Document of The World Bank FOR OFFICIAL USE ONLY Report No. 85266-GT INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY LOAN IN THE AMOUNT US$340 MILLION TO THE REPUBLIC OF GUATEMALA FOR A ENHANCED FISCAL AND FINANCIAL MANAGEMENT FOR GREATER OPPORTUNITIES DEVELOPMENT POLICY LOAN May 5, 2014 Poverty Reduction and Economic Management Central America Country Management Unit Latin America and the Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. REPUBLIC OF GUATEMALA GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange rate effective as of April 29, 2014) GTQ 7.7 = US$1.00 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CAUCA Central American Uniform Customs Code CCT Conditional Cash Transfer CES Economic and Social Council (Consejo Económico y Social) COMUSAN Municipal Councils of Food and Nutritional Security (Consejos Municipales de Seguridad Alimentaria y Nutricional) CPS Country Partnership Strategy DPL Development Policy Loan ENCOVI National Survey on Living Conditions (Encuesta Nacional de Condiciones de Vida) FDI Foreign Direct Investment GDP Gross Domestic Product IADB Inter-American Development Bank IBRD International Bank for Reconstruction and Development IMF International Monetary Fund IPRIMA Tax on the First Registration of Automobiles (Impuesto Específico a la Primera Matrícula de Vehículos Automores) ISR Income Tax (Impuesto Sobre la Renta) LAC Latin America and the Caribbean MIDES Ministry of Social Development (Ministerio de Desarrollo Social) MINFIN Ministry of Public Finance MOHSA Ministry of Health and Social Assistance (Ministerio de Salud Pública y Asistencia Social) OECD Organization for Economic Cooperation and Development RBB Results Based Budgeting RECAUCA Regulation of the Central American Uniform Customs Code RUU-N Single Beneficiary Registry SAT Tax Administration Superintendence SESAN Secretariat of Food and Nutritional Security VAT Value-Added Tax WB World Bank Vice President: Jorge Familiar Acting Country Director: Maryanne Sharp Sector Director: J. Humberto Lopez Sector Manager: Auguste Tano Kouame Lead Economist/Sector Leader: Oscar Calvo-Gonzalez Task Team Leader: Marco Antonio Hernández Oré ii   REPUBLIC OF GUATEMALA ENHANCED FISCAL AND FINANCIAL MANAGEMENT FOR GREATER OPPORTUNITIES DEVELOPMENT POLICY LOAN TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY I. INTRODUCTION AND COUNTRY CONTEXT .......................................................... 1 II. MACROECONOMIC POLICY FRAMEWORK .......................................................... 3 RECENT ECONOMIC DEVELOPMENTS ................................................................................... 3 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY .......................................... 7 III. THE GOVERNMENT’S PROGRAM ............................................................................. 8 IV. THE PROPOSED OPERATION ..................................................................................... 9 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ............................ 9 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ................................ 11 LINK TO CAS AND OTHER BANK OPERATIONS ................................................................. 25 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS ................... 25 V. OTHER DESIGN AND APPRAISAL ISSUES ............................................................ 26 POVERTY AND SOCIAL IMPACT ............................................................................................ 26 ENVIRONMENTAL ASPECTS ................................................................................................... 27 PUBLIC FINANCIAL MANAGEMENT, DISBURSEMENT AND AUDITING ASPECTS .... 27 MONITORING AND EVALUATION ......................................................................................... 29 VI. SUMMARY OF RISKS AND MITIGATION .............................................................. 29 ANNEX 1: POLICY AND RESULTS MATRIX ...................................................................................... 31 ANNEX 2: LETTER OF DEVELOPMENT POLICY ............................................................................... 34 ANNEX 3: FUND RELATIONS ANNEX ................................................................................................ 43 ANNEX 4: POVERTY AND SOCIAL IMPACT OF SOCIAL PROTECTION PROGRAMS ................ 44 ANNEX 5: COUNTRY AT A GLANCE (Includes Country Map) ........................................................... 55 This DPL was prepared by a team led by Marco Antonio Hernandez (Senior Economist, LCSPE). The team consisted of Mateo Clavijo, Miguel Angel Saldarriaga, Patricia Chacon Holt, Diana Lachy (LCSPE); Christine Lao Peña (LCSHH); Edmundo Murrugarra (LCSHS); Wendy de Leon, Fernando Paredes (LCCGT); Carolina Rendon, Enrique Fanta, Katherine Grau (LCSPS); Javier Baez, Leonardo Lucchetti, Maria Eugenia Genoni, Kiyomi Cadena (LCSPP); Kathy Lindert (LCSHD); Maria Pia Cravero, Jimena Garrote (LEGLE); Patricia de la Fuente Hoyes (CTRLN); Robert Montgomery (LCSEN); Antonio Blasco (LCSFM); and Concepcion Aisa (FABBK). We are grateful to our peer reviewers, David Gould (ECACE), Marcelo Bortman (ECSH1), and Munawer Khwaja (PRMPS). The team gratefully acknowledges the support and guidance provided by Maryanne Sharp (Acting Country Director, LCC2C), Humberto Lopez (Sector Director, LCSPR), Auguste Tano Kouame (Sector Manager, LCSPE), Oscar Avalle (Country Manager, LCCGT), and Oscar Calvo-Gonzalez (Lead Economist and Sector Leader, LCSPR). Finally, the World Bank team would like to express its gratitude to the Government of Guatemala for their collaboration in the preparation of this Development Policy Loan. iii   SUMMARY OF PROPOSED LOAN AND PROGRAM REPUBLIC OF GUATEMALA ENHANCED FISCAL AND FINANCIAL MANAGEMENT FOR GREATER OPPORTUNITIES DEVELOPMENT POLICY LOAN Borrower Republic of Guatemala Implementing Ministry of Public Finance Agency IBRD Loan Amount: US$340 million. Terms: Commitment-linked variable spread