Guatemala - Industrial Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3711-GU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$20.0 MILLION TO THE REPUBLIC OF GUATEMALA FOR AN INDUSTRIAL CREDIT PROJECT January 26, 1984 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Official Foreign Exchange Rate Parallel Foreign Exchange Rate (1983) US$1.00 = Q 1.00 US$1.00 = Q 1.35 Q 1.00 = US$1.00 Q 1.00 = US$0.74 In this report, currency accounts are expressed in Quetzales (Q) and US Dollars (US$) at the Official Foreign Exchange Rate. FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS BANDESA - Banco Nacional de Desarrollo Agricola (National Agricultural Development Bank) BANVI - Banco Nacional de Vivienda (National Housing Bank) BG - Banco de Guatemala (Guatemala's Central Bank) CACM - Central American Common Market CIIU - Clasificacion Industrial Internacional Uniforme (Uniform International Industrial Classification) CABEI - Banco Centroamericano de Integracion Economica (Central American Bank for Economic Integration) CORFINA - Corporacion Financiera Nacional (National Financial Corporation) FIASA - Financiera Industrial y Agropecuaria, S.A. (Industrial and Agricultural Finance Corporation) FIGSA - Financiera Industrial de Guatemala, S.A. (Guatemalan Industrial Finance Corporation) FISA - Financiera Industrial, S.A. (Industrial Finance Corporation) GUATEXPRO - Centro Guatemalteco de Promocion de Exportaciones (Guatemalan Export Promotion Center) ITC - International Trade Center SIECA - Secretaria Permanente del Tratado General de Integracion Economica (Permanent Secretariat for the General Treaty for Central American Economic Integration) SVIR - Standard Variable Interest Rate of the Bank  FOR OFFICIAL USE ONLY GUATEMALA INDUSTRIAL CREDIT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Guatemala Beneficiary: Banco de Guatemala (BG) Amount: US$20.0 million equivalent, in various currencies, including about US$0.1 million capitalized front-end fee. Terms: Repayable in 17 years, including four years of grace, at the standard variable interest rate (SVIR). Relending Terms: (A) The Borrower would onlend to BG US$17.9 million, at the same interest rate, term and grace period as for the proposed Bank loan. The Borrower would bear the cross-currency exchange risk with the US Dollar. BG would onlend in Quetzales US$17.9 million equivalent for investment financing on the following terms: Interest Including Per Annum Grace in % Term (Years) BG to Participating Financial Intermediaries for: Subloans to Small Enterprises'/ SVIR + 1) ) Same as subloans Subloans to Medium ) to enterprises Enterprises2/ SVIR + 2) Weighted Average SVIR + 1.9 Participating Intermediaries to Enterprises for: Subloans to Small SVIR+ ) Enterprises1/ up to 5 U - ) ~~~~~~~~~~Up to Up to Subloans to Medium SVIR + ) 12 Years 3 Years Enterprises2/ up to 5 ) 1/ Enterprises with fixed assets of up to US$250,000. 2/ Enterprises with fixed assets of more than US$250,000. Relending to any single enterprise and its subsidiaries would be limited to US$1.5 million. In addition, BG would not finance firms having alternative sources of foreign exchange financing. This would effectively limit the participation of most large enterprises. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - BG would bear the exchange risk between the US Dollar and the Quetzal; an average spread of 1.9 percentage points for BG has been allowed to cover its operating costs for the project and the exchange risk. (B) The Borrower would make available to BG US$2.0 million of the loan proceeds for technical assistance, comprising: (i) US$625,000 on a non-reimbursable basis, to finance training and policy studies to be carried out by government agencies; and (ii) US$1,375,000 on the same terms as the Bank loan and with an annual interest rate of up to the interest rate payable on the Bank loan, for onlending through participating finan- cial intermediaries to enterprises in Quetzales, on terms of up to five years including two years grace, at the same interest rate payable by BG to the Borrower plus a one percent spread for the financial interme- diaries, to assist the enterprises to develop non- traditional industrial exports outside the Central American Common Market (CACM) by identifying product quality and design standards required in markets outside the CACM and developing test marketing and promotional strategies for specific products. Project Description: The proposed loan would support the Government's strategy and measures it is taking to promote non- traditional industrial exports outside CACM for the efficient growth of industry by: (i) providing techni- cal assistance to help exporters of non-traditional products develop new markets outside the CACM; to strengthen the Government's export promotion policy framework and strategy; and to strengthen the capacity of BG and participating financial intermediaries to prepare, appraise and supervise projects; and (ii) pro- viding medium and long-term credit and foreign exchange for financially and economically sound industrial reconversion or expansion projects. By providing enterprises with technical assistance, credit and foreign exchange, the proposed loan is expected to generate employment, income and a more rapid expansion of non-traditional exports than might otherwise be possible.  - iii - Project Risks: The proposed loan's principal risk is slower than expected commitments due to lags in improved export performance stemming from slow recovery of world trade coupled with difficulties in opening new export markets. In addition, disbursements could be delayed by start-up difficulties in putting into operation new financing arrangements. Finally, the generally unsettled situation in Central America could delay some investment decisions. However, the project's emphasis on technical assistance and training should reduce these risks. To minimize the risks further, the Bank intends to supervise closely the start-up of the project unit in BG. Estimated Cost: ----------US $Million----- Local Foreign Total Investment Component 11.0 17.9 28.9 Technical Assistance 1.0 2.0 3.0 Total Project Cost 12.01/ 19.91/ 31.91/ Front-End Fee on Bank Loan - 0.1 0.1 Total Financing Required 12.0 20.0 32.0 Financing Plan: ----------US $Million----- Local Foreign Total IBRD - 20.0 20.0 BG 1.0 - 1.0 Intermediaries 6.5 - 6.5 Enterprises 4.5 - 4.5 Total 12.0 20.0 32.0 Estimated Disbursements: ----------US $Million------- IBRD FY 1985 1986 1987 1988 Annual 4.5 7.0 7.0 1.5 Cumulative 4.5 11.5 18.5 20.0 Economic Rate of Return: Not applicable Staff Appraisal Report: 4390b-GU dated January 26, 1984. 1/ Including price contingencies.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GUATEMALA FOR AN INDUSTRIAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$20.0 million to the Republic of Guatemala to assist in the financing of an Industrial Credit Project. The loan, which includes a capitalized front-end fee of one-fourth of one percent, would have a term of 17 years, including four years of grace, at the standard variable interest rate. The proceeds of the Bank loan would be onlent to the beneficiary, Banco de Guatemala (BG) at the same interest rate, term and grace period as for the proposed Bank loan, except for US$2.0 million for technical assistance. PART I - THE ECONOMY 2. A report entitled "Guatemala Economic Memorandum" (Report No. 4195-GU) was circulated to the Board in June 1983. The conclusions of that report are incorporated in this section. Annex I summarizes the main social and economic indicators. Overview 3. Guatemala's population of about 7.5 million (mid-1982) is growing at about 3.0 percent per year. Its most significant characteristic is a sharp ethnic division. The Indians, about half of the total population, constitute its poorest segment. The separation of the Indians from the rest of society - of mixed ancestry and European origin - has its roots in cultural and linguistic differences, and has been exacerbated by lack of access to good land, public services, and employment in the modern sectors. Malnutrition is severe and infant mortality is high. The adult literacy rate is only 46 percent, one of the lowest in Latin America. The high population density (262 per square kilometer of agricultural land) is nearly triple the average in Latin American countries. Resources 4. Guatemala has a diversified physical environment. The varied climate and dispersion of good soils allow cultivation of a variety of agricultural products. The country has some petroleum and nickel deposits as well as substantial hydro-electric power potential and some exploitable  - 2 - geothermal fields. Guatemala's natural beauty, mild climate, archeological monuments, and proximity to the United States constitute a good potential for tourism development. Structure of the Economy 5. The small size of the country makes external markets important to growth, while making the economy vulnerable to fluctuations in international prices. Exports of primary agricultural and manufactured products (mainly consumer goods) have been a major source of growth. Primary products are exported to the U.S., Europe, and Japan. A major share of manufactured exports is oriented to other countries of the Central American Common Market (CACM). Guatemala has consistently achieved trade surpluses vis-a-vis other CACM members, but the dynamism and growth potential of this market has been reduced recently by economic and political problems in the region. 