Guatemala - Current economic position and prospects

Fu R EY RESTRICTED Report No. W.H. 34-b This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE CURRENT ECONOMIC POSITION AND PROSPECTS OF GUATEMALA February 2, 1955 Western Hemisphere TABLE OF CCNTETS Page No. Y,ap Basic Data Charts Summary i Chapter I Introduction 1 Chapter II The Guatemalan Economy in the Last Five Years 2 National Income 3 Public Finance 4 Public Debt 6 Foreign Debt 7 Money, Banking and Insurance 8 Balance of Payments 10 Chapter III Develooments After the June Revolution 12 Fiscal Problems 12 Monetary Listurbances 14 Suspension of Land Reform 15 Government Attitude toward Business 16 Foreign Companies 17 U.S. Grant-in-Aid Program 19 National Council of Economic Planning 19 Chapter IV Prospects of the Economy 20 Fiscal Outlook 21 Balance of Payments Prospects 22 Statistical Appendix UNmVED ROADS ASPHALT ROAOS u RAILROADS + INTERNATIONAL BOUNDARY DEPA.RTMENT BOLINDARY - f E L P E T E N 0 20 40 MILES BRITISH &.A L*sERAv HONDURAS S a mO M A M A f 0IOTA N L AKE IZABEL KR C% NNI EL SMLRALES NMOSTENA \t PACAPA SOLA HONDURAS MAT EJALAP4 IEu MAZATENGO• TM A ~APERo \. .ø sculkNi'~L AI LAPA i0I :SATE EL SALVADOR PACIFIC OCEAN1 DECEMBER, 1954 GUATEMALA BASIC DATA Area: 42,02 square mile-* Population (mid-195): 3,13,OOO Gross National Product, 1953: (Q million) Consumption Expenditures 432.4 Current Government Expenditures 53.7 Public Investment 29.3 Private Investment 38.7 Net Foreign Investment 4.2 Total 5M8.3 Per Capita Gross National Product, 1953: Q 181 Public Finance, July 1953 to June 1954: 7al Expenditures 82.5 Budgetary Receipts 65.6 Revenues Assigned to Sinking Funds 5.5 Gross Borrowings 17.3 Net Deficit 11.4 Government Debts, September 1954: Internal: Funded 18.3 Floating and Short-Term 2h.1 Foreign (status in dispute) 1.2 Money and Credit, September 30, 1954: Currency in circulation 55.1 Demand Deposits of Public 2h.7 Net Gold and Foreign Exchange Reserves 37.8 Balance of Payments, 1953: Exports, f.o.b., adjusted 97.8 Imports, f.o.b., adjusted 72.2 Services (net) -21.3 Current Account Surplus 4.2 Exports9 f.o.b. I (Q llion) (Q million) Coffee 68.2 Live Animals 0.5 Bananas 12.6 Foodstuffs & Beverages 8.6 Lumber 0.6 Raw materials 8.5 Essential Oils 0.8 Manufactures 52.6 Other 6.7 Machinery & Equipment (17.7) Art Objects,Gold & Silver 0.1 Total 18-y Total 70.2 To: United States 77% From: United States 64% Westerr. Europe 19% Latin America 1h% Canada 2% Cont.Western Europe 13% Latin America 2% United Kingdom 4% Canada 3% GUATEMALA GROSS NATIONAL PRODUCT (MILLIONS OF QUETZALES) YEARLY TOTAL PRIVATE INVESTMENT AND600 NET FOREIGN INVESTMENT PUBLIC INVESTMENT 500 CURRENT 400 GOVERNMENT EXPENDITURE400 CONSUMPTO EXPENDITURE 300 0 0 1948 1949 1950 1951 1952 1953 1954 1955 GOVERNMENT RECEIPTS AND EXPENDITURES (MILLIONS OF OUETZALES) 100 I 100 YEAR ENDING JUNE 30 75 75 EXPENDITURES* 50 50 K-RECEIPTS 25 25 0 0 1949 1950 1951 1952 1953 1954 1955 1956 *Budgetory and extraordinary expenditures combined MONEY SUPPLY AND FOREIGN EXCHANGE RESERVES tMILLIONS OF QUETZALES) 100 1 100 END OF QUARTER I MONEY SUPPLY.. 80 1 80- s I NET GOLD AND FORE IGN EXCHANGE RESERVES 60 -6 40 40 20 20 0 0 I I III IV I II III IV I II Ill IV I II Il1 IV I II III IV I 11 III IV I II III IV 1948 1949 1950 1951 1952 1953 1954 12/17/54 No.968 IBRO- Economic Staff GUATEMALA BALANCE OF PAYMENTS ON CURRENT ACCOUNT (MILLIONS OF OUETZALES) YEARLY -'RECEIPTS FROM EXPORTS PAYMENTS FOR IMPORTS 8O AND NET INVISIBLES_ 80 NET INVISIBLES 60 .60 4O -40 IMPORTS (f.o.b) 20 -20 1949 1950 1951 1952 1953 1954 1955 COMPOSITION OF EXPORTS (MILLIONS OF OUETZALES) 100 100 YEARLY ea -80 60 60 ESSENTIAL OILS OTHER LUM8tR 40 CHICLE 40 BANANAS 20 -20 COFFEE *Banana exports ore undervalued at a fictitious unit value COMPOSITION OF IMPORTS (MILLIONS OF QUETZALES) 8000 YEARLY 60 -FOODSTUFFS BEVERAGES: 6 LIVE ANIMALS AND OTHE R 40 - ---- 40 RAW MATERIALS 20MANUFACTURED 2 ARTICLES 0 I I I[ I0 1948 1949 1950 1951 1952 1953 12/17/54 No.969 IBRD- Economic Staff SUMMARY 1. The government of Prcsident Arbenz, which was overthrown by a .revolution in June 1954, pursued economic and financial policies which were not conducive to private productive activity and investment of foreign capital in the country. Although it had accepted almost all the recommen- dations of a survey mission organized by the Bank in 1950, it failed to act on most of them. The government's economic and social policies were motivated primarily by political considerations and as a consequence threatened to disrupt the economic life of the country. In spite of a large increase in public investment expenditures, per capita income of Q 150 remained unchanged during the last five years. 2. The Arbens government did not last long enough to cause any permanent damage to the economy, partly because of inefficiency, and partly because of the favorable development of the balance of payments, which showed current account surpluses for the last four years thanks to high proceeds from coffee exports. There was a considerable increase in the internal debt, but the debt service has been assured by the imposition of new taxes. Foreign exchange reserves still amount to more than 40% of the money supply, and are equivalent to the value of four months' imports. 3. When the revolutionary junta took over the government in the summer of 1954, it found the public administration in a state of confusion and disintegration. The new government was acutely embarrassed by a shortage of funds in the Treasury - this, however, was largely seasonal - and by a large floating debt. There had been substantial withdrawals of bank deposits, and a flight of capital abroad. Preoccupation with political probleu and a series of changes in the structure of the new government delaycd the formulation of economic policies and development plans. The government repealed some taxes and lowered others, but in October it was forced to impose a series of emergency taxes. At the same time it incurred substantial short-term debts with the central bank. b. In the last few weeks, however, political tensions have subsided and the transitional period of indecision, uncertainty and vacillation appears to have come to an end. The flow of government receipts has been resumed, and the government has paid up a substantial proportion of overdue salaries, wages, and suppliers' bills. There has been a flow of funds back into the banking system and there are indications that the outflow of capital has ceased. With the assistance of grants-in-aid from the U.S. Government amounting to $6.45 million, and the proceeds of emergency taxes, the government has started a public works emergency program which is to lead into a five-year development program announced by the President. The planning of public investment and the formulation of economic policies have been entrusted to a National Council of Economic Planning, which has already begun to function and is reviewing the recommendations of the 1950 Bank miesion. 5. Steps are being taken to repeal legislation and modify practices hampering the flow of private investment, both domestic and foreign. The land reform which had been started by the Arbens government has been i suspended, and expropriation proceedings are being reviewed to remedy abuses and illegal seizures of land which took place during the last few months of the previous regime. A modification of the land reform legislation is under study. 6. The United Fruit Company, w1ich under the land reform had lost two- thirds of its land holdings, renegotiated its contract with the government with regard to its subsidiary the Compania Agricola and agreed to the pay- ment of a 30% tax on the earnings of the subsidiary. The company is also considering plans for the expansion of operations on its directly-owned plantations, and has proposed to the government a revision of the contracts pertaining to these properties. Other foreign-owned enterprises likewise have expressed readiness to review and modify their contractual relations with the government. 7. Local business enterprises are showing a growing measure of confi- dence in the stability of the political situation, although there is still some dissatisfaction with the slowness of the administrative and legislative machinery. 8. The balance of payments prospects for the current crop year are good, provided there is no further decline in the price of coffee between now and April. If coffee prices decline in the next few years, Guatemala may temporarily experience some balance of payments difficulties and may incur a loss of foreign exchange reserves. But it should not be too diffi- cult to compensate for the expected decline in the unit value of coffee exports through an expansion of coffee production -- wnich remains highl profitable even with lower prices -- an increase in exports of cotton an other agricultural commodities, and a rise in tourist receipts, which in recent years have been held down by the adverse political climate. 9. Guatemala called its foreign debt for repayment in 1944. Aside from a small residual sterling debt, the settlement of which is in dispute, Guatemala has no public foreign debt. In view of this, the favorable balance of payments prospects, and the economic and financia policies which the new government intends to pursue, Guatemala could well for its economic develop- ment incur a considerable volume of foreign debt over the next few years, provided that the proceeds of external loans are used for high-priority projects. ii I. INTRODUCTION 1. In 1950, a survey mission organized by the International Bank pre- pared a report on the economy of Guatemala. It recommended a six-year develop- ment program calling for an increase in public investment expenditures of Q 60 million. Two-tbirds of this sum was to be financea from domestic sources and the balance of Q 20 million through foreign loans, presumably from the Bank. The report proposed that Q 26 million be spent on roads and port facilities, Q 12 million on electric power, Q 8 million on public health and sanitation projects, 4 8 million on agricultural projects, and smaller amounts on tele- communications and irrigation. It also recommended that a National Economic Council and a Planning Secretariat be established, that the government pursue policies conducive to an expansion of private domestic investment and an in- flux of capital from abroad and that it settle its disputes with the United Fruit Company and the International Railways of Central America (IRCA) through an amicable renegotiation of their long-tem contracts. 2. The mission report was submitted to the krbenz government in July, 1951. It was briefly discussed by the National Economic Council which had been established prior to the formal submission of the report, and studied in the course of the following three months by a "Citizens' Committee" nomi- nated by the president. The committee, which consisted of representatives of the Chamber of Commerce, the Association of kgricultural Producers, labor unions and the government, endorsed all its recommendations with the exception of those for the improvement of relations with the American-owned corporations. The government acted on a few of the major recommendations of the survey re- port. It started to construct a new highway linking Guatemala City with Puerto Barrios, the country's sole seaport on the Atlantic Coast, previously accessible oily by rail; it enacted legislation compelling insurance companies to invest +hAr reserves in the country; and it adopted various fiscal measures suggested by a representative of the Bank who had been stationed temporarily in Guatemala following submission of the report. 