Guatemala - Memorandum on recent economic development and prospects

eE / X,'L/i Report No. 681 -GU / Memorandum on Recent Economic Development and Prospects of Guatemala March 31, 1975 FC Latin America and the Caribbean Regional Office Not for Public Use U Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS 1 Quetzal (Q) = 1 U.S. dollar GLOSSARY OF ABBREVIATIONS AID - U.S. Agency for International Development AVIATECA - Guatemalan Airlines ANACAFE - National Coffee Association BANDESA - National Bank for Agricultural Development BCIE - Central American Bank for Economic Integration CACM - Central American Common Market OORFINA - National Finance Corporation EXMIBAL - Company for the Exploration and Exploitation of the Izabal Mines FEGUA - Guatemalan Railroads FYDEP - Peten Development Agency GUATEL - Guatemala Telecommunications Administration GUATEXPRO - Guatemalan Export Promotion IDB - Inter-American Development Bank IGSS - Guatemalan Social Security Institute INDE - National Electricity Institute INDECA - National Institute for the Commercialization of Agricultural Products INFOM - Municipal Development Institute INFOP - Institute for the Development of Production INGUAT - Guatemalan Tourism Institute INTA - National Institute for Agrarian Transformation INTECAP - Technical Education Institute INVI - National Housing Institute FISCAL YEAR January 1 to December 31  This report is based on the findings of an economic mission to Guatemala in September 1974 composed of: Guillermo Castafeda Chief Josefina-Vial Economist   GUATEMALA TABLE OF CONTENTS Page Number COUNTRY DATA SUMM.A.RY AND CONLUSIONS.i -i I. INTRODUCTION ...................................... 1 II. ECONOMIC DEVELOPMENT ........................,.,, . 2 III. PUBLIC FINANCE ...................................... 5 A. Central Government ...... 6 Revenue.. . . ... 7 Current Expenditure. 8 Investment Expenditure . . 9 B. Rest of the Public Sector . IV. MONEY AND BANKING ................ .. i5 V. BALANCE OF PAYMENTS ................................. 19 Exports . ........ 19 Imports ........................................... 22 Financing the Current Account Deficit ............ 2 VI. NAAJOR DEVELOPMENTS IN 1974 .......................... 25 VII. MEDIUM-TERM PROSPECTS ...... 30 MAP STATISTICAL APPENDIX Population National Accounts Public Finance Balance of Payments External Public Debt Money and Credit Price Indexes   Page 1 of 2 pages COUNTRY DATA - OUATEMALA AREA 2/ POPULATION DENSITY 1bG,900 ker 5.1bmillion (mid-1973) k7.6 per kn3t Rate of Growth: 2.1% (from 196h to 17) .. per 2c /of arable land p.a. POPULATION CHARACTERISTICS _1971-) HEALTH i 197i4 Crude Birth Rate (per 1,000) 35 Population per physician 3,620 Crude Death Rate (per 1,000) 14 Population per hospital bed L36 Infant Mortality (per 1,000 live births) o3 INCOME DISTRIBUTION ( ) DISTRIBUTION OF LAND OWNERSHIP 0964) % of national income, highest quintile .. % owned by top 10% of owners 76.55 lowest quintile ., % owned by smallest 10% of owners 0.05 ACCESS TO PIPED WATER t ACCESS TO ELECTRICITY ( ) % of population - urban .. 'A of population - urban - rural .. - rural NUTRITiON l970) EDUCATION (1973) Calorie intake as % of requirements 52 Adult literacy rate % h6. 5 Per capita protein intake 51 Primary school enrollment Z 60.' 'I GNP PER CAPITA in 1973 : US $520 GROSS NIATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWTH (%. constant prices) US $ Mn. x 1960-65 1965-70 1973 GCiP at Market Prices 2,5hh.6 100.0 5.2 5.5 6.1 Gross Domestic Investment 375.8 Il .L5 5. 5.9 15.0 Gross National Saving 010.1 16.1 6.4 7.6 36.1 Current Account Balance 34.3 1 .3 Exports of Goods, NPS 529.9 20.6 1'.0 6.6 b.6 Imports of Goods, NPS 491.1 19.3 6.0 3.9 2.2 OUTPUT, 1ABOR FORCE p PRODUCTIVITY IN 1973_" Value Added Labor Force2 V. A. Per Worker UJS $Mln. %A Mln. 7US % Agriculture 616.3 28.3 o.8o 56.7 773 1X5.5 Industry 31l.5 19.0 0.27 19.2 i,535 959. Services 1,152.6 52.7 (.3 25.1 9.3.3 210.7 Unallocated Total/Average 2,185.0 100.0 1 .51 100.0 1,55, 100.-9 GOVERNMENT FINANCE General Goverrmeat Central Government Min.) 7. of CIP ( Q Mln.) 'A of GDP 1973 1973 1l26i2 1973 L973 1969-7 3 Current Receipts 317.9 12.3 12.2 213.2 5.2 8.5 Current Expenditure 265.6 10.3 10.6 136k1 6.5 7 . Current Surplus 3273 2.C 7.6 .4h 1. 1.2 Capital Expenditures 99.9 3.9 3.0 73.9 2.9 2.1 External Assistance (net) 25.0 1.C 0.8 17.2 C.7 D.5 1/ The Per Capita CNP estimate is at 1973 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. Not comparable with latest World Atlas oecause of downward revision on population figures and changes in the GNP series. