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Guatemala—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Guatemala City, Guatemala
March 15, 2002

The following item is a Letter of Intent of the government of Guatemala, which describes the policies that Guatemala intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Guatemala, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1.  Guatemala's main challenges in 2002 are to strengthen its macroeconomic performance while defending social expenditure to help achieve the targets of the 1996 Peace Accords, and addressing the weaknesses of the financial system. The attached memorandum of economic and financial policies sets forth the objectives and policies of the government's economic program and the measures that the government of Guatemala intends to adopt during 2002. In support of these objectives and policies, Guatemala hereby requests a 12-month Stand-By Arrangement in an amount equivalent to SDR 84 million (40 percent of quota). The Government of Guatemala intends to treat the Stand-By Arrangement as precautionary.

2.  The memorandum of economic and financial policies includes quarterly performance criteria for key variables in 2002. The government will conduct with the Fund a review of the program that will be completed by August 15, 2002 and, at any time during the period of the arrangement, the Government of Guatemala will consult with the Fund, at the initiative of the government or whenever the Managing Director of the Fund requests such consultation, on the adoption of any measures that may be appropriate for achieving the objectives of the program.

3.  The government has implemented the following prior actions before Board consideration of the request for the Stand-By Arrangement: approval of the 2002 budget consistent with the program, issuance of the Presidential Decree (Acuerdo Gubernativo) strengthening expenditure control, implementation of a critical mass of fiscal measures, and the capitalization of the Banco del Ejercito. The government's economic program also contains structural benchmarks: submitting to congress the new laws of the central bank and banking supervision and monetary laws before completion of the review noted above, completion of on-site inspections of banks and adopting measures necessary to deal with banks that might result to be insolvent.

4.  The government is of the view that it is important to provide a convincing signal of Guatemala's commitment to maintain sound economic policies during 2003, a year leading to a political transition. Hence, the government intends to follow this program with another covering 2003 that could be supported by a Stand-By Arrangement from the Fund. To this end, it would begin negotiations with the Fund on a subsequent Arrangement at the time of the review under the 2002 program.

5.  Guatemala is committed to provide the Fund with such information as the Fund requests on the progress made in policy implementation and the achievement of the program objectives.

Sincerely yours,

/s/

Eduardo Humberto Weymann Fuentes
Minister of Finance

 

 /s/

Lizardo Arturo Sosa López
President of the Bank of Guatemala

Attachments

Guatemala—Memorandum of Economic and
Financial Policies

1.  Upon assuming office in January 2000, the administration of President Alfonso Portillo was confronted with a very difficult economic situation resulting from domestic and external factors. On the domestic side, Guatemala was implementing loose demand policies and poor management of the exchange rate policy. The macroeconomic conditions also reflected adverse terms of trade and weather conditions (including Hurricane Mitch) and turbulence in international capital markets. On the eve of the inauguration of the new administration the international reserve position had weakened significantly, in part reflecting large capital outflows, and economic activity was slackening. The deterioration of the macroeconomic situation and an inadequate legal and regulatory framework of the financial sector had weakened the financial system and some small banks had fallen into insolvency. Furthermore, lack of resources and limited institutional capacity had held back the implementation of the 1996 donor-supported Peace Accords, which had set an ambitious social agenda to address inequalities and institutional failures through the mobilization of domestic and external resources (including an increase in the tax ratio to 12 percent of GDP by end-2000).

2.  Against this background the new administration moved quickly in the fiscal and monetary areas, including through steps to reform the financial system, to address the country's economic problems, and reinvigorate the implementation of the Peace Accords. As a result, the combined public sector deficit (including the losses of the central bank) narrowed from 3 percent of GDP in 1999 to 2¼ percent in 2000, as the government reduced expenditures and increased the top income tax rate from 25 percent to 31 percent; widened the base of the VAT to include custom duties; and phased out some tax exemptions. However, in 2001 lack of effective expenditure controls contributed to a substantial increase in outlays, weakening again the fiscal position. Nonetheless, the combined public sector deficit was limited to 3 percent of GDP as the government introduced in July 2001 a package of measures amid strong popular opposition. The package included an increase in the VAT rate from 10 to 12 percent, and higher income tax rates on commercial and agricultural enterprises, excise taxes on fuel oil, and import duties on used cars. In addition, in November 2001 congress approved an increase in the excises of cigarettes. In January 2002 the authorities increased custom duties on gasoline, and in February 2002 congress approved additional tax measures including increases in the excises on beer, alcoholic beverages, and soft drinks.

3.  During 2001 progress was achieved in improving tax administration. In July 2001 congress approved reforms to the tax and penal codes that will enhance the effectiveness of the Tax Administration Superintendency (SAT). With financial assistance from the World Bank, the SAT has continued to improve its human resources management, information systems, and training.

4.  To control inflation and strengthen net international reserves, the central bank (BANGUAT) has intensified open market placements to absorb part of the external capital inflows, and sterilize the central bank credit expansion resulting from the refund to depositors of the intervened three banks and the withdrawal of government's deposits. These placements have been made over the past two years in the context of a steady decline in interest rates, which reflect renewed confidence in the quetzal. The net international reserve position has strengthened considerably from about US$1 billion at the time of the inauguration of the new administration to an estimated US$2.3 billion, or about 130 percent of base money by end-2001. The external current account deficit amounted to 5½ percent of GDP in 2000 and is estimated to have narrowed in 2001 as the effect of the slowdown of economic activity on imports more than offset a lower external demand for exports. The capital account surplus rose owing to the sharp increase in private capital inflows and the 2001 proceeds from the privatization of the telephone company (GUATEL). Real GDP growth has slackened to 2¼ percent in 2001 while inflation, after remaining at 5 percent in 2000, rose to about 9 percent in 2001 reflecting mostly a one-off price spike resulting from the increase of the VAT rate and food shortages resulting from the drought that affected the country.

