Guatemala - Current economic position and prospects

RESTRICTED FllE CoPy Report No.W.H. 52a This report was prepared for use within 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 DEVELOPNIENT CURRENT ECONOMIC POSITION AND PROSPECTS OF GUATEMALA February 5, 1957 Department of Operations Western Hemisphere  CURRENCY Quetzal Qi 1 U.S. $1  CONTEN1TS BASIC DATA Page Paragraph SUMMAP.Y i 1 - I- GENERAL 1 1-11 II - RECENT ECONOMIC DEVELOFM51TS 4 12 -42 Agricultural Production 5 14 -21 Industry and Mining 6 22 -25 Other Economic Activities 7 26 -28 !toney, Credit and Prices 8 29 -33 Foreign Trade and Balance of Payments 9 34 -36 Public Finance 10 37 -42 III - LONGER RANGE PROSPECTS U1 43 -51 APPENDIX - The National Economic Planning Council 16 1 -13 and the Five-Year Development Progeam Underlying Assumptions 16 3 - 4 Size and Compsition of the Program 18 5 -10 The First Year of Execution 20 U -13 STAlISTICAL TABLES Table 1 - Gross National Product or E'xpenditure, 22 194E-1955 Table 2 - Per Capita G.N.P., 1948-1955 23 Table 3 - Agricultural Producticn, 1247-48 to 1955-56 24 Table 4 - Government Receipts and Expenditures 1948-149 to 1955-56 25 Table 5 - Government Revenues, 1948-49 to 1955-56 26 Table 6 - Internal Debt, 1954, 1955 an.... 1956 27 Table 7 - Money Supply and Gold and Foreign Exchange Raseives, 1949-1955 28 Table 8 - Balance Sheet of Banco de Guatemala 29 Table 9 - Banking Statistics, June 30, 1956 30 Table 10- Government Financial Institutions 31 Table 11- Price Movements, 194C-1955 32 Table 12- Balance of Payments 1950-1955 33 Table 13- Composition of Exports, 1948-1955 34 Table 14- Composition of Imports, 1950-1955 35 Table 15- Direction of Foreign Trade 36 Table 16- Coffee Exports, 1918-L9 to 1955,-56 37 Table 17- Prices of Imports and Exports, and Terms )f Trade, 1948 to 1955 38 Table 18- Public Investment Program, 1955/56-59/60 39 Table 19- Summary of External Public Debt. 40  BASIC DATA Area 42,042 square miles Population, 1955 3,281&,000 Gross Nlational Product, 1955: (Q million) Consumpticn Expenditures 444.0 Current Government Expenditures 57.6 Public Investment 35.2 Private Investment 47.5 Net Foreign Investment -5.3 Total 579.0 Per Capita Gross National Product, 1955 Q176.5 Public Finance, July 1955 to June 1956: Total Expenditures 83.7 Budgetary Receipts 77.4 Revenues Assigned to Sinking Funds 5.7 Net Deficit -o.6 Gross Borrowings 6.8 Government Debts, June 30, 1956: Internal: Funded 23.4 Floating & Short-term 18.0 Foreign: Recognized 21.2 Status in disnute 1.2 Money & Credit, June 30, 1956: Currency in circulation 53.4 Demand deposits of public 40.6 Net gold & foreign exchange reserves 72.4 Balance of Payments, 1955: Exports, f.o.b. adjusted 106.3 Imports, f.o.b. adjusted 93.3 Services (net) -18.3 Current account deficit - 5.3 Donations 9.6  Exports, f.o.b. Imports, f.o.b. (Q million) (Qmillion) Coffee 75.2 Live animals o.6 Bananas (undervalued) 9.4 Foodstuffs & Beverages 14.3 Chicle 1.4 Raw Materials 10.7 Lumber 0.5 Manufactures 66.3 Essential Oils 1.1 Machinery & Equipment (24.4) Other 10.9 Total 98.7 Total 91.9 To: United States 74% From: United States 64% Western Europe 20$ Latin America 14% Latin America 2% Cont.Western Canada 2% Europe 114% Other lp United Kingdom 4% Canada A Other 1%  SUM4ARY 1. The Guatemalan economr, at least the monetary sector, has been exyeriencing a rapid expansion since mid-1955, following a period of economic stringency and dislocation after the revolution of June 1954 and several years of semi-stagnation before that date. A maior factor in this growth is an ambitious program of public works, especially highway con- struction, financed in large part by foreign grants and loans; but pri- vate investment, including an important component of foreign and repatriated capita], has also increased substantially. The general policies of the present Government, whose period of office ends in 1960, together with the oppcrtunities available for increasing agricultural, forest and minerals production, seem conducive to a continuance of such investments, and con- sequently to continued growth of the economy after 1958 even without fur- ther external grants (although perhaps at a somewhat slower rate). 2. Agricultural production has not so far expanded in proportion to the increase in total output, as a result partly of adverse weather con- ditions in 1954/55, but also of more fundamen ,al factors. A major ob- stacle is the sharp dichotomy existing between the commercial and subsis- tence sectors of the econcny, and the extremely low productivity of the latter; the possibility of its beins substantially improved in the short term is limited by the native communitiest distrust of and isolation from the Ladino populatien, which can only gradually be broken down. In the conmmercial sector a small but iniluential minority of farmers are seeking to alter the traditional pattern of agricultural output, through develop- ment of idle or underutilized land, mechanizaticn, new crop varieties and cultivation techniques, etc.; they are hampered by inadequate medium and long-term credit facilities and marketing arrangements. The contemplated transfer of the national farms to private hands should bring about higher levels of productivity on these important holdings. 