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. '"Unallocated" consists mainly of unemployed workers seeking their first job. 31 In 1958 prices. not available not applicable  Page 2 of 2 pages COUNTRY DATA - JUATEMALA MONEY, CREDIT and PRICES 1966 1969 1970 1971 197 2 197 3 (MillionQuetz outstanding end period) Money and Quasi Money 239.3 31 I.7 350.1 3bb.& 462.7 590.5 Bank Credit to Public Sector 3h.2 13.9 h1'.1 67.1 101.4 111.1 Bank Credit to Private Sector 176.0 231h.9 24b.9 257.2 270.1 305.9 (Percentages or Index Numbers) Money and Quasi Money as % of LNP 17.4 1.7 1ci.o 20.0 23.5 23.2 General Price Index (1965 = 100) 99.1 103.0 108.1 lo6.o 1 u5.3 120.7 Annual percentage changes in: General Price Index -0.9 1.6 5.0 -1.2 -1.4 14.6 Bank credit to Public Sector, net 11.1 -6.4 63.2 51.1 9.6 Bank credit to Private Sector 7.2 6.o 3.3 8.1 10.0 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-73) 1971 1972 1973 US $ Mln % (Millions US $) Coffee 105.o 32.6 Exports of Goods, NFS 33d.5 395.3 529.9 Cotton 36.5 11.2 Imports of Goods, NFS 371.0 396.5 891.1 Bpnanss 21.6 6.7 Resource Gap (deficit -) . 5 1TT2 jo.b Meat 17.0 5.2 Sugar 12.8 3.9 Interest Payments (net) -12.3 -1h.o -9.4 All other commodities 131.1 140.4 Workers' Remittances . . Total 32li.o T 8 QO Other Factor Payments (net) -29.5 -33.1, -37.0 Net Transfers 2'.2 20.0 8 .9 EXTERNAL DEBT. DECEMBER 31. 1973 Balance on Current Account 38C.1 -15.c .3 US $ Mln Direct Foreign Investment 28i.6 15.3 2|.7 Net MQT Borrowing Public Debt, incl. guaranteed 192.3 Disbursements 22.4 32.3 23.3 Non-Guaranteed Private Debt Amortization -20.2 -38.9 -12.8 Total outstanding & Disbursed Subtotal 2.2 -2.6 10.5 l/ Capital Grants 7.0 6.2 9.C DEBT SERVICE RATIO for 1973 Other Capital (net) 1. 25.2 -22.4 % Other items n.e.i 16:L 2 c. 7.o Increase in Reserves (+) 11.o 50.3 67.' Public Debt, incl. guaranteed 3.75 Non-Guaranteed Private Debt Gross Reserves (end year) 101o.6 185.5 227.0 Total outstanding & Disbursed Net Reserves (end year) 08.0 13,.3 2C1.3 RATE OF EXCHANGE IBRD/IDA LENDING, February 28,l975(Million US $): IBRD IDA US $ 1.00 = Quetzples 1.CR Q 1.00 = US $ 1 .Co Outstanding & Disbursed 34.6 Undisbursed 11.4 This rate uf exchenge hat Outstanding incl. Undisbursed 76r prevailed since December 18, 1946 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. not available not applicable July 18, 1972 EPD/PRD  SUMMARY AND CONCLUSIONS i. Guatemala's rate of economic growth has been accelerating since 1950. Although the rate of growth fluctuated substantially during 1963-73, it never fell below h percent per annum; on average product grew by about 5.8 percent per year. The average rate of growth of GDP for the years 1972 and 1973 is estimated at more than 7 percent per annum. Population growth seems to have decelerated significantly in the last decade, falling from 3.1 percent during the period 1950-6h to 2.1 percent per annum during 196h-73. The benefits of economic growth have been extremely concentrated and the standard of living of the rural poor -- who make up nearly 50 per- cent of the 5.2 million population -- does not seem to have improved significantly. GNP per capita reached more than US$500 in 1973. Prelim- inary estimates for 1974 indicate output grew by some 5.7 percent. ii. The Guatemalan public sector's role in promoting economic growth has been limited. As emphasized in previous World Bank reports, a more active Government participation in the growth process is needed to attack successfully the deep-seated long-term development problems of the country. Substantial increases in development expenditures (both capital and current) are needed to broaden the country's economic and social base and to inte- grate the large subsistence sector into the market economy. The Government that left office in July 1974 is credited with some positive actions in this direction as part of the implementation of the 1971-75 Development Plan. Investment expenditures were doubled in 1972-73, with a large proportion of the increase occurring in health and education; thus from an annual average of Q3.7 million for investment expenditures in these areas during 1968-71, they reached an average of Q20 million in the years 1972-73.