there are about 100 small unregulated financial entities.

During most of the 1980s interest rates were subject to direct controls. In the context of macroeconomic imbalances and high inflation rates, these controls resulted in negative real interest rates, and inhibited financial deepening. Since late 1989, the Guatemalan authorities have taken a number of steps to reform the financial system. Interest rates were liberalized, interbank deposits were allowed, and actions were adopted to facilitate the entry and exit of financial institutions. Moreover, the Bank of Guatemala was authorized to conduct open market operations with its own paper, which made monetary management more effective, and commercial banks were allowed to pay interest on demand deposits. In addition, a constitutional amendment approved in January 1994 prohibited the Bank of Guatemala from providing credit or guarantees (directly or indirectly) to the public sector. 2/

The process of financial liberalization was accompanied by the introduction of measures aimed at establishing an adequate regulatory and supervisory framework. To that end, during 1992 the Superintendency of Banks established a risk information bureau and issued several prudential norms in the areas of loan provisioning and classification, accounting standards, information disclosure, and rollover practices. In addition, in September 1993 the Monetary Board approved a financial modernization program that is being supported by a Financial Sector Loan from the IDB and an Economic Modernization Loan from the World Bank. The program is aimed at increasing competition in the financial sector, strengthening regulatory and supervisory procedures, and providing a regulatory framework for the domestic stock market. A number of steps taken under this program are reviewed in detail in Appendix I.

Commercial and development banks played a leading role in financial intermediation during 1990-94. However, an increased reliance on reserve requirements applied to commercial bank deposits as instruments of monetary control encouraged the expansion of nonbank financial institutions, although their role in financial intermediation is still secondary. Commercial banks accounted for about 70 percent of the financial system liabilities to the private sector in 1994, compared with 72 percent in 1990, and they provided 90 percent of total credit to the private sector in 1994, compared with 94 percent in 1990.

2. Overall trends

In broad terms, developments in the financial sector during 1990-94 were characterized by a decline in the ratio of financial savings to GDP at the beginning of the period, followed by a gradual recovery in subsequent years, a reduction of the net indebtedness of the nonfinancial public sector with the domestic banking system, a significant expansion of credit to the private sector in real terms, and a substantial recovery of net international reserves, which had been virtually depleted at end-1989.

In 1990 inflation accelerated and real interest rates turned negative, which resulted in a decline in financial savings relative to GDP (Table 9). At the same time, credit conditions were tightened through open market operations to offset the impact of central bank financing of the public sector deficit (Table 10). This led to a contraction of 28 percent in credit to the private sector in real terms, and facilitated some recovery of international reserves.

Table 9.

Guatemala: Private Sector Financial Assets

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Sources: Statistical Appendix Tables 16,41 and 44.

Deflated by the consumer price index.

Table 10.

Guatemala: Summary Accounts of the Monetary Authorities.

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Sources: Statistical Appendix Tables 16 and 37