Guatemala - Second Telecommunications Project

rILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1599-GU REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA GUATEMALTECA DE TELECOMUNICACIONES WITH THE GUARANTEE OF THE REPUBLIC OF GUATEMALA FOR A SECOND TELECOMMUNICATIONS PROJECT April 2, 1975  Currency Equivalents US$ 1.00 1.00 Quetzal (Q) Q 1.00 US$ 1.00 Fiscal Year January 1 - December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPKiENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA GUATEMALTECA DE TELECOMUNICACIONES WITH THE GUARANTEE OF THE REPUBLIC OF GUATEMALA FOR A SECOND TELECOMMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed loan fo'r the equivalent of US$26.0 million to the Empresa Guatemalteca de Teleco- murnicaciones with the guarantee of -the Republic of' Guatemala for a second telecommunications project. The loan woiold have a termn of 20 years, including 4 years of grace, with interest at 6-1/2 percent per annum. PART I - THE ECONOMY 2.. A memorandum entitled "Memorandum on Recent Economic Development and Prospects of Guatemala" wK IJ!. hb d-istributed to the Executllive Directors shortly. A country data sheet is attached as Annex I. 3. Guatemala, one of the five countries in the Central American Common Market area, has the largest population and the most varied physical environ- ment among them. Mountains divide Guatemala into four main regions: the high- lands, the Pacific coastal plain, the Atlantic area and the Peten. The var- ious climates and the rich soils allow the cultivation of almost any type of agricultural product. There are deposits of nickel that will be commercially exploited with the participation of IFC, marble quarries of good potential for exports, and some exploration for oil is being done. Guatemala's natural beauty, climate, archeological rnonurnents, folklore and proximity to the Un"ited States give her a high potential for tourism development. L;. Most of the country's population and economic activity is in the highlands. The principal food crops -- corn and beans -- are grown here, and mast of the cof'fee is grown on the southern highland slopes. Nearly all the major urban centers and most of the country's industrial activities are located in the highlands. The Pacific coastal plain produces cotton, sugarcane, cattle, rice and other tropical crops. The Atlantic area produces bananas and sorne coffee. The Peten, which is the northernmost province, occupies about a third of the country's area but is largely unexploited. It contains the most important archeological monumentsof the Mayas and produces chicle and some tropical woods. 5. Guatemala's population has been growing at more than 2 percent per annum and now totals about 5.2 million. The most significant characteristic  F the popujlation is its sharp ethnic division. The pure Indians, who make Lu) about 50 percent. of the total population, are economically, culturally and linguistically separated i'rom the rest of the population, that is main- ly of mixed Spanish and Indian origin. A large part of the Indian popula- Lion does not participate in the money economy. They are engaged in sub- sistence agriculture and have a standard of living well below that of the rest of tne cconcmy. As discussed in the economic memorandum, the economy has been grow- ing at an average rate of 6.5 percent per annum for the past four years. The main impetus for this growth, especially in 1972-73,were the good market con- ditions for the leading exports of Guatemala. Provided the present western world recession does not significantly weaken the country's traditional ex- ports f'or a lengthy period of time, the economy can continue to grow in the next few years at rates similar to those registered in the recent past. 7. Although Central Government savings increased significantly in 1973, they attained a share of' only 1.4 percent of GDP. Both current reve- nues and expenditures remained at the very low level which has been charac- teristic f'or Guatemala. Proposals made by the last administration during the first half of 1974 to establish new export taxes and raise the rates of exist- ing ones were substantially modified as they passed through Congress.As finaDy enacted,new export taxes were introduced for sugar,beef and fish,and a more pro- gressive sliding scale (tied to world price movements) was adopted for ex- port taxes on the two most important export commodities, coffee and cotton. The new law, however, established a very high minimum price subject to tax lor the latter two commodities, and some government officials are concerned that revenues from coffee and cotton might be reduced if the present prices for these commodities are not maintained in the world market. In September of 1974, the Congress approved an additional, less ambitious tax package which includes increases in the stamp tax rate (from 1.5 percent to 2.0 per- cent), the taxes on motor vehicles, the fees on passports, airport taxes, taxes on alcoholic beverages and cigarettes, the tax on land (from 0.6 to 0.8 percent for those properties over Q50,000 wLith the minimum value subject to tax being raised to Ql,000), and increases in personal and family exemptions. It is expected that the September tax measures will yield additional reve- nues of about Q26 million a year. 8. Central Government investment reached Q74 million, or 2.9 percent j'f GDP in 1973, which represents an all time high for Guatemala. Investment in the social areas increased by more than 100 percent, especially in educa- rion and health. Although investment expen6i'ture during, the earliy months of _L14 ;ontinued at a high level, disbursements from the international financing agencies were well behind schedule. This apparent anomaly suggests that the high level of Government expenditure may have resulted more from Govern- ment absorption of increases in project costs than from more rapid progress in project execution. 