- iii. The major bottlenecks that prevented achievement of higher public investment levels in the past were the inadequate capacity to prepare and execute projects and an inadequate system of taxation. Nlew efforts are being made to enlarge project preparation capacity. Tax revenues are less than 8 percent of GDP, which is among the lowest in the developing countries. New tax measures were taken in l974, but these were primarily intended to compen- sate for the erosion of Government revenues resulting from the inelasticity of the tax system in the face of inflation. The new administration is cur- rently preparing a new economic development plan. In the meantime, however, some basic policy decisions have been made as part of the emergency program to fight inflation -- that is, the Government has provided fertilizers, extension services and storage, and has increased support prices in order to stimulate production of basic grains. These measures should be integrated into a compFehensive development program to improve the productivity of small-scale subsistence agriculture in order to increase the lot of the poor- est sectors of the economy. iv. Prices have been growing at an unusually fast rate in the recent past. The force behind this new phenomenon in the Guatemalan economy  - ii - originated mainly in the external sector. The Government has taken a series of measures to reduce the impact of world market conditions on the rest of the economy. The policies have been aimed mainly at increasing the supply of goods which are considered essential. In addition, a temporary price control system was introdLuced to fight hoarding and artificial price escala- tion. Excess liquidity in the banking system prevailed in 1972 and 1973. The monetary authorities were slow in responding to this situation. It was not until September 1974 that an upward revision of interest rates and reserve requirements for the banking system was implemented. v. In 1973 the balance of payments reached a record surplus of US$67.0 million, and the Central Bank's foreign reserves reached a record of US$213.R million. However, mainly because of the increase in the price of oil and speculative stockpiling of imported raw materials and intermediate goods, the balance in current account switched from a surplus of US$3h.0 million in 1973 to a deficit of about. US$75.0 million in L97L4. In addition, there was a short-term capital outflow of about US$30.0 million last year. vi. Despite higher costs of fuel and other imported inputs, the over- all economic prospects for Guatemala for the rest of the decade are reason- ably good. With no basic changes in policy, the economy could grow at about 6 percent per year under fairly safe balance of payments conditions. However, a continuation of past trends would only have a very limited effect on the large segment of the population still on the margin of the cash economy. If this segment of the population is to be integrated gradually into the modern economy, a more agressive development policy will have to be implemented. The very low public debt service ratio (3.8 percent in 1973), which will probably decline further, would easily allow the increases in foreign indebtedness which are needed to accelerate development. However, this increase in the inflow of foreign resources could be brought about only if the country were to expand its absorptive capacity through the strengthening of the project preparation process and through a fiscal effort sufficient to generate the required additional counterpart financing.  ECONOMIC DEVELOPMENT AND PROSPECTS OF GUATEMALA Chapter I: INTRODUCTION 1. Mountains divide Guatemala into four main regions: the highlands, the Pacific coastal plain, the Atlantic area and the Pet6n. Geological history has given this mountainous tropical country very fertile, volcanic soil and a range of altitudes which offer a wide variety of climates. These varied regional conditions are well-suited to the growth of almost any type of agricultural product. The Pacific lowlands produce cotton, sugar cane, cattle, rice and other tropical crops. The upper Pacific piedmont is an excellent coffee region and most of the coffee is produced in this area. The highlands produce most of the corn and beans, which are the principal items in the country's diet, and the Atlantic area produces bananas and some coffee. The Pet6n, which is the northernmost province, occupies about a third of the country's area, but is largely unexploited. It contains the most important archeological monuments of the Mayas, and produces chicle and some tropical woods. 