Guatemala - Education Project

RESTRICTED FILE COPYVRE RIC [LE COPYl X Report No. P-650 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GUATEMALA November 12, 1968  INTERINATIONAL BANK FOR RECONSTRUCTION AID DEVELOPENT REPORT AND RECONIEDhTION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GUATEIALA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$6.3 million to the Republic of Guatemala. PART I - IIISTORICAL 2. The proposed project, which is the first education project to be financed by the Bank in Guatemala, was identified by a UNESCO mission in 1965. Subsequent UNESCO missions assisted the Guatemalan authorities in preparing the project, and it was appraised in January-February 1968. 3. Negotiations took place in WJashington during September 17-20, 1968. The Guatemalan Government was represented by Messrs. Edwlin Alcantara, Finance Ministry; Rafael Perez I'iera, Vice-Minister of Coil!unications and Public i'orks; Arturo Lemus, Yinistry of Education; and Edgardo Castaneda., Project Director designate. 4. The proposed loan, the fourth made to Guatemala, would increase the Bank's total lending to Guatemala to US$46.5 million (net of can- cellations). IDA has not made any credits to Guatemala. The following is a summary statement of Bank loans to Guatemala as of September 30, 1968: US$ Millions Loan Number Year Borrower Purpose Amount Undisbursed 124 1955 Republic of Guatemala Roads 18.2 9 487 1967 INDE Power 15.0 11.3 545(1) 1968 INDE Power 7.0 7.0 Total (less cancellations) 40.2 of which has been repaid to Bank and others 14.4 Total now outstanding 25.8 Amount sold 2.8 of which has been repaid 2.1 0.7 Total now held by Bank 25.1 Total undisbursed 18.3 (1) Not yet effective.  5. IFC made one investment of US$200,000 in a flour mill in Guatemala; it sold $134,000 and wa.s repaid the balance. PART II - DESCRIPTION OF TIE PROPOSED LOAN 6. Borrower: Republic of Guatemala. Amount: The equivalent in various currencies of US$6.3 million. Purpose: To assist in financing the construction and equipment of a secondary teacher training school, fifteen new general secondary schools and the expansion and improvement of the Technical Institute of Agriculture. Amortization: In 25 years, including a 10 year period of grace, through semi-annual installments beginning April 1, 1979 and ending October 1, 1994. Interest Rate: 6-1/2 percent per annum. Commitment Charge: 3/4 of 1 percent per annum. PART III - THE PROMECT 7. An appraisal report entitled "An Education Project in Guatemala" (TO-681a) is attached. 8. Education is given high priority by the Guatemalan Government. The country has ample natural resources, but lacks the qualified manpower to put its resources to productive use. Over 60 percent of the popula- tion a.ge 7 and above is illiterate. Only 8.9 percent of the labor force has had primary education; 1.9 percent high school educations and 0.7 per- cent higher education. 9. Primary education suffers from high drop-out rates (72 percent in urban and 98 percent in rural areas for the 1960 cohort); inadequately qualified tea.chers; uneven student-teacher ratios, ranging from 1 to 100 students per teacher; unequal education opportunities as between urban and rural schools (74 percent of urban school age population attend, only 23 percent of rural) and inadequate schools. Secondary school curricula do not correspond to employment opportunities, and there is a lack of laboratories, workshops and textbooks. While the Government is preparing a new national development plan, the Education Planning Office has estab- lished the main outlines and much of the content of a three-year education  plan covering 1969-71, which *ould improve education, both primary and secondary. The proposed project is the first step in the implementation of the plan for secondary education. 10. The proposed project consists of the construction and equip- ment of (i) a new secondary teacher training school; (ii) additions to the existing Technical Institute of Agriculture; and (iii) 15 new general secondary schools. The secondary teacher training school would provide 700 new places and contribute about 85 percent of the new and 50 percent of the retrained personnel required to have a, fully qualified secondary teacher force by 1980. The new secondary schools would provide for 13,400 student places and revised curricula which wJould reflect the demand for skills of different kinds. The expansion of the Technical Institute of Agriculture would raise its places to 600, triple the present output at the skilled worker level and graduate annually 80 at the technician level. 11. The execution of the project would be entrusted to a special project unit within the Hinistry of Public Wriorks. The director of this unit w7oUld be assisted by an advisory committee of representatives of the Ministries of Education, Finance, Publicl forks and Agriculture and the University of San Carlos. 12. Capital cost per student place is about US$933 for the teacher training school, $540 for secondary schools providing only three years of general training and $645 for secondary schools providing three years of general education and two additional years of specialized training. These costs are reasonable. Annual recurrent costs are estimated at US$3.4 million equivalent. With the measures recently taken to increase revenues (see paragraph 22 below), the Guatemalan Government will be able to finance its part of the capital cost of the project and cover the recurrent costs. 13. Total project costs are estimated at US$12.6 million equivalent, including some land sites that have to be acquired by the Government. Total estimated foreign exchange cost would be US$3.6 million equivalent, which represents 28.5 percent of total estimated project cost. The project is part of a comprehensive education program, which includes primary and higher education, and which calls for a total investment of about $41 million over the next three years. Even allowing for lending for education by IDB and AID, which should provide over the three years some $18 million, there remains a major financial effort required of the Government. Taking into account the key role of the project in the over- all program and the dependence of Guatemala on an inflow of capital to sustain a tolerable level of public investment, some local financing seems to be in order. A loan of $6.3 million, covering 50 percent of total project cost, thus appears fully justified. 