9. The Planning Council is currently preparing the Government invest- mient program for the next five years (and expects to have it ready - - ;;). The intention is to maintain the agricultural sector as first priority in the economy, paying particular attention to the most depressed rural areas. Although there has been some improvement in the last year or .tLJo, project preparation continues to be the main bottleneck, in the Central Government and in the autonomous public agencies, to the achievement of higher  -3- investment levels. Only a few entities operate on the basis of an up-to- date investment plan, and those plans that do exist may be substantially revised in the context of the overall plan. Further emphasis, therefore, on project preparation will be an essential ingredient to the success of the new investment program. 10. The balance of payments has been in a strong position in recent years, in particular in 1973, when foreign exchange reserves increased by US$67.0 million and Central Bank reserves attained an all time high of US$213.8 million at the end of the year. This was possible (despite an increase of nearly 25 percent in imports) because of a substantial improve- ment in the prices of coffee and cotton; an increase in sugar volume; and an increase of more than 37 percent in the export value of manufactured goods. Tourism continued its strong growth of previous years. The number of tourists increased by 16 percent during 1973, while their expenditures grew by nearly 50 percent. Preliminary estimates for 1974 would indicate that although receipts from exports of goods and services increased. by about 33 percent, payments for imports increased by about 60 percent. The increase in export revenue originated mainly in price increases, while the major factors responsible for the boost in import payments were fuel price increases and speculative stockpiling of raw materials and interm,ite goods, which took place early in the year. The net impact of these de- velopments was a shift from a US$34.0 million current account surplus in 1973 to a US$75.0 million deficit in 1974, and a decline of about US$30.0 million in net reserves for the year. 11. Over the medium-term, while coffee will continue to be the single most important export, tourism is expected to continue to grow at a high rate and become the second most important foreign exchange earner. The Gov- ernment is giving high priority to the development of the sector, and the private sector is already building new hotels and enlarging the existing ones, which will add 1,000 first class rooms to the 1,200 available now in that category. Manufactured products are expected to increase their share of merchandise exports from 34 percent in 1973 to about 43 percent in 1980. By 1977, nickel will be added to mineral exports, accounting for about 6 percent of merchandise exports thereafter. Although export volumes are expected to grow somewhat faster than import volumes in the remainder of the decade, because of expected further deterioration in the terms of trade, payment on imports of goods and services are expected to increase as rapidly as exports receipts. 12. The rate of inflation which accelerated in the early months of 1974 appears to have tapered off later in the year attaining a level of about 15 percent for the year as a whole (similar to the 1973 level). The 1974 inflation was due mainly to higher import prices for fuels and fertili- zers. The large gain in foreign reserves during 1973 resulted in high li- quidity in the banking system which extended into 1974. Moreover, the lower internal interest rate, as well as the tight money market in the industrial countries induced a switch from import financing by suppliers and foreign financial institutions to financing by local banks. The increased credit demand exceeded by far the expanded resources of the financial system and started to spill over in the balance of payments. It was not until September  1974 that the authorities took action in the monetary field, increasing interest rates, and cash and reserve requiremernts of the banking system. These measures are expected to prevent further foreign reserve losses. External Financing 13. The external public debt repayable in foreign currency amounted to US$192 million at the end of 1973, or US$11 million excluding undis- bursed commitments. Guatemala's debt-service ratio has, in the past, been relatively low and has been reduced further by last year's fast growth in export value. Also, the average terms of the external public debt have imnproved substantially over the last Lew years as a result of increased lhorroXiing from international financial institutions. A debt-service level below 3 percent of total exports is expected to be maintained at least for the remainder of the decade. 1a. Apart from the Bank, external f'inancing has been provided princi- pally by USAID, the Inter-American Development Bank (1DB) and the Central American Bank for Economic Integration (CABEI). IDB and CABEI funds have carried very soft terms and contained large components repayable in local currency. Thre IDB has made loans for agriculture (general credit lines, irrigation and fisheries), housing, transportationi, water supply and health services. USAID has fi-nanced mainly rural development and primary education, but has also granted loans f'or industrial development, rural electrification, hcusing and health facilities. CABEI has concentrated mainly on projects with regional impact in highways, telecommunications, agriculture and in- dacs try. 15. The lending of these agencies from 1950 to the end of 1973 is sum- m.arized below: (In millions of US dollars) IBRD AID IDB CABEI Total 66.5 o3.3 119.2 94.4 Cummulative Lending 1950-65 16.2 16.0 23.3 / Cummtulative Lending 1966-73 48.3 67.3 95.9 V 'heritn pOI t .8 32.9 37.3 Power & Telecocrmiuni( Ition 36.0 7.(!0 14J4 Education 0.3 36' Health 5.9 _3L.l Flooring 2.0 Agriculture 4.0 27.5 13.5 30.24 Industrv 10.0 1.5 Others 7.5 j.t 10.3 I/ CABEJI 1h; Been in operation since 1900. In9crroi