2. On the other hand, the rugged and broken topography has hampered transport and created great obstacles to the development of the country, and has tended to perpetuate the cultural isolation of some segments of the rural population. There has been no extensive exploitation of Guatemala's mineral resources. The first large commercial exploitation of nickel, near Lake Izabal in the Atlantic area, will be started in early 1977. Exploratory work in potential petroleum areas has been carried out, apparently with encouraging results; however, while exploration continues, there are as yet no immediate plans for exploitation. The natural beauty of the country and its rich history, which has left archeological monuments and folklore of rare quality, give Guatemala a high potential for tourism development. 3. Guatemala has the largest population among the Central American countries. Because of the good climate and soils, most of the population and economic activity are concentrated in the central highlands and the Pacific slopes. The population is mainly rural. Guatemala City, the capital, has more than 717,000 inhabitants, but only two other cities have over 30,000. Guatemala's population has been growing at about 2.1 percent per annum in the last decade and now totals 5.2 million. The most signif- icant characteristic of the population is its sharp ethnic division. The pure Indians, who make up about 43 percent of the total population, are economically, culturally and linguistically separated from the rest of the population, which is mainly of mixed Spanish and Indian origin. A large part of the Indian population participate to a very limited extent in the money economy and political life of the country. The main contribution of the Indians to output, apart from their subsistence agriculture, has been to provide a labor supply for the large coffee and cotton plantations at harvest time.  Chapter II: ECONOMIC DEVELOPMENT 4. Guatemiala's rate of economic growth has been accelerating in the last two decades. In the first five years of the L950's, despite the stimulating effects of the Korean War on the country's exports, the average rate of growth was only about 2.5 percent per annum. Substantial improve- ments in world market conditions for coffee in 1956-57 stimulated the economy, and output increased at a yearly average of 6.9 percent. However, as world market conditions for primary commodities deteriorated in 1958, growth fell back to 2.3 percent. In subsequent years the rate of growth remained above 3.5 percent. In 1963 Guatemala achieved a record crop of coffee, and the production of cotton, which had expanded rapidly in pre- vious years, nearly doubled. Despite some deterioration in prices, the value of Guatemala's exports increased by about 30 percent and output by 9.5 percent. After 1963 the annual rate of growth never fell below 4.0 percent and on average product grew by about 5.8 percent per annum. 5. The improvements of the 60's and 70's have been the result of two main factors: first, the development of commercial agriculture in new areas on the Pacific Coast, and second, the creation of the Central American Common Market in 1960. The Common Market gave a powerful incentive to the manufacturing sector which grew at a high rate until the 1969 Honduras-El Salvador border conflict, which disrupted the market and contributed to Honduras? withdrawal from it. However, an interim bilateral trade agreement with Honduras and good market conditions for most of Cpntral Arnerican primary products spilled over into the manufacturing sector, which resumed its high rate of growth early in 1973. 6. Preliminary results of the 1973 census indicate that, contrary to previous estimates, population growth has decelerated significantly in -the last decade, falling from 3.1 percent per year in the intercensus period 1950-64 to 2.1 percent per year between 1964 and 1973. Moreover, the ratio of urban population to total population has remained almost unchanged be- tween the last two censuses. This would appear to be the result of a steep- er decline in urban birth rates rather than a halt in urban migration -- the share of population aged 0-14 in the urban area has declined by 1.5 percentage points between 1964 and 1973, while the corresponding share in rural areas has been reduced by only half a percentage point. 7. The change in structure of active population has followed the standard pattern for countries at Guatemala's stage of development, with primary activities losing their relative importance to secondary and tertiary activities. A major portion of the relative decline in the active agricul- tural population has been absorbed by manufacturing and construction -- the former losing over seven percentage points of its share in the total, while the latter two together gained 5.5 percentage points (See Table 1).  