5.  To address the weakness of the financial sector, the monetary authority initiated a thorough assessment of the banking system with help from the FSAP mission. As a result, in October 2001 the Monetary Board (MB) requested that the courts liquidate three banks and two finance companies that were intervened early in the year. Shareholders of another weak bank, the Banco del Ejército, increased its capital in December 2001, and a draft law permitting its sale was approved by congress in January 2002; the due diligence for the sale of this bank will be initiated before June 30, 2002.

6.  In order to improve the efficiency and soundness of the financial sector, congress approved on January 31, 2002 a new banking law. This law introduces consolidated supervision and capital adequacy requirements, including offshore operations, and allows for the reform of the regime for bank resolution and exit procedures while making operative an explicit but limited deposit guarantee. The resolution of banks will be financed exclusively by the government. In addition, the government with help from the Fund, World Bank, and IDB has been preparing new central banking and banking supervision laws and a new monetary law. The draft of the central banking law defines clearly that its objective is to preserve price stability, and reinforce its autonomy. The draft of the law on banking supervision aims at reinforcing the functional autonomy of supervisors through adequate sanctioning and information gathering powers and legal protection. The draft of the monetary law provides an improved legal framework to facilitate exchange convertibility, free capital mobility, domestic contracts in foreign currency, and domestic financial intermediation in foreign currency (including the constitution of foreign currency deposits). The government is working with congress to secure the two-thirds majority needed for the passage of these laws before August 15, 2002. In the meantime, the government is determined to use its statutory powers to protect the independence of the central bank. Accordingly in February 2001, the monetary board issued a regulation limiting its lender-of-last resort facilities to collaterized short-term liquidity assistance at punitive interest rates.

7.  Congress approved an Anti-Money Laundering Law in October 2001, which classifies money-laundering activities as a criminal offense, expands the banking secrecy rules to deal with suspicious financial transactions, and permits the Guatemalan authorities to share information with other countries. In addition, the law creates an autonomous authority to investigate suspicious transactions. The government is of the view that this law strengthens money-laundering controls sufficiently to take Guatemala off the list of "noncooperative" countries as elaborated by the OECD-backed Financial Action Task Force (FATF).

8.  Guatemala's obligations under the Central American Common Market were fulfilled in January 1999 when the maximum common external tariff was reduced to 15 percent. Starting in October 2000, exports of maquila, particularly textiles and apparel, enter free of duty to the U.S. market under the Caribbean Basin Initiative. In March 2001, a free trade agreement between Mexico and the Northern Triangle (Guatemala, Honduras, and El Salvador) became operational, reducing import tariffs and barriers to capital and labor mobility among these countries.

9.  Most of Guatemala's indicators of external vulnerability have improved since 2000. The external debt-to-GDP ratio has declined to about 16 percent, and the ratio of NIR to the stock of short-term debt on a remaining maturity basis has increased to about 175 percent. In October 2001, Standard & Poor's rated Guatemala's foreign currency sovereign credit BB with a stable outlook and Moody's Investors Service assigned a foreign currency country ceiling of Ba2. As a result, Guatemala recovered its access to the Euromarket, by floating US$325 million of ten-year bonds in November 2001 with proceeds earmarked to repay short-term government debt falling due in late 2001 and 2002, hence helping to improve the debt profile.

10.  Following a year of slow advances, the structural transformation set out in the 1996 Peace Accords accelerated in 2001. Social expenditure rose by some 20 percent to the equivalent of 5½ percent of GDP, particularly in primary health and education and in food aid to peasants affected by the drought in the east of the country. The government declared a state of emergency as the drought intensified poverty in rural areas already affected by the collapse of international coffee prices. The latter has had a negative effect on rural workers who depend on seasonal work in coffee plantations.

The Economic Program for 2002

11.  The government is strongly committed to speed up the implementation of the Peace Accords, and to strengthen macroeconomic performance by substantially improving the fiscal position, defending public sector expenditure in the social areas, and addressing the weaknesses of the financial system. The government is aware of the urgent need to address the structural weakness of the public finances, and lingering difficulties in the financial sector. Monetization of the fiscal deficit, including the cost of bailing out troubled banks, may undermine confidence in the central bank's ability to maintain stability over the medium term. In fact, it is becoming difficult to tighten monetary policy further given the already significant amount of outstanding open market certificates (6¾ percent of GDP at end-2001). The financial system remains fragile as nonperforming loans (NPLs) represented about 15 percent of total loans and despite increases in the banks' provisions these only covered about 25 percent of NPLs as of November 2001.

12.   Reflecting the weak external demand and the effects of the September 11, 2001 events, the government has lowered its forecast of real GDP growth to 2⅓ percent in 2002 (same as in 2001 and slightly below population growth). The program described below targets a reduction in inflation to a 4-6 percent range in 2002, and the narrowing of the external current account deficit further. Net international reserves are expected to fall slightly to US$2.1 billion (115 percent of base money at end-2002), mostly reflecting the service of external debt in 2002 using proceeds from bonds floated in the Euromarket in 2001.

Fiscal policy

13.  Fiscal policy will aim at reducing the combined public sector deficit to 1½ percent of GDP and the central government deficit to 1¼ percent of GDP in 2002, while protecting expenditure in the social areas and covering the cost of restructuring the banking system. Quarterly ceilings on the combined public sector deficit are presented in Table 1.

14.  Tax revenue is projected to increase by 1 percentage point of GDP to 10¾ percent of GDP in 2002, reflecting the full-year effect of the tax packages approved in 2001 and measures introduced in 2002, and improved tax administration. While under the present circumstances it would not be possible to meet the tax ratio of 12 percent of GDP in 2002 as previously scheduled, the government is fully committed to achieve this fiscal target by 2004 as recently discussed with the Peace Commission.