3. In the course of 1952 and 1953 it became obvious, however, that the Arbenz government did not intend to adopt the recommendations of the Bank mission in full, and that its economic policies would follow an extremist line. A series of laws was enacted fostering the "social revolution" to which the Arbens government had devoted itself: a limitation of residential rents to 7% annually of the assessed value of real property; a limitation of the sale price of building lots to 110% of the original purchase price, ir- respective of the duration of ownership; and last but not least, an agrarian reform law providing for the expropriation of unused land. 4. More important than the new legislation infringing upon property rights was the capricious administration of both old and new laws. Labor courts established under a 1947 law invariably found in favor of employees and labor unions even when the employers appeared to have the law on their side. The government openly supported comiunist-controlled labor union, to the point of threatening employers with expropriation if they did not accede to union demands. It became virtually impossible to dispossess a tenant who failed to pay rent. The greatest abuses, however,.occurred in. the administration of the land reform law. When the law was enacted, few - 2 - faults could be found with its provisions. It authorized expropriation of unused tracts only, provided for indemnification of the landowners with long- term bonds -- though at low assessment values instead of the market value -- and in general afforded what appeared to be adequate protection to landowners. In the first few months after the enactment of the law, more or less orderly procedures were followed. But with the encouragement of political leaders and government officials, the land reform program soon became dominated by arbitrarinQss and mob violence. Estates were invaded, forests and fields were burned, cattle were stolen and slaughtered, and land under pasture or crops was taken away indiscriminately. The National Farms (Fincas Nacionales) which the previous government had confiscated from German nationals and former President Ubico, and which included some of the country's biggest and best coffee and sugar plantations, were divided among agricultural workers without regard to the economic losses consequent on the breaking up of integrated productive units. The United Fruit Company lost 414,000 acres out of a total estate of 563,000, for which it was offered compensation of W 1,085,000. Al- though the present banana plantations were not affected, the company lost much of the land suitable and set aside for banana farming. However, only 6,000 of the expropriated acres were allocated among 1,600 farmers. 5. The policies of the Arbens government left their mark on Guatemala's economy, not so much by way of permanent or serious injury but rather by way of opportunities foregone and time lost. Their consequences were a slowing down of the growth of the economy, a considerable (though by no means dangerous) increase in the public debt, a rise in the money supply accompanied by a rather mild increase in prices, and a loss of foreign reserves during a period of record foreign exchange earnings. Only the strong balance of payments position and conservative monetury management by the 3anco de Guatemala prevented a major fir.-:ial and economic calamity in the period which culminated with the revolution of June 1954. II. THE GUATEMALAN ECONOMY IN THE LAST FIVE YEARS 6. The Government of Guatemala has changed but the structure of the economy and the problems besetting it remain the same. Guatemala still is an underdeveloped country with all the characteristics of underdevelopment: a low level of per capita production, particularly of the underemployed agricultural population; a high rate of illiteracy; inadequate transportation, power genera- tion, education and health facilities; a shortage of skilled labor and of transferable savings; and an inefficient and cumbersome public administration. These deficiencies are compounded by the small size of the domestic market, which precludes the establishment of manufacturing industries in which econo- mies of scale lower cost; by the distortion of the legal and institutional framework of the economy which the Arbenz government and its predecessor created; and by the inexperience of the new government. Guatemala now has, however, certain advantages which are lacking in some other underdeveloped countries. it has a growing urban middle class and a considerable number of successful entrepreneurs in agriculture and industry who have managerial experience and technical knowledge, and an even larger number of would-be entrepreneurs who lack capital. It has a government committed to a liberal policy of cooperation with domestic capital and anxious to atract foreign capital. -3- It has a sound currency secured by ample gold and exchange reserves, and no exchange restrictions. Its balance of payments prospects are promising even if the exchange proceeds of its coffee exports decline. 7. With slightly less than 3.2 million inhabitants, Guatemala is the most populoas of the Central American countries. The population density is 75 persons per square mile. Since the population is concentrated in the mountainous region in the center of the country - while the lowlands of the Peten are virtually uninhabited - and has been growing at the rate of 3% annually, population pressures in the temperate portions of the country may become a problem in the not too distant future. About two-thirds of the population is Indian; a large majority of these are illiterate and many do not speak Spanish. About 75% of the population is employed in agriculture, a sector which accounts for two-thirds of the gross national product. Because of the high prices of coffee and the expan- sion of cotton production, the share of agriculture in total output has increased in recent years, notwithstanding the avowed aim of the Arbenz government to industrialize the country, and the support and protection that it gave to the wage earners in industry and commerce. The main crops for domestic use are corn, rice, beans, and wheat - the country's staple foods - and cotton. Production of the latter now exceeds domestic requirements and it will become a significant export crop unless the domestic production of cotton textiles expands by the moderniza- tion of existing mills, or the establishment of new ones. The export sector of the economy consists of coffee, which in 1953 accounted for 77% of the value of total exports; bananas; essential oils produced from citronella and lemon grass; chicle; abaca; and tropical woods. Livestock and dairy production have expanded in recent years, but the number of cattle, estimated at over three million in 1953, has declined appreciably in the last 12 months as a result of the iand reform. With the exception of a cement factory which recently has been enlarged, most manufacturing establishments are small and produce consumer goods for the local market. Breweries, distilleries and cigarette factories account for over LO% of the entire industrial production. There are several textile mills, but despite strong protective measures, including the prohibition of competing imports, textile production has in the last five years declined by almost one- fourth. Since the end of the war, total industrial production has expanded by less than 20% and accounts for not more than one-tenth of the national income. Mining activities are confined to quarrying of stone and sand, and the output of two very small lead-zinc mines. ITational Tn-!ome 8. According to estimates prepared by the Banco de Guatemala, the gross national product (UNP) amounted in 1953 to " 558 million, or Q 180 per capita. Consumption expenditures accounted for Q h32 million (77%), government expendi- tures on current acnount for Q 54 million (10%), public investment for Q 23 million (5%), private investment for C 39 million (7%), and the balance of payments surplus on current account for Q 4 million (1%). Estimates of the national accounts for earlier years - which, however, appear to be rather unreliable -- indicate that since 1948 the real national product Ihas increased by less than 3% per year, while prior to that year real income had been rising rapidly. The rise in the GP failed to keep pace with the growth of the popula- tion so that in 1953 per capita income was slightly below that of 1948. Expro- priations under the agrarian reform law, the subsequent suspension of expropria- tion proceedings and, in many instances de facto restoration of rural property to its previous ownerst the decline in public investmeit expenditures after the June revolution, and the curtailment of private investment both before and after the revolution probably resulted in a further decline in income in 1954. 9. It is difficult to find a satisfactory explanation for the stagnation in real per capita Income in the last five years, a period during which Guatemala's terms of trade improved by more than 80% (and thus alone raised the real GNP by 12%), and most Latin American countries with equally favorable external conditions recorded significant gains in per capita income. The high rate of population growth itself is partly responsible; in part, the stagnation was probably due to the relatively low level of total domestic investment, with private investment fluctuating below 6% and 8% of GNP, and public investment rising from an average of 3% between 1948 and 1950, to 4% in the last three years. The reluctance of the private sector to expand investment may te explained by the unfavorable political conditions, while the failure of government investment to bring about a rise in per capita income may be attributed to the fact that several major development projects are still under construction, It appears also likely that large "leakages" - of inefficiency and corruption - occurred in the flow of public investment expenditures. Moreovcr, because of the government's policies, the stimulating effects which increased public investment normally has on private directly-productive investment, did not materialize. Although some public facilities such as roads, water systems, hospitals, etc. have been improved, these improvements did not induce an expansion of private investment because of the antagonistic attitude of government toward producers in agricult-re and industry. 10. It may also be surmised that private savings (and investment) were adversely affected by the redistribution of income -wich took place in the last few years: the income of urban and, to a lesser extent, of rural rage earnero expanded rhlle entrepreneurial income declined. Moreover, the economy had to "do without" a significant proportion of private savings which accumulated abroad. According to U.S. stat-Itcs, holdings of dollar balances of Guatemalan "business and individuals" rose by $15 million between 19h8 and 1953, and Guatemalan scarces estimate the accumulation of private balances held abroad - in Yexico as well as the U.S. -- at a much higher figure. Public Finance 11. Between July 198 and June 195L, government receipts rose from Q 6.1 million to Q 71.1 million, while expenditures increased from Q b9.1 million to Q 82.5 million. Nuring the same period, the government debt (excluding the defaulted sterling debt of f 427,000 - see paragraph 19 below) inc:--ased from Q 2.9 million to Q 33.b million, and the indebtedness of state fin ncial institutions rose from Q 0.3 million to Q 8.0 million. Between 197 and the end of 1952 the fiscal operations of the government were reasonably conserva- tive. Government disbursements proper, both for current expenditures and public works, were met out of fiscal receipts and the government incurred debt only to finance the Production Development Institute (Instituto de Famento de la Produccibn -- INFOP), to increase the resources of the National !!ortgage Bank, and to pay for some extraordinary (though not necessarily very productive) outlays such as the construction of low-cost housing projects and of a stadium. Beginning in 1953, however, the government, disregarding the mission's recom- mendations, embarked or. a Q 20 million development progran financed through the -5- sale of 5% 20-year bonds to the central bank. As a result of this operation, the government debt rose from Q 14.7 million to C 33.4 million in the course of the fiscal year 1953-54. These figures do not include Q 2.0 million and Q 7.8 million respectively of 3% Agrarian Reform bonds, issued by the government as indemnity payments for expropriated land but which virtually all landowners affected by the land reform refused to accept. All but Q 200,000 worth of the bonds are still held by the goverment. Since the land reform program has been suspended and it is lil- 1 that most of the land will be returned to the former owners, the bulk of the bond issue will be cancelled. 