Table 1: ECONOMICALLY ACTIVE POPULATION 1950, 1964, 1973 (Percentage distribution) 1950 1964 1973 Agriculture 66.1 63.9 56.7 Mines and Quarries 0.2 0.2 0.2 Manufacturing 12.4 1265 14.6 Construction 2.9 2.9 4.3 Electricity 0.1 0.1 0.3 Commerce 5.9 6.7 7.9 Transport 1.7 2.h 2.7 Services L0.7 12.3 13.3 TOTAL 100.0 100.0 100.0 3ource: Appendix table 1.2 8. The average rate of growth of GDP for the years 1972 and 1973 is estimated at more than 7.0 percent per annum. While in 1972 agriculture grew faster than manufacturing (9.6 percent versus 5.5 percent), the reverse occurred in 1973 with manufacturing growing by 8 percent, and agriculture by 7.3 percent. 9. Agriculture employs about 57 percent of the active population, although it contributes only about 28 percent of GDP. The rate of growth of agricultire has fluctuated sharply in response to changes in weather and market conditions. In 1972-73 gross production grew by more than 11.5 percent per annum. This high rate of growth compares very favorably with the generally modest rates achieved in the preceeding seven years. Favorable market condi- tions for some industrial crops led to a significant expansion of production and exports. However, official export statistics do not fully reflect the price movements because a high proportion of sales are made under futures contracts, and, in addition, there is an apparent tendency to understate export prices. This rapid growth of industrial crops has driven the price of land up, especially in the south, where cotton and sugar are produced. Some areas previously used for cattle raising and maize cultivation have been plant- ed with the above mentioned crops. The rapid expansion of commercial crops in 1972-73 induced an increase in rural wages. It is estimated that most of the farmers were paying wages above the legal minimum wage set at Ql.15 per workday plus food and lodging.  Table 2 GDP BY TYPE OF ECONOMIC ACTIVITY 1950 - 1973 (In percentage) Annual Averages t950-52 1957-59 1966-66 1971-73 Gross Domestic Product 100.0 100.0 100.0 100.C Primary production 32.6 . 9.7 29.0 26.2 Agriculture and related sectors 32.6 29.5 26.9 26.1 Mining 0.2 o.2 0.1 .1 Secondary production 15.4 16.4 17.1 1d.d Manufacturing 12.1 12.6 1h.27 15.9 Construction 2.6 3.1 1.9 1.7 Utilities o.5 0.7 1.0 1.2 Services 51.o 53.9 53.9 53.o Transport and Communications 3.7 -T:T5.1 5, 3 g Commercial services 26.3 226.4 27.7 26.2 Financial services 1.3 1.6 2.4 2.3 Housing services 8.6 6.6 7.9 6.4 Public Administration 6.2 5.9 h.6 4.7 Other 5.7 6.1 5.8 5.6 Source: IBRD report WH-132b and appendix table 2.1 10. The average growth rate of gross production of food crops has exceeded 5 percent per annum in 1971-73 after the very low growth registered in the pre- ceeding six years. However, the production of maize, the main staple of the population, dropped in 1971 and 1972, while that of beans, the other basic food crop, registered significant gains only in 1972 and 1973, The slow growth in basic grains has forced the Gcvernment to import substantial amounts of corn in the recent past. In view of the importance of basic grains, the Government has taken measures to promote their production. II. Although investment has fluctuated widely from year to year, for the last 23 years it has been growing on the average at a faster pace than GDP. In 19g0 gross investment as a percentage of GDP was only about 9.3 percent. In the second half of the l950's, the economic boom which crigina.ted in the external sector, had a positive impact on investment -- in 1956-53 the rate of investment attained a level of 15.3 percent. In the period l19:-62 investment was substantially depressed and the average rate of investment declined to about 9.6 percent of GDP. However, investment received renewed stimulus there- after as a result of the creation of the Central American Cormon Market, which brought with it generous exemptions from duties 'on imports of capital goods and raw materials, tax holidays for new industries, and increased import duties on products which would be competitive with those of the  Commcn Market. Since 1963 the average rate of investment to GDP has rema_ned at nearly 13 percent, with public investment increasing sub- stantially in 1972 and 1973. 