15.  An important element of the fiscal program for 2002 is to hold total expenditure of the central government about constant following a 22 percent increase in 2001, which would imply a decrease in terms of GDP by 1 percentage point to 12¾ percent in 2002. Quarterly ceilings on central government expenditure are presented in Table 2. The tightening of expenditure reflects the plan adopted by the President of the Republic to ensure an increase in national savings despite the decline in world coffee prices and a negative external environment. Consistent with this plan, the government issued a decree (acuerdo gubernativo) in February 2002 introducing expenditure actions as indicated below. These actions are linked to those aimed at strengthening budget control and management with early warning indicators under the Integrated Financial Management System (IFMS, see below).

16.  Notwithstanding the measures noted above, the government will study further possible steps to strengthen expenditure control. In this regard the Fiscal Affairs Department of the Fund will provide technical assistance focusing on making an overall evaluation of existing mechanisms of public expenditure management to identify weakness and suggest corrective actions to the processes of budget preparation and execution, and cash planning and management.

17.  The government is of the view that the envisaged progress in strengthening fiscal policy has to be accompanied by a sustained improvement in social conditions. Over the long run, the gradual integration of the large rural indigenous population into the market economy, together with the strengthening of human capital through poverty reduction and access to basic education and health, should raise the productivity of labor and expand the domestic economy. During the program period social expenditure will be maintained at over 5 percent of GDP and the government plans to improve the efficiency of social expenditure by coordinating purchases of different social funds. The program includes quarterly targets on social expenditure which are presented in Table 3.

Monetary policy

18.  In general, the central bank will continue to maintain a tight stance of monetary policy until after the fiscal position and the banking system are strengthened. Monetary policy aims at reducing inflation and maintaining an adequate level of international reserves. Broad money is projected to increase by above 8 percent in 2002 allowing for an increase in bank credit to the private sector of 9 percent (slightly faster than nominal GDP). The monetary program assumes net domestic assets of the central bank as the intermediate target, which are projected to increase by 15 percent, providing room for the projected private sector credit growth, while achieving the targeted net international reserves. The program sets quarterly ceilings on the net domestic assets of the central bank (Table 4) and quarterly floors on net international reserves (Table 5).

Banking system

19.  As noted, the government is strengthening its efforts to secure approval of the new laws of the central bank and banking supervision and monetary law by August 15, 2002.

20.  An important step in improving the health of the banking system is to resolve the situation of the insolvent banks. The authorities are implementing a mechanism to handle consolidation and regularization of banks under which performing assets of an insolvent bank would be transferred to a solvent bank, and judicial participation will be limited to liquidating nonperforming assets (instead of all assets). Hence, the mechanism would expedite banking resolution.

21.  Furthermore, the monetary authority has decided to undertake a comprehensive examination of the banks in the system to assess the need for additional actions to strengthen their balance sheets, and the possible consolidation of financial institutions through mergers and acquisitions. To this effect, the superintendency of banks has initiated a program of comprehensive on-site inspections of all banks according to the schedule noted below. Based on these inspections, the government will identify banks in need of increasing their capital base and will agree with their shareholders on plans to capitalize such banks without delay. The program considers as structural benchmarks the initiation of the capitalization program before August 15, 2002 of banks identified as undercapitalized in the inspections to be concluded before April 30, 2002.

External policies

22.  In order to maintain Guatemala's relatively favorable debt-service profile over the medium term, the government intends to limit the contracting or guaranteeing by the public sector (including the central bank) of nonconcessional external debt. Consistent with these overall guidelines, quarterly ceilings on gross external debt have been established, which are set out in Table 6. The government is aware of the need to monitor closely indicators of external vulnerability and in this regard it will make efforts to establish its own database of corporate external debt (currently this debt is monitored using the database of the Bank of International Settlements).

23.  The exchange rate will continue to move in response to market conditions, and the central bank will continue limiting its intervention in the FOREX market only to smooth out fluctuations. The central bank will continue to assess on a continuous basis Guatemala's external competitiveness in view of the still high external current account deficit and the weak world coffee prices. The government will continue its efforts aimed at further trade liberalization, including through bilateral and regional trade arrangements consistent with WTO guidelines.

24.  Guatemala maintains an exchange system that is free of restrictions and will not impose new restrictions on the making of payments and transfers for current international transactions, introduce multiple currency practices, impose or intensify import restrictions for balance of payments reasons, or enter into new bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement. Moreover, Guatemala will continue with its stated policy of not incurring external payment arrears (Table 7).

Structural reforms

25.  Guatemala has made substantial advances in the area of privatization as it has divested almost all of its participation in the largest enterprises. During 2002 the government is planning to sell its remaining shares in the power company (EEGSA) (about 14 percent of the total), energy distribution companies, and the national airline.

26.  The government also will improve the targeting of the subsidy on electricity services. To this end, during the second quarter of 2002 the national commission of energy will propose to congress modifications to the general electricity law to, inter alia, limit the subsidy to a maximum household consumption of 300 Kw a month.

27.  The government has been providing nonrecurring assistance to coffee producers suffering from the effect of low world prices. This assistance--at the government's borrowing costs plus a margin--is helping coffee producers to restructure their debts with the banking system, and to diversify into other products and sectors. The government is concerned that the problems in the coffee sector could be structural in nature and is beginning to take actions to foster the restructuring of the agricultural sector, including with assistance from the World Bank and IDB, such as through improvements in rural infrastructure and technical assistance to diversify into nontraditional agricultural exports, and tourism.