loan, denominated in US dollar, with level Financing Data repayments of principal payable in 25 years (including 10 years of grace period). The Borrower wishes to maintain all risk management options embedded in the loan, and requests an Automatic Rate Fix based on an amount equal to 10 percent of the loan. The Front end fee is 0.25 percent of the total loan amount, financed out of the loan proceeds. Operation Type Second in a programmatic series of two single-tranche Development Policy Loans. Pillars of the The Program Development Objective of the Development Policy Loan (DPL) series is to support Operation the Government of Guatemala to (i) strengthen tax administration and tax policy; (ii) strengthen And Program budget management and increase the results orientation of public spending; and (iii) improve the Development management and coordination of social policies. Objective(s) The following key outcomes are expected to be achieved by the end of the DPL series in 2014: Strengthening Tax Administration and Tax Policy  Increase in the income tax-to-GDP ratio (baseline: 2011=2.7 percent; target: 2014=3.2 percent)  Increase in the tax base (number of effective tax payers making direct payments to SAT) by at least 10 percent from 2011 to 2014 (baseline: 2011=1,441,246; target: 2014=1,585,370)  Increase in the amount of administrative sanctions in the area of customs in line with the National Customs Law (baseline: 2013=0; target: 2014=4 million quetzales) Enhancing Budget Management and Increasing the Results Orientation of Public Spending Result  Increase in the percentage of children less than 1 year old in 83 prioritized Indicators municipalities who receive the appropriate growth promotion package of services for their age which includes weight and height check-ups (baseline: 2011=37.5 percent; target: 2014=50 percent)  Increase in the percentage of the total budget under the results-based budgeting framework (baseline: 2011=0 percent; target: 2014=9 percent) Improving the Coordination and Management of Social Policies  Increase in the percentage of beneficiaries across all social programs that are included in the Unique Beneficiary Registry (baseline: 2011=0; target: 2014=80 percent)  Increase in the percentage of the population in the country represented by an active Municipal Council of Food and Nutrition Security (COMUSAN) that is in charge of coordinating the implementation of the Zero Hunger Pact at the local level (baseline: 2011=25 percent; target: 2014=90 percent) Overall Risk Moderate Rating Operation ID P133738 iv   IBRD PROGRAM DOCUMENT FOR A ENHANCED FISCAL AND FINANCIAL MANAGEMENT FOR GREATER OPPORTUNITIES DEVELOPMENT POLICY LOAN TO THE REPUBLIC OF GUATEMALA I. INTRODUCTION AND COUNTRY CONTEXT 1. This program document proposes a Second Development Policy Loan (DPL) in the amount of US$340 million to the Republic of Guatemala. The proposed operation is the second in a series of two single-tranche operations, the first of which was approved in September 2012. This DPL series is informed by the lessons learned in previous World Bank operations and supports the Government to (i) strengthen tax administration and tax policy; (ii) strengthen budget management and increase the results orientation of public spending; and (iii) improve the management and coordination of social policies. 2. Guatemala is the largest economy in Central America. Guatemala’s GDP is about US$53 billion (2013) and its per-capita gross national income (GNI) is US$4,880 (2012). It has a multiethnic population of about 15 million. The country is known for the implementation of prudent macroeconomic policies. Between 2001 and 2013, annual GDP growth was comparable to the LAC average at 3.3 percent (the LAC average was 3.4 percent for that period), however less volatile than the regional average. Democratic institutions are now well established following a 36-year civil war that ended in 1996. Despite progress, however, persistent economic and social challenges have affected the population’s trust in the Government’s capacity to eradicate poverty and boost shared prosperity. 3. Sustaining progress in poverty reduction is an ongoing challenge. Guatemala reduced its poverty headcount rate between 2000 and 2006 from 56.2 percent to 51 percent, according to the Government’s methodology to measure poverty. Extreme poverty decreased modestly from 15.7 percent to 15.2 percent over the same period. However, in the wake of the global financial crisis, poverty rates increased. The latest household survey indicates that the poverty rate increased from 51 percent in 2006 to 53.7 percent in 2011, although extreme poverty did decrease during this period from 15.2 percent to 13.3 percent. Geographically, poverty is disproportionately concentrated in rural areas and amongst the indigenous population. Despite marginal increases in poverty, inequality improved slightly between 2006 and 2011, explained by modest reduction in extreme poverty and improvements in the middle class income. 4. Shared prosperity developments and social indicators remain weak compared to other middle-income countries. In LAC, the mean real per capita income of the bottom 40 percent of the population during the last decade (2003-2012) increased by around 5 percent. In Guatemala, however, the mean real per capita income of the bottom 40 percent did not improve during the last decade (2000-2011). Lack of progress in shared prosperity in Guatemala is associated to the modest, and often unequal, coverage of basic goods and services, which is due to the low public revenue collection and limited effectiveness and efficacy of public expenditures. The limited ability of the State to provide sufficient and quality basic public goods and services hinders economic opportunities, particularly for the most vulnerable. This is evidenced by Guatemala’s low Human Opportunity Index (which measures the degree of equity in the access to basic goods and services), which is among the lowest in LAC. In addition, 1   Guatemala’s level of chronic malnutrition remains among the worst in the world, with about half of all the children suffering from malnutrition. Nonetheless, the country has achieved some progress during the last decade on social indicators. Rates of primary school enrollment (general population and for girls) increased by 12 and 15 percentage points, respectively, during 2000- 2010. During the same period, rates of childhood mortality declined from 49 to 32 per thousand. The Government plans to undertake a new household survey in 2014 to overcome data limitations that currently restrict the ability to evaluate recent progress in poverty reduction and shared prosperity. 