12. The new more aggressive investment policy of the Government compensated in part for the lower levels of investment in the private sector in 1972. Private investment in the manufacturing sector declin- ed due to prevailing uncertainties in the Central American Common Market and to the existence of substantial excess capacity in industries such as textiles. Recent increases in demand for manufactured products have led to an expansion of investment in stocks, particularly in the early months of 197h. The strong external market for the main commodity exports of Guatemala stimulated investment in agriculture in 1972-73. Moreover, as a result of the economic boom, the housing industry, which had stagnated for many years, was growing at about 19 percent per annun. Construction activity is mainly concentrated in Guatemala City. 13. The country's economic fortunes have traditionally depended on fluctuating prices and supply conditions for a few agricultural export crops. Development in the agricultural sector has been restricted almost exclusively to large commercial agriculture, which is concentrated in only a few areas of the country. The effects of rapid economic growth have not been spread widely through the economy. Real wages in plantation agriculture have traditionally been low and it appears that only recently they have register- ed some improvements. Productivity in most of the highlands -- where mainly basic grains are grown on small plots of land -- has made only small gains. Since the beginning of the 1960's the base for economic growth was broadened with the creation of the Central American Common Market, which became an important outlet for Guatemala's industrial production. The size of the market and the limited possibilities for futher import substitution will continue to be a major constraint to future growth of the manufacturing sector. However, the experience gained through the Common Market will be very valuable in promoting non-traditional exports to third markets. Chapter III: PUBLIC FINANCE 1[. Although Guatemala's public sector participation in GDP has increased during the last eight years, it still remains at a very low level. During this period GDP in current terms grew at an average rgte of 8.2 percent per annum, while public sector current revenue grew at about 10 percent per annum and current expenditure at a slightly lower rate. This expansion of public sector operations was due to the creation of new public entities and the rapid development of some public utilities already in existence.. The average annual rate of growth of public investment expenditure during the period exceeded 11 percent. As there was only a modest increase in current savings, the overall deficit of the public sector increased by about 9.7 percent per  - 6 - annum on the average, attaining a level of 1.2 percent of GDP in 1973. A. Central Government 15. Guatemala's management of fiscal affairs has had remarkable success in achieving internal stability through conservative budget han- dling. This stability, however, has been attained at very low levels of revenue and expenditure. During the fifties and up to 1958, Central Govern- ment current revenue stood at about 9.4 percent of GDP, dropping to about 8.5 percent in 1959-60 due to a reduction in tax collections on external trade. During these years coffee prices declined steeply and imports were significantly depressed. This declining trend in fiscal revenues continued for the first three years of the sixties because of further deterioration of the external sector and the introduction of tax exemptions under the Central American Common Market. The ratio of Government revenues to GDP fell to 7.6 percent during this period. Tax measures taken in subsequent years succeeded in raising this ratio to about 8.5 percent of GDP, a level which was maintained Table 3: PUBLIC SECTOR SUMMARY OPERATIONS 1/ (Main items as a percent of GDP) 965-67 1968-70 l971 1972 1973 Current Revenue 11.2 11.6 12.1 13.0. 12.3 (Central Government) (6.7) (6.5) (6.7) (b.b) (b.2) Current Expenditure 9.8 10.3 10.5 11.4 10.3 (Central Government) (7Mb) (7.6) (7.4) (7.6) (6.5) Savings 1.h 1.3 1.6 1.6 2.0 (Central Government) (0.9) (0.9) (1.3) (1.2) (1.h) Investment 2.6 2.5 2.9 3.0 3.9 (Central Government) (2.2) (1.6) (1.7) (2.5) (2.9) Deficit Financing -1.2 -1.0 -1.0 -1.2 -1.7 (Central Government) (-1.2) (-o.6) (-0.4) (-1.2) (-1.4) 1/ Total public sector figures are net of transfers. Source: Appendix tables 2.2 and 5.6; components may not add up because of rounding off and the exclusion of capital receipts.  - 7 - until 1972. The traditional policy has been to adjust total expenditures to the revenues available. Guatemala's various administrations have frequently resorted to austere measures to keep the deficit to very low levels. Since 1959 the overall Central Government deficit has never exceeded 1.8 percent of GDP and has averaged only about 1.0 percent. 