12. The tax receipts of the government are relatively low. In 1952-53, they accounted for less than 10% of the GNP; in the current fiscal year they might exceed 11% because of the imposition of "emergency" taxes in October 1954. (See paragraph 36 below). Import and export duties are the principal source of tax revenue; in the last few years they accounted for about two- thirds of total tax receipts. Import duties are generally high. In 1952 they equalled 27% of the c.i.f. value of imports; in 1953, when the duty on a large number of articles was raised to give additional protection to domestic products and to provide funds for the amortization of the new bond issue, they exceeded 30% of the value of imports. The tax burden on imports (as well as exports) was increased further by the imposition in 1953 of a 6% "port surcharge" on all levies on imports and exports. The proceeds of this surcharge were assigned for the amortization of the Development Bond issue. Export duties, which until 1950 were relatively unimportant, yielded in the fiscal year 1953-54 more than Q 10 million, and may bring in as much as Q 22 million in the current fiscal year. The most important such duty is the coffee eport tax which is levied on a sliding scale. It rises from Q 4 per quintall/lof coffee at a New York price of $30 to $40, to Q 8 at a price between $55 and SW). If the price exceeds $60 per quintal the tax is Q 8 plus 25% of the excess over 60. The tax rate for each crop year is determined on the basis of the average quotation for Guatemalan or Colombian coffee at the New York coffee exchange during the month of May preceding the crop year. In 1953-54 the tax, including minor surcharges, amounted to Q 8.65 per quintal. For the current crop year it has been raised to Q 18.35, including an emergency surcharge of Q 3. 13. Other important sources of receipts are liquor and tobacco taxes (from which revenue, including assigned revenue, of Q 12.5 million was derived in 1953), stamp taxes (Q 3.7 million), and a progressive business profits tax imposed on non-agricultural business income (Q 4.3). There is no personal income tax although an income tax law has been under discussion for many years. The new government has announced that it will submit an income tax proposal to the National Assembly next year, but because of the opposition of the politi- cally influential professional groups of lawyers, doctors, etc., its passage does not seem assured. 14. The only noteworthy occurrence on the expenditure side was the expenditure, between January 1953 and June 1954, of Q 16.25 million of 1/ One quintal - 100 Spanish lbs = 101.4 English lbs. -6- extraordinary receipts derived from the issue of development bonds. Under the terms of the development plan of 1952 these funds were to be used to complete the highway from Guatemala City to Puerto Barrios, to finance the construction of the Port of Santo Tomis, and to build a hydro-electric plant with a generating capacity of 20,000 kw. However, none of these projects has been completed and only one, the Port of Santo Tombs, being built by Morrison- Knudson, is nearing completion. When the Atlantic Highway was begun in 1951, it was hailed as the "road to freedom" (from the country's exploitation by the American-owned railroad), but only a small portion has so far been constructed and surfacing has not even been started. The hydro-electric plant has not gone beyond the planning stage and its future is uncertain (see paragraph 47 below). The rapid disbursement of the borrowed funds is accounted for to the extent of Q 5 million by the purchase of military equipUentt in Zurope in the spring of 1954. Public Debt 15. The public debt, including the debts of the government, municipali- ties, and government financial institutions amounted at the end of the fiscal year 1953-5& to Q 46.4 million, which is less than one year's revenue. This total included bonds of 4 30.2 million, issued by the government(Q 18.2 million), the City of Guatemala (Q 3.9 million), the National Mortgage Bank (Q 6.3 million) and INFOP (Q 1.8 million). The remainder consisted of bank debts, held by the National Mortgage Bank, of the government (Q 3.9 million), the City of Guatemala (Q 0.8 million) and other municipalities (Q 0.1 million), a floating debt of Q 9.6 million, and "various debts of varying maturities (Q 1.7 million). The bank debts represent in part a contingent liability of the government arising out of the financing of low-cost housing projects. Part of ths debt was incurred for the construction of a sports stadium; the retirement of this debt has recently been assured by setting up an amortiza- tion fund to which certain tax receipts have been assigned. The floating debt, which in the last few years fluctuated around Q 5 million, was unusually high at the end of June, reflecting the delay in payments of salaries, wages, and supply bills caused by the revolution (see paragraph 32 below). 16. Although the funded debt has increased sharply in recent years, its present volume does not endanger the country's fiscal stability. Interest and amortization payments for most of the government and municipal issues are secured by the assignment of certain tax proceeds to sinking funds; in the case of those issues which are not serviced through assigned taxes the cenbral bank makes rigid and strict use of its authority as fiscal agent, deducting daily quotas from the General Fund of the Treasury and allocating them to the sinking funds. (The same system is used for the retirement of short-term Treasury bills issued to offset seasonal variations in tax receipts.) Sinking fund provisions are ample. Assignments of tax receipts to the sinking fund of the 20-year development bonds Q 16.25 million of which had been issued by the end of the fiscal year 1953-54s were s,ifficient to retire Q 4.3 million in one year. The central bank estimates that the entire issue will be retired within four years. The Banco de Guatemala has also continued to accumulate, through daily allocations from the General Fund, a sinking fund of over Q L00,000 for the retirement of Agrarian Reform bonds, al.though, as already mentioned, almost the entire issue is still held by the Treasury. The -7- bonds issued by the National Mortgage Bank and INFOP are also regularly ser- viced and guaranteed by the government. The government's development bonds, most of the municipal bonds, and one issue of tha bonds of the mortgage bank bear 5% interest per year; two issues of the N.tional Mortgage bank and INFOP sold especially to insurance companies as compulsory investment of reserves for policies written in U.S. dollars, and a small issue of the City of Guatemala, carry a 4% coupon; one issue of mortgage bank bonds pays 3, and the interest on short-term Treasury notes is 2%. 17. Q 25.0 million of the total of Q 30.2 million of bonds outstanding on June 30, 1954, was held by the central bank, either in its own name or for the account of sinking funds or the Securities Regulation Fund; the latter is an open-market-operations fund established under the provisions of the central bank law and receives a certain part of the bank's net income every year. The only bonds held outside the central bank are forced holdings of insurance com- panies (Q 3.9 million), pur,hases of other banks (Q 0.3 million), and of the public (Q 1.0 million). Insurance companies were required by a 1951 law to invest 40% of their technical reserves in governm'.nt bonds. Since foreign companies had written policies in U.S. dollars, 011s incurring dollar lia- bilities, they refused to accept quetzal bonds. After lengthy negotiations an agreement was reached under which the insurance companies accepted 4% bonds issued by the National hortgage Bank and INFOP and secured by the cen- tral bank's current account deposit with the Chase National Bank in New York which, in turn, was secured by a pledge of gold held at the Federal Reserve Bank of New York. Because of other provisions of the law regulating insurance companies, the foreign companies stopped issuing new policies in 1952. But since premium payments on outstanding policies are still accumulating, the companies have had to increase their bond purchases every year and at present Q 2.8 million of the gold-secured bonds are outstanding. Domestic companies hold Q 1.1 million of 5% municipal and mortgage bank bonds. 18. The Banco de Guatemala, acting either on behalf of the Securities Regulation Fund, or on its own account, will purchase at any time government, government-guaranteed, and municipal bonds at par plus accrued interest. In consequence, the holders of the bonds consider them equivalent to interest- bearing demand deposits and sell and re-purchase them whenever it is con- venient. In spite of this, the number of bcnd purchasers is small and the amount of bonds in the hands of the public is insignificant -- because of the potential investors' distrust of government in general and of the Arbenz government in particular. To some extent, the absence of a bond market is also due to a virtually complete lack of publicity; there is the distinct possibility that the public can be persuaded to buy -- and hold -- government bonds if confidence in the new government increases and sales efforts are properly organised. Foreign Debt 19. The foreign debt of Guatemala consisting of various issues of dollar and sterling bonds totalling 401,264,000 and E1,490,620, respectively, was -8- called and redee,ied at par in 194.t, except for the sum of Z 427,O00 which the government has refused to recognize. Payment of the foreign debt was announced in July 19L4, shortly before the fall of the Ubico regime in October of that year. The new government set January 15, 1945 as a deadline for the submission of all sterling bonds, and declared that all bonds not submitted for redemption would be presumed to be held by Ge;man enemy-aliens and therefore invalidated. Although the British authorities, at the request of the British Council of Foreign Bondholders, protested this procedure and asked for an extension of the deadline, the Guatemalan government refused to extend it. The matter was regularly brought to the government's notice, but these representations were ignored. In the last few years, the British Council has established that virtually all British-owned bonds were in fact redeemed in 1944 and that the following amounts are still held in Great Britain and abroad: Switzerland Z 150,000 Belgium 180,000 Italy 44,700 Netherlands 4,000 France & Gr. Britain (mostly France) 29,000 Vatican 3,40o Undetermined 16,900 Total z 427,000 U.S. dollar equivalent ... $1,195,000 20. In November 1954 the British Minister in Guatemala asked the new government of Castillo Armas to redeem the debt, a request supported by repre- sentatives of the countries in which bonds are held. The Guatemalan authori- ties promised to give the matter careful consideration, and it now appears possible that a settlement may be reached. Money, Banking and Insurance 21. The Guatemalan quetzal is a freely convertible currency which has been at par with the U.S. dollar since 1924. It is issued by the Banco de Guatemala which was established in 1966, with the technical assistance of the Federal Reserve Board, as an autonomous government agency. Its policies are determined by the onetary-Board, composed of the president and the vice- president of the Banco, the Ministers of Economy and Finance, a representative of the University and a representative of the commercial banks. Under the provisions of the monetary law, the issue of currency is not directly related to the level of gold and foreign exchange reserves, but central bank policies affecting the total money supply (demand deposits and currency in circulation) are made dependent on the volume of foreign exchange sales and thus on the movements in the balance of payments. Under some conditions, e.g. if a foreign exchange loss of certain proportions occurs, the central bank has the right to -9- propose to the governent the imposition of exchange restrictions, but it has never made use of this authority. The Banco exercises strict control over the banking system. Commercial banks are required to maintain in the central bank deposits equivalent to 25% of their demand deposits and must offer all foreign exchange to it. 22. Since 1948, the money supply has increased from Q 52 to Q 80 million, or by almost one-half. The rise took the form, almost exclusively, of an increase in the currency issue which expanded from Q 33 million to Q 55 million; and accounted, in the fall of 1954, for 72% of the money supply, while demand deposits of the public stood at Q 25 million, compared with : 19 million six years before. If these figures are related to the movements in foreign exchangc holdings of the banking system, it becomes evident that the expansion of the money supply was caused entirely by the long-term lending and rediscount operations of the central bank. The statistics also show, however, that the central bank has acted with restraint and kept the credit expansion well within the limits of the balance of payments movements. Even after the substantial capital flight which took place before and during the June revolution, gold and exchange reserves amounted to 47% of the money supply and were equal to the value of imports over a period of four months. The central bank could not always resist the pressures for sxpansion of credit to the goverment and to the banking system, particularly to the government banks. But it , . -* managed to compensate for the extension of credit by the accumulation of sinking funds in the case of public loans, and the prompt retirement of discount privileges on credits granted to the banks. 