US embassy cable - 05GUATEMALA703

UNCLAS GUATEMALA 000703 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR WAFER 
 
E.O. 12958: N/A 
TAGS: EFIN, SENV, GT 
SUBJECT: IMF AND FINANCE MINISTRY NOT PURSUING STAND-BY 
AGREEMENT; TIME TO MOVE FORWARD WITH TFCA 
 
 
1.  (SBU)  Summary:  Guatemala and the IMF have decided not 
to proceed with a new stand-by agreement (SBA).  The IMF is 
insisting on a commitment to pass fiscal reform legislation 
by a given date, which Guatemala does not believe it can 
guarantee in the current congressional environment.  Both 
sides agree that the macroeconomic situation is in good shape 
and that an SBA is not needed.  Under these circumstances, we 
believe the time has come to approve Guatemala's eligibility 
for a debt-for-nature swap under the Tropical Forest 
Conservation Act.  End summary. 
 
No Date Certain for Fiscal Reform, So No SBA 
-------------------------------------------- 
2.  (SBU)  An IMF staff mission that arrived in February for 
the 2005 Article IV consultation failed to reach agreement 
with Guatemala's Ministry of Finance on a new stand-by 
agreement (SBA).  IMF ResRep Erik Offerdal told EconCouns 
that the Fund was pleased by what it found during the visit, 
but the two sides could not reach agreement on a timetable 
for tax reforms.  Offerdal said that the IMF insisted that a 
firm date be established for passing tax reforms that would 
lead to revenue collections equivalent to at least 12% of 
GDP.  Finance Minister Bonilla would not commit to such a 
date on grounds that the government could not force the 
Congress, which it doesn't control, to do its bidding.  She 
felt that Guatemala had no need for an SBA other than as a 
seal of approval that might lower borrowing costs.  Setting a 
date for tax reform and then missing it because of 
congressional politics would send a worse message to markets 
than not having an SBA at all.  Offerdal said the Fund 
mission had sympathy for Bonilla's position but had no 
flexibility on getting a near-term date certain for passing 
tax reform legislation. 
 
Fund Agrees to Accentuate the Positive... 
----------------------------------------- 
3.  (SBU)  Offerdal said that the Fund agreed to downplay the 
lack of agreement on an SBA and speak well of Guatemala's 
performance in its public statements.  The Fund's subsequent 
press release did not mention an SBA at all, noting instead 
that economic performance "had improved," "international 
reserves rose to record levels," "the budget deficit was 
reduced sharply," while "early actions have aimed at 
addressing corruption; reducing the size of the military; and 
strengthening the public finances."  The release also notes 
that the "Guatemalan financial system has been strengthened 
considerably in recent years."  The only comment that wasn't 
positive was that "inflation drifted upward to over 9 
percent," due both to oil prices and "relatively easy 
monetary conditions." 
 
...As Results Exceed Expectations 
--------------------------------- 
4.  (U)  The latest data we have seen for 2004 indicates net 
fiscal revenue collections of 10.3% of GDP, which we 
understand would have been a couple of tenths of a percentage 
point higher except that the Ministry of Finance made 
considerable progress on clearing Portillo-era arrears of 
value added tax rebates to exporters.  The fiscal deficit was 
0.3%, well below original expectations and reflected better 
controls over spending.  The targets for 2005 are 10.5% for 
revenues and 1.8% for the deficit, with the deficit to be 
reduced to 1.5% and social spending to increase if and when 
additional revenues are mobilized. 
 
Comment:  Moving Forward with the TFCA 
-------------------------------------- 
5.  (SBU)  We understand that Washington agencies were 
expecting an SBA to be signed early this year and were 
waiting for that to happen before approving Guatemalan 
eligibility for a debt-for-nature swap under the Tropical 
Forest Conservation Act.  Now that an SBA is not on the 
horizon but the Fund is nevertheless satisfied with 
Guatemala's economic performance, we urge Washington to wait 
no longer and move ahead with TFCA approval, preferably in 
advance of the presentation of the staff report on the 
Article IV consultation to the Board, which we understand is 
being delayed until May.  (Guatemala has not yet been told 
about the Article IV delay, so we ask that this information 
be held closely for now.) 
HAMILTON