16. The administration that left office in July 1974 relied mainly on administrative reforms to increase current revenue. Although some improvements were made, the overall impact was limited. On the expenditure side the Govern- ment had adopted an ambitious development program for 1971-75. A necessary precondition for the implementation of the program, however, was the creation and reorganization of public sector entities, a task to which the Government gave high priority in 1971-72. In 1972-73 Central Government investment expenditures increased substantially. Revenue 17. In early 1973 the outgoing administration realized that the level of current revenue required to substantially step up Government expenditures Table 4 CENTRAL GOVERNMENT CURRENT REVENUE (In millions of current Quetzales) 1965 1965 1971 1972 1973 Tax Revenue 107.1 120.4 153.8 164.2 169.2 Direct Taxes 16.4 22.1 26.3 29.d 33.0 Income tax 13.1 16.c 20.5 22.4 25.3 Property tax 3.3 6.1 5.o 7.4 7.7 Indirect Taxes 90.6 98.3 127.5 134.4 156.2 Foreign trade 43.5 34.4 47.5 47.1 57.1 (Export duty) ( 5.5) ( 4.b) ( 6.0) ( 5.6) (13.9) (Import duty) (30.5) (26.1) (34.8) (33.9) (37.7) (Unallocated) 4 4.5) ( 3.5) ( 4.7) ( 4.6) ( 5.5) Domestic transactions 47.3 63.9 80.0 67.3 99.1 Stamp tax (15.6) (30.6) (36.9) (40.6) (49.6) Petroleum Products ( 6.6) ( 9.5) (12.0) (13.2) (14.5) Tobacco ( 4-8) ( 5.1) ( 6.9) ( 7.c) ( 7.2) Alcohol (14.0) (15.1) (17.5) (18.5) (20.6) Other ( 4.3) ( 3.3) ( 6.4) ( 6.o) ( 7.2) Non-Tax Revenue 11.7 13.4 19.2 19.9 24.0 Total Current Revenue 118.9 133.o 173.0 104.1 213.2 Source: Table 5.2 of the Statistical Appendix.  - 8 - while maintaining stability could not be attained through administrative im- provements alone. However, the proximity of the presidential election (March L974) made the introduction of new taxes politically difficult at that time. 18. While no new taxes were introduced during 1973, tax administration improvements yielded positive results. The number of tax returns audited increased by 43 percent, with efforts concentrated on the larger taxpayers, and 12,143 new properties were entered in the tax records. Although the number of notices to delinquent taxpayers was reduced from 19,000 in 1972 to about 3,000 in 1973, the contacts in the latter year were in the form of personal visits by tax inspectors rather than letters sent through the mail as in the previous year. The yield on account of tax penalties increased by more than 3h0 percent. A new sales tax auditing team was organized at the beginning of 197h. This team has been visiting the interior resulting in substantial benefits for the internal service. There are still, however, two important measures which need to be implemented: the use of tax identification numbers and the completion of property identification on the Pacific Coast. 19. In October 1973, the Goverrment extended for two years the import duty exemption on raw materials for the industries included in the Common Market 4greement, and whose initial 10-year exemption period had expired. It is expected that the authorities will continue extending the deadlines until the General Agreement being sought in the fiscal area, as part of the restructuring of the Common Market, is completed. It is estimated that if the Government were to eliminate import duty exemptions, most of which are attributable to the Common Market Agreement, it could more than double import duty collections. Current Expenditure 20. Central Government current expenditures during 1965-73 have grown at a lower rate than GDP. The structure of these expenditures in general has registered only minor variations during the period. Between 1965 and 1972, expenditures on social services grew at a faster rate than general services. In 1973, however, expenditures on general services increased sharply, and their share in total expenditures returned to its 1965 level. 21. Given the degree and extension of poverty in the country, and particularly in rural areas, the low level of current expenditure is clearly in- adequate to meet the needs of the population. An expansion of current expend- itures in health and education is urgently needed. Moreover, the levels of Government investment in 1972-73 and those projected for future years, particular- ly in the social areas, will demand substantial increases in the Government's current expenditures.  Table5 : CENTRAL GOVERYIENT CURRENT EXPENDITURE PER HEAD (In current Quetzales) 1965 1968 1971 1972 1973 Economic Services 2.4 3.2 3.9 4.4 4.0 Social Services 9.6 10.9 14.0 13.8 14.5 Education 57. -777 7.1 -h79 7.3 Health 2.5 3.0 3.5 3.9 3.9 Social Welfare 2.1 2.2 3.h 3.u 3.3 General Services 1Lc.1 11.3 11.7 12.9 15.4 General Administration 37 3.9 T7