US embassy cable - 04GUATEMALA525

C O N F I D E N T I A L SECTION 01 OF 02 GUATEMALA 000525 
 
SIPDIS 
 
WHA FOR DAS FISK AND DAS DERHAM 
EB FOR DAS GREENWOOD 
TREASURY FOR OASIA: BILL BLOCK 
 
E.O. 12958: DECL: 02/02/2009 
TAGS: EFIN, PGOV, GT 
SUBJECT: EMBASSY SUPPORTS GUATEMALAN REQUEST FOR QUICK 
DISBURSEMENT OF IDB SAL FUNDS 
 
Classified By: Ambassador John R. Hamilton for reason 1.5 (d) 
 
Summary and Action Request 
-------------------------- 
1.  (C) Guatemala's new government is strapped for cash.  It 
inherited a backlog of unpaid bills and lost 10% of its tax 
base to a court challenge.  It is proposing serious fiscal 
reform, including cutting the military by half and attacking 
the corruption that depletes or diverts revenues, but its 
longer-term plans will rely on resuscitating the Fiscal Pact 
so that it has the mandate and legitimacy to force enduring 
reform, including any tax increases, through a fractious 
Congress.  It is choosing not to borrow or negotiate with the 
IMF in the absence of Fiscal Pact legitimacy, and that leaves 
few short-term options other than crippling austerity.  To 
survive though the short term without abandoning all 
initiative, the GOG will shortly be asking for the release of 
$80 million in IDB sector adjustment loan resources.  We 
understand that they have the sympathy of the Fund and IDB, 
but they are not fully in compliance with the Fund program. 
We urge Washington agencies to support release of the $80 
million to help underwrite the new government's 
extraordinarily promising start. 
 
2.  (C)  We have just heard that Guatemala may request an 
additional $50 million of World Bank sector adjustment 
funding.  Our understanding is that those funds are not 
intended for budget support but instead for recapitalization 
of the banking system.  We would want to know more about 
compliance with the Bank's program and the mechanics of 
disbursement before recommending any action on this request. 
End Summary and Action Request. 
 
Bleak Short Term Outlook While Fiscal Pact Resuscitated 
--------------------------------------------- ---------- 
3. (SBU) Guatemala is strapped for cash.  The Berger 
administration came to office with empty coffers, backlogs of 
unpaid salaries and bills, and on the heels of a court ruling 
that eliminated the "IEMA" asset-based tax that had provided 
ten percent of total revenues.  Tax reform is necessary and 
will be a Berger priority.  The Berger administration 
proposes to begin the process by resuscitating the Fiscal 
Pact that was negotiated by the Arzu Administration in 1999, 
after the Peace Accords, with some 650 civil society groups. 
The Portillo government subsequently discarded the Pact.  The 
new administration calculates that a renewed Fiscal Pact will 
provide the mandate and legitimacy needed to push a 2004 
budget and tax reform plan through an unfocused and 
politicized Congress.  Until that happens, the government is 
choosing not to approach international debt markets or 
negotiate a new program with the IMF in order not to be seen 
as prejudicing the outcome of the Fiscal Pact discussions. 
This leaves the government dependent upon austerity measures 
and a depleted tax base until the new Fiscal Pact can be 
agreed and implemented. 
 
$80 Million from the BID Requires Flexibility 
--------------------------------------------- 
4. (C) In the interim, $80 million of fast-disbursing funds 
are potentially available from the IDB under the Financial 
Sector Adjustment program.  Disbursement is contingent, 
however, upon IMF concurrence or compliance with an IMF 
program.  Guatemala currently is not fully compliant with its 
IMF stand-by, and we understand that it is for two reasons 
that are relatively minor: 1) a law exempting the sale of 
bank asset portfolios from the value added tax is still stuck 
in Congress, and 2) outside auditors have not been brought in 
to look into the failed national mortgage bank (CHN).  The 
tax exemption is not particularly controversial, and we 
expect it will be passed in due course.  The CHN audit has 
been overcome by events, as the bank's failure is no longer 
just a bankruptcy but the centerpiece of high-profile 
criminal cases under investigation by Guatemalan prosecutors 
and the U.S. BICE.  The IMF stand-by agreement will likely 
lapse in mid-March without Guatemala's full compliance, and 
the government does not expect to seek another Fund program 
until later in the year. 
 
Fund and IDB Staffs Look to the USG 
----------------------------------- 
5.  (C)  We understand that both the IMF and IDB staffs are 
prepared to be flexible if their boards are prepared to 
concur.  We also hear that the staffs will be looking 
specifically to the U.S. executive directors for signs of our 
sentiments.  This filtered back to us following IDB President 
Iglesias's trip here a couple of weeks ago.  We note that it 
was the U.S., with this Embassy's strong urging, that 
abstained on the 2002 stand-by agreement because supposed 
prior conditions on financial reform legislation had not been 
fully met.  We heard at the time that it wasn't a pleasant 
experience for Fund staff, and we're not surprised at their 
caution this time.  Times have changed, however.  In 2002 we 
were concerned about giving the benefit of the doubt to a 
government that had veered seriously off course.  This time, 
we have a government that knows where it's going and whose 
aims we support. 
 
Economic Team to Visit Washington 
--------------------------------- 
6.  (C)  A vice ministerial delegation from the Berger 
economic team arrived in Washington over the February 28-29 
weekend to seek concurrence of the Fund and Treasury to 
release the $80 million from the IDB.  We had been told that 
economic policy coordinator Aitkenhead and Finance Minister 
Bonilla would lead a team later in the week, but Aitkenhead 
changed his mind and dispatched a more junior mission in 
order to save time.  We believe strongly that we should 
accommodate the Guatemlan request.  The new government has, 
in six weeks, brought extraordinary pressure to bear on 
corrupt former officials (both the former President and his 
revenues chief abruptly left the country before court orders 
barring their travel took effect), and it has convoked the 
renewed fiscal pact dialogue and chosen its moderators.  It 
has changed management in the ports, where customs and tax 
evasion were largely centered, and is working on a plan to 
cut the military by half.  The early signals could not be 
more clear that the Berger Administration wants its fiscal 
house in order, with efficient revenue collection and 
refocused spending on education and health.  It has also made 
clear that it is prepared to raise tax rates if needed to 
finance what Guatemalans want from their Fiscal Pact, but 
that will take some time.  The quickest and most tangible 
action we can take in coming days to help the government keep 
its momentum would be help it access the IDB disbursement. 
 
World Bank Funds 
---------------- 
7.  (C)  The Guatemalans may also ask for disbursement of 
approximately $50 million in World Bank sector adjustment 
funds.  We are not yet ready to recommend how to deal with 
such a request and would want to consult further with our 
World Bank colleagues on Guatemala's compliance with some of 
the specific conditionalities in their program.  The World 
Bank program undewrites, at least in part, a specific 
mechanism of subordinated debt to help recapitalize the 
banking system and is not simply policy-linked budget 
support.  Our initial reaction is that the World Bank funds 
are a crucial element in bank restructing efforts spanning 
several years and are best left for their intended purpose. 
HAMILTON