14. Procurement of goods and services will be on the basis of international competitive bidding both for building construction and  purchases of equipment. It is likely that building construction con- tracts will go to local contractors, that furniture will be bought locally and that instructional equipment will be imported. Architectural and other services may be provided partly from abroad, partly locally. The loan would be disbursed to cover the full amount of foreign expendi- ture and a proportion of the local expenditure, depending on the exact distribution of expenditure between foreign and local, so as to cover 50 percent of total project cost. PART IV - LEGAL INSTRUIEaNTS AND AUTHORITY 15. The draft Loan Agreement between the Republic of Guatemala and the Bank and the Report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 16. The loan documents contain the usual covenants for education projects. PART V - THE ECONO0L 17. The last Bank Economic Report on Guatemala entitled "Current Economic Position and Prospects of Guatemala" (WH-178b, iiay 6, 1968), was distributed to the Executive Directors in May 1968. It observed that the growth of Guatemala's economy in the last several years has not been very impressive. During 1960-67 an average annual growth rate in GDP of about 4.3 percent per annum combined with a population expansion of over 3 percent to keep per capita income growth at only slightly above 1 percent per annum. The increase in GDP in 1965-67 barely kept pace with population. The economy remains heavily dependent on agriculture, which accounts for close to 30 percent of GDP and provides the bulk of exports to the world markets. Coffee and cotton alone accounted in 1967 for 43 percent of Guatemala's total exports. Manufacturing, although growing at an average 7 percent per annum since 1960, still accounts for only about 15 percent of GDP and caters only to the domestic market and to the markets of the other Central American countries. 18. The Guatemalan Government is aware of the urgent need to accelerate economic growth and distribute its benefits more evenly among the population, thus gradually reducing the present sharp differences in education, health and income. To this effect, the Government, while continuing to follow a prudent monetary policy, intends to accelerate measures to diversify the economy and reduce its sensitivity to fluctu- ations in the world markets for coffee and cotton. The Government recognizes that this implies a greater effort in agrarian reform and agricultural diversification, in the reorientation of manufacturing towards world markets and in the expansion of public investment. W4hile emergency tax measures may provide the needed increase in public savings  - 5 - in the short run, there is growing awareness in Guatemala that in the long term a satisfactory level of public savings can be achieved only by reforms that will both increase taxes and spread their impact more equitably. 19. This awareness is in direct response to the recent deterioration in the Guatemalan economic and financial situation. As for the external finances, in contrast to the 1960-65 period, during which small trade deficits were more than offset by net capital inflowis so that international reserves increased slightly, the balance of payments deteriorated in 1966-67. The deterioration took place in spite of Guatemala's improving trade posi.tion with the rest of the Central American Common Market and was due to a sharp drop in capital inflows caused by political un- certainty, to large increases in imports from countries outside the Common Market, to increases in remittances abroad, and to a fall in exports because of weakening coffee and cotton prices and of production problems in cotton. 20. As for the domestic finances, government finances have fluctu- ated in step with the economy in general. Revenues declined in the early years of this decade, a period of general economic stagnation. they increased substantially in 1964 and 1965 - following two years of record growth of the economy, sharp expansion of foreign trade and the introduc- tion of new taxes - but failed to increase as expected in 1966 and 1967. Current expenditures continued to rise, however, so that public savings net of amortization became negative in 1967. Public investments have also fluctuated in step with these overall developments. 21. Estimates for 1968 indicate that economic growth has continued to be modest (around 4 percent), and that public investment has again failed to increase as planned. However, it appears that the balance of payments deterioration and the declining trend in public savings of the past twTo years have been arrested. The Government has also succeeded in reducing short-term borrowing abroad and negotiating substantial amounts of long-term development loans to help speed up agricultural and indus- trial diversification, and thereby create the potential for improved export growth in the years ahead. 22. The most urgent problem in Guatemala is to establish the basis for a more sustained development than has been possible in the last few years. Important steps have recently been taken. Guatemala's ability to carry out its development plans for the next two years, including the education project described in this report, has been improved by revenue measures recently adopted, or at present under active consideration by Congress, and by the Government's declared intention to keep a strict check on non-development expenditures and improve prepara.tion and administration of projects. The most important new measure, an import surcharge which is expected to yield at least US$8 million yearly, has already been approved. Together with various other tax measures, govern-  - 6 - ment revenues should increase by US$16 million (i.e., 12 percent above present levels) in 1969. As a result, savings should be sufficient to cover about 35 percent of public investment in 1969-70, with net capital inflows from abroad accounting for the remaining 65 percent. 23. With the domestic policies now in prospect, Guatemala, with an external debt ratio of 8 percent, is creditworthy for new external borrowing on conventional terms. Given the expected recovery in export earnings, the additional long-term borrowing abroad now envisaged should not raise the debt service ratio beyond the 8-9 percent level in the 1970's. PART VI - COiMPLIANCE WITH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMI.EKDATIONS 25. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to the Republic of Guatemala in an amount equivalent to US$6,300,000. RESOLVED: THAT the Bank shall grant a loan to the Republic of Guatemala, in an amount in various currencies equivalent to six million, three hundred thousand United States dollars (US$6,300,000), to mature on and prior to October 1, 1994, to bear interest at the rate of six and one-half percent (6-1/2%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Education Project) between the Bank and the Republic of Guatemala which has been presented to this meeting. Robert S. McNamara President by S. R. Cope Attachments Washington, D.C. November 12, 1968