23. Prices, both wholesale and retail, have been reasonably stable in the last few years. Between 19h8 and 1953, wholesale prices rose by 12% and retail prices by 21%, compared with 5% and 11%, respectively, in the United States. The absence of inflationary pressures was largely the result of the cautious monetary management of the central bank, but it was also due to the fact that increased money income generally to a large extent, and in certain conditions entirely, "spills over" into additional import demand, and that a considerable portion of an expansion in the money supply is extinguished by foreign exchange sales. In the last 12 months, presumably as a direct consequence of the loans made by the National Agrarian Bank, a considerable price rise occurred, with the wholesale and the consumer price indices advancing 8% between September 1953 and September 1954. But because of the decline in public works expendi- tures and the halting of the expansion of bank credit (beyond the limits of strictly seasonal requirements), price increases have come to an end. There is, however, the possibility of a further price increase within the next few months, if the corn crop turns out to be insufficient, as forecast by some observers. 24. The banking system consists of two private local banks, a branch of the Bank of London and South America, and three government-owned institutions: the National Mortgage Bank which has been in operation for 25 years, the Production Development Institute (Institato de Fomento de la Produccion -- INFOP) established in 198, and the National Agrarian Bank which was founded last year in connection with the land reform. The Bank of London is primarily a foreign exchange bank; its deposits normally are twice as large as its loans and discounts. The Banco Agricola y Mercantil, one of the two private banks, -10- was, prior to 1946, the central bank. It engages primarily in the financing of coffee production and of imports; it supplements its own resources through substantial discount operations with the Banco de Guatemala. The Banco de Occidente, the other private bank, is a provincial bank with its main office in Quotzaltcnango, the second largest ton-n of Guatemala, and a branch in the capital. 25. There has been no significant change in the operations of the private banks. The activities of the government banks, however, have expanded continuously in the last few years. The National Mortgage Bank, which operates an insurance department, a savings plan with a lottery (capitalizaci6n' and a pawn shop, has been financed in part by the sale of bonds to the Banco de Guatemala and through rediscount operations. It is the most important insti- tutional source of mortgage credit and although its last balance sheet shows Q 3.9 million as overdue, its operations are considered conservative and on the whole sound. When INFOP was established, it was expected to become the main source of agricultural and industrial development capital, but has fulfilled this function to a very limited extent only. It has acquired a large number of agricultural and industrial enterprises and operated them with varying success. Recently, it has become more and more subject to political influence and pressure and has been forced to make loans to friends and followers of Arbens. It financed the production of cotton and guaranteed a minimum price above the world market price, then had to sell the excess over local requirements at a loss. It has been reported that the weeding out of its loan and investment portfolios may involve a loss of Q 2 million. The National Agrarian Bank began operations in October of last year. By June 1954 it had made approxi- mately 45,000 loans to small agricultural producers who obtained land under the agrarian reform. Because of an almost complete lack of supervision of the borrowers, nd the suspension of the land reform, a very large proportion of the loans must be considered lost. 26. The volume of transferable savings generated in the economy is insignificant. Total savings and time deposits amounted to Q 2.9 million at the end of September 1954; the volume has been increasing slightly in recent years, particularly after January 1, 1953, when the rate of interest on small savings deposits in goverment banks was raised to 5% per year. Savings in the form of life insurance purchases rose considerably, however, in spite of the withdrawal of foreign companies. Premium payments rose from Q 740,000 in 1948 to Q 2,071,000 in 1952, and Q 2,643tooo in 1953. Insurance companies have become an important source of real estate financing and are the only institutional buyers of government and government-guaranteed bonds. 27. The maximum rate of interest on bank loans was raised by the Banco de Guatemala in January 1953 from 6% to 8% per year (plus 1% commission). Since the Banco de Guatemala has no jurisdiction over interest rates on credit operations outside the banking system, the legal maximum rate of 6% continues for private credit. It is impossible, however, to enforce rate restzictions on private transactions and-rates.of 12 or more are considered.normal. Balance of Payments 28. After a large deficit in 1949, the balance of payments of Guatemala -11- showed a surplus on current account throughout the last four years. Gross foreign exchange earnings of Guatemala rose from ' 70 million in 1949 to Q 103 million in 1953, while imports of goods and services expanded from Q 78 to Q 99 million; the surpluses between 1950 and 1953 totalled Q 27 million. Exchange reserves, however, increased in the same period by only Q 4.2 million; the remainder was accounted for by recorded adverse capital movements (Q 6.3 million) and by errors and omissions which, in conjunction with U.S. data on Guatemalan private holdings of dollar balances, must be interpreted as move- ments of flight capital (Q 16.6 million). 29. The increase in exchange earnings was almost entirely due to the rise in coffee prices, although because of substantial advance sales during a period of rising prices Guatemala actually gained less than most other coffee countries from the boom conditions in the coffee market. With an export volume fluctuating around ivillion qLintals, sales preceeds rose.om 36 million in the 1948-49 crop year to ii 80 million in l9r3-5l. Exports of bananas, the second largest export commodity, fluctuated between 7.1 million and 3.7 million stems per year because of periodic blowdowns of banana planta- tions. The United Fruit Company accounts for 70-90% of banana exports. Exports of chicle (from the Pet6n forests), valued at .., 2 million in 1952, disappeared entirely in 1953 because of labor troubles, but were resumed in 1954. Receipts from the tourist trade, which reached Q 2.4 million in 1950, have declined in recent years and have been more than offset by travel expenditures of Guatemalans abroad. 30. There has been no significant change in the volume and composition of merchandise imports in the last five years. Food imports are relatively unimportant. Guatemala imports in substantial quantities only wheat flour, lard, ane dairy products, particularly dried milk. Among industrial products, the most important imports are textiles, which account for almost 10% of the total value, motor vehicles and all kinds of machinery and equipment. Pur- chases of gasoline have increased in recent years, reflecting the increased use of motor vehicles. 31. In the last five years, anywhere from 77-92% of the total of Guatemalan exports was shipped to the United States. The only other export market of some consequence has been Western Europe which, before the war, used to purchase appreciable quantities of Guatemalan coffee. In the last two years exports to Western Europe have expanded again; in 1953 they came to almost 20% of total exports. Exports to Latin America, although still small, have increased considerably in the last two years because of a free trade agreement with El Salvador concluded in 1951, which permits the entry into El Salvador, free of duty, of some Guatemalan manufactured articles. The U.S. share in Guatemalan imports has declined in recent years, but it still comes to almost two-thirds of total imports. Mexico and other countries in Central America and the Caribbean account for 10-14% of Guatemalan imports, as do the countries of 1estern Europe whose products have replaced some imports from the United States in recent years. -12- III. DEVELOPMEITS APMER THE JUNE REVOLUTION Fiscal Problems 32. When the revolutionary junta took over the government in early July 1954 it found the public administration in a state of confusion and disinte- gration. The new government's composition changed several times until Colonel Castillo Armas was inaugurated as the constitutionally elected President in early November 1954, for a tem ending in March 1960. In July the new govern- ment was acutely embarrassed by a shortage of funds in the Treasury; there was only Q 2 million in the General Fund of the government - the equivalent of less than two weeks' operating expenditures -- and the flow of tax receipts was disrupted. A low treasury balance at the beginning of July is a normal occurrence in the fiscal operations of the Guatemalan Government. The bulk of the export taxes is collected during the coffee export season from November to April; before November expenditures always exceed receipts. Likewise, at the end of the fiscal year large payments are made, mainly for the retirement of short-term borrowings from the central bank which, according to the Guatemalan constitution, must be repaid in the fiscal year in which they are incurred. The government also was taken aback by the large amount of the public debt and particularly by the size of the floating debt, which by the end of June nad reached Q 9.6 million. A high volume of floating debt at the end of the fiscal year is also not unusual, however. It consists to a large extent of salary and wage payments for June for which funds have been allocated but not disbursed. 33. After some delay the fiscal administration was normalized. The backlog of wages and salaries was paid, largely from the proceeds of short- term borrowing operations from the central bank, which under the constitution are permitted in an amount up to 10% of the estimated budget receipts. The disorganization of the tax administration; the low level of imports and the corresponding reduction in import duties; and an unusually late coffee crop, due to adverse weather conditions, which curtailed the flow of export taxes forced the government, despite the provisions of the (suspended) constitution, to increase its tax-anticipation borrowing from the central bank to 15% of estimated budget receipts, and by the end of October tax-anticipation borrow- ing had reached Q 9.9 million. 