28.  The government is of the view that improving transparency and reducing corruption are important elements of its overall strategy. A crucial element of this strategy is strengthening and extending the Integrated Financial Management System (IFMS) to other public agencies outside of the central government. Accordingly, the IFMS included the Social Investment Fund in December 2001, and will include the Guatemalan Social Security System (IGSS) before August 31, 2002. In addition, it will include the Land Reform Fund (FONTIERRA), the Solidarity and Community Development Fund, and the largest municipalities by end-2002. Also, the IFMS includes upgrading the congress' computer capability for budget oversight and evaluation. Moreover, with technical assistance from the World Bank, the government has prepared draft legislation, currently under consideration by congress, to strengthen the laws on probity and on the office of the comptroller general. The government has negotiated with the IDB a modernization loan, which will assist with the establishment of an anti-corruption strategy. As a first step, this loan will help the authorities draft a new procurement law, which will be sent to congress by April 2002. Also, the government, with technical assistance from US AID is preparing a draft law, which will require the government to present together with the annual budget an estimate of the revenue foregone from tax privileges, exemptions, and exonerations.

29.  Moreover, the government requested technical assistance from the Fund to prepare the basic questionnaire to adopt the Fund's code on fiscal transparency.

30.  The government plans to initiate a comprehensive review of the social security system with the aim of protecting the sustainability of the fiscal accounts and increasing national savings. The government, with assistance from the World Bank, will update actuarial studies to evaluate the costs and benefits of different options to reform the system.

Table 1. Performance Criterion on the Overall Deficit of the Combined Public Sector1
(In millions of quetzales)
Overall Deficit of the Combined Public Sector Ceiling
January 1–June 30, 2001 (actual) 1,880
January 1–December 31, 2001 (estimated) 4,915
January 1–March 31, 2002 (indicative target) 535
January 1–June 30, 2002 50
January 1–September 30, 2002 1,140
January 1–December 31, 2002 2,585
1Cumulative flows from the beginning of corresponding year.

 

Table 2. Performance Criterion for the Central Government Expenditure1
(In millions of quetzales)
  Ceiling
January 1–June 30, 2001 (actual) 9,560
January 1–December 31, 2001 (estimated) 22,330
January 1–March 31, 2002 (indicative target) 4,665
January 1–June 30, 2002 9,280
January 1–September 30, 2002 15,225
January 1–December 31, 2002 22,515
1Cumulative flows from the beginning of corresponding year.

 

Table 3. Indicative Targets for the Central Government Social Expenditure1
(In millions of quetzales)
Central Government Social Expenditure Floors
January 1–June 30, 2001 (actual) 3,950
January 1–December 31, 2001 (estimated) 8,970
January 1–March 31, 2002 (indicative target) 1,515
January 1–June 30, 2002 3,515
January 1–September 30, 2002 6,070
January 1–December 31, 2002 9,095
1Cumulative flows from the beginning of corresponding year.

 

Table 4. Performance Criterion for the Stock of Net
Domestic Assets of the Bank of Guatemala
(In millions of quetzales)
  Ceiling
(end of period)
June 30, 2001 (actual) –6,634
December 31, 2001 (estimated)

–8,933

March 31, 2002 (indicative target)

–8,490

June 30, 2002

–10,080

September 30, 2002

–9,180

December 31, 2002

–6,528


 

Table 5. Performance Criterion on NIR of the Monetary Authorities (MA)
(In millions of U.S. dollars)
  Floor
(end of period)
June 30, 2001 (actual) 1,802
December 31, 2001 (estimated) 2,301
March 31, 2002 (indicative target) 2,200
June 30, 2002 2,350
September 30, 2002 2,220
December 31, 2002 2,091

 

Table 6. Performance Criterion on Nonconcessional External Debt of the Public Sector
(In millions of U.S. dollars)
  Short-Term
0–1 Year Maturity1		 More
than 1 Year2
January 1–June 30, 2001 (actual) 340 124
January 1–December 31, 2001 (estimated) 115 610
January 1–March 31, 2002 (indicative target) 40 440
January 1–June 30, 2002 30 540
January 1–September 30, 2002 15 665
January 1–December 31, 2002 15 710
1Stocks at end-period.
2Cumulative flows of contracted debt from the beginning of corresponding year.

 

Table 7. Continuous Performance Criterion on Non-accumulation of External Arrears
(In millions of U.S. dollars)
   
January 1–June 30, 2001 (actual) 0
January 1–December 31, 2001 (estimated) 0
January 1–March 31, 2002 (indicative target) 0
January 1–June 30, 2002 (performance criteria) 0
January 1–September 30, 2002 (performance criteria) 0
January 1–December 31, 2002 (performance criteria) 0

Prior Actions and Structural Benchmarks
Under the Stand-By Arrangement

Prior actions

  • Approval of the 2002 budget by congress consistent with the program.

  • Issuance of the Presidential Decree (Acuerdo Gubernativo) strengthening expenditure control as described below.

  • Tax measures described in paragraph 2 of this memorandum (i.e., increase in excise taxes for soft drinks, wine, beer, and liquor) enter into effect.

  • Capitalization of Banco del Ejército by Q 150 million needed to set the stage for its privatization.

Structural benchmarks

  • The new central bank and banking supervision laws, and the monetary law will be approved by congress before completion of the review of the program, scheduled for August 15, 2002.

  • The superintendency of banks will complete a comprehensive assessment through  on-site inspections of banks according to the plan indicated below. Results of ongoing inspections and of those to be completed before April 30, 2002, and measures to be adopted to deal with banks that are determined to be insolvent, will be reported to the Fund before completion of the review of the program, scheduled for August 15, 2002.