5. Since taking office in January 2012, the Government has sought to address these development challenges by improving the progressivity of revenues and expenditures, including the approval of a comprehensive tax reform and measures to improve the quality of spending and a more coordinated formulation of social policies. As described in this program document, the tax reform approved in 2012 represents the first comprehensive tax reform in over 20 years, and is expected to expand the Government’s revenue base by simplifying taxes, as well as enhancing tax administration, controls, and transparency. To date, tax revenues as a share of GDP have risen by about 0.5 percentage points relative to the average of the previous three years. Improvements in revenue collection have been modest, but meaningful. Furthermore, the reform has improved progressivity and in its absence, tax revenues would have declined. In addition, the tax reform withstood legal challenges, unlike previous reform efforts which had been rolled-back. Moreover in November 2013, to support the tax reform, the Government approved a comprehensive reform package aimed at improving public financial and debt management, internal and external audit systems, and tax administration. The Government of Guatemala is also promoting progressivity by improving the quality of spending. The Government is introducing results-based budgeting (RBB), first through a pilot program in the health sector and now expanding RBB to all ministries. To better target social policies, the Government is implementing a flagship “Zero Hunger” Program, strengthening monitoring and evaluation systems for social programs, and promoting multi-sectoral policy consensus through the recently-created Economic and Social Council (Consejo Económico y Social, CES).1 These reforms are expected to benefit poor and vulnerable groups. 6. Despite the peaceful 2012 transition, politics remain polarized and continue to pose a challenge to further advancing the reform agenda. The absence of a simple majority in Congress (the ruling party has 56 out of 158 seats) and the fragmented nature of Guatemala’s party system pose challenges for garnering political support for the continuation of the administration’s reform agenda. A complex political economy environment in the past has impacted the timely approval of legislation as well as new Government borrowing. For instance, Congress did not approve the 2014 Budget and as a result, the 2013 Budget was automatically renewed.2 Given the political economy context in Guatemala, improving the quality of spending―including RBB and measures to improve the targeting of spending―is needed to forge consensus to raise revenues in the medium-term.                                                              1 The CES is made up of representatives from the business sector, cooperatives, and trade unions. 2 The budget is published promptly after its approval in the official gazette, and can be downloaded from the Ministry of Finance’s webpage (http://www.minfin.gob.gt/presupaprobado/presupaprobados.html). The 2013 budget has been amended for 2014 for a total of US$8,699 million. 2   7. Notwithstanding the challenging policy environment, important inroads have been made, signaling the consolidation of reforms necessary for meeting critical development challenges. Revenue collection has been weakened by poor performance in customs, causing fiscal space to grow less than projected. To better understand this phenomenon, the Government of Guatemala has requested World Bank support for complementary analytical and advisory activities for tax and customs administration. Moreover, in the context of a limited fiscal envelope, the Government has continued to emphasize social spending by amending the budget for 2014 to include an additional US$195 million for education and health, thus helping to maintain focus on the priority of reducing chronic childhood malnutrition. 8. This programmatic DPL series of Enhanced Fiscal and Financial Management for Greater Opportunities has supported this reform program, and the proposed Second DPL is fully consistent with the World Bank Group’s objectives of reducing poverty and spreading shared prosperity. The proposed operation complements efforts of other development partners, and builds on lessons learned and progress achieved under previous World Bank operations. It helps consolidate a set of cross-sectorial policies intended to support a more efficient delivery of quality public services. At the same time, this operation aims to establish a foundation for progress in the medium- to long-term. In particular, new initiatives include enhancements to the organizational structure of the Tax Administration Superintendence (Superintendencia de la Administración Tributaria, SAT), the creation of a Department of International Taxation within the Ministry of Finance (Ministerio de Finanzas Públicas, MINFIN), and mandating the use of the Single Treasury Account and the Integrated Financial Management System (SIAF) for all budgetary transactions, thereby increasing the transparency and monitoring of public spending. In addition, to enhance its policy dialogue, the World Bank Group is engaged in a series of analytical and advisory activities in support of envisaged reforms in this DPL in the areas of economic governance, poverty and equity monitoring, and competitiveness. II. MACROECONOMIC