34. The government was reluctant, however, to draw down the remainder of the Q 20 million development bond issue, of which Q 3.75 million was still available. It therefore suspended or curtailed a large proportion of the pub- lic works program which the previous government had started. This, together with the delay in the coffee harvest, brought about a sharp rise in unemploy- ment, particularly in the construction industry which during the dry period of the fall and winter normally employs a large number of people. Unemployment has apparently been especially severe in Guatemala City where, according to newspaper estimates, more than 20,000 persons are out of work. There are also -13- other centers of unemployment in the towns on the Atlantic Coast, where con- struction of the Guatemala City-Puerto Barrios highway has been curtailed, and in some towns on the Pacific slope. When the government became aware of the potential political dangers of large-scale unemployment and the resulting complaints of the business community, and after it was satisfied that the revenues from assigned taxes would be sufficient to amortize the development bond issue, it decided to use the remainder of the devGlopment loan and draw down an additional Q 2 million, leaving (at the middle of November) an unused margin of Q 1.75 million. Tax receipts and borrowings were used to pay off a large part of the floating debt, and by mid-November the floating debt had declined from Q 9.6 million to an estimated Q 4.5 million. A revision of all outstanding claims against the government was ordered and all creditors were asked to submit their claims and supporting documents by November 13. Since the Minister of Finance (who had been Comptroller General under the tightfisted regime of General Ubico) considers the settlement of the government's short- term debts his primary task - and virtually a personal obligation - it appears likely that the floating debt will be retired, or at least substan- tially reduced, by the end of the fiscal year. 35. The financial stringency of the government was aggravated by the repeal of two tax laws. Shortly after the June 1954 revolution the goverment decreed the abolition of the import duty of 20 cents per gallon on gasoline. This tax had yielded Q 4 million in the previous year. It was abolished in the belief that its elimination would substantially reduce the cost of trans- portation and thus help to bring down the cost of living. Actually there was no noticeable decline in transportation costs, and in early October a tax of 10 cents per gallon was re-introduced, leaving the government with a net loss in re.cnue of Q 2 million. The additional import duties imposed on a long list of co-.irodities in December 1952 were also abolished; the proceeds of these increases had been assigned to the amortization fund of the development bonds. This lowering of import duties was acclaimed as a relief measure by the business community which had been complaining about the low volume of sales, blaming it on the high duties. On the other hand, many local producers were adversely aifected by the price competition of imported goods and were forced to curtail or suspend their operations. Tnerefore, the government decided to re-impose arie- of the high dutias ad a new list of tariff increases waa announced. .- I - - - .c. S : 36. Realizing, perhaps e%en over-estimating, its financial difficulties, the government appealed for voluntary contributions to assist in the recon- struction of the country, to pay the members of the Liberation Army of Col. Castillo Armas, and to indemnify the victims of the civil war. However, the results of the appeal were disappointing; less than Q 100,000 was collected. When it became clear that the government could not rely on voluntary contri- butions it issued, in mid-October, a decree imposing a series of emergency taxes. It announced a surcharge of Q 3 per quintal on the coffee export tax, raising the total tax on coffee to Q 18.35 per quintal, or almost 30% of the prevailing export price. It also imposed an export duty of Q 2 per quintal on cotton exports. It doubled the property tax from Q 3 to Q 6 per thousand of assessed valuation and introduced a 1% tax on the gross capital (balance sheet total) of business enterprises. It also added several minor taxes, among them a tax of Q 1 per head of cattle for herds of 100 and over, an income tax equivalent to one day's salary for employees paid Q 100 or more per month, and a 10% tax on the average monthly income of self-employed professionals such as doctors, lawyers and architects. Proceeds of all these taxes were estimated at Q 6.2 million, and public assurances were given that the taxes would be levied for one year only, that in the meantime the entire fiscal structure would be revised, and that a general income tax would be introduced. Out of the estimated tax proceeds Q 1.5 million was assigned to pay the members of the Liberation Army and to make indemnity payments to victims of the June revolu- tion, Q 1 million for public health measures, Q 1 million for low-cost houlsing projects, Q 1 million for road repairs, and Q 1.7 million for "other extraordi- nary expenditures" which include the employment of additional frontier guards to prevent smuggling across the Mexican and Honduran borders. The reaction of the public to the imposition of new taxes was in general not unfavorable but objections were raised against the provision that the 1% levy on the capital of business enterprises was to be paid before the end of the year. The provisions of the law were later modified to permit financial institutions to deduct bank deposits from their balance sheet total. The allocations of the tax proceeds, except the payments for the Liberation Army, were subsequently combined with the U.S. grant-in-aid program (see paragraph 50, below) and consolidated into the "emergency program". Monetary Disturbances 37. In the last few months of the Arbenz regime, and during and immedi- ately after the June revolution, the banking system and the exchange reserves of the country were under considerable pressure. Short-term assets of Guatemalan business and individuals in the United States, which in the previous year had remained more or less stable around $18 million, rose to $23.5 million by the end of July 1951. At the same time bank deposits in Guatemala declined by Q 8.1 million between March and June, compared with a seasonal decline of approximately Q 2 million in previous years. It is difficult to disentangle the purely seasonal from the abnormal movements during this period. Apparently there was no major capital flight proper; what happened was that exporters did not repatriate their exchange proceeds, while purchases of foreign exchange to pay for imports were high, and rose in July and August after railway traffic between the Atlantic port and Guatemala City was resumed. As a result, the foreign exchange reserves declined sharply from July on. The situation was further aggravated by a delay in coffee shipments caused in part by adverse weather conditions and in part by the lack of interest of American buyers in Guatemalan coffee. Thus, while the seasonal low of exchange reserves is normally reached in October, reserves continued to decline until November 15, 1954 when they hit a low of Q 33.6 million, compared with a seasonal peak of Q 53.6 million in February. 38. During Octobrr and ijovember, 1954, the central bank -ws very concerned about the loss of forLign exchange, particularly since it was at the same time wommitted to advance funds bc tne government tc compen- sate for the seasonal declzne in tax receipts. -However, it resisted - pressures by the government banks to increase their rediscount facilities. The business community and some coffee producers who needed funds to finance the coffee harvest voiced misgivings about the restrictive attitude of the central bank. Some government officials supported the views of importers and coffee -15- growers, and publicly suggested a liberalization of banking legislation. The central bank thereupon asked the International Monetary Fund for advice. An IMF mission supported the position of the central bank that at that time a change in banking legislation was not called for and that for the time being the legitimate credit needs could be met witnout legislation or a fundamental change in bank policy. These views were accepted by the government, and there was no need for immediate action since the exchange crisis had passed. The central bank permitted a slight expansion of bank credit to compensate for the delay in coffee exports and to assist the government in the financing of the coffee harvest of the nationalized farms. The total of additional credit facilities of the central bank was kept below Q 8 million and did not cause any further difficulties since coffee started to move and a gradual backflow of cash and dollar holdings into Guatemalan banks set in. Suspension of Land Reform 39. By far the most significant measure of the new government was the suspension of the agrarian reform immediately after the revolutionary junta took over. The land reform law was not repealed - and in fact President Castillo Armas declared that the objectives of the law were desirable - but the allocation of expropriated land was halted and a revision of all exprop- riation decrees was ordered. The practical effect of these measures was to undo the land reform almost completely since most of the rural workers who had obtained land abandoned it, partly because they were afraid of prosecution for having been associated with political parties of the Arbenz regime, and partly because of the insecurity of their claims to the land: most land- owners had appealed the expropriations and the appeals had not yet been disposed of. The government also repossessed the nationalized firms which had been d.stributed among farm workers, and the tenants on the distributed land reveit,d to the status of hired workers of the government. 40. Contrary to general expectations, the de facto repeal of the land reform met no opposition and apparently caused little resentment. The main reasons for the absence of ar adverse reaction were that the beneficiaries of the program had not yet become used to their new status as landowners, and that a lack of working capital had prevented many of them from making effective use of the land - in spite of the financial assistance which the new National Agrarian Bank had given to 45,000 borrowers. l. The land reform and its subsequent repeal has left Guatemala with two problems. The first and short-term problem is that the production of staple food has appreciably suffered because of the change in ownership -- in many instances twice witAin one crop year - and a shortage of corn and beans may occur toward the end of the crop year. The long-run and more.impor- tant problem is the political impossibility of completely abandoning the land reform movement which obviously has great popular appeal for the large land- less rural population. The plans of the new government have not crystallized as yet. Several members of the cabinet have indicated their belief that the government should divest itself of ownership of the national farms which com- prise some of the best farm land of the country and account for about one- fourth of all coffee production and a substantial proportion of the sugar -16- crop and of the liv3stock holdings. They believe that these farms should be sold to private interests, although it is not clear how such sales could be financed and political favoritia avoided. Other politically influential persons have expressed the belief that, prior to any final disposition of the nationalized farms, the original expropriation proceedings should be reviewed with the thought that some of the fams might have to be returned to their former owners who had been held to be German enemy-aliens under too broad an interpretation of the expropriation law. The outcome of a case now pending at the International Court in The Hague may have an important bearing on the government's policy in this matter. As for assistance to landless rural workers, the government is now thinking about some form of colonization or settlement scheme under which it would provide land, credit and technical supervision to settlers in hitherto unpopualated areas and which would involve the construction of access and feeder roads. As a first step in this direc- tion, the government has asked FOA for technical assistance in the field of agricultural credit and for the reorganization of the agency administering the land reform. Government Attitude toward Business 42. The government has also given private assurances to its political supporters that it will revise those laws enacted by previous governments which hamper agricultural and industrial production and impede the flow of private investment. The laws placing a ceiling on rents of residential properties and limiting the price of building lots are to be repealed, cer- tain onerous provisions of the labor law are to be revised and the administra- tion of the labor law, which has been criticized more than the provisions of the law itself, is to be improved. 43. In general it is fair to say that the government is taking a liberal attitude toward these problems and prefers that the conflicting views and interests of the various elements of the economy be reconciled by direct discussion and negotiation between those elements rather than by government intervention. Partly because of its inexperience and partly also because it wants to avoid political dissatisfaction and unrest, it has not yet adopted a firm policy and, as the example of the sequence of tax repeals and the im- position of new taxes shows, has occasionally acted at cross purposes. The business community and landed interests have shown some impatience and the government has been under pressure from its right wing to take a strong stand, particularly in the field of labor-management relations. 