    Guatemala—Expenditure Control

    The decree (acuerdo gubernativo) of February 2002 introduced the following actions to control expenditure:

    (i) set specific quarterly expenditure ceilings for each ministry; (ii) prohibit increases in central government budgetary appropriations (ampliación presupuestal) unless they have been declared priority expenditures and have external financing in line with the macroeconomic program; (iii) prohibit offsetting savings in expenditure other than in the wage bill with additional spending in different categories; (iv) freeze general wages (including bonuses) to the civil service; (v) prohibit the increase in the number of civil servants except in the health, education and security sectors, areas in which the decree stipulates ceilings for the possible increases; (vi) indicate that all government's investment will be included in the budget, and subject to the review and approval of the National System of Public Investment (SNIP) and the prior certification of available financing by the ministry of finance. The ministry of finance through the commission of programming and budget execution will monitor the implementation of the government's investment program. This commission will put special emphasis in monitoring operations involving advance payments (anticipos) to suppliers by checking that the line ministry (or unit) issues an identification document (comprobante único de registro--CUR) prior to approval of the operation, and that the contract with the supplier is rescinded before the operation is reversed; and (vii) reiterate that all inter-ministerial transfers will have to be approved by the ministry of finance.

    Guatemala—Program of On-Site Inspections

    Ongoing inspections

    Banco del Café
    Banco SCI
    Banco del Quetzal
    Vivibanco
    Banco Corporativo
    Banco de Comercio

    Inspections to be completed before April 30, 2002

    Banco Industrial
    Banco de Occidente
    Banco G&T Continental
    Banco Agrocomercantil
    Banco Reformador
    Banco de Exportación
    Banco Internacional

    Inspections to be completed before August 31, 2002

    Banco de Desarrollo Rural
    Banco Uno
    Banco de la República
    Banco Privado de Desarrollo
    Banco de Antigua
    Banco de América Central
    Banco Cuscatlán de Guatemala
    Citibank N.A.
    Lloyds Bank PLc Sucursal Guatemala


     

    Guatemala—Technical Memorandum of Understanding

    1.  This technical memorandum of understanding (TMU) sets out the quarterly performance criteria (PCs) and indicative targets (ITs) as well as structural benchmarks established in the memorandum of economic policies (MEP) attached to the letter of intent dated March 15, 2002. This TMU also spells out the list of data that the authorities are committed to provide to the Fund staff on a timely basis. Progress in the implementation of the policies indicated in the MEP will also be monitored by a program review. The review is expected to be completed with the Executive Board on August 15, 2002, based on performance by end-June.

    I.  Fiscal Targets

    A.  Performance Criterion on the Overall Deficit of the Combined Public Sector1

    (In millions of quetzales)

    Overall Deficit of the Combined Public Sector Ceiling
    January 1–June 30, 2001 (actual) 1,880
    January 1–December 31, 2001 (estimated) 4,915
    January 1–March 31, 2002 (indicative target) 535
    January 1–June 30, 2002 50
    January 1–September 30, 2002 1,140
    January 1–December 31, 2002 2,585
    1As measured by the net financing requirement defined in the text below. Combined public sector defined in the text below.

    2.   The balance of the combined public sector (PS) is defined as the sum of the overall balances of the nonfinancial public sector (NFPS) and the operating result (quasi-fiscal balance) of the Banco de Guatemala. The NFPS consists of (i) the central government, the social security institute (IGSS), the municipalities and other decentralized agencies, which conform the general government; and (ii) the public enterprises: electricity company (INDE), telecommunications company (GUATEL), water and sewerage company (EMPAGUA), Quetzal Port, and six other small enterprises.

    3.   For any given calendar period, the balance of the NFPS is measured in quetzales as the sum of cumulative flows from the beginning of the corresponding year of: (i) net domestic financing of the NFPS; (ii) net external financing of the NFPS; and (iii) privatization proceeds, as defined below. Items denominated in foreign currency will be converted into quetzales at the actual exchange rate of each transaction.

    4.   The domestic financing of the NFPS is defined as the sum of (i) net credit (direct credit less deposits) from the domestic financial system; (ii) net proceeds from the placement, with the domestic financial system and other private sector residents, of bonds (issued or guaranteed by any PS entity) denominated in domestic or foreign currency or indexed to any foreign currency; (iii) floating debt (difference between the amount of expenditure on a commitment basis (devengado) and on a cash basis (pagado); (iv) suppliers' credit; (v) amount of pending VAT devolution to exporters below the "normal" level; and (vi) the value of any new leasing contracts entered into by the public sector during the program period, which is the present value at the commercial interest reference rate (CIRR) (at the inception of the lease) of all lease payments expected to be made during the period of the lease contract excluding those that cover the operation, repair, or maintenance of the property.

    5.   The domestic financial system comprises the banking sector, and the nonbank financial intermediaries. The banking sector includes the monetary authority and the commercial and development banks. The monetary authority (MA) includes the Bank of Guatemala and the Security Regulation Fund (Fondo de Regulación de Valores).

    6.   The net external financing of the NFPS is defined as the sum of (i) disbursements of loans; (ii) proceeds from the placement with nonresidents of bonds (issued or guaranteed by any PS entity) denominated in domestic or foreign currency or indexed to any foreign currency; (iii) changes in net financial assets held abroad by the PS; (iv) suppliers' credits; and (v) the value of any new leasing contracts entered into by the public sector during the program period, which is the present value at the commercial interest reference rate (CIRR) (at the inception of the lease) of all lease payments expected to be made during the period of the lease contract excluding those that cover the operation, repair, or maintenance of the property.

    7.   Privatization proceeds are defined as the cash payments (converted to quetzales at the actual market exchange rate of each transaction) and nonrecurrent fees (e.g., prepayments) received by the PS in payment for concessions to operate public services and for divestments of public enterprises. For purposes of the program, nonrecurrent fees will be accounted for over the concession period, distributed in equal quarterly amounts.