POLICY FRAMEWORK RECENT ECONOMIC DEVELOPMENTS 9. Economic growth in Guatemala has historically been stable but modest. Between 2001 and 2007 GDP growth averaged 4.1 percent. Although the country was negatively affected by the global financial crisis in 2008-2009, it avoided falling into a recession. Since then its growth rate has increased and growth volatility was below the regional average, despite the occurrence of natural disasters in 2010. The country grew by 2.9 percent in 2010 and accelerated to 4.2 percent in 2011, driven by rising remittances and consumption. In 2012 growth decelerated to 3.0 percent due to a sluggish recovery of the United States and a deteriorating security situation in Guatemala. Overall, much of Guatemala’s relative economic stability can be attributed to prudent macroeconomic policies that have kept inflation and public debt manageable, and thanks to a relatively more diverse export base which has helped cushion the impact of terms of trade shocks. 10. Economic activity improved in 2013 and the underemployment rate fell. GDP growth increased to 3.5 percent in 2013. All sectors with the exception of mining (which has a low share of the productive structure) showed positive results. Agriculture, manufacturing, and services 3   were the key drivers of growth, contributing to three-quarters of GDP growth. Growth in 2013 was also fuelled by a steady rise in remittances and a pick-up in investors’ confidence. The combination of these factors translated into slightly better employment opportunities, with the underemployment rate falling to 69.2 percent in 2013 from 74.5 percent in 2012. 11. Inflation inched up in 2013 due to food commodity supply shocks but remained within the Central Bank target of 3-5 percent. Inflation increased from 3.4 percent in 2012 to 4.4 percent in 2013 mainly driven by increases in food prices. Monetary authorities retained a prudent policy stance, raising interest rates by 25 basis points in April 2013 in response to food supply shocks, before cutting rates by 25 basis points in November 2013 and again by 25 basis points in March 2014 as food price pressures receded. Table 1: Guatemala—Key Economic Indicators 2009-2016 (Percent of GDP, unless otherwise indicated) E F F F 2009 2010 2011 2012 2013 2014 2015 2016 Real Economy (Annual Percent Change unless otherwise indicated) Real  GDP 0.5 2.9 4.2 3.0 3.5 3.5 3.6 3.6 Domestic demand ‐1.5 4.3 5.4 2.4 3.3 3.2 3.1 3.2 Private  consumption ‐0.3 3.4 3.7 2.6 2.9 3.3 3.4 3.4 Fixed investment ‐16.1 ‐2.6 8.0 9.3 1.3 3.1 3.4 3.7 Consumer prices (end of  period) ‐0.3 5.4 6.2 3.4 4.4 4.5 4.3 4.3 GDP (millon of USD) 37,734 41,338 47,689 50,232 53,298 56,778 60,660 65,065 Fiscal Accounts (percent of GDP) (Percent of GDP unless otherwise indicated) Revenues and grants 11.1 11.2 11.6 11.7 11.7 11.9 11.9 11.9 Of which: Tax  revenues 10.3 10.4 10.9 10.9 11.0 11.1 11.2 11.2 Total  Non financial  expenditures 12.8 13.0 12.9 12.5 12.3 12.3 12.3 12.2 Current expenditures 8.7 8.9 9.0 9.2 9.3 9.4 9.3 9.2 Capital  expenditures 4.1 4.1 4.0 3.3 3.0 3.0 3.0 2.9 Primary balance ‐1.7 ‐1.8 ‐1.3 ‐0.9 ‐0.6 ‐0.5 ‐0.4 ‐0.2 Overall   balance ‐3.1 ‐3.3 ‐2.8 ‐2.4 ‐2.1 ‐2.1 ‐2.0 ‐2.0 Central  Government Debt 23.0 24.5 23.9 24.5 24.9 25.7 26.8 27.7 External Sector Current Account Balance 0.7 ‐1.4 ‐3.4 ‐2.6 ‐3.2 ‐3.3 ‐3.3 ‐3.4 Trade  Balance ‐8.9 ‐10.3 ‐10.4 ‐11.4 ‐12.1 ‐11.8 ‐11.9 ‐12.0 International  Reserves 13.8 14.4 13.0 13.3 13.6 13.2 12.7 12.3 NIR (in months of  imports) 4.9 4.7 4.1 4.4 4.5 4.4 4.3 4.3 Exchange  rate Exchange  rate  (end of period, Qt/USD) 8.33 7.98 7.80 7.89 7.86 7.94 7.95 7.95 Nominal  exchange  rate change 8.0 ‐1.3 ‐3.4 0.6 ‐0.4 1.0 0.0 0.0 Real  Effective  Exchange Rate  (2011=100) 97.0 101.0 100.0 95.3 94.3 Source: World Bank Staff estimates based on data from the Ministry of Public Finance and the Central Bank. 12. The current account balance deteriorated in 2013 due to supply-side shocks but it remains within the average for LAC. Guatemala’s current account deficit widened from 2.6 percent of GDP in 2012 to 3.2 percent of GDP in 2013. The widening is explained by a larger trade deficit which increased from 11.4 percent of GDP in 2012 to 12.1 percent of GDP in 2013, and reflects a widening of the private saving-investment gap. Notably, the trade balance 4   deteriorated as a result of a fall in coffee exports, which was due to both a reduction in coffee prices, down 50 percent from their peak in 2011, and the coffee rust—a parasitic fungus affecting coffee plants—that affected Central America. 13. Remittances grew strongly in 2013 in line with improved economic activity in the United States. Guatemalan remittances did not decline as much during the global crisis in 2007- 2009 compared to other Central American countries because most Guatemalan workers in the United States are employed in agriculture and services, rather than construction. The hispanic unemployment rate in the United States decreased from 12.5 percent in 2010 to 9.2 percent in 2013. As a result, remittances to Guatemala rose from 9.2 percent of GDP in 2011 to 9.8 percent of GDP in 2013. 14. Building on its recent reform momentum (the country was one of the top 10 reformers worldwide in the 2014 Doing Business ranking), Guatemala could benefit from an increase in foreign direct investment (FDI). Compared to the rest of Central America, FDI in Guatemala is low (around 2 percent of GDP), and an increase in FDI could encourage further investment to stimulate economic growth. Continuing the implementation of the reform agenda to reduce the costs of doing business, including further strengthening legal institutions to support corporate governance and insolvency regimes, would help promote investment. 