44. There has been no labor trouble under the new government. Labor unions, which were the most important supporters of the Arbenz regime, have been ordered to reorganize and to elect officials free of any connection with the old leftist political parties. This process apparently has been success- ful so far and several unions have been certified as authorized bargaining agents. -17- Foreign Companies *5. -hli, the kAgh expectations rhidi came in thewkc of thc rcrclution have given way to an attitude or hopeful but watchful waiting on the part of domestic enterprise, the foreign companies operating in Guatemala have openly thrown their support to the new government. The United Fruit Company has reached an agreement with the government regarding their properties in the Pacific Coast region, the Cia. Agricola in Tiquisate. Both the United Fruit Company and the government were anxious to arrive at a settlement as quickly as possible, in order to strengthen the government politically and enable it to receive the income tax due from the Cia. Agricola for 1954, amounting to about $r700-750,000. The agreement also provides for the company to donate to the government without compensation, some 100-120,000 acres of land suitable for the production of corn, cotton, and other crops. Most of this land has been cleared, numerous wells have been drilled, electric power is available, and some irrigation canals have been built (the company has not been providing irrigation to this area so long as the status was in controversy, but would probably be willing and able to do so under proper arrangements for payment). The land in question had largely been taken over by squatters and the company and the government considered that it would be difficult or politically unwise to dispel them. In effect, then, the agreement gives this land to the government, which pre- sumably will confirm the title of the present holders under appropriate new regulations, in return for cancelling the previous expropriation of other United Fruit properties in the Pacific region. 46. The issues involved in reaching a settlement on the company's Atlantic coast properties in Bananera are more complicated. A much greater investmert will be required for flood-fallowing and drainage of large areas in order to get these properties back into efficient production. The company wants certain guarprtees from the government, and especially exemptions from duties for necessary equipment, before they would feel justified in going ahead. They are now making financial and technical estimates for these longer term investments, which they estimate would be on the order of %20-25 million over five or six years. They expect, however, to be able to conclude a contract with the governent before the end of the current year. Since they mada no profit on these operations in 1956, no income tax liability is involved, 47. The Fruit Coripany-controlled International Railways of Central America (IRCA), which hitherto have been the main adversary of communist- controlled and government-supported labor unions, likewise has offered its cooperation to the new government, particularly with regard to the operation of the new Atlantic seaport of Santo Tomfs which will be completed sometime next year. According to the railway company, the Arbenz government has never given an indication of how the port was to be operated and how it was to be connected with the port terminal of the railway in Puerto Barrios which IRCA operates. Since both seaports will be accessible from Guatemala City by rail only for at least the next few years - until the highway to the Atlantic is completed - IRCA would like to run the new port, presumably under some rental or management agreement with the goverment. So far, however, no concrete proposals have been made. - 18 - 48. Emprosa El4ctrica de Guatemala, the local subsidiary of American & Foreign Powero,has come forward with a proposal to expand its generating capacity by 25,000 kw. This is to be doie throu-h an investment of about .20 million for the expansion of an existing thermo plant by 7,500 kw., and as a second phase, the construction of two hydro stations of approxi- mately 8,750 kw. each. The power co,mpany is expecting to finance the ex- pansion program in part by a loan from the Export-Import Bank, the appli- cation for which has been dormant for some time. The Government has ap- proved the Empresa's irogram and has ur:.ed the company to start it as soon as possible. With this decision, the Government has apparently abandoned a 20,000 kw hydro project (a carryover from the previous reg,ime) which w-,uld have diverted a large part of the water resources now used to generate power for Empresa. 49. American oil companies have renewed their interest in oil ex- ploraion in Guatemala. Immeaiately after World War II Shell and Texaco were enga,ed in exploratory work and test drilling in the region around Lake Izabal and in the Pet6n. But the Gu,;atemalan petroleum law which was passed in 1949 contains provisions which rake it pracically impossible for foreign companies to work in Guatemala, and when a-l chances for a re- vision of the law disappeared aurin6 the Arbenz regime the companies left. It nas now been reported that several responsible oil companies - and a host of promoters of doubtful responsibility -- have approached the Castillo Armas rovernment with requests for oil leases, in the hope that the law will be revised to make ex lorations possible. Several companies have pro- posed to the government the setting up of oil refineries which are to use imported crude oil wiile they carry out explorations. The government has appointed a special coT-mittee to prepare a revision of the petroleum law, and has Sou,ht the aavice of three experts, two Venezuelans and one American, on the drafting of new legislation. The uraft of a new law has been publishe-, presumatly to determine the reaction of the oil com- panies. Apparently further changes may have to be made to obtain a bill satisfactory bot.h to the oil companies and the government. 50. American insurance companies have i;.dicated their desire to re- sume ozer. acdiTs in auatemala. PAkmerican Life of New Orleans submitted a memorandum to the government sugges ing a series of changes in those pro- visions of the insurance law which the companies consider the major impedi- ments to successful operation in the country. They do not object to compul- sory invrstmen_t in Guatemala of the reserves against policies written tnere, but ask for greater freedom in the choice of investment. The com- panies are confident that their proposals will be accepted and PanAmerican Life has alreay resumed operatioi;s. -19- U.S. Grant-In-Aid Program 5l. The U.S. Government has announced an allocation of $6,425,000 for economic and financial assistance to Guatemala. Of this total, $l.425,000 is a contribution from a special appropriation for the completion of the Inter- American Highway, while the balance has been allocated by the Foreign Opera- tions Administration. The U.S. contribution for the completion of the Inter- American Highway is to be used to connect the present terminal point of the highway near Huehuetenango in the Guatemalan Highlands with the Mexican border. The Guatemalan Government is to contribute an amount equal to one-half of the U.S. share, i.e. Q 712,000. The FOA grants have been allocated as follows: $500,000 for the completion of the Roosevelt Hospital in Guatemala City -- under construction during and after the war with the assistance of the U.S. Government but not yet completed by the Guatemalan authorities; $1,300,000 for technical assistance and $3,200,000 for general economic aid. The Guatemalan authorities and the FQA ission have reached an agreement to use the bulk of the economic aid for the improvement of a highway on the Pacific Coast which later on is to be extended to connect with the IBRD-financed coastal highway in El Salvador. The connection between the port of Champerico and the existing high- way also will be financed with these funds. The Guatemalan Government must con- tribute one-third of the construction cost. The remainder of the economic aid is to be used for smaller public works projects, probably to improve the water supply of rural municipalities. A small proportion of the technical assistance allocation is to be used for a rural school construction program to be tied in with a general program of technical assistance in the field of education. A relatively large proportion of the technical assistance allocation is likely to be used up by fellowship grants for studies in the United States. 52. The original intention of the Guatemalan Government was to use the American aid largely for housing and local improvement schemes in several municipalities of the country primarily in the areas where sympathy for the Arbens regime had been strong. But since FOA requires a separate project agreement for every scheme and their processing would presumably cause delays, it was decided to concentrate the allocation of the economic aid on one major project, i.e., the Pacific highray, already under construction. National Council of Economic Flanning 53. The preoccupation with immediate political problems and the frequent changes in the composition of the government have prevented the formulation of economic policies and preparation of an economic program. In order to remedy this situation, of which the public had been critical, the government decided at the end of October to set up a National Council of Economic Planning (Consejo Nacional de Planificaci6n Scon6mica) consisting of the Ministers of Economy, Finance, Communications and Public Works, Agriculture and Public Health, the presidents of the Banco de Guatemala and INFOP, and three represen- tatives of the -resident. At the urging of the Bank mission the decree estab- lishing the Council also provided for a secretariat to perform staff functions for the Council. The President announced that the task of the Council would be the preparation of two plans: an emergency program utilizing the U.S. grants and the proceeds of the special taxes imposed in October, and a five-year -20- development program to be financed through ordinary budget receipta and domestic and foreign loan operations. 5h. The secretariat of the Planning Council was established and partially staffed even before the formal approval of the decree defining the functions of the Council and of the secretariat. Because the use of U.S. funds has already been decided upon and the proceeds of the emergency taxes will have to be used to finance public works already in progress, the secretariat and tho Council will have to devote little time to the formulation of an emergency program. The secretariat has, however, begun a study of the 1950-51 report of the Bank mission to determine which of the recommendations are applicable to present conditions. It will use the program prepared by the Bank mission as a basis for the formulation of its own development plan, and is attempting to complete its investigations in time to have the first phase of the plan included in the budget for the fiscal year 1955-16. 55. The priority requirements for public investment appear to be funda- mentally the same as those suggested by the Bank mission three years ago. Road construction and improvement are now even more urgent tasks than they were then, since the number of motor vehicles in use has increased by more than 20%. Only 200 miles of highway in a network of 2,000 miles of roads have been sur- faced so far, and many important connections - among them those of the Inter- American Highway from the terminal point in the Guatemalan Highlands to the Mexican border, from Zacapa to Guatemala City on the Atlantic side, from the Mexican border to Retalhuleu, and from Chiquimulilla to the Salvadorean border on the Pacific slope - are still to be built or are in need of major improve- ment. The last two projects would complete the Pacific Coastal Highway and thus establish a direct coastal connection between Mexico and Nicaragua. Although the recent increase in generating capacity is considered sufficient to satisfy the power requirements of the City of Guatemala for the next two years, the need to supply power to the areas not serviced by Empresa Elctrica is continuing and growing. To the needs for new hospitals, schools, technical training centers and water works, etc., have been added the needs for low- cost housing construction in Guatemala City and urban centers in the provinces where a large influx of population from rural areas has taken place. In the private sector the most urgent need is for medium- and long-term crellit to finance the purchase of agricultural and industrial machinery. A substantial proportion of industrial production, particularly of textiles, will have to be modernized in order to lower production costs and to meet the competition of imported goods. Road construction now in progress, or planned, along the Pacific coast and in the adjacent piedmont area is opening up large areas of fertile land which cannot be exploited to best advantage unless the require- ments for agricultural machinery and processing equipment (cotton gin, cl presses) are met. IV. PROSPECTS OF THE ECONOMY 56. Given a period of political tranquillity during the next few months, during which the new government may assert itself and convince the business community of its intentions of cooperation and support, the prospects for an expansion of agricultural and industrial production are good. The establishment -21- of reasonably peaceful labor-management relations should go a long way toward enhancing labor productivity both in agriculture and industry. (A local shoe manufacturer reported that since the June revolution his output per man-day has increased by 50%.) 