6. Agriculture, manufacturing, tourism and, recently, oil are important sectors in Guatemala. Agricultural output growth at 3.8 percent a year during 1965-1982 has been among the highest in Latin America; the sector presently generates over one-fourth of GDP and about half of total employment and exports (mainly coffee, cotton, sugar, bananas, and beef). Savings from export agriculture provide a substantial share of investment financing. Industrial output, which grew at an annual rate of about 5.8 percent during 1965-82, presently contributes over one-fifth of GDP, employs one-sixth of the labor force, and accounts for about one-third of exports. In the mid-1970s, tourism expanded to rank third after coffee and cotton as a foreign exchange earner. Tourism earnings, however, fell from about US$82 million in 1979 to US$12 million in 1982 as political tensions in the region increased and security conditions in Guatemala worsened. Crude oil production started in 1979 and reached about 10,000 barrels per day in 1983, equivalent to one-fourth of domestic consumption. About half of the production is exported, since it cannot be used domestically because of its high sulphur content. Proven oil reserves are modest, estimated to last about six years at the current rate of production. Exploration continues, however, and the Government hopes to confirm larger reserves. Growth Paths 7. Until the 1960s, Guatemala's growth originated mostly from exports of traditional products. During the 1960s and early 1970s, industrial growth was stimulated by Guatemala's participation in the CACM, which provided manufacturing firms with a larger protected market. This period saw the emergence of a dynamic industrial class. However, as the limit of expansion of the CACM trade was approached, further development of industry was constrained. This limitation, combined with a decline in world demand for traditional export crops, underscored the need to broaden the basis for economic growth. Towards this end, the Government is taking steps to re-orient its incentive system to encourage non-traditional exports to markets outside the CACM, both in industry and in agriculture, to stimulate the domestic economy through their multiplier effects.  -3- Recent Growth Trends 8. Between 1965 and 1978, Guatemala enjoyed steady and substantial economic growth with a low rate of inflation. GDP grew at six percent per year, fostered by favorable world prices for the country's traditional exports, growth of manufactured goods to CACM countries and expansion of tourism. The private sector played a major role in diversifying exports by developing cotton and sugar plantations, and by creating the largest industrial sector in Central America. During the last six years, however, the country experienced serious economic difficulties caused mainly by (i) falling world demand and prices for Guatemala's traditional export crops and rising international prices which led to a 24 percent deterioration in the terms of trade; (ii) payment difficulties in the CACM, which adversely affected exports of manufactures; and (iii) political developments in Central America which discouraged private investment and foreign financing while stimulating private capital outflows. All of these unfavorable developments resulted in a significant deceleration in GDP growth from five percent in 1978 to less than one percent in 1981 and a decline in 1982 to minus 3.5 percent and in 1983 to minus 2.3 percent. Fiscal and Balance of Payments Policies 9. Government policies until the late 1970s have given top priority to financial stabilitv and to providing a favorable climate for domestic and foreign investors. Key elements of this approach have been a strong and stable currency, freedom from external payments restrictions, import protection through the CACM common tariff, and minimal taxation. Current public revenues fluctuated around 12 percent of GDP; current expenditures, around 9 percent; public investment, about four to five percent; and the public deficit, about two to three percent. The level of public expenditure was low, compared with that of countries at a similar stage of economic development, and economic growth benefitted only a small segment of the population. Basic services, particularly in, education, health and rural developments, remained inadequate. 10. During 1980-81, there was a departure from the generally cautious fiscal and monetary policies. In an effort to stimulate the economy, the Government increased public investment to 7.4 percent of GDP in 1980 and to 8.6 percent in 1981. However, a sharp decline of Ziscal revenues from foreign trade and domestic production brought about a substantial deterioration of public savings which dropped to about 1.1 percent of GDP in 1981. The public deficit reached 6.8 percent of GDP in 1981 and was financed mostly through an expansion of Central Bank credit, which tripled in 1980 and doubled again in 1981. The rate of inflation increased to 9.5 percent per annum on the average during these two years. 11. Expansionary fiscal policies in 1980-81 were accompanied by large external imbalances which drained international reserves. Imports continued to increase while depressed export proceeds caused an acute shortage of foreign exchange. The current account deficit of the balance of payments increased from 2.6 percent of GDP in 1979 to 6.5 percent in 1981. Low levels of official external financing, difficulties in  - 4 - collecting payments in convertible currencies from other CACM countries, drying up of foreign commercial bank and supplier credits and net private capital outflows of about 2.8 percent of GDP annually further exacerbated the foreign exchange shortage. To protect reserves, exchange controls were introduced in 1980 and made more stringent in 1981, while the Central Bank increased its borrowing from foreign sources. Nevertheless, net foreign exchange reserves decreased to US$23.5 million at the end of 1981, equivalent to about 0.2 months worth of merchandise imports (compared to US$733.1 million, equivalent to 6.3 months of merchandise imports in 1978). 12. The Government which took office in March 1982 started addressing the rapidly deteriorating economic situation by taking austerity measures aimed at containing the disequilibrium in public finances and balance of payments. Total Government expenditures in 1982-83 were about 20 percent below the level in 1981 as a result of sharp cutbacks in both current and capital spending. Current expenditure was reduced mainly through a freeze in Government salaries, reductions in personnel and cuts in budget allocations of goods and services. Costly, low priority infrastructure projects were either postponed or cancelled. As a result, the central government deficit was cut to 4.6 percent in 1982 and about 3 percent in 1983, from 7.4 percent in 1981. The growth of domestic credit to the public sector also dropped, to about 30 percent from 97 percent in 1981, and the rate of inflation decreased to about six percent. In November 1982, the ceilings on domestic interest rates were lowered to 12 percent (for loans) and to 9 percent (for deposits) in line with the downward trend of domestic inflation and foreign interest rates. 