15. Guatemala has been successful in maintaining fiscal stability despite exogenous shocks, and public debt as a share of GDP remains low at around 25 percent (Table 2). In 2013, the overall fiscal deficit decreased slightly to 2.1 percent of GDP, down from 2.4 percent of GDP in 2012, continuing a four-year downward path. Yet, this fiscal consolidation was mostly due to cuts on the expenditure side since there has not been a substantial increase in revenues. Indeed, tax revenues continue to be the lowest in Central America. Tax revenues dropped dramatically during the crisis to 10.3 percent of GDP in 2009, and as of 2013 (11 percent of GDP), they have not yet recovered to pre-crisis levels (12.1 percent of GDP in 2007). 16. In order to increase tax collection, in 2012 the Guatemalan Government launched a comprehensive tax reform, which represented a major milestone, since previous reforms had been reversed. The tax reform, which comprised two tax laws, the “Ley de Actualización Tributaria” and the “Ley Antievasión II”, took full effect in 2013. It aimed to modernize income tax collection by increasing its tax base and eliminating tax exemptions through control of deductions and elimination of payroll tax credit. Furthermore, it eliminated several Value Added Tax (VAT) exemptions and strengthened tax administration efforts. 17. While the goal of the tax reform to increase tax revenues by 1 percentage point was not achieved, the main component of revenues covered by the reform (income tax) increased by more than 20 percent in 2013. The reform, which focused on the income tax, was initially expected to raise tax revenues by around 1 percentage point of GDP, from 10.9 percent of GDP in 2012 to 11.8 percent in 2013, as foreseen in the 2013 Budget. However, tax revenues only increased by 0.1 percent of GDP in 2013 to 11 percent of GDP. It is worth noting that in 2013, when the income tax reform took full effect, income tax revenues grew by more than 20 percent (compared to 5 percent in 2012). As a share of GDP, income taxes grew from 2.7 percent of GDP in 2012 to 3 percent in 2013. 5   18. However, the strong growth in income tax collection was offset by a significant slowdown in VAT collection on imported goods. The growth rate of the VAT collection on imported goods (the largest tax item, representing 3.2 percent of GDP) slowed down significantly in 2013 relative to previous years. The VAT on imported goods grew by 0.2 percent in 2013, compared to 5.2 percent in 2012. There are a number of factors behind its slowdown. First, in 2013, customs controls were affected by institutional problems inside the SAT, which included massive layoffs and changes in management. As a result, weaker customs capacity likely allowed for greater tax evasion. Furthermore, these institutional problems were compounded by a significant slowdown in 2013 of the growth in the value of imports that are subject to taxes, which meant that VAT collection on imports remained broadly unchanged in nominal terms relative to the previous year. In the medium-term, the value of the VAT on imported goods is projected to recover, but not significantly enough to result in an increase as a share of GDP In the longer term, the ratio may increase in line with continuous efforts to build capacity in tax and customs administration (a key objective of this DPL series, as further elaborated below). Table 2: Operations of the Guatemalan Central Government 2009-2016 (Percent of GDP) E F F F 2009 2010 2011 2012 2013 2014 2015 2016 Total  Revenues (Including grants) 11.1 11.2 11.6 11.7 11.7 11.9 11.9 11.9       Tax  revenues 10.3 10.4 10.9 10.9 11.0 11.1 11.2 11.2          Income  taxes 2.3 2.3 2.7 2.7 3.0 3.0 3.1 3.0          Taxes on goods and services (VAT) 4.9 5.1 5.2 5.3 5.3 5.3 5.4 5.5         Taxes on foreign trade 0.7 0.7 0.7 0.6 0.4 0.4 0.4 0.4 Non‐tax  revenues 0.7 0.8 0.8 0.8 0.7 0.7 0.7 0.7 Total  expenditures 14.2 14.5 14.4 14.1 13.9 13.9 14.0 13.9      Current expenditures 10.1 10.4 10.4 10.8 10.9 10.9 11.0 11.0            Wages 3.6 3.8 3.8 3.8 4.0 4.0 3.9 3.9            Good and services 1.8 1.9 1.9 2.2 2.2 2.2 2.2 2.1            Payments to Social  Security 0.9 0.9 0.8 0.8 0.9 0.9 0.9 0.9            Interest payments 1.4 1.5 1.5 1.5 1.5 1.6 1.7 1.7     Capital  expenditures 4.1 4.1 4.0 3.3 3.0 3.0 3.0 2.9           Gross Public Invetment 1.8 1.8 1.8 1.0 0.9 0.9 0.9 0.9 Primary Balance ‐1.7 ‐1.8 ‐1.3 ‐0.9 ‐0.6 ‐0.5 ‐ 0.4 ‐0.2 Overall   Balance ‐3.1 ‐3.3 ‐2.8 ‐2.4 ‐2.1 ‐2.1 ‐ 2.0 ‐2.0 Financing 3.1 3.3 2.8 2.4 2.1 2.1 2.0 2.0 External  financing (net) 1.3 1.5 0.1 1.5 1.3 0.8 0.9 0.9 Domestic financing (net) 1.8 1.8 2.7 0.9 0.9 1.3 1.1 1.1 Central  Government Debt 23.0 24.5 23.9 24.5 24.9 25.7 26.8 27.7 External 13.1 13.5 11.8 12.6 13.1 13.1 13.2 13.1 Domestic 9.9 11.0 12.1 12.0 11.8 12.7 13.6 14.5 Source: World Bank Staff estimates based on data from the Ministry of Public Finance and the Central Bank. 19. Public investment fell in 2013 as a result of lower-than-anticipated revenues. Current expenditures increased in 2013 from 10.8 percent of GDP in 2012 to 10.9 percent in 2013, mainly due to a rise in wages. Also, there were increases in transfers and expenditure in goods and services, which also contributed to the rise in current expenditures. On the other hand, capital expenditures were reduced from 3.3 percent of GDP in 2012 to 3 percent in 2013. 6   20. The Government continued to fund its deficit by combining bond issuances and loans from multilateral agencies. The Guatemalan Government has been meeting its financing needs predominately with multilateral loans and bond issuances. For the past three years the composition of debt has relied more on bond issuances and less on multilateral loans. For instance, in 2010 bond issuances represented about 50 percent of total borrowing, while multilateral loans represent about 40 percent. As of end-2013 these ratios changed to 60 percent (bonds) and 37 percent (multilateral loans). Guatemala has been able to access international markets at lower rates than other Central American peers. 