    8.   The balance of the combined public sector (PS) defined above assumes that interest and amortization payments on domestic and external debt are on a due-basis. Interest and amortization payments on foreign currency denominated debt as well as any financing transaction denominated in foreign currency are converted into quetzales at the bid-ask average market exchange rate prevailing at the moment (or settlement) of the transaction. Any unforeseen changes in the recording procedures of PS accounts that may require an adjustment in the overall balance of the PS shall be agreed with the Fund staff before any change is effected.

    B.  Performance Criterion for the Central Government Expenditure1

    (In millions of quetzales)

     

    Ceiling

    January 1–June 30, 2001 (actual) 9,560
    January 1–December 31, 2001 (estimated) 22,330
    January 1–March 31, 2002 (indicative target) 4,665
    January 1–June 30, 2002 9,280
    January 1–September 30, 2002 15,225
    January 1–December 31, 2002 22,515
    Measured as defined in the text below.

    9.   For any given calendar period expenditure of the CG is defined as the cumulative flows from the beginning of the corresponding year of expenditure as reported in the financial statistics of the central government prepared by the Directorate of Fiscal Analysis of the Ministry of Finance (see below). Any unforeseen change in the reporting of measurement of the central government expenditure that may require an adjustment in the definition of social expenditure will be agreed with Fund staff before the change is effected.

    C.  Indicative Targets for the Central Government Social Expenditure 1

    (In millions of quetzales)

    Central Government Social Expenditure Floors
    January 1–June 30, 2001 (actual) 3,950
    January 1–December 31, 2001 (estimated) 8,970
    January 1–March 31, 2002 1,515
    January 1–June 30, 2002 3,515
    January 1–September 30, 2002 6,070
    January 1–December 31, 2002 9,095
    1Measured as defined in the text below.

    10.   For any given calendar period, the central government social expenditure is defined as the cumulative flows from the beginning of the corresponding year of social expenditure, as reported in the financial statistics of the central government, for the follow up of the Peace Accords prepared by the Directorate of Fiscal Analysis of the Ministry of Finance (see below). Any unforeseen changes in the reporting or measurement of the social expenditure that may require an adjustment in the definition of social expenditure will be agreed with the Fund staff before the change is effected.

    II.  Monetary Targets

    A.  Performance Criterion on NIR of the Monetary Authorities (MA)1

    (In millions of U.S. dollars)

      Floor
    (end of period)
    June 30, 2001 (actual) 1,802
    December 31, 2001 (estimated) 2,301
    March 31, 2002 2,200
    June 30, 2002 2,350
    September 30, 2002 2,220
    December 31, 2002 2,091
    1Includes the Bank of Guatemala and the Security Regulation Fund. Measured as defined in the text below.

    11.   The stock of NIR of the MA is defined as the difference between the U.S. dollar value of gross liquid foreign assets, and short-term foreign liabilities as defined below.

    12.   The definition of gross foreign assets and net foreign assets should be consistent with the Data Template on International Reserves and Foreign Currency Liquidity and the fifth edition of the Balance of Payments Manual (BPM5). Gross reserve assets must be under the control of the monetary authorities and include monetary gold, holdings of SDRs, any reserve position in the Fund, and holdings of foreign exchange in convertible currencies. Excluded from reserve assets are capital participation in IFIs, any assets in nonconvertible currencies, holdings of precious metals other than monetary gold, encumbered reserve assets, reserve assets pledged as collateral for foreign loans, reserve assets pledged through forward contracts, and redeposits at the commercial banks. Short-term foreign liabilities of the MA are defined as the sum of (i) all foreign currency-denominated liabilities of the MA with an original maturity of one year or less; (ii) liabilities to the Fund; (iii) any foreign currency liabilities of the MA to residents, including financial institutions; and (iv) any short-term liability converted into a medium-term liability during the program period.

    B.  Performance Criterion for the Stock of Net Domestic Assets of the Bank of Guatemala1

    (In millions of quetzales)

      Ceiling
    (end of period)
    June 30, 2001 (actual) –6,634
    December 31, 2001 (estimated) –8,933
    March 31, 2002 –8,490
    June 30, 2002 –10,080
    September 30, 2002 –9,180
    December 31, 2002 –6,528
    1Measured as defined in the text below.

    13.   The stock of NDA of the Bank of Guatemala is defined as the difference between the stock of currency issue and the stock of NIR of the Bank of Guatemala as defined above. For the purpose of calculating NDA, the assets and liabilities denominated in foreign currency of the Bank of Guatemala will be valued at Q 8 per U.S. dollar.

    III.  External Debt Ceiling

    A.  Performance Criterion on Nonconcessional External Debt
    of the Combined Public Sector    1

    (In millions of U.S. dollars)

      Short Term
    0–1 Year Maturity
    (Outstanding stock)    		 More than 1 Year
    (cumulative flow of
    contracted debt)2
    January 1–June 30, 2001 (actual) 340 124
    January 1–December 31, 2001(estimated) 115 610
    January 1–March 31, 2002 40 440
    January 1–June 30, 2002 30 540
    January 1–September 30, 2002 15 665
    January 1–December 31, 2002 15 710
    1Measured as defined in the text below.
    2From the beginning of the corresponding year.

    14.  The ceiling on short-term debt covers the outstanding stock (rather than in a contracting basis) of external debt with original maturity of one year or less owed or guaranteed by the combined public sector. For purposes of this performance criterion, the term "debt" has the meaning set forth in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85), August 24, 2000), and for this performance criterion concessionality does not apply. The ceiling on long-term debt covers the external debt with an original maturity of more than one year contracted or guaranteed by the combined public sector. This performance criterion applies not only to "debt" as defined in point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, but also to commitments contracted or guaranteed for which values have not been received. The ceilings refer to debt with a grant element of less than 35 percent calculated on the basis of current specific commercial interest reference rate (CIRR) as discount rates. The ten-year average CIRR shall be used as the discount rate for loans of a maturity of at least 15 years; for loans of a maturity of less than 15 years, the discount rate is based on the average CIRR of the preceding six-month period. The ceilings on external debt apply to the cumulative amount for the year. For program purposes external debt denominated in currencies other than U.S. dollars will be converted into U.S. dollars at the exchange rate between the respective currencies as of December 31 of the previous year.

    15.   Guatemala will maintain its stated policy of not incurring external payment arrears. This performance criterion applies on a continuous basis. Arrears are defined as a bill that has been received for goods and services verified as successfully delivered but not paid after what is considered "acceptable grace period" normally 30 days.

    B.  Continuous Performance Criterion on Nonaccumulation of External Arrears

    (In millions of U.S. dollars)

    January 1–June 30, 2001 (actual) 0
    January 1–December 31, 2001 (estimated) 0
    January 1–March 31, 2002 0
    January 1–June 30, 2002 0
    January 1–September 30, 2002 0
    January 1–December 31, 2002 0

    IV.  Adjustment for External Financing

    16.   The program is based on projected net external financing of the nonfinancial public sector of US$21 million in the first half of 2002, US$17 million in the first three quarters of 2002, and US$53 million in 2002. The shortfall (excess) of external financing noted below is net of the projected disbursements referred to in paragraph 19. The program is also based on projected central government revenue of Q 9,600 million during the first half of 2002, Q 14,500 during the first three quarters of 2002, and Q 20,100 in 2002.

    17.   In the event of a shortfall of net external financing, floors on net international reserves will be adjusted downward and the ceilings on net domestic assets of the MA will be adjusted upward by the full amount of the shortfall up to a maximum of US$21 million during the first half of 2002, US$17 million during the first three quarters of 2002, and US$53 million during 2002.

    18.   In the event of excess of net external financing from the IDB, the World Bank, and the Central American Bank of Economic Integration (CABEI) only, ceiling on the combined public sector deficit will be adjusted upward (to a more negative value), and on the central government's total expenditure and floors on the central government social expenditure will be adjusted upward by the full amount of the excess of external financing up to a maximum of US$15 million during the first half of 2002, US$25 million during the first three quarters of 2002, and US$40 million during 2002. The nonconcessional external debt ceilings for each quarter will be adjusted accordingly by the contracted amount.1 In the event of external financing beyond the quarterly amounts noted above (US$5 million during the first quarter of 2002, US$15 million during the first half of 2002, US$25 million during the first three quarters of 2002, and US$40 million during 2002), the targets on net international reserves will be adjusted upward and the limits on net domestic assets will be adjusted downward by the full amount of the excess in each quarter.

    19.   The program projections for external financing do not include the Financial Sector Adjustment Loan from the World Bank or other external loans to be used to finance the restructuring of the banking system. To the extent that these loans are disbursed, the floors of the net international reserves of the MA and the ceilings on the nonconcessional external debt will be adjusted upward and the ceilings on the net domestic assets of the MA will be adjusted downward by the net amount of the loan. The nonconcessional external debt ceiling will be adjusted accordingly by the contracted amount. When proceeds from this loan are used the floor of net international reserves of the MA will be adjusted downward, and the ceiling on the net domestic assets of the MA will be adjusted upward by the amount used.

    V.  Adjustment for central government revenue

    20.   In the event of excess of government revenue with respect to the amounts noted in paragraph 16, both the ceilings on total expenditure and the floors on social expenditure will be adjusted upward by the full amount of the excess (i.e., the adjustment will allow an increase in social expenditure only).

    VI.  Adjustment for Credit to Coffee Producers

    21.   Limit on the overall deficit of the combined public sector will be adjusted upward (to a more negative value)/downward (to a less negative value), and on the central government expenditure will be adjusted upward (downward) by any excess (shortfall) of bonds issued to provide financial assistance to coffee producers with respect to the equivalent of US$40 million in 2001 and US$60 million in 2002. In any event, the bonds issued to help coffee producers should not exceed the equivalent of US$100 million over the 2001–02 period.

    VII.  Adjustment for Debt Substitution

    22.   In the event that proceeds from bonds issued to substitute debt exceed the amount of substituted debt, floors on NIR will be adjusted upward, and ceilings on net domestic assets will be adjusted downward by this excess. The nonconcessional external debt ceilings will be adjusted accordingly by the contracted amount.

    VIII.  Structural Benchmarks

    23.   There are structural benchmarks during 2002 on submitting to congress the new laws of the central bank and banking supervision and the monetary law, and assessing the conditions of banks and adopting measures necessary to deal with banks that resulted insolvent. Both structural benchmarks should be implemented before completion of the review under the program.

    IX.  Information

    24.   The authorities are committed to provide regularly to the Fund staff the necessary information to monitor the program in an adequate manner, in particular as it refers to the following specific daily, weekly, and monthly data with a delay not exceeding the lag indicated in parenthesis.

    25.   The Bank of Guatemala will send the IMF information through:

      (a) A daily electronic mail.

      (b) A weekly fax.

      (c) A monthly fax.

      (d) A monthly pouch of data sent by a courier.

    In addition, timely information will be provided to the Fund on economic and financial measures taken by the government, as well as changes in legislation including regulations approved by the Central Bank of Guatemala, the ministry of finance, the superintendency of banks, the SAT, and other key economic agencies.

    The daily electronic mail will be sent at the beginning of the next working day unless otherwise agreed, and will contain:

      (i) The level of net international reserves.

      (ii) The stock of currency issued .

      (iii) The deposits of the central government and the rest of the nonfinancial public sector in the Bank of Guatemala.

      (iv) The exchange rate of the quetzal vis-à-vis the U.S. dollar.