57. The most important condition for an increase in income in excess of the rate of population growth is the maintenance of public investment at an adequate level and an expansion of private investment. The outlook for a rise in private investment is favorable. In the last few years a backlog of readily exploitable investment opportunities in agriculture, industry and housing has accumulated, and even now in spite of a feeling of uncertainty and impatience with the new government, some businessmen are moving ahead with their investment plans. Several local manufacturers of soap, vegetable oil, textiles and plastics already have placed orders for new equipment abroad, and sellers of agricultural machinery report a marked increase in their sales and orders. Local manufac- turers realize that their plants must be modernized in order to lower production cost and to become more competitive with imports. This would permit a gradual reduction of the high protective duties and the abolition of the system of import quotas. Private construction activity is still depress3d but is expected to expand quickly as soon as the legislation limiting rents and the price of building lots is repealed. The tourist industry already is benefitting from the improved political climate. Fiscal Outlook 58. The fiscal outlook for the current financial year appears satisfactory although the lowering of gasoline taxes and the temporary reduction of certain import duties are likely to curtail revenues by Q 2.5 million to Q 3 million, and the budget estimate of import duty collections may turn out to be excessive in view of the low level of imports during the past few months. These short- falls will likely be made up through larger collections of export taxes, while the proceeds of the emergency taxes and U.S. grants should be sufficient to finance a volume of public works almost as high as last year. If the volume of imports expands in the first six months of 1955, it is possible that the Minister of Finance will be able to liquidate the floating debt almost entirely, and still close the fiscal accounts with a cash surplus. 59. The .1inistry of Finance may, however, run into difficulties in the fiscal year 1955-56 because of the expected fall in coffee export prices. If the price of Guatemalan coffee falls by Vay to between $55 and 60 per quintal (and if present tax rates remain unchanged), the Treasury stands to lose Q 10 per quintal or a total of Q 12 million. A drop in revenue of this proportiln would necessitate a curtailment of government expenditures, particularly on public works, unless it is made up by credit operations in the country and abroad. The situation may be alleviated somewhat by new tax receipts from foreign companies -- perhaps as much as Q 1 million - and the more efficient administration of other taxes, particularly the business profits tax. Some further relief may come from a small expansion of the volume of coffee exports and the export of other taxable commodities. But the Treasury my have to resort to some further borrowing 'rom the central bank (unless bond sales to the public can be expanded). In view of the rapid amortization of the debt now -22- outetanding, there is room for new credits. Following 1956 government receipts are likely to increase through the introduction of a general income tax, a rise in tax payments by foreign companies, and the expected expansion of domestic investment and business activity. 60. On the other hand, a gradual expansion of government expenditures appears unavoidable. Whatever land reform measures the government finally decides on, they will involve additional expenditures for agricultural credit, extension services, etc. even if extensive use is made of government-owned land which would not require indemnification of present owners. The re-opening and final settlement of the question of the confiscation of German property also is likely to involve public expenditures, some of them perhaps in foreign exchange. And there is finally the irreversible trend toward larger outlays for education, public health, and other social services - at present provided at an inadequate scale by any reasonable standard - which is bound to keep the Treasury under pressure. An increase in tax revenues proportionate to the growth in national income may be insufficient to take care of the necessary increase in public expenditures, and a considerable strengthening of the tax structure will be required if government deficits - and the resulting pressures on the balance of payments - are to be avoided. Balance of Payments Prospects. 61. The balance of payments outlook is reasonably good in the next 18 months, and rather promising in the long run. In the current crop-year, proceeds of coffee exports are likely to reach again almost Q 80 million and local disbursements of the United Fruit Company and proceeds of minor exports may push the total of exchange receipts over the Q 100 million mark, a record level for any 12-month period. Imports, on the other hand, have been relatively low since the June revolution although they may rise somewhat in the course of the next six months. Tourist receipts, which in the last few years have been insufficient to offset travel expenditures of Guatemalans abroad, should like- wise increase. All in all, the balance of payments should show a surplus on current account, substantially in excess of that of last year, while movements on capital account, persistently outward in the last few years, should be reversed. This may even permit a moderate expansion of domestic credit to satisfy the demands of the business community for the financing of medium- and long-term investment. 62. A fall of 20% in the price of coffee between now and the beginning of the next export season (October 1955) would entail a decline of foreign exchange earnings of approximately 916 million and would involve an Rt least temporary loss in exchange reserves. The decline in coffee earnings because of lower prices is likely to be offset, however, by increased foreign exchange earnings from other sources. In the next crop season Guatemala expects an exportable surplus of cotton of 125,000 quintalss which would produce Q 4 million. Minor exports (of chicle, essential oils, and lumber) are also likely to expand. By the end of 195 the banana expansion program of the United Fruit Company should result in a substantial increase in local dis- bursements which may rise from the present annual rate of Q 11 million to somewhere between Q 15-20 million in the next five years. -23- 63. On the expenditure side, a decline in import purchasce is not too likely if, as indicated above, the major proportion of the loss in coffee proceeds is absorbed by the Treasury and if private investment expenditures rise. Nevertheless, an increase in private investment and the resulting rise in imports is not likely to lead to balance of payments pressures, since a large proportion of investment expenditures could be financed by flight capital presently held abroad. 64. Three to five years from now, Guatemala's balance of payments posi- tion is likely to show further improvement. The most promising development in this respect is the expansion of coffee production which began during the last two years and which is likely to accelerate now that there is no longer a danger that coffee land will be expropriated. Observers familiar with Guatemalan coffee production confidently predict that output will expand by as much as 50% in thn next five years even if the price declines to, say, 50 or 55 cents. This conclusion is based on the fact that although wages of rural agricultural workers have risen considerably, Guatemala is still a low- cost coffee producer. It costs an average of Q 20-24 to produce a quintal of washed but unhusked coffee (caf; en persamino), depending on where it is grown. At present the price of coffee en pergamino at the processing plant (beneficio) is Q 36 to Q 38 per quintal, making possible a gross profit of 50% or more. Even were the price of coffee to drop substantially, which under the prevailing sliding scale would call for the application of a lower tax rate, it would be still profitable to expand coffee production. Another reason for anticipating an increase in production is the plan to sell the national farms to private producers. The management of the nationalized farms has been inefficient. More efficient private management is expected to result in a substantial increase in output even without any increase in acreage. 65. There are also distinct possibilities for increased exports of lumber, saw mill products and plywood, if a road construction program now in the planning stage opens up the area around Lake Izabal. Other export commo- dities with good potentials for rapid expansion are vegetable oils, cotton seed, sesame, livestock and meat. Tourist expenditures are likely to expand, particularly after the completion of the Inter-American Highway to the Mexican border. STATISTICAL LPPENDII STATISTICAL APPENDIX LIST OF TABLES Table No. Title 1 Gross National Product or Expenditure, 1948-1953 2 Per Capita G.N.P., 1948-1953 3 Agricultural Production, 1947-48 to 1953-54 4 Government Receipts and Expenditures, 1948-49 to 1953-54 5 Government Revenues, 1948-49 to 1954-55 6 Government Debt, 1953 and 1954 7 Money Supply and Gold and Foreign Exchange Reserves, 1948-1954 8 Balance Sheet of Banco de Guatemala 9 Banking Statistics, September 30, 1954 10 Government Financial Institutions 11 Price hovements, 1948 to 1954 12 Balance of Payments, 1949-1953 13 Composition of Exports, 1948 to 1953 14 Composition of Imports, 1948 to 1953 15 Direction of Foreign Trade 16 Coffee Exports, 1948-59 to 1953-54 17 Prices of Imports and Exports, and Terms of Trade, 1948 to 1953 TABLE 1 Gross National Product or Expenditure, 1948-1953 (Q million) A. At Current Prices Consumption Current Government Public Private Net Foreign Year Total Expenditure Expenditures Investment Investment Investment 1948 428.6 352.9 30.0 14.1 36.6 - 4.9 1949 419.7 352.3 30.6 19.2 25.9 - 8.3 1950 467.7 370.2 53.2 2.7 37.4 4.1 1951 522.3 420.6 41.9 15.4 42.4 1.9 1952 555.2 427.7 57.5 22.3 30.9 16.8 1953 553.3 432.4 53.7 29.3 38.7 4.2 B. At 1953 Prices 1948 493.9 426.0 33.7 10.8 28.2 - 4.8 1949 456.1 397.7 33.7 13.8 18.5 - 7.6 1950 484.1 389.9 55.7 2.9 32,0 3.6 1951 513.3 423.6 41.6 12.3 33.9 1.9 1952 559.2 440.1 57.7 18.7 25.9 16.8 1953 558.3 432.4 53.7 29.3 38.7 4.2 1/ Current Account surplus enly, excluding errors and omissions. The figures showing net foreign investment in 1953 prices have been recomputed to correct a technical error. Note: Because of the inadequacy of price data, the estimates of investment expenditures at 1953 prices are believed to be rather inaccurate. Source: Annual Report of Banco de Guatemala, 1953. TABLE 2 Per Capita G.N.P., 1948-1953 Year Per Capita G.N.P. At Current Prices At 1953 Prices 1948 160.o 18h.3 1949 152.0 165.1 1950 16h.7 170.5 1951 178.2 175.2 1952 185.2 186.5 1953 180.6 180.6 Source: Annual Report of Banco de Guatemala, 1953. TABLE 3 Agricultural Production, 1947-48 to 1953-54 (Thousand quintals 1/) 1947-48 1950-51 1952-53 1953-54 Mainly for Domestic Use Corn 11,811 11,643 9,#408 lO,50 Rice 197 172 214 290 Beans n.a. 533 578 n.a. Wheat. 295 437 485 n.a. Sugar 590 52h 797 890 Cotton (ginned) 39 45 62 80 Mainly for Export Coffee 1,103 1,178 1,267 19364 Bananas 2/ 6,3O5 3,83 2,068 3,696 Essential Oils 2/ 3 10 15 12 Chicle J' 49 14 23 - 1/ One Spanish quintal equals 100 Spanish lbs, or I0.h3 English lbs. 2/ Preliminary estimates / Export figures for calendar year preceding crop year Source: Statistical Office, !Iinistry of Agriculture, and export statistics. TABLE 4 Government Receipts and Expenditures, 1948-69 to 1953-54 (Q millions) Fiscal Yearl/ Total Budgetary Assigned BorrowingsY Surplus (4.) ExpeituresI Receipts evu or Deficit -) 1948-49 49.1 44.5 0.6 2.0 - 4.0 1949-50 55.0 42.8 1.0 7.2 -11.2 1950-51 48.1 47.4 1.1 1.1 4. 0.4 1951-52 54.1 57.4 1.0 1.6 * 4.3 1952-53 68.2 61.5 2.7 1.2 - .0 1953-54 82.5 65.6 5.5 17.3 -11.4 1/ Fiscal year ending June 30 2/ Cash expenditures (except for June 1954 for which only authorized expenditure figures were available) on ordinary budget account plus disbursements of borrowed funds / Assigned to various sinking funds Gross borrowings, excluding seasonal short-term borrowings repaid in same fiscal year / Budgetary receipts plus assigned revenues minus expenditures Source: Banco de Guatemala Government Revenues 1948-49 to 19-5 (Q mlion) Total Total Import Export Liquor aid Stamp BusLness Other Non-tax Fiscal Year Revenney Tax Receipts Duties Taxes Tobacco Taxes Taxes Profits Tax Taxes Receipts 1948-49 44.5 33.3 14.4 3.2 8.9 2.3 3.6 1.8 11.2 1949-50 42.8 35.1 15.7 2.0 9.0 2.4 3.9 2.0 7.7 1950-51 47.4 41.0 17.6 5.7 9.3 2.7 3.5 2.3 6.4 1951-52 57.4 49.6 19.5 9.7 11.0 3.1 3.7 2.6 7.8 1952-53 61.5 52.8 23.1 19.8 11.2 3.5 4.0 3.3 8.7 1953-54 (11 months) 59.6 52.e 19.4 10.4 11.4 4.2 3.7 3.1 7.6 1954-55 (Budget 70.1 64.2 26.3 11.8 11.2 4.1 4.5 6.3 5*9 estimates) 1/ ExcludLng "assiged revenues" allocated to sinking funds. S-'urce: Banco de Guatemala, Statistical Bulletin; Budget Law far 195455. TABLE 6 Government Debt, 1953 and 1954 (Q million) June 30 June 30 September 30 1953 1954 195_ Floating Debt 4.1 9.6 9.6 Loans from Banks 3.1 3.8 3.7 Funded Debt 1/ 5.8 18,2 18.3 Short-term Treasury Notes - -- 9*0 Other Current Obligations 1.7 1.8 1.8 TOTAL 14.7 33.4 42.4 1J Excluding the issue of "Agrarian Bonds" (of Q 2.0 million in 1953 and Q 7.8 million in 1954) almost entirely in the hands of the Treasury. Includes "various creditors", the capital contribution of Guatemala to the IBRD, an account payable to the International Postal Union, etc. Source: Banco de Guatemala Note: 1954 figures partly estimated. TABLE 7 Money Supply and Gold and Foreign Exchange Reserves, 1948-1954 (Q million) End of: Curremy Demand Deposits Money Supply Net Gold and Reserve Rati* of Fublic Forein Exchaie Reserve % 1948 September 32.9 19.2 52.1 44.3 85 December 35.5 19.3 54.8 45.9 84 1949 March 35.5 2i.7 57.2 47.0 82 June 34.2 22.0. 56.2 44.2 79 September 35.2 19.0 54.2 38.8 72 December 37.5 20.0 57.4 36.9 64 1950 March 37.8 22.7 60.5 39.3 65 June 35.6 22.3 57.9 35.6 61 September 35.7 21.3 57.2 34.3 60 Decenber 38.8 no.a. n.a. 38.2 n.a. 1951 March 39.0 2e.7 65.7 43.8 67 June 38.7 24.2 62.9 41.4 66 September 37.7 21.1 58.8 34.3 58 December 40.2 22.2 62.4 40.7 65 1952 March 4l.4 27.2 68.6 53.3 78 June 42.0 19.3 61.3 47.1 77 September 41.2 18.5 59.7 41.5 69 December 45.4 20.6 66.0 43.9 66 1953 March 47.1 27.1 74.2 54.7 74 June 45.1 25.8 70.8 52.6 74 September 44.8 24.0 68.8 39.3 57 December 53.2 25.0 78.1 42.5 54 1954 March 54.6 31.0 85.6 54.0 63 June 552 22.9 78.1 43.9 56 September 55.1 24.7 79.8 37.8 47 1/ Preliminary. n.a. not available Source: IWF Mission to Guaterala TABLE 8 Balance Sheet of Banco de Guatemala (Q million) June 30 September 30 June 30 September 30 Assets 1953 1953 1954 1954 Gold and Foreign Exchange Reserves: 51.9 38.7 43.7 37.8 Gold 27.2 27.2 27.2 27.2 Foreign Exchange 24.6 11.4 16.5 10.6 Rediscounts and Advances to Banks 7.5 11.6 13.0 9.8 Investments 8.2 19.5 20.6 29.4 Other Assets 2/ 2.5 2.7 8.3 9.7 Liabilities Currency and Coin Issue 47.0 47.3 57.8 55.1 Deposits: Total 17.3 16.6 16.8 20.0 Banks 12.2 10.3 13.5 12.1 Government and Other Official 3.9 4.7 3.1 6.4 Other 1.2 1.6 0.2 1.5 Letter of Credit Outstanding 0.4 1.3 0.9 0.2 Other Liabilities V 0.3 0.6 0.7 0.9 Capital and Reserves 2.4 2.4 3.0 3.0 1/ Including investments of sinking funds 2/ kostly undistributed profits TABLE 9 Banking Statistical OSegtember 309 1954 Demand Time and Paid up Rediscounts Cash and Loans and Investment Deposits Savings Capital and and Advances from due from Discounts Deposits Reserves Central Bank Other Banks Private Banks Bank of London and S.A. 10,139 - 550 - 7,083 3,780 - Banco Agricola y Mercantil 7,72 - 2,303 2,049 4,062 8,096 200 Banco de Occidente 1,175 282 1,227 86. 1,151 2,889 - Goverment Banks National Mortgage Bank 3,752 2,047 4,815 3,879 1,515 21,356 2/ INFOP 698 616 9,850 2 3,064 2,060 4,557 5,467 I National Agrarian Bank - - 9,958 - 1,50 4s793 - Yl In addition, bonds of Q 6,439,000 outstanding Including long-term loans of Q 7,393,000 37 In addition, bonds of Q 1,769,000 outstanding hostly in INFOP's own enterprises Source: Balance sheets of institutions TABLE 10 Government Financial Institutions MQ 1000) National Mortgage Bank INFOP End of: Loans Deposits Bonda Loans Investment Deposits Bonds Deman Time & Savings Outstanding in own Demand Tim & Outatanding Enterprises Savings December 1949 16,692 5,318 1,149 3,072 2,294 512 242 156 1950 15,740 3,908 1,350 3,046 2,691 1,728 338 339 n 1951 16,782 3s620 1,452 2,546 4,o79 2,344 461 360 " 1952 17,121 3,248 1,238 2,599 3,889 3,395 269 383 i 1953 20,297 4,039 1,578 5,021 4,087 5,311 800 510 September 1953 19,546 3,1455 1,470 5,123 3,669 5,213 464 607 1954 21,356 3,752 2,047 6,439 4,557 5,397 698 616 1,769 Source: Balance sheets of institutLena TABLE 11 Price Movements, 1948 to 1954 (1948 - 100) Annual Consumer Prices Retail Wholesale Prices Average Guatemala City 1/ Prices Domestic Importe , Products Goods 1948 100.0 100.0 100.0 100.0 1949 106.9 109.9 103.2 93.2 1950 114.6 112.9 109.7 89.4 1951 119.8 124.8 U5.6 95.6 1952 117.2 118.4 114.5 93.3 1953 120.8 121.3 114.8 94.1 1954 Janury 117.6 122.4 112.8 103.2 February 119.3 126.5 114.2 102.8 March 119.1 129.0 114.4 100.2 April 124.0 132.7 119.3 114.7 May 126.7 137.8 120.1 106.5 June 126.7 137.9 125.0 1o.6 July 128.5 138.3 123.8 106.3 August 12h.5 133.4 121.4 107.8 September 125.5 n.a. 123.2 98.8 1/ 46 articles "of prime necessity" in Guatemala City 2/ 15 articles in Guatemala City and local markets / 62 articles ' 9 articles Source: Statistical Office TABLE 12 Balance of Payments 1969-1953 (Q millions) Current Account: 1949 1950 1951 1952 1953 Merchandise: Exports, f.o.b. adjusted 2/ 63.2 78.9 84.3 94.7 97.8V Imports, f.o.b. adjusted 2. 60.9 6h.1 75.6 69.7 72.2 Balance 27 611-7 7 " _4_277O Z Services (net): Transportation - 7.7 - 6.5 - 7.8 - 6.6 - 8.7 Travel and Tourism + 1.5 + 0.7 - - 0.6 - Insurance - 1.4 - 1.4 - 1.1 - 1.5 - 1.0 Government Services 0.6 0.5 a 0.5 0.6 0.6 Other Services 0.8 - 0.8 - 0.7 - 1.6 - 1.8 Dividend and Interest - 1.5 - h.0 2.1 , 2.0 -7. Remittances 4 1.7 * 0.9 . 0.3 - 0.4 - 0.1 Balance -16. I7 5 =. -TT 3 Current Account Balance - 8.3 * 1.1 1.9 "16.8 + 4.2 Capital Account (net): Private long-term 5.0 a .8 a 2.7 1.5 - 0.1 Private short-term -10.3 - 1.3 a 2.3 -11.3 a 0.2 Official and banking long-term - 0.1 - 0.1 - 0.3 - - Official and banking short-term + 1.0 4 0.2 a 0.2 - - 2.0 Change in reserves (- increase . decrease) . 9.3 - 1.3 - 2.5 - 2.1 + 1.7 Total Capital Movements 4 1.9 s. 2.3 * 2.3 -1.8 0.2 Errors and Omissions + 3. - 6.4 - 4.2 - 2.0 - 4.0 1/ Adjusted for undervaluation of banana exports ?/'Arbitrarily reduced by Q 10 million, to allow for overestimate of value of banana exports, and dividend and interest payments. 2/ Converted from c.i.f. to f.o.b. basis, deducting freight, insurance, etc., but not commissions and similar charges. Note: Because of rounding, components may not equal totals Source: Banco de Guatemala: Balanza de Pagos Internacionales de Guatemala for 1953. These estimates differ slightly from those shown in the Balance of Payments Yearbook of the IMF because a different method of adjusting for the undervaluation of bananas in the trade returns has been used. The adjustment also affects dividend and interest payments and private long-term capital movements. TABLE 13 Composition of Eparts, 1948 to 1953 (Q millions) 1948 % 1949 % 1950 % 1951 % 1952 % 1953 % Exportsp f.o.b.1 50.2 100 52.2 100 67.6 100 76.1 100 87.5 100 88.9 100 Coffee 30.7 61 37.4 72 52.8 78 58.5 77 71.6 82 68.2 77 Bananas 10.3 21 7.4 14 7.6 11 6.0 8 4.7 5 12.6 14 Chicle 2.7 6 1.8 3 1.3 2 2.0 3 1.7 2 - - Lumber 0.5 1 0.2 2/ 0.2 2 0.6 1 0.8 1 0.6 1 Essential oils 0.8 2 1.0 2 1.4 2 2.2 3 1.3 1 0.8 1 Other exports 5.0 10 4.1 8 4.3 6 6.7. 9 7.5 8 6.7 8 1 Banana exports undervalued Less than 0.5% Source: Statistical Office, ard Banco do Guatemala TAB3LE Lr Composition of Imports, 1948 ti' 1953 (Q millions) 1948 % 1949 % 1950 % 1951 % l9 5 1953 % !aorta, c.i.f. 68.3 68.0 71.2 C0.8 75.7 79.5 Freight, Lnsurance, Commission,etc. 7.3 7.1 7.5 6.4 8.4 9.3 Imports, f.',.b. 61.0 100 60.9 100 63.7 100 72.4 100 67.3 100 70.2 100 Live animals 0.5 1 0.3 2/ 0,3 2/ 0.5 1 0.3 2/ 0.5 1 Foodstuffs and Beverages 6.2 10 7.6 12 7.9 12 9.3 13 10.2 15 8.6 12 Dairy Products 0.8 1 0.9 1 1.2 2 1.4 2 1.0 1 1.4 2 Lard 0.1 2/ 0.6 1 0.8 1 1.4 2 1.1 2 0.9 1 Wheat flour 2.8 5 2.3 4 2.1 3 2.6 4 2.6 4 2.5 4 Sugar 2/ I1 20.5 2/ 0.1 2/ 1.9 3 n.a. Liquor 1 0.4 1 0.5 0.4 1 0.4 1 0.4 1 Raw Materials 8.7 14 7.5 12 8.3 13 8.7 12 8.0 12 8.5 12 Crude Za besel oil 3.2 5 2.2 4 2.2 3 2.4 3 2.0 3 2.3 3 Gasoline and Kerosene 2.1 3 2.1 3 2.1 3 2.5 3 2.7 4 3.1 4 Lubrication oil 0.4 1 0.3 2 0.3 2/ 0.5 1 0.3 2/ 0.4 1 Fertilizer 0.3 2/ 0.1 . 0. 1 0.9 1 0.9 1 n.a. Cotton 1.4 2 1.0 2 1.2 2 0.6 1 0.1 3/ n.a. Manufactured Articles 45.5 75 45.4 75 47.2 74 54.0 75 48.8 73 52.6 75 Cosmetics 0.4 1 0.5 1 0.5 1 0.6 1 0.6 1 n.a. Paints and Varnishes 0.4 1 0.5 1 0.4 1 0.5 1 0.4 1 0.5 1 Drugs and Vitamins 1.7 3 1.7 3 1.9 3 2.1 3 2.6 4 n.a. Fungicides and Insecticides 1.5 2 1.0 2 1.1 2 2.1 3 2.5 4 1.6 3 Yarns, Textiles & Wearing Apparel 11.5 19 1.2 18 13.0 20 13.5 19 12.8 19 n.a. Rubber Products 0.9 1 0.8 1 1.1 2 1.5 2 1.3 2 n.a. Paper and Paper Products 2.2 4 1.9 3 1.8 3 2.5 3 2.6 4 n.a. Glass and Chinaware 1.5 2 1.1 2 1.2 2 1.5 2 1.2 2 n.a. Iron and Steel Products 4.1 7 4.9 8 4.9 8 5.6 8 4.6 7 n.a. Transpt.Equipt.incl.Motor Vehicles 7.4 12 7.6 12 7.9 12 8.6 12 6.7 10 7.7 11 Elect.Machinery & Equipment 2.1 3 2.2 4 2.2 3 2.4 3 1.9 3 2.2 3 Mechanical Equipment 5.3 9 5.0 8 4.5 7 5.4 7 47 7 5.6 7 Other Machinery & Equipment 1.8 3 2.1 3 2.0 3 2.4 3 2.0 3 1.9 3 Clocks and Watches 0.4 1 0.3 2 0.4 1 0.4 1 0.3 2 0.3 2V Art Objects, Gold and Silver 0.1 2/ 1 0.1 .3/ l/ 2/ 0.1 2/ 0.1 2/ 1/ Less than Q 50,000. 2 Less t-a9n 0.5% courcet Statistical Office, and Banco d- rtvlatemala TABLE 15 Direction of Fo gn Trade (Q millions 1948 % 1949 % 1950 % 1951 % 1952 % 19k3 % Export, f*o.ba/ 50.2 100 52.2 100 67.6 100 76.1 100 87.5 100 88.9 100 United States 44.6 89 47.8 92 60.2 09 66.7 88 72.8 83 68.1 77 Canada 2.0 4 1.4 3 1.2 2 1.9 2 0.8 1 1.8 2 United Kingdom 0.7 1 2 1.5 2 Latin America 0.9 2 OA. 1 0.5 1 0.9 1 2.2 3 2.1 2 Western Europe 1.9 4 2.6 5 5.5 8 6.3 8 10.1 12 16.7 19 Eastern Europe - 0 0 0.1 0 2 - Other Countries / 0.1 0 - 0.1 0 Imports, c.ie. 68.3 100 68.0 100 71.2 100 80.8 100 75.7 100 79.5 100 United States 52.1 76 50.0 74 468.8 69 54.3 67 476 63 51.3 64 Canada 1.5 2 1.5 2 2.3 3 2.7 3 2.2 3 2.1 3 United Kingdom 1.9 3 1.6 2 2.3 3 3.2 4 4.1 5 3.3 4 Latin America 9.0 13 9.3 14 10.1 14 7.6 9 1.1 15 10.9 14 Vestera Europe 2,9 4 4.4 6 6.2 9 9.7 12 9.2 12 10.2 13 Eastern Europe 0.5 1 0.5 1 0.6 1 1.0 1 0.6 1 0.9 1 Overseas Sterling Area 0.4 1 0.4 1 0.6 1 0.7 1 0.4 1 0.4 1 Other Countries 0.1 1/ 0.2 4/ 0.3 2/ 1.7 2 0.4 1 0.3 0 1 Banana exports undervalued Less than Q 50,000 Less than 0.5% S&urce: Banco de Guatemala - Statistical Bulletin TABLE 16 Coffee Exports, 1948-49 to 19M-5 Crop Year '4uantity Valuet f.o.b. Price Quintal (1000 quintals) (Q 1000) 1948-49 1196.7 36,15.8 30.25 1949-50 1166.2 46,419.7 40.50 1950-51 1096.3 58,309.5 53.19 1951-52 1313.8 70,985.5 5j.03 1952-53 1243.8 67,938.4 5.62 1953-54 1245.2 79,860.8 64.13 Source: Statistical Office TABLE 17 Prices of Imports and Exports, and Terms of Trade, 1948 to 1953 (1948 - 100) Annual Average Export Pricesvl Import Prices1/ Terms of TradeVf 1948 100.0 100.0 100.0 1949 110.3 93,2 118.3 1950 147.7 89.5 165.0 1951 173.3 1%)1.6 170.6 1952 173.1 101.4 170.7 1953 184.6 101.3 182.2 1952 1st quarter 177.4 102.1 173.8 2nd " 169.7 102.1 166.2 3rd * 167.9 101.4 165.6 4th * 167.8 100.6 166.8 1953 lt quarter 180.2 101.8 177.0 2nd " 184.9 100.8 183.4 3rd * 182.0 101.2 179.8 4th * 191.4 101.6 188.4 1/ 1950 weights 2/ Export prices divided by import prices Source: Banco de Guatemala