21. The financial system is relatively sound, contributing to macroeconomic stability. As noted in a joint IMF-World Bank Financial Sector Performance Assessment (FSAP) conducted in March 2014, Guatemalan banks are well capitalized as a result of macroeconomic stability, improvements in regulations and enhancements in risk-based supervisory practices. However, efforts are still needed to strengthen precautionary buffers, improve the oversight of financial conglomerates and address risks arising from the operations of offshore banks, formalize and consolidate financial cooperatives and improve the terms and features of loans to medium and small sized companies and low income-households. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 22. The Guatemalan economy is projected to continue growing at a moderate level during 2014-2016, sustained by private consumption and a slight increase in investment. Private consumption is expected to remain the main driver of economic growth, supported by steady growth in remittances. Both rising public and private investment are expected to boost domestic demand. Similar levels of imports to those experienced in 2012 and 2013 are projected to continue in following years. As the United States economy recovers, and exports and private investment rises, the country is expected to continue to grow around 3.5 percent, mainly due to persistent structural constraints such as the country’s weak fiscal intake, low investment, and high levels of labor informality. Inflation is expected to remain under the Central Bank’s target of 3-5 percent. 23. Guatemala fiscal deficit is projected to stabilize at around 2 percent of GDP during 2014-2016. A slight increase in tax revenues is foreseen from 11 percent of GDP in 2013 to 11.2 percent of GDP in 2016, as well as a slight increase in current expenditures due to an increase in interest payments. 24. Central Government debt as a share of GDP is projected to remain low (Table 3). Guatemala’s debt-to-GDP ratio is expected to increase from 24.9 percent in 2013 to 27.7 percent of GDP by 2016. External debt is projected to remain at around 13 percent of GDP while domestic debt is expected to increase from 11.8 percent of GDP in 2013 to 14.5 percent in 2016, due to a rise in bond issuances in the domestic market. About 60 percent of Central Government debt is denominated in foreign currency and this poses certain risks in the case of sharp depreciation of the quetzal. A slight increase in interest payments is projected, as advanced economies are foreseen to recover gradually and thus accessing international markets may not yield the favorable rates seen in previous years. 7   Table 3: Government’s Medium-Term Financing Plan (Percent of GDP) 2013 2014 2015 2016 Financing needs 3.9 3.1 3.4 3.5 Amortizations 1.7 1 1.4 1.6     Domestic 0.5 0.5 0.9 1.1     External 1.2 0.5 0.5 0.5 Primary Deficit ‐0.6 ‐0.5 ‐0.4 ‐0.2 Interest Payments 1.5 1.6 1.7 1.7 Financing sources 3.9 3.1 3.4 3.5        External  Disbursements 1.2 0.4 0.6 0.6        Treasury Bonds abroad 1.3 0.9 0.8 0.8        Treasury Bonds in the  domestic market 1.1 2.3 2.7 2.9        Change  in deposits, (+) decrease, (‐ ) increase 0.3 ‐0.5 ‐0.7 ‐0.8 Source: Ministry of Public Finance. 25. Under conservative assumptions, Guatemala’s public debt will remain sustainable in the medium term. The most recent IMF debt sustainability analysis (DSA) undertaken in August 2013 as part of the Article IV Consultation notes that while public debt has been rising since 2008, it remains at low levels. Over the next 30 years, assuming that revenue intake remains broadly unchanged, the DSA projects that Guatemala’s debt-to-GDP ratio would rise at a gradual pace but remain below 40 percent of GDP. Under a number of alternative scenarios, debt sustainability is the most sensitive to a large depreciation in the quetzal or to a shock stemming from contingent liabilities. Given the relatively low level of public debt and the prudent fiscal stance, the DSA projects that the macroeconomic framework will remain adequate even under a scenario in which fiscal revenues remain at current levels. It is worth mentioning, however, that the Government’s ability to implement counter-cyclical fiscal policies is limited due to the low revenue intake and the fact that interest payments as a percent of total revenues are projected to increase from around 13 percent in 2013 to around 14.5 percent in 2016. 26. Guatemala’s current account deficit is projected to remain below the world average at around 3.3 percent of GDP during 2014-2016. The trade deficit will remain stable at around 12 percent of GDP. FDI is also projected to remain stable at around 2 percent of GDP. 27. Guatemala’s macroeconomic framework is deemed adequate for development policy lending, notwithstanding the mentioned risks from external factors. The 2014-2016 macroeconomic framework is expected to support economic growth in line with potential GDP. Inflation is expected to be contained and fiscal policy is expected to remain prudent. The current account deficit is projected to be largely financed through FDI, and the remaining financing needs are expected to be easily met during the forecast period. III. THE GOVERNMENT’S PROGRAM 28. The Government’s program is built around five strategic pillars: (1) democratic security and justice; (2) competitive economic development; (3) productive and social infrastructure for development; (4) social inclusion; and (5) sustainable rural development. Since taking office, the Government has announced three strategic pacts to support the implementation of the five pillars: (i) a Fiscal Pact, including tax reforms as well as measures to improve the 8   transparency and quality of public expenditure; (ii) a Zero Hunger Pact3 to reduce chronic malnutrition, emphasizing the first 1,000 days of life; and (iii) a Security, Justice, and Peace Pact to tackle the high rates of crime and violence. These pacts aim to strengthen the relevant institutions and improve inter-ministerial coordination at the central and local levels. 