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Fiscal and Institutional Development and Protecting the Poor

Fundamentals for Broad-Based and Inclusive Growth in Guatemala


Overview

A series of loans from the International Bank for Reconstruction and Development supported Guatemala's development agenda. Through stronger fiscal and institutional management – and a better performing social safety net – the Bank project helped improve governance and encouraged families to keep their children in school and attend regular health checks. Project results include tax modernization measures that generated extra revenues in a period of fiscal crisis, increased access to public information which was formalized across most central government agencies, and an improved business environment.

Challenge

Since the signing of the 1996 Peace Accords, the country has made headway in addressing social needs and building democratic institutions. Nevertheless, serious challenges remained. The series of Programmatic Fiscal and Institutional Development Policy Loans was initiated in 2008 during a period of political transition, but also at a time of great economic uncertainty with the emergence of the global financial crisis and subsequent slow-down in growth. Despite considerable progress across the policy spectrum and positive real per capita growth rates, institutional and development outcomes in Guatemala signaled the need for further reform. In 2008, the new Colom administration's program stressed reducing poverty and inequality. The fundamental challenges for policy makers were to maintain macroeconomic stability, foster growth and create the needed fiscal space to accelerate poverty reduction, but in an environment of increased transparency and stronger institutions.


Approach

The Programmatic Fiscal and Institutional Development Policy Loan Series is aligned with Guatemala's Country Partnership Strategy and the government's four-pronged development strategy. The first loan was signed on March 6, 2009, and a second on December 7, 2009. The loan series focused financial and technical support around four key areas: Macroeconomic stability and financial sector deepening; Governance and transparency; the Mi Familia Progresa Conditional Cash Transfer (CCT) Program; and Sustainable growth and productivity. The policy measures to address key development challenges include fiscal and tax administration reforms to raise tax revenues above their low base, extending banking supervision, and creating a moveable assets registry to improve credit to firms that lack fixed capital. With respect to governance and transparency, measures were taken to increase scrutiny and control over public trust funds and strengthen public financial management and procurement systems for central and local governments. These steps included creating institutional structures to promote public accountability and reduce corruption, and passage and implementation of an Access to Public Information Law. The rapid roll-out of Mi Familia Progresa had raised questions of targeting and compliance with eligibility criteria, and so, to enhance the program's poverty reducing impact, the IBRD loan program supported the introduction of proxy means testing to identify eligible beneficiaries, and improved procedures for verifying beneficiaries' co-responsibilities (i.e., confirming school and health check attendance). Sustained growth and productivity gains also require a conducive business environment, and the project supported measures focused on accelerating customs clearance and reducing tax reporting requirements through more efficient electronic processes.


Results

Fiscal modernization efforts to improve the tax administration system resulted in mandatory electronic submission of business withholding taxes, which improved both accuracy and efficiency. According to the Superintendencia de Administración Tributaria, the combined impact of these measures added about US$12 million to fiscal revenues in 2010.  The implementation of the transitional gross revenues tax helped the Government to meet the targeted tax revenue outcome indicator for 2010.

With respect to promoting financial sector stability and deepening, consolidated supervision has been implemented in nine of the 11 financial companies operating in Guatemala, and all four key profiles for risk-based supervision have been completed and applied to all financial groups. Early evidence suggests that the registry of movable assets increased the amount of credit in the economy, such that the share of credit guaranteed by movable collateral reached 4 percent of total credit as of December 2010.

The adoption of the Access to Public Information Law, which empowers citizens to hold the government accountable for its use of public resources, led to the creation of specialized public information offices in 85 percent of central government agencies.

Targeting and transparency of the Mi Familia Progresa program have improved greatly. The program was extended into more than 270 municipalities to reach over 900,000 families in a very short period of time.  The program’s simple design and likely modest leakages (due to very high poverty rates in rural areas) mitigates concerns about the program’s execution.  The government confirmed that, through a large verification network of local representatives, 100 percent of beneficiaries are sending their children to school and attending required health check-ups; this result is double the 50 percent verification rate targeted in the outcome indicator.

The share of firms submitting tax declarations electronically has risen from 34 percent in 2007 to 42 percent in 2010, reducing the amount of time required to make tax declarations and at the same time improving accuracy. Exporting and importing firms’ productivity has also been stimulated by the new Customs Management System SAQB’E implemented in 15 ports (out of 18 in total).  By digitizing customs clearance documentation, clearance times for imports fell from 19 to 17 days and from 18 to 17 days for exports (according to World Bank Doing Business Indicators).


Bank Contribution

Under the Country Partnership Strategy, IBRD afforded Guatemala a borrowing window worth US$970 million for the fiscal years 2009-2011, of which US$500 million was designated for this programmatic loan series (subsequently increased to US$550 million). This series of loans was prepared in close consultation with the government and stakeholders, such as civil society groups and international donors.  The policy measures were identified on the basis of extensive analytical work including: the Guatemala Poverty Assessment (2008), Investment Climate Assessment (2008), Country Economic Memorandum (2005), Public Expenditure Review (2007), Financial Sector Assessment Program Update (2007) and the Country Fiduciary Assessment (2007)


Moving Forward

The Bank will continue to support Guatemala’s reform program.  The forthcoming Public Expenditure Review will be a useful tool to help the government further deepen and institutionalize public financial management reform, tax reform, and the effectiveness of social spending, particularly through the CCT program.  With respect to the latter, disseminating Bank and other donor-prepared evaluations of Mi Familia Progresa in terms of its costs and benefits could provide the impetus for improving the program (e.g., through better targeting), generating broad political support and securing adequate dedicated public resources to finance it in the future.


Beneficiaries

Petrona Díaz Sicay, a mother of four, lives with her family in an adobe house in Barrio Chutinamit, San Antonio Palopo, Sololá. Overlooking gorgeous views of the Atitlan Lake, San Antonio Palopo is one of the poorest municipalities in Guatemala, with four out of 10 people living in extreme poverty. Petrona is a beneficiary of the CCT program Mi Familia Progresa, receiving 300 quetzales a month (US$38.40 dollars). “I am grateful for this support", says Petrona. "Our children are studying and we are sending them to school. I use this money to buy products that are needed in the house. I buy maize, beans, noodles, incaparina and oatmeal. I am also grateful because we are getting help at the health post; I take my kids there to check on their health.”

Maria Xol Lopez and her five children used to live in a one-room house in San Bartolome Jocotenango, Quiche. A bed, the kitchen, and a table occupied the small space. The smoke from the firewood used by Maria for cooking made her children ill. However, with the first payments of Mi Familia Progresa, Maria was able to save enough to lay cement beside her adobe house and build a new room, where the children now do their homework and sleep, away from the fumes. Maria does not let her children miss school and, with the cash transfers from Mi Familia Progresa, she is saving to buy a new mattress for her children’s bed.


For more information, please visit the Projects website.

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