13. The current account deficit of the balance of payments also decreased to 3.8 percent in 1982 and about 2.6 percent in 1983, as imports declined more rapidly than exports reflecting the decline in economic activity as well as an intensification of exchange controls. Net short term capital outflow decreased. However, falling long-term capital receipts were insufficient to finance the current deficit. To cut the loss of gross reserves, the Government introduced restrictions on import payments and delayed the processing of commercial payments, resulting in arrears of about US$280 million at the end of 1983. Pressure on the quetzal resulted in a premium of 30-35 percent for the dollar on the officially tolerated parallel market. The loss in net reserves was sharply reduced in 1982 and was reversed in 1983. 14. Based on a stabilization program, the Government reached agreement with the IMF for a stand-by arrangement of US$120 million equivalent (upper credit tranches) over the period August 1983-December 1984. Through 1983, Guatemala has qualified for all purchases available under the stand-by. In the external sector, the stabilization program aims at achieving a small overall surplus in 1984 and a reduction of payment arrears, while relaxing exchange controls. The stabilization program is predicated on achieving further progress in the fiscal area, including a tax reform to improve the efficiency of the tax system and to support production and exports with a view toward encouraging rapid economic recovery. The program aims at containing the overall public sector deficit at 3.0 percent in 1984, while increasing government current and capital  - 5 - expenditures to support a larger development effort, particularly to reduce poverty in rural areas and diversify exports. During 1984, the Government expects that the main contribution to adjustment will come from tax reform legislation which was enacted in 1983, and is designed to improve the overall efficiency of the tax system. The main component of the reform is the substitution of a value added tax for the existing sales (stamp) tax. The new tax is expected to reduce significantly tax evasion. In addition, the existing progressive rate structure of the corporate income tax has been simplified; a new tax on the net income of financial institutions has been introduced; taxation of credits, transfers and repatriated income of foreign investors has been changed to be comparable to that of other countries with the view to encourage foreign investment; and taxation of beverages and other selected items has been increased. To support production and improve export competitiveness, the tax package provides for exemption of exports from the value added tax, progressive elimination of all other taxes on exports over the next three years and tax credits of up to 15 percent for non-traditional exports outside the CACM. The Government's budget for 1984 envisages a modest increase of current expenditure (about 11 percent) and a significant increase of current revenues (about 24 percent) from the depressed levels of 1983, with the objective of financing about US$418 million of capital expenditures. Although much higher than capital expenditures in 1983 (US$287 million), the 1984 level would be near the levels achieved in the late 1970s. 15. As regards credit, the program calls for a slowdown in the growth of overall domestic bank credit to a rate consistent with approximate equilibrium in the overall balance of payments. A significant part of this deceleration is to result from the fiscal measures and the resulting reduc- tion in credit demands. The authorities have stated their intention to follow a flexible interest rate policy to ensure that domestic interest rates in the banking system continue to be positive in real terms and competitive with comparable rates abroad. Elimination of a 3 percent stamp tax on bank credits in the context of the tax reform has helped to reduce the excessive cost of short-term borrowing. External Debt 16. Apart from the Bank, official external financing has been provided primarily by the Inter-American Development Bank (IDB), the Central American Bank for Economic Integration (CABEI), the U.S. Agency for International Development (USAID) and the Investment Fund of Venezuela (VIF). IDB funds carried a substantial concessional element and often contained components repayable in local currency. The IDB made loans for agriculture (credit, irrigation and fisheries), industry, electric power, transportation, rural education, water supply, and health services. CABEI concentrated mainly on regional projects in highways, telecommunications, and in recent years, on power and water supply projects. USAID mainly financed rural development, rural electrification, rural education and health facilities. VIF assisted in power generation and transmission.  - 6 - 17. The external public debt of Guatemala is low by international comparisons. In 1982, its outstanding and disbursed medium- and long-term public external debt amounted to only 12.6 percent of GDP. Service payments on that debt were equivalent to 6.8 percent of exports of goods and non-factor services. International agencies accounted for 46.8 percent of total disbursed and outstanding debt in 1982. The Bank's share of the debt outstanding was 16.6 percent and its share of service was 25.2 percent i-n 1982. Of other major lenders to Guatemala, IDB holds 21.7 percent of external public debt outstanding, VIF 18.8 percent, CABEI 8.3 percent, and USAID 7.6 percent. Prospects and Creditworthiness 18. The country is facing liquidity problems in the external sector as well as in the fiscal accounts. The authorities are addressing these problems within the framework of the stabilization program agreed upon with the IMF. In the medium- and long-term, economic prospects of Guatemala should improve, and the economy might sustain a growth rate of three to four percent, provided the authorities continue to carry out a comprehensive development effort. The Government is about to complete preparation of a 1984-87 development program and has sent the Bank a statement of the main policies it intends to follow. These policies aim at (i) strengthening private investment incentives and promoting labor intensive production; (ii) stimulating financial savings and private capital inflows; (iii) increasing public savings to enable public enterprises to finance a larger part of their capital outlays from their own resources; (iv) modernizing and diversifying industrial and agricultural enterprises; (v) re-orienting incentives to favor non-traditional exports to markets outside the CACM; and (vi) shifting away from infrastructure investments, in favor of productive and social sectors. The Governement is expected to use external debt capacity prudently to address the problems in productive sectors and in a few main social areas, in order to reactivate the economy, expand public services for the urban and rural poor and reduce social tensions. Thus, if the country continues to carry out economic programs in line with those of the recent past, Guatemala is considered creditworthy for Bank lending. In view of the country's pressing need for development finance and considering the Government's progress and planned efforts to contain the public sector deficit and to redirect expenditures to social services for low-income groups, Guatemala's poverty-oriented development projects merit support beyond their foreign exchange costs.  - 7 - PART II - BANK GROUP OPERATIONS 19. Guatemala to date has received Bank loans totaling US$293.7 million (including US$20 million on third window terms) for 13 projects. Of these, three were for education; four for power; two for telecommunica- tions; two for highways; one for livestock development; and one for earth- quake reconstruction. Seven Bank-financed projects have been completed in Guatemala, three in electric power and one each in telecommunications, education, livestock and highways. Performance audit reports have been issued for two power projects, and the livestock, education and telecommunications projects. The performance audits conclude that project objectives generally have been achieved; however, implementation has been much slower than forecast during appraisal. Effectiveness of all Bank loans has been delayed because of a lengthy ratification process. Most projects now under implementation have also been delayed by the limited administrative capacity of the institutions involved as well as weak inter-agency coordination. However, disbursements of Bank loans have reached a satisfactory pace in the past two years. Two large power projects have accounted for the bulk of disbursements since 1978. Annex II contains a summary statement of Bank loans and IFC investments as of September 30, 1983. 20. Bank financing for infrastructure projects has supported the creation of more efficient public agencies. It also has been instrumental in maintaining a Bank presence in the country through lending operations, while continuing a dialogue with the authorities on the desirability and implementation of a larger development effort. Bank lending for education has more directly encouraged the undertaking of key development challenges we believe the Government faces--such as expanding the provision of basic services, both productive and social, to the rural and urban poor, and supporting the formation of a modern industrial private sector--with the objective of promoting economic diversification and easing the growing social tensions which have characterized Guatemala's recent past. Encouraging progress has been made in the last two years in the Bank's dialogue on sectoral and project issues. 21. IFC has made three investments in Guatemala. The first, a US$200,000 loan in 1958 for a flour mill, has been fully repaid. The second, a loan of US$15.0 million to Exploraciones y Explotaciones Mineras Izabal, S.A. (EXMIBAL), a company established in Guatemala to exploit the nickel ore deposit at Lake Izabal in eastern Guatemala, was approved in July, 1973. After some initial delays in finalizing the project design and in arranging additional financing made necessary by substantial cost over- runs, the plant began operations in mid-1977. The third was a loan of US$3 million to Cementos Progreso S.A. (formerly Cementos Novella S.A.), a Guatemalan enterprise, to help finance an expansion of its existing cement production facilities. The expansion was completed and commercial operations started in 1979.  -8- 22. The pipeline of projects for Bank consideration has improved over the last two years. A Basic Education Project to assist in textbook development, construction of primary schools in poor urban areas and education planning was approved by the Board in June 1983. A Power Distribution Project has been appraised; it includes measures for the rationalization and strengthening of the institutional framework of the energy sector. The Government has requested Bank assistance in preparing projects in the fields of low-cost housing, increasing productivity of small farmers, water supply and export diversification, and in slrengthening the country's ability to plan and carry out public investment projects.Negotiations for a Telecommunications Project have been completed; co-financing from suppliers has been obtained through international bidding procedures, and the project is expected to be submitted for Board consideration shortly. The Government has requested Bank assistance in preparing projects in the fields of low-cost housing, increasing productivity of small farmers, water supply and export diversification, and in strengthening the country's ability to plan and carry out public investment projects. PART III - THE INDUSTRIAL SECTOR Industrial Policies and the CACM. 23. Exports of manufactured goods have been a major stimulant to industrial development in Guatemala. Total manufactured exports nearly doubled from 1977 to US$322 million in 1980, with their share of total exports increasing from 15 percent in 1977 to 21 percent in 1980. Most important in 1980 were chemicals (US$111.5 million), followed by food, beverages and tobacco (US$50.6 million), metal products and machinery (US$32.5 million), textile products (US$24.4 million), rubber goods (JS$23.1 million), paper products (US$21.4 million) and non-metallic minerals (US$20.4 million). 24. Central American trade played an important role in the develop- ment of the industrial sector-through the framework of the CACM, as most of Guatemala's manufactured exports went to Central America. The CACM, created in 1961 by the five Central American countries, provided a free trade area for regionally manufactured goods through a common external tariff, a free trade convention, and a common system of incentives for industrial investment comprising tariff exemptions on imported inputs and capital goods from outside the CACM and income tax exemptions. The CACM made it possible for many firms to achieve economies of scale and to contribute to an expansion in employment. However, high protection for some consumer goods discouraged their producers from attaining i:nternational competitiveness.  - 9 - 25. In the mid-seventies the small size of the CACM became an obstacle to the further development of regional industry. Opportunities for investment in new activities were exhausted, and growth of the manufacturing sector was limited to increases in demand for existing products. Obstacles to free trade became common, as governments tried to protect some industries against regional competition. 26. The CACM limitations have been aggravated over the last three years by the world-wide recession, the drop in prices and revenues for all major commodities exported by Central America (coffee, cotton and sugar) and political troubles affecting the region. Depressed proceeds from traditional exports of all members of the CACM caused a substantial reduction in the purchasing power of the population. The shortage of foreign exchange was made more serious by net capital outflows in 1980-82 and the drying up of foreign bank and suppliers' credits. Intraregional trade decreased by about five percent in 1982 and contracted further in 1983. Prospects for the regional market are likely to remain limited in the future. 27. Faced by the growing limitations of the CACM, the Guatemalan Gov- ernment, in the early 1970s, became interested in promoting exports outside the region. The Government established a public export promotion agency, the Guatemalan Export Promotion Center (GUATEXPRO), which focussed on stim- ulating non-traditional Guatemalan exports outside the CACM. Some positive results were achieved although the share of such exports in 1981 (estimated at US$65 million or 18 percent of total manufactured exports) was still low. In 1983, the Government merged the functions of GUATEXPRO with those of the Department for Export Promotion of the Ministry of Economy with the objective of closer coordination of export support policies. 28. Diversification efforts are presently constrained mainly by the scarcity of foreign exchange to import raw materials and equipment. This hampers industrial production for new export markets; capacity utilization, which had grown during 1978-1980, dropped in 1981-82. A US$60 million loan made by the IDB in November 1983 is expected to help alleviate the shortage of industrial inputs. However, scarcity of foreign exchange also hinders the conversion of existing plants to production for new markets, the starting up of new lines of production and the renewal of existing plants which have deteriorated because of postponed maintenance and repairs. Manufacturing gross investment is estimated to have declined by about 25 percent in real terms from high levels in 1978 to1981. Part of the decline can be explained by a "wait-and-see" attitude of some investors due to the uncertainties affecting Central America, but a major constraint is the availability of foreign exchange. A shift to a more normal level of investment can be expected to begin in 1984 if the foreign exchange constraint is eased. Export Development Strategy and Outlook 29. The Government recognizes that a coordinated and well-planned export drive is essential to enhance Guatemala's export prospects in the medium- and long-term. Only in this way can Guatemala achieve the  - 10 - relatively high level of export growth required for further economic development. The reduced purchasing power of the CACM and its depressing effect on capacity utilization of industrial plants are powerful stimulants to encourage exporters to reorient Guatemala's industrial development from regional import substitution to exports for third markets. 30. The Government has decided to introduce policy improvements to reduce and gradually eliminate existing disincentives for exports outside the CACM to encourage increased productivity and domestic value added, as well as to assist exporters in the opening up of new markets for non-traditional exports (i.e., all exports except coffee, cotton, sugar, bananas and beef). To this end, the Government has decided: (i) to give priority to non-traditional exports in the phasing out of exchange controls and import restrictions; (ii) to revise export incentives, including a reshaping of tariff policies to rationalize the current uneven effective protection for industrial products; and (iii) to increase technical assistance to exporters concerned with the promotion and development of non-traditional exports. Details of the Government's current policy framework for industry are given in paras. 31 through 35 below. Measures which would be implemented in these areas under the proposed project are indicated in para. 48. 31. The exchange restrictions which were introduced in 1980, and were strengthened in November, 1982, set a ceiling for the allocation of foreign exchange to most industrial inputs at 50-70 percent of the 1981 level. These restrictions hampered industrial production and exports, as inventories were drawn down and new inputs had to be imported. 32. Within the framework of the stabilization program and the stand- by arrangement with the IMF, the Government is committed to phase out grad- ually the exchange controls and import restrictions before the end of 1984. The Government took a first step in this direction in January, 1983, by permitting exemptions from import restrictions for enterprises exporting at least half of their production outside the CACM. At the end of 1983, the Government increased the allocations of foreign exchange to most industrial inputs to 70 percent and plans further increases in mid-1984 within the framework of the consultations with the IMF under the stand-by arrangement. 33. Under the present export incentive system, the protection offered by the CACM tariff is unevenly distributed and is biased against exports to third countries of products with high domestic or CACM input content. While intermediate goods not produced in the region can be imported free of duty, intermediate goods produced in the region receive substantial protection, and producers using the latter as inputs face higher costs than their competitors in international markets. 34. To compensate for the anti-export bias , the Government introduced measures in the early seventies including, primarily, a "drawback" mechanism--which allows exporters to be reimbursed for import duties on inputs used in the production of their exports to markets outside the CACM--reserved to enterprises outside the capital city. In 1982, the  - 11 - Government extended the mechanism to include enterprises located in the capital. The tax package of August 1983 includes additional measures in support of exports (para. 14, above). Nevertheless, complementary measures are needed to provide the incentive required to increase exports, particularly a stronger effort to assist potential exporters for market development of specific products, as well as to strengthen the capacity of BG and participating financial intermediaries to appraise and supervise export projects. 35. A revised common external tariff for the CACM has been proposed recently by the Secretariat for Central American Economic Integration (SIECA). The proposal incorporates improvements in the fields of exonera- tions, ad valorem taxation of imports and nomenclature. The Government is aware of the need to rationalize and reduce protection, and is prepared to revise the common external tariff accordingly, in coordination with the other governments of the region. 36. An export diversification effort by the private sector with strong support from the Government is likely to succeed, considering the dynamism that Guatemala's private industries and banks have shown in the past. This effort will require foreign exchange financing of (i) technical assistance to help exporters with market development and to strengthen the capacity of BG and the financial intermediaries to evaluate projects, and (ii) investments to restructure and modernize production facilities. The proposed project would help meet these needs. Industrial Finance 37. The Central Bank (BG) was established in 1945 with responsibility for formulating and implementing monetary policy, ensuring the efficient operation of the banking system, and managing Guatemala's international reserves. BG is well regarded inside and outside Guatemala as a professional, well-managed and adequately staffed organization. Under the Bank's Livestock Development Project (Loan 722-GU, approved in FY71) a special fund was created in BG for the discounting of livestock subprojects presented by qualifying financial intermediaries. BG has also managed other funds and export credit lines extended by other governments. 38. Among institutions providing financing to industry are four private financieras, Financiera Guatemalteca S.A. (FIGSA), Financiera Industrial y Agropecuaria S.A. (FIASA), Financiera Industrial S.A. (FISA), and Financiera de Inversion; 14 commercial banks (including one official and one semi-official bank, ten Guatemalan private banks and twoforeign banks); and the state-owned Corporacion Financiera Nacional (CORFINA). 39. The objective of the financieras is to invest in, promote and channel domestic and foreign resources to industrial, agricultural and livestock enterprises. Financieras can only lend for a minimum of three years to investment subprojects and are subject to appropriate reserve requirements on their obligations. Like commercial banks, they cannot grant loans to a single firm for more than 20 percent of their equity,  - 12 - nor, as a rule, participate for more than 25 percent in the paid-in-capital of any single enterprise. In 1983, financieras held 5.8 percent of the banking system's assets of US$2.6 billion in comparison to 2.7 percent at the end of 1975. Financieras' assets increased in nominal terms by 23 percent on average p.a. during 1975-1983, while their industrial portfolio increased at double this rate. Financieras' portfolio in arrears (as percentage of total portfolio) was 3.9 percent at the end of 1981 and increased to 8.0 percent in 1983. This level is expected to decrease, as BG is planning to provide temporary relief of liquidity problems to sound enterprises through special rediscount facilities. Their return on equity was more than 34 percent in 1982 and 24 percent in 1983. 40. The fourteen commercial banks account for 85 percent of the banking system's assets. Their loan portfolios--mostly short-term loans of up to one year--grew from US$385 million in 1975 to US$1.2 billion in 1982. Loans are concentrated in industry (34 percent), commerce (21 percent), and agriculture (16 percent). Commercial banks' equity increased from US$56 million in 1975 to US$147 million in 1983, as the maximum earning assets/equity ratio of 10:1 required them to raise capital to keep pace with their expanding operations. 41. CORFINA was created in 1972 as an autonomous government entity with responsibility for promoting the development of industry, mining and tourism, by sponsoring new enterprises, granting long-term loans and providing technical assistance. CORFINA started operations in 1974, mainly focussing on medium- and large-scale enterprises. By the end of 1982, CORFINA's assets amounted to US$313 million (about 12.2 percent of banking system assets) of which US$166 million was invested (including equity of US$17 million and loans of US$149 million) in 16 projects promoted by CORFINA itself. Of these projects, nine are in operation, but over half are incurring losses. The other seven require additional investments of about US$45.0 million before they can commence operations. Financing of Industry 42. Internally generated resources have traditionally been the major source of funds for the financing of industrial enterprises. They provided around 45 percent of total resources, while bank loans provided about 23 percent and other sources 32 percent. Only about one-third of borrowing is long-term. Larger firms, overall, have had easier access to long-term credit than smaller firms; they have been able to rely increasingly on borrowings to finance their needs, including resources from abroad. 43. During 1975-83, over one-third of total credit from the banking system was channeled to industry; industrial credit grew by about 14 percent p.a. While commercial banks have been the main source of financing to industry, the private financieras and CORFINA have been practically the only sources of medium- and long-term credit. For the next several years, CORFINA's lending is expected to be limited because of serious portfolio problems, and the private financieras are expected to be the main source of industrial term lending.  - 13 - PART IV - THE PROJECT 44. A staff Appraisal Report entitled Industrial Credit Project", No. 4390b-GU, dated January 26, 1984, is being distributed separately to the Executive Directors. Annex III of the President's Report contains a timetable of events in processing the proposed project and a description of the special conditions of the proposed loan. The project was appraised in December, 1982. Negotiations were held in Washington during the week of May 9-17, 1983. Proposed Objectives and Description 45. The proposed project would be the first Industrial Credit project to be financed by the Bank in Guatemala. The proposed loan would support the Government's strategy (paras. 29-30 above) to promote non-traditional industrial exports outside the CACM during a time of severe foreign exchange constraints, for the growth of industry by: (i) providing technical assistance to encourage producers of non-traditional products to export to markets outside the CACM; to strengthen the Government's export promotion policy framework and strategy; and to increase the capacity of BG and participating financial intermediaries to prepare, appraise and supervise projects; and (ii) providing medium- and long-term credit and foreign exchange to medium andsmaller enterprises to finance the fixed assets and related permanent working capital needs of financially and economically sound investment subprojects for industrial rehabilitation, reconversion or expansion. 46. By providing enterprises with technical assistance, credit and foreign exchange, the proposed loan is expected to facilitate the modernization and reorientation of export industries towards markets outside Central America, thus generating new employment, income and a more rapid expansion of output and non-traditional exports than might otherwise be possible. Manufacturing, agroindustrial, and mining enterprises would be eligible to participate. Institutional Structure 47. A Project Unit would be established by BG to carry out the proposed project (Section 2.02(a) of the draft Project Agreement) and would be assisted by consultants as necessary (Section 2.03 of the draft Project Agreement). Its operations would be governed by a Statement of Operating Policies and Procedures, supplemented by a Credit Manual covering its investment financing operation; these documents specify, among other things: (i) financing objectives; (ii) the type of subprojects that would be financed; (iii) the terms and limits of financing; (iv) the criteria for subproject approval; (v) the responsibility of financial intermediaries; and (vi) guidelines for subproject appraisal and supervision. Their content has been agreed upon during negotiations. Their adoption by BG's Board of Directors would be a condition of effectiveness (Section 6.01(c) of the Loan Agreement). The unit would have its own full-time staff (Section 2.02 (b) and (c) of the draft Project Agreement), which would include a manager responsible for implementing the project.  - 14 - Appointment of the manager would be a condition of effectiveness (Section 6.01(b) of the draft Loan Agreement). Each eligible investment subproject would require approval by BG's Credit Committee, based on an appropriate Iechnical, economic and financial justification (para. 52), prior to requesting authorization to withdraw. Financial accounting would be handled by the appropriate sections of BG. Technical Assistance Component 48. The project's technical assistance component (US$2.0 million) would focus on directly assisting exporters of non-traditional products to develop new markets outside of the Central American Region; aiding the Government in strengthening its export promotion system; and training staff of the Project Unit and participating financial intermediaries in the preparation, appraisal, and supervision of subprojects. Under the direction of the Project Unit, technical assistance in market development would be provided to potential exporters to enable them to determine the export potential of specific products, to identify product quality and design standards required in markets outside the CACM, and to develop test marketing and promotional strategies for specific markets. The Government would be assisted in developing a viable export promotion system through a review of the existing system of export incentives, institutional framework and financial mechanisms. Expertise would be provided to study: (i) appropriate levels of effective protection of individual industrial products; (ii) alternatives for providing incentives to exporters, including measures which would compensate for the anti-export bias of the present system (para. 33); (iii) ways of widening the range of services available to exporters; and (iv) ways to improve and expand the existing financial mechanisms for exporters. Project Unit and financial intermediary staff would receive training in project evaluation and supervision. The Project Unit would also receive assistance in carrying out a study of possible ways of stimulating and supporting increases in the productivity of small-scale enterprises, focussing on policy and other constraints and the means of eliminating them. 49. Technical assistance and training would total about 165 man-months of consulting services at an estimated average cost of US$12,120 per man-month, including administrative overhead, salaries, international travel and subsistence. To finance this cost, the Borrower would make available to BG US$2.0 million of the loan proceeds for technical assistance, comprising: (i) US$625,000 on a non-reimbursable basis, to finance training and policy studies to be carried out by government agencies; and (ii) US$1,375,000 on the same terms as the Bank loan and with an annual interest rate of up to the interest rate payable on the Bank loan, for onlending through participating financial intermediaries to enterprises in Quetzales on terms of up to five years including two years grace, at the same interest rate payable by BG to the Borrower plus a one percent spread for the financial intermediaries, to assist the enterprises in developing non-traditional industrial exports outside the CACM. If the demand for such subloans is unsatisfactory, the Borrower could charge a slightly lower rate.  - 15 - Investment Component 50. The investment component of the project would assist industrial firms to modernize, rehabilitate, restructure or expand existing production capacity or establish new plants, provided that the firms are or will become internationally competitive. Taking into account conservative estimates of the private banking sector, as well as the level of imports of capital goods to industry, an investment demand of about US$125.0 million p.a. for imports of machinery and equipment may be expected over the next two to three years. About one-third of this amount, or US$40 million p.a., is expected to be financed through the financial system. This would include about US$18 million under the proposed project. The remaining US$22 million would be met by commercial banks. Suppliers' credits, private sources, bilateral export lines of credit administered by BG, and in a few cases direct foreign loans are expected to cover the balance of the investment demand for imports. The total cost of investments under the project, including incremental permanent working capital needs, is expected to amount to about US$29 million, of which the Bank would finance US$17.9 million equivalent, amounting to the expected foreign exchange cost. Participating financial institutions, project sponsors and BG would contribute the balance of about US$11 million equivalent. The project would facilitate the access to credit of small-scale enterprises (i.e., with total assets--excluding land--of less than US$250,000 equivalent), which account for over two-thirds of the number of firms, by providing additional inducements for banks to lend to such firms in the form of a larger spread (para. 52). 