29. The Fiscal Pact comprises a set of measures to improve revenue collections, raise transparency, and improve the quality of public spending. An intensive consensus building process preceded these measures, which enabled the Government to adopt the tax reforms in 2012, followed by the approval of a reform package in November 2013, which included a Budget Reform, a reform of the Organic Law for the Tax Administration Superintendence, reforms to the Comptroller General of Accounts, and a new Law on Illicit Enrichment. The reforms are anticipated to strengthen governance in Guatemala’s and support economic growth. 30. The Zero Hunger Pact is aimed at helping achieve sustainable food and nutrition security in the long term. The Pact aims to (i) achieve a 10 percentage point reduction in chronic malnutrition in children under five years of age; (ii) reduce the mortality rate related to acute malnutrition in children under five years of age; and (iii) combat hunger and promote food and nutrition security amongst the most vulnerable members of the population (rural areas and marginalized urban areas of the country). The Pact is embedded within the National Strategic Plan for Food Security and Nutrition and is designed to ensure participation across all sectors in the fight against cyclical, structural, and behavioral causes perpetuating chronic malnutrition. 31. To improve strategic planning of investment, the Government is preparing the first National Development Plan for Guatemala. Led by the Planning Secretariat (SEGEPLAN), this effort culminates a planning process carried out over the last five years, beginning with municipal, departmental, and regional development plans, and which now includes a national level planning exercise. The Plan de Desarrollo K’atun was initiated in 2013 and once completed it will layout the strategic development areas for the country until 2032. The strategic areas of the plan are expected to be formulated in 2014, and this strategy will inform the 2015 and 2016 budgets. IV. THE PROPOSED OPERATION LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 32. The proposed DPL supports the Government’s program on revenue mobilization, transparency, efficiency of spending, and coordination of social policies. Specifically, it aims to (i) strengthen tax administration and tax policy; (ii) strengthen budget management and increase the results orientation of public spending; and (iii) improve the management and coordination of social policies.                                                              3 Zero Hunger is a multi-sectoral program that aims to coordinate various interrelated policy interventions (e.g. training, counseling women and caregivers, health and nutrition services, including growth monitoring, food fortification, microcredit, water and sanitation and promotion of healthy households or “hogares saludables”) all of which contribute to reducing malnutrition. The program emphasizes the first 1,000 days of life (targeting women and young children less than 2 years of age). The SESAN coordinates the Zero Hunger Program, with the support of several ministries, including the Ministries of Social Development; Health; Education, Agriculture; Communication; Infrastructure and Housing, as well as the private sector and civil society organizations. 9   33. The program supported by DPL2 is stronger than that originally envisioned in DPL1. The six triggers were converted into prior actions and four of them were deepened, reflecting a steady reform progress. Furthermore, a new prior action has been added which supports a substantive reform package including measures to enhance the Organic Budget Law, the Organic Law for the Tax Administration Superintendence, and the Organic Law for the Comptroller General of Accounts. Regarding quality of spending and coordination of social policies, the authorities are aware that improving the results orientation of the budget is a long- term reform process that will require political support from consecutive governments, and important measures were taken to maintain the reform momentum, including (i) expanding the legal framework for Results-Based Budgeting to the entire central government; and (ii) improving monitoring and evaluation systems for social programs. 34. DPL outcome indicators have been updated to enhance the monitoring and evaluation framework, and to reflect changes in the program (e.g., additional reforms) as well as varying reform speed. In particular, the indicator concerning tax collection has been modified, from total tax collection (as a percent of GDP) to income tax collection. As Guatemala is a country that historically has relied heavily on indirect taxes such as VAT rather than more direct taxes such as income tax, the selection of the income tax indicator represents the need to measure progress both in terms of revenue mobilization and in terms of the progressivity of the tax system, which will be important for increasing shared prosperity. In terms of social indicators, these have been updated to reflect lessons learned from the first year of implementation of RBB. Notably, the DPL2 policy matrix includes baseline values for these indicators, which were not available when DPL1 was prepared. 35. The design of the proposed operation builds on lessons learned from previous DPLs in Guatemala and the World Bank’s experience with other middle-income countries (see Box 1). The experience of the previous DPL series, which suffered from both internal political economy factors and external shocks, highlights the need to be conservative while at the same time consolidate positive outcomes from Government’s reform efforts and long-term engagement with the country, specifically on fiscal and social sector issues. Additional relevant lessons include (i) the importance of ownership of the reform program demonstrated by the non- reversal of the fiscal reform despite claims of unconstitutionality; and (ii) strong analytical underpinnings and links to complementary World Bank investment lending and Analytical and Advisory Activities, including the Integrated Financial Management System (Sistema Integrado de Administración Financiera – SIAF) project, technical assistance for coordinating social sector interventions, and the recent implementation of benchmark analysis IAMTAX (Integrated Assessment Model for Tax Administration). The program was initiated and developed by the administration, with technical input from the World Bank. Furthermore, key Analytical and Advisory Activities helped inform the reform efforts of Government and supported a fruitful policy dialogue. 