3. Besides agriculture., output of industrial, timber and mineral products is expanding, and these fields offer considerable promisefor the future. Intensive and widespread e.;ploration for oil has begun. Tourist traffic is increasing rapidly, and will receive a major stimulus from the opening of the Inter-American Highway in 1958. There appear to be good prospects, therefore, despite the dubious outlook for coffee prices, for a steady growth of GNP and export receipts, at a rate of perhaps 5% per year. Given the very rapid rate of pcpulation growth, this would per- mit living standerds to rise by only about 2% per year. 4. After a brief decline, money supply has risen sharply since early 1955, reflecting the rise in foreign exchmnge reserves. The Banco de Guatemala has kept a fairly tight rein on credit expansion and the Government has followed a generally conservative budget policy (facili- tated by extraordinery receipts from foreign grants and loans). The  - i - cost of living has risen by only about 1 per year, but there is some danger that this rise may accelerate in the short-term future. 5. In 1955 the value of exports was about 8% higher than in 1953, and the upward trend probably continued in 1956; imports rose by nearly 30p in the same period, resulting in a deficit of $5 million on current account. However, the influx of private capital and foreign loans and grants, (the latter of which are expected to continue until mid-1958) was sufficient to offset the current account deficit and permit a $15 millior increase in foreign exchange reserves; it is expected that this reserre accumulation will be drawn down moderately in the years after 1958 to permit a continued high level of investment without undue price increases. 6. The Government has adopted a five-year (1956-1960) program of economic development, emphasizing private enterprise and investment but specifically envisaging public investments of about Q 250 million. This general order of magnitude seems reasonable. The program of specific investments heavily stresses construction and improvement of highways, the lack of which is a major obstacle to the national eccnomic development; however, some shift of emphasis toward measures directly to stimulate production, especially in agriculture, and to improve rural education and health, seems desirable. The National Economic Planning Council, established with advice and assistance from the Bank, is currently revising the pro- gram along these lines. 7. This investment program still needs to be refined considerably, adjusted periodically, and supplemented by a number of fundamental insti- tutional and administra`ive measures; but in general it appears to pro- vide a satisfactory basis on which to build the country's economic develop- ment. It has gotten off to a fairly good start in its first year. 8. The service of Guatemala's present external debt (not including the disputed sterling debt), requires only about 2% of the value of current exports; the prospects for expansion of production and exports seem generally favorable; budgetary receipts are rising and internal bonded debt is being amortized at a rate that would permit its redemption well before maturity. The country could safely assume additional foreign debt for sound productive projects.  I. GENEDAL 1. The Government of Guatemala ieaded by President Arbenz, which was overthrown in June 1954, left a legacy of financial and administrative disorder, and demoralizaticn of the national economy. The new Govern- ment of President Castillo Armas, despite some initial confusion as to specific measures, made clear its intention to alter fundamentally the policies of the previous regime which had militated against private pro- ductive activity and investment of foreign capital, ard to create an economic and political climate conducive to private enterprise. It took as a general guide the recommendations of the Survey Mission organized by the International Bank in 1950/51, and asked that the Bank assign a resident representative to assist the Gcvernment in formulating a definite program to carry thcm out. The Bank acceded to this request, and from February 1955 to September 1956 maintained a Special Representative in Guatemala, assisted during part of this period by another Bank staff member. 2. The general orientation of the new Government is evidenced in various measures taken in the past two years: in the removal of unrealistic restrictions on rents, interest rates,meat prices, etc.; in its treatment of foreign capital; in its pDlicies on exploitation of natural resources; and perhaps most importantly, in the changes it made in the agrarian and labor laws, and especially ir. their administration. 3. Under the previcus regime the labor courts had invariably found in favor of employees and syndicates even when the law appeared to be on the other side. The Governnent had openly supported communist-controlled unions, even threatening emplcyers who resisted their demands with ex- propriation. The prusent labor code preserves most of the legal safeguards of the earlier lafr, but had modified some provisions that had been inter- preted in especiLlly arbitrary fashion. The principal unions have been reorganized under new leadership with governmental encouragement but without its direct backing; they have not yet, however, acquired much independent strength. A Ministr-y of Labor, separate from the inistry of Economy, has recently been created. 4. The agrarian law, whose prcvisions were mcderate enough in them- selves, in the last years of the Arbenz regime had been turned into an instrument of arbitrary confiscation and political reprisal. With the encouragement of Government officials, estates were invaded without legal sanction, and pasture and crop lands, as well as idle acteage, were taken crer and split up indiscriminately into tiny, uneconomic plots. Little technical or financial assistance, and often no title or other security of tenure, were given to the recipients of these lands. The present Gcvern- ment has continued th;e parcelling of idle land, in a program that calls for resettlement of over 5,000 families per year through 1960. Its emphasis, however, is on establishing viable family farm units of 10-20 hectares, with necessary roads and community services, with supervised credits for  -2 the ncw farmers, and with clear title of ownership after a brief pro- bationary period. 5. The new petroleum code was criticized by the oil companies, in the drafting stage, as being unduly severe; but twenty-nine companies filed for permits as soon as it became law. A settlement was reached with the United Fruit Company, by which it turned over substantial tracts of land to the Government and made certain tax concessions, in return for safeguards to permit its undertaking large-scale new investments in land reclamation and new plantings. The concession agreement of the Inter- national Railways of Central America (IRCA) was similarly renegotiated on terms more favorable to Guatemala, and negotiations for revision of the contract of the Eipresa Electrica de Guatemala (an American and Foreign Power subsidiary) are in progress. 6. These measures have fostered a marked increase in private in- vestment - up an estimated 280, in real terms, in 1955 over the level of the two previous years, and apparently still farther in 1956. An even greater stimulus to economic expansion has been provided by an anbitious public investment program, an important share of which is financed from external sources; over $50 milliLn of U.S. grants have been programmed (and some $20 million expended through June 1956), and the IBRD has made a loan of $18.2 million. The resulting increase in Gross National Product in 1955 over 19548 may be estimated at 5-6% at current prices, and even more in real terms; and there is every indication of further substantial expansion in 1956. By contrast, in the period 1948-53 the indicated growth rate of real Gross 'lational Product was less than 2% per year, despite an improvement of 60M in terms of trade (Table 1). 7. The Government has adopted, in principle, a 5-year development program drafted by the National Economic Planning Council, which projects public investments of Q 250 million during the years 1955/56 through 1959/60 (Table 18). The Council's report stresses that these public investments "'will justify themselves only if they serve as the indispensable foundation and effective stimulus for directly productive economic activities,, which must be undertaken principally by private persons;" and that'lin esti- mating the amount of public investment that Guatemala may permit itself, special care was taken to leave an adequate margin of resources for the recuirements of the private sector." It estimates that this margin would amount to nearly Q 300 million over five years, leaving to private initia- tive the allocation of this sum. 8. The Council's estimates of Guatemala's investment capacity appear optimistic but not unreasonable; and given the traditional timidity of Guatemalan financiers, a relatively sanguine attitude on the part of the Government seems appropriate, or even necessary, to encourage the required private investment. A more serious obstacle than financial capacity, to the execution of the proposed program, are the organizational deficiencies  of both Government and private institutions, and the shortage of adminis- trative and technical personnel. (See App~endix for further discussion of the five-year program). 9. Certain adjustments in the composition and emphasis of the public investment program appear desirable in the light of further studies and developments since it was first formulated. On the whole, however, it seems well-designed to meet some of the principal problems of the Guatemalan economy - its excessive dependence on a single product, coffee; the undue concentration of population in the highlands, while the resources of the Pacific coastal zone, the North and the Peten remain largely undeveloped; and the inadequacy and high cost of tr- .sportation. The investments proposed and the policy and admiristrative measures recon^mended should also help substantially to create the foundation and incentives required for productive private activity. 10. The program is directed primarily at development of the commercial economy of Guatemala, which now engages only a minority of the total working population but probably accounts for two-thirds of the value of national output. The "native" majority are economically, socially and culturally isolated, living still almost in the pre-Columbian pattern, and deeply distrustful of the dominant Ladino (Europeanized) minority; their transition into the modern world is inevitably a difficult process. Nevertheless, the more vigorous and adaptable of them are making it al- ready, influenced by the increasing pressure of population on their low- level subsistence economv, the attractions of urban life and rising wages in the money economy, and the increasing ease of transportation. The process will presumably accelerate as more employment