51. The financieras have the orientation and staff necessary to help prepare and evaluate investment subprojects and would account for most of this type of lending. The two financieras which have been in operation for over a decade, FIASA and FIGSA, are expected to be the most important intermediaries using Bank funds. Together with FISA and Financiera de Inversion, the two newer Guatemalan financieras, they are expected to account for over three-fourths of the utilization of the investment component. It is not anticipated that CORFINA (para. 43, above) could meet the critera for participation in the project (para. 54, below). Some of the more dynamic commercial banks are expected to participate actively in the project and to account for the other one-fourth. With appropriate training, commercial bank staff can be expected to become proficient in subproject evaluation and supervision procedures. To encourage as many financial institutions as possible to participate, no more than US$5 million of the proceeds of the loan could be committed by any single intermediary. The adequacy of this requirement would be reviewed not later than September 30, 1985 (Section B(c) of the Schedule to the draft Project Agreement). 52. The first five investment subprojects processed by the Project Unit would require the Bank's approval regardless of subloan size. Thereafter, Bank approval would be required only for investment subloans above US$200,000. This procedure is expected to result in a review by the Bank of 25-30 subprojects covering about one-half of the investment component. The Borrower would onlend to BG US$17.9 million, at the same  - 16 - interest rate, terms and grace period as for the proposed Bank loan. The Borrower would bear the cross-currency exchange risk with the US Dollar. BG woDuld onlend an equivalent amount in Quetzales to medium-sized and snall-scale enterprises. The interest rate to the enterprises would be equal to the Bank's variable interest rates plus (i) a spread to BG of one percentage point for small-scale enterprises and two percentage points for medium-scale enterprises and (ii) spreads to financial intermediaries of up t:o four percentage points for small-scale enterprises and three percentage points for medium-scale enterprises. These rates would be positive in real terms (para. 55). The terms for investment subloans would be up to 12 years, wit:h up to three years of grace, based on cash flow projections for each subproject. BG would bear the exchange risk between the US Dollar and the Quetzal; the spread for BG would cover its operating costs for the subloans andt the exchange risk. Project Cost and Financing Plan 53. The total financing requirements of the project, including price contingencies, are expected to amount to US$32 million, of which the Bank urould finance US$20.0 million, or 63 percent, equivalent to the expected foreign exchange cost involved. Participating financial institutions would pirovide US$6.5 million equivalent (20 percent of the total), project sponsors, US$4.5 million (14 percent); and BG, US$1.0 million equivalent (3 percent). The proposed loan of US$20.0 million, including a front-end fee of aboDut US$0.1 million, would be made to the Republic of Guatemala for on-lending to BG. Execution of a Subsidiary Agreement between the Borrower and BG satisfactory to the Bank would be a condition of effectiveness (Section 6.01(a) of the draft Loan Agreement). BG would channel the proceeds of the loan to industrial borrowers, through financial intermediaries that meet BG's conditions for participation. The loan would be repaid in equal Seni-annual principal repayments over a fixed 17-year term, including four yeatrs of grace. Loan Conditions 54'. Intermediaries would be required to sign participation agreements with BG, which would detail the intermediariest responsibility to: (i) maintain a sound financial condition; (ii) appraise subprojects in accordance with BG guidelines; (iii) supervise subprojects to ensure that resources have been actually used for the goods and services to be financed under the subloans and that subprojects have been progressing on schedule; (iv) adhere to terms of lending and repayment of subloans; (v) ensure that procurement and disbursement provisions are met; (vi) maintain adequate records on Bank-financed sub-projects; and (vii) provide the Project Unit and the Bank with periodic reports on subprojects financed and under study. As a condition for loan effectiveness, BG would have to enter into participation agreements, satisfactory to the Bank, with at least three intermediaries (Section 6.01(d) of the draft Loan Agreement). To avoid concentration of investment financing, relending of Bank funds for investment sub-projects to any single enterprise or its subsidiary would be limited to US$1.5 million.  -17- This requirement could be waived provided that (i) the firm would produce non-traditional exports and would export at least 50 percent of its output to non-CACM markets, and (ii) financing required over this limit would be essential if the firm were to meet its export goals. A lower limit of US$10,000 would also be established for investment financing. Investment subloans of over US$200,000 would need to be approved by the Bank and include a calculation of the economic rate of return of the subproject. 55. Based upon the Bank's prevailing interest rate, final rates to en- terprises would be around 15 percent for investment subloans, and around 11 percent for technical assistance subloans. As inflation declined to about 6 percent in 1982-83 and is expected to continue at low levels, the proposed rates are likely to remain positive in real terms. The interest rate structure of the project would be reviewed no later than August 31, 1985 and annually thereafter (Section 2.05(a) of the draft Project Agreement). The criteria used to conduct such annual review would inter alia take into account the rate of inflation, the fiscal deficit and the balance of payments situation. The surplus of repayments to BG over repayments due to the Bank would be relent by BG for purposes consistent with those of the project (Section 2.04(b) of the draft Project Agreement). Agreement was reached during negotiations that, as a condition of effectiveness, the Government would take steps to ensure that the imported inputs to be used in investment and technical assistance subprojects financed under the project are exempted from import restrictions (para 32, above; Section 6.01(e) of the draft Loan Agreement). Procurement 56. The proceeds of the loan would finance the foreign exchange costs of imported and locally procured equipment, materials, civil works and servi- ces. No purchase contracts are expected to exceed US$750,000 equivalent. Consulting services for subprojects or technical assistance for the project would be open to international recruitment and would be selected in accord- ance with Bank guidelines for the selection of consultants. For investment subloans, participating intermediaries would satisfy themselves that procured items are suitable for the respective subprojects and reasonably priced, and that the beneficiaries are purchasing from the most advantageous source. All subproject appraisals would include a discussion of procurement procedures used, responses received, prices quoted and criteria for selection of suppliers.  - 18 - Commitment and Disbursement 57. The final date for submission of investment subprojects would be June 30 1986, (Section 3.02(c) of draft Project Agreement) and the closing date for disbursements December 31, 1987. The Bank would disburse for (i) 100 percent of documented foreign expenditures for imported machinery, equipment, raw material inventories and services; (ii) 60 percent of local expenditures for locally procured goods purchased off-the-shelf, representing the average foreign exchange component; (iii) 40 percent of investments in industrial buildings and related civil works representing the average foreign exchange component; and (iv) 100 percent of expenditures for the technical assistance component of the project. Full documentation would be required based on an approved list of goods and services for every investment subproject. Since the two-tier system involving BG and the financial intermediaries requires a longer time for processing of subprojects than is usual for single-tier loans, disbursements for investment subloans would be made for expenditures incurred up to 180 days prior to the receipt by the Bank of the particular subloan request. Accounting, Auditing and Reports 58. BG would maintain separate project accounts for subproject financing, in accordance with accounting principles consistently applied and in a form satisfactory to the Bank. The project accounts would be audited annually by Guatemala's Superintendency of Banks or by independent auditors acceptable to the Bank. The audit report would express an opinion as to the reliability of the statements of expenditures to support claims for disbursements; specifically, whether such claims are supported by adequate documentation and reflect properly the expenditures eligible for financing under the loan agreement, and the adequacy of corresponding internal controls. The annual audit report, in a scope and format satisfactory to the Bank, would be submitted to the Bank not later than four months after the end of each BG fiscal year. Project Benefits and Risks 59. The proposed project through technical assistance and investment financing would help the Guatemalan Government to support the development of non-traditional exports outside the CACM, which are likely to be the most dynamic element of industrial growth in the medium and long-term. It would ease the problems faced by industrial firms in dealing with the lack of foreign exchange resources for the rehabilitation, reorientation and expansion of their production facilities. It would help enterprises increase non-traditional exports by providing technical assistance for market development of specific products. Moreover, the proposed project would assist the Government in studying the most appropriate means of developing the related policy framework. The project is also expected to contribute to the institutional development of the financial system. It would focus on  - 19 - widening financial intermediation and supporting BG's efforts to build up subproject appraisal and supervision capabilities of participating intermediaries. Thus the project would help create more effective mechanisms for financing export production for markets outside the CACM and longer-term industrial investments. It would facilitate the access to credit of small-scale enterprises and would promote the study of ways to increase their productivity. 60. Under the project, some 60-80 investment subprojects would be financed, involving total investment costs of about US$28.9 million, and focussing on a wide range of small- and medium-sized enterprises. The investment subprojects to be financed are expected to have a substantial employment impact, generating a total of about 1,500-1600 new jobs, at an average total fixed investment cost per job of about US$20,000 in 1983 prices. Based on the financieras' subproject pipeline, the bulk of the financing is expected to go to the food, beverage and tobacco, chemicals, clothing, metal-mechanics, and wood products subsectors. 61. As conceived, the proposed loan's principal risk is slower than expected disbursement due to lags in improved export performance stemming from slow growth in world trade coupled with difficulties in opening new export markets. In addition, disbursements could be delayed by start-up difficulties in putting into operation new institutional arrangements. This risk would be considerably reduced by rapid implementation of the technical assistance and training components. The generally unsettled situation in Central America could also delay some investment decisions. However, this risk was taken into account in the definition of the loan amount. To reduce the risks further, the Bank intends to closely supervise the initial start-up of the project unit in BG. PART V - LEGAL INSTRUMENTS AND AUTHORITY 62. The draft Loan Agreement between the Republic of Guatemala and the Bank, the draft Project Agreement between the Bank and Banco de Guatemala, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. The most important features and special conditions of the draft Loan Agreement and the draft Project Agreement have been included in Part IV and are summarized in Section III of Annex III of this Report. The following are special conditions of effectiveness of the Loan and Project Agreements:  - 20 - (i) that the Subsidiary Loan Agreement between the Borrower and BG has been executed; (ii) that the manager of the Project Unit has been appointed, and the Statement of Operating Policies and Procedures and the Credit Manual have been approved by BG; (iii) that BG has entered into Participation Agreements -with at least three participating intermediaries; and (iv) that the Borrower has established procedures to exempt the imported inputs to be used in investment and technical assistance sub-projects financed under the proposed project from import restrictions. 63. I am satisfied that the proposed loan would comply with the Airticles of Agreement of the Bank. PART VI - RECOMMENDATION 64. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President by Ernst Stern Attachments lWashington, D.C. ,January 26, 1984  ANNEX I -21- Page 1 of6 T A B L E 3A PAGE I CUATE4ALA - SOCIAL INDICATORS DATA SHEET GUATEMALA REFERENCE GROUPS (WEICHTED AVERAGES) Ia MOST (HOST RECENT ESTIMATE) /b /RECENT MIDDLE INCOME MIDDLE INCOME 1960-b 1970 ESTIMATb- LAT. AMERICA & CARIB EUROPE AREA (THOUSAND SQ. Wt) TOTAL 108.9 108.9 108.9 AGRICULTURAL 24.8 24.8 27.0 GNP PER CAPITA (US$) 260.0 430.0 1140.0 2088.2 2453.6 ENERGY CONSUlFTrION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 180.0 234.0 308.0 1407.6 1580.8 POPULATION AND VITAL STATISTICS POPULATION,MID-YFAR (THOUSANDS) 3966.0 5353.0 7477.0 URBAN POPULATION (% OF TOTAL) 33.0 35.7 39.4 65.9 47.8 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILL) 12.1 STATIONARY POPULATION (MILL) 25.0 YEAR STATIONARY POP. REACHED 2120 POPULATION DENSITY PER SQ. KM. 36.4 49.2 66.7 35.6 82.0 PER SQ. KM. AGRE. LAND 159.9 215.7 268.6 93.2 157.2 POPULATION AGE STRUCTURE (Z) 0-14 YRS 46.2 45.7 43.0 40.1 31.9 15-64 YRS - 51.1 51.6 53.9 55.8 60.9 65 AND ABOVE 2.7 2.7 3.0 4.1 7.2 POPULATION GROWTH RATE (%) TOTAL 2.9 3.0 3.0 2.3 1.6 URBAN 3.7 3.8 3.9 3.7 3.4 CRUDE BIRTH RATE (PER THOUS) 48.3 44.1 39.1 31.5 25.0 CRUDE DEATH RATE (PER THOUS) 18.5 13.9 10.3 8.1 9.1 GROSS REPRODUCTION RATE 3.4 3.1 2.6 2.0 1.7 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUS) ., 21.2 19.8 USERS (% OF MARRIED WOMEN) .. 7.0 18.0/c FOOD AND NUTRITION INDEX OF FOOD PROD. PER CAPITA (1969-71-100) 93.0 101.0 116.0 113.0 108.4 PER CAPITA SUPPLY OF CALORIES (Z OF REQUIREMENTS) 96.0 94.0 93.0 111.3 129.6 PROTEINS (GRAMS PER DAY) 60.0 57.0 55.0 67.9 92.3 OF WHICH ANIMAL AND PULSE 21.0 20.0 19.0/d 34.1 34.6 CHILD (AGES 1-4) DEATH RATE 10.4 9.2 5.2 5.3 10.4 HElALTH LIFE EXPECT. AT BIRTH (YEARS) 47.2 52.9 58.8 64.6 67.2 INFANT MORT. RATE (PER THOUS) 91.9 87.1 65.9 62.6 71.4 ACCESS TO SAFE WATER (%POP) TOTAL * 38.0 40.0/e 64.8 URBAN ,, 88.0 87.07e 77.8 RURAL . 12.0 14.07; 44.3 ACCESS TO EXCRETA DISPOSAL (Z OF POPULATION) TOTAL . .. 25.0/e 54.6 URBAN .. .. 40.07Te 69.8 RURAL * 11.0 17.0/e 29.8 POPULATION PER PHYSICIAN 4420.0/f 3730.0 8600.0 1776.0 1094.8 POP. PER NURSING PERSON 9040.0/f 1260.0 1620.0 1012.2 762.5 POP. PER HOSPITAL BED TOTAL 380.0 470.0 520.0& 477.0 334.0 URBAN 190.0/f 210.0 .. 667.5 216.0 RU'RAL .. .. .. 1921.6 ADMISSIONS PER HOSPITAL BE) .. 19.6 .. 27.2 20.0 HOUS ING AVERAGP SIZE OF HOUSEHOLD TOTAL 5.2/i 51 O/ URBAN 5.27? 4.9 RURAL 5.37T 5.t.. AVERAGE NO. OF PERSONS/ROOM TOTAL 2.6/i 2.2/j URBAN 1.97? 1.6 RUtRAL 3.17? 2. 77 . ACCESS TO ELECT. (% OF DWELLINGS) TOTAL 22.0/i 28.5/ .. URBAN 56.07i 67.8.. RURAL 4.60/i 5.4.. _- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -_ _ -_ _ _ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ - -_ -  ANNEX I - 22 - Page 2 of 6 T A B L E 3A PAGE 2 GUATEMALA - SOCIAL INDICATORS DATA SHEET GUATEMALA REFERENCE GROUPS (WEIGHTED AVERAGES) /a HOST (MOST RECENT ESTIMATE) /b lb RECENT MIDDLE INCOME MIDDLE INCGQE 1960- 1970- ESTIMATE- LAT. AMERICA & CARIB EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 45.0 57.0 69.0 105.0 102.2 MALE 50.0 62.0 74.0 106.3 107.2 FEMALE 39.0 51.0 63.0 103.6 97.9 SECONDARY: TOTAL 7.0 8.0 16.0 40.0 56.5 MALE 8.0 9.0 17.0 38.6 63.4 FEMALE 6.0 8.0 15.0 41.2 48.9 VOCATIONAL (% OF SECONDARY) 18.6 15.0 19.0 34.0 ' 22.4 PUPIL-TEACHER RATIO PRIMARY 30.0 36.0 34.0 30.7 24.7 SECONDARY 8.0 14.0 20.0 16.7 22.1 ADULT LITERACY RATE (2) 31.5 46.1L