      (v) Amount of the central bank intervention in the FOREX market (end of working day).

      (vi) Placements and amortization of certificates of open market operations by maturity, interest rate and holder (nonfinancial private sector, financial sector, nonfinancial public sector).

    The weekly information will contain and will be sent with a lag of no more than one week:

      (i) The level of gross international reserves and level and composition and liabilities as defined in paragraphs 12 and 13.

      (ii) Principal accounts of the balance sheet of the central bank.

      (iii) Daily buying and selling exchange rates in the interbank foreign exchange markets.

      (iv) Weekly amounts of the central bank intervention in the FOREX market.

      (v) Placements and amortization of certificates of open market operations by maturity, interest rate and holder (nonfinancial private sector, financial sector, nonfinancial public sector).

      (vi) Commercial banks average deposit and loan interest rates in domestic and foreign currencies.

      (vii) Foreign currency cash flow of the central bank.

      (viii) Devolution of VAT to exporters.

    Monthly information

      (i) Details of cumulative losses of Bank of Guatemala.

      (ii) Main monthly accounts of the commercial and development banks.

      (iii) Monthly accounts of the central bank.

      (iv) Monthly consumer price index.

      (v) Monthly information of IGSS position with the banking system.

      (vi) Main economic and financial laws, and related monetary board regulations.

    26.   The ministry of finance will fax every month the following information:

      (i) Updated monthly data for net disbursements of public and publicly guaranteed external debt of one year or less, and contracted debt of more than one year. These data will be prepared by the Public Credit Directorate of the ministry of finance.

      (ii) Data on disbursements and amortization of credit from the IDB and World Bank.

      (iii) Total government revenue measured on a cash basis, and divided between tax revenue and nontax revenue, transfers and grants. Tax revenue will be divided between direct taxes (income tax, IEMA, oil royalties, other) and indirect taxes (domestic VAT , VAT on imports, excise taxes on oil, alcohol and beverages, stamp taxes, vehicle taxes, import taxes, other taxes).

      (iv) Total government expenditure measured both on a commitment basis and a cash basis, and divided between current and capital expenditure. Current expenditure will be divided between expenditure in wages and salaries, goods and services, external and internal debt interest payments, and transfers (identifying at least those to municipalities and social funds). Capital expenditure will be divided between direct investment and capital transfers (identifying at least those to municipalities and social funds).

      (v) Total government social expenditure, defined as expenditure in education, science, and culture; health and social assistance; housing; internal security; the Judicial Organism, the Constitutional Court and the Attorney General's office.

      (vi) The stock of floating debt (deuda flotante) at the beginning and the end of the period.

      (vii) External financing of the central government and INDE, including disbursements and amortizations of external loans and bonded debt placed with nonresidents, as well as any variation of external arrears.

      (viii) Domestic financing of the central government, including variation of deposits in the central bank and commercial banks, as well as bonded debt placed with residents and any variation of arrears with domestic debt holders.

      (ix) Privatization receipts.

    Guatemala—Definition of Central
    Government Expenditure1

    Central government expenditure is defined as all direct expenditure and transfers made by the institutions that comprises the central government:

    • current expenditure: expenditure in wages and salaries, goods and services, interest payments, and current transfers; and

    • capital expenditure: direct capital expenditure, net lending, and capital transfers.

    Central Government Expenditure
    June 2001
    (In millions of quetzales)
    Total 9,557.2
    Current expenditure 7,054.2
       Wages and salaries 2,711.2
       Goods and services 1,205.8
       Interest payments 1,077.0
       Current transfers 2,059.0
     
    Capital expenditure 2,503.0
       Direct expenditure 892.0
       Net lending 0.0
       Capital transfers 1,611.0
    1Source: Directorate of Fiscal Analysis of the Ministry of Finance.

    Guatemala—Definition of Central Government
    Social Expenditure1

    Central government social expenditure is defined as all direct expenditure and transfers made by the institutions that comprises the central government in the following areas:

    • Education, science, and culture

    • Health and social assistance

    • Housing

    • Internal security

    • Judicial organism and Constitutional Court

    • Attorney General's Office

    Central Government Social Expenditure
    June, 2001
    (In millions of quetzales)
    Total 3,950.1
    Education, science, and culture 1,011.6
    Health and social assistance 1,897.4
    Housing 43.5
    Internal security 550.2
    Judicial Organism and Constitutional Court 281.3
    Attorney's General Office 166.1
    1Source: Directorate of Fiscal Analysis of the Ministry of Finance.

    Guatemala—Prior Actions and Structural Benchmarks Under the Program

    Prior actions

  • Approval of the 2002 budget by congress consistent with the program.

  • Issuance of the Presidential Decree (Acuerdo Gubernativo) strengthening expenditure control as described in paragraph 15 of the Memorandum of Economic and Financial Policies.

  • The entrance into effect of tax measures approved by congress in January and February 2002 (described in paragraph 2 of the Memorandum of Economic and Financial Policies).

  • Capitalization of Banco del Ejército by Q 150 million needed to set the stage for its privatization.

    Structural benchmarks

  • The submission to congress of the new laws on the central bank and banking supervision and the monetary law before the completion of the review of the program, scheduled for August 15, 2002.

  • The Superintendency of Banks will complete a comprehensive assessment through on-site inspections of banks according to the plan indicated in the Memorandum of Economic and Financial Policies. Results of ongoing inspections and of those to be completed before April 30, 2002, and measures to be adopted to deal with banks that are determined to be insolvent, will be reported to the Fund before completion of the review of the program, scheduled for August 15, 2002.

    1The program assumes cumulative flows of contracted debt from the IDB, the World Bank, and CABEI of US$540 million during the first half of 2002, US$665 million during the first three quarters of 2002, and US$710 million during 2002.

    		•