opportunities develop. The "Indian problem", as such, is likely eventually to disappear through the progressive absorption of the "natives" into the Ladino community. But this absorption can probably be eased substantially and the tensions it creates reduced, through educational and welfare programs such as the Government has already init-iated on a limited scale, with foreign tech- nical cooperaticn. U1. Of no less importance than the Fublic investment program, especially for enccuraging private enterprise and investment, are a num- ber of legal and institutional reforms or innovations which are in prepar- ation or under active study. Among them are: (a) Development of an improved capital market. A stock exchange law is being studied, and a group of Guatemalan and foreign entrepreneurs are attempting to form a finan- cial corporation for diversified equity investment. (b) A revised industrial promotion law, which should sub- stitute clearly defined, generally applicable tax or other conicessiens for the broad administrative discretion provided under the present law.  - 4 - (c) Reform of the business profits tax and institution of a soundly-based Personal income tax. (d) Establishment of a satisfactory law and adminis- trative framework for the regulation of public services. (e) Establis Lent of satisfactory policy and adminis- trative ma: ery for stabilizatic*n of the domestic grain market. (r) Definition of policy and specific measures for dis- posal of the N tional Farms (fincas nacicnales). (g) Improvement of agricultural credit facilities, especially for medium and long-term development needs. (h) Organization or reorganization of several important Government agencies - the proposed Housing and Municipal Development Institutes, the State Hydroelectric Company, the national telecomaunications administration, etc. (i) Reform of the budgetary, accounting and financial control machinery of the Government. (j) Improvement of systems of production and marketing of Guatemalan coffee. U. PECENT ECCNuMIC DEVELOP?ENTS 12. The economic history of Guatemala since June 1954 falls into two distinct phases. The first, lasting 2pproximately a year, was a period of economic and political uncertainty, aggravated by a sharp drop in the price of coffae from the 1954 peak and by poor grain harvests. The cautious financial policies of the new Government, which produced an effective budget surplus of over Q 9 .illion, had a definite deflationary effect. Bublic and private investment was low and monetary expansion was halted. Food prices rose as a result of the poor harves., but fell again sharply following word of emergency grain import-. The decline in foreign exchange reserves during the last nine months of 1954, part'y due to seasonal factors, was recouped early in 1955. 13. The e..conomic stringency of the initial period gave way in the latter half of 195$ to a marked expansion, which has continued to the present. It has beer. due partly to the measures taken by the new Govern- ment to restore confidence and encourage private investment, partly to the renewed rise in coffee prices, and partly to the rising level of expenditures on public works, financed with the aid of foreign loans and grants. As already noted the Gross Natioral Product probably rose at least 5-6% in 1955 over 1954, private investment expanded by over one-fourth  -5- and public investment roughly doubled. Gross investm.ent reached an estimated 1J.3% of GNP, as against the previous peak of 12.7% in 1i953. Gold and foreign exchange reserves increased by 40c in the same year, cnd the upward trend has continued. Budgetary receipts in 1955/56 were 18% higher than in 1953/54 while expenditures were only 1.5% greater. Agricultural Production 14. The rate of growth of agricultural output, especially foodstuffs, during the past two yezrs has been disappointing (Table 3), despite some increase in credits to agricultural aid livestock producers and a sharp rise ir imports of agricultm-al equipment. The unusually heavy rains of 'ast year are partly responsible, but the conservative pattern of most agricultural produotion in Guatemala has hampered rapid expanision of output to meet the growing demand. 15. 1954/55 was a particularly bad year for Born and beans, the two main staples in the popular diet, and a serious food shortage was averted only by importing 2.5 miillion iuintals of corn (about 15% of normal consumption) during 1955, fron tVht U.S. (on a grant basis) and Mexico. The 1955/56 corn crop is roughly equal to the average for recent years, but an additional 4c,O00o quintals have been irnported, financed by ICA, during 1956. The Government's guarantee of a rainimu price to producers apparently increased plantings to sone, but so far only a limited, extent. Average yields arc very 'low, because of the poor varieties, poor land and primitive cultivation methods generally employed; the larger land-.owners in the pla-ns have mostly preferred other crops. The orovision of better grain storage and marketing facilities should make production of corn End beans commercially more attra tive and more efficient; the Government is studying a oro-ran to this ena. 16. Livestock production remains substantially short of the courtry.s rising require,ents; impurts of beef .^nd dairy products exceed Q 2 million yearly. Ho-ever, the intensive efforts being made in tnis field should bear Iruit in the near future. Beef prices, previously controlled at 10