10   Box 1: Context of Development Policy Loans in Guatemala Since the global financial crisis the World Bank has been actively engaged with the Guatemalan authorities with the goal of enhancing the country’s economic fundamentals. Fiscal performance and its social spending have targeted relevant areas aligned with this DPL’s policy objectives. In 2009, a DPL programmatic series aimed at enhancing Guatemalan fiscal and institutional capacity was initiated. The series covered the 2008-2011 period and consisted of three separate operations. The series sought to support the Government’s development plan by enhancing capacity for increased public spending in priority sectors and improving public expenditure transparency and management. Within the context of enhancing economic fundamentals, the series monitored the fiscal deficit, ensuring that it did not rise above 3 percent of GDP on average for the 2008-2011 period. This objective was achieved, partially because the Government was conservative and cutback on investment by making adjustments in line with tax revenues. Regarding tax collection, the DPL series’ sought to ensure that it did not fall below 11 percent of GDP in the 2008-2011 period. As Guatemala was hit hard by the global financial crisis, there was a small deviation in the outcome indicator of tax revenues and the target was not met. On the social side, the DPL series also aimed at strengthening the effectiveness of conditional cash transfer (CCT) programs through the enhancement of monitoring and evaluation of program design and its outcomes. This was achieved by verifying CCT beneficiaries (half of whom lived in extreme poverty) with a new framework for monitoring and evaluation. Furthermore, the transparency of targeting of social programs was improved and public financial management was strengthened by the introduction of RBB. While the country was able to maintain macroeconomic stability during 2008-2011, the impact of previous DPLs was limited in terms of expanding fiscal space, given the difficult economic environment the country faced. External conditions were not favorable and the Government implemented a mild anti- cyclical fiscal policy to face the crisis. In order to protect social spending, public investment was reduced and the composition of public spending was shifted towards consumption. The initial DPL series that covered the 2008-2011 period supported a tax reform that was not passed due to internal complications within the country, and the original tax revenue targets had to be reduced. The present DPL series (initiated in 2012 and culminating with the present 2014 DPL) is motivated by the tax reform passed in 2012 and closely monitors its performance and outcomes. It also continues to support progress achieved in terms of enhancing transparency and governance by strengthening public financial management, including RBB, and improving the management and coordination of social policies, including enhancements in monitoring and evaluation systems. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Operation Pillar 1: Strengthening Tax Administration and Tax Policy 36. This pillar supports the package of tax reforms approved in 2012, the progress made to improve transparency on international taxation and the reinforcement of accountability of public financial management and tax administration. The tax reforms are expected to improve tax collections and lead to greater international cooperation on taxation. A recently approved law is expected to improve transparency of public financial management and the tax collecting agency. 11   Indicative Trigger(s) for DPL2 Prior action(s) for DPL2 The Government has issued the Prior Action 1: To raise tax revenues, the Borrower has: (a) issued implementing regulation for the reforms of implementing regulations for: (i) the income tax (ISR) reform, as the ISR, IPRIMA, and IVA. evidenced by the Borrower’s Executive Agreement No. 213-2013; (ii) the value added tax (VAT) reform, as evidenced by the Borrower’s Executive Agreement No. 5-2013; and (iii) the tax reform for the new tax on motor vehicles first registration (IPRIMA), as evidenced by the Borrower’s Executive Agreement No. 133-2012; and (b) improved the organizational structure of the Tax Administration Superintendence in line with international practices, as evidenced by Legislative Decree No. 13-2013. The Government has issued the Prior Action 2: To strengthen the Tax Administration implementing regulation for the National Superintendence in alignment with the Central American Uniform Customs Law. Customs Code (CAUCA) and the Regulations of the Central American Uniforms Customs Code (RECAUCA), the Borrower approved the National Customs Law through the enactment of Legislative Decree No. 14, 2013, including: (a) a definition on customs infringements and related sanctions; (b) the regulation of the suspension and cancellation of customs licenses; and (c) the establishment of procedures against fraud and contraband. The Government has: (i) signed an Prior Action 3: To increase transparency and exchange of additional five Tax Information Sharing information on international taxation, the Borrower has: (a) signed Agreements; (ii) submitted to Congress an additional tax information exchange agreement with the twelve Tax Information Sharing Commonwealth of Australia, dated September 26, 2013; (b) signed Agreements; and (iii) has joined the the Convention on Mutual Administrative Assistance in Tax Organization for Economic Cooperation and Matters on December 5, 2012; and (c) created an international Development (OECD) Multilateral taxation unit within the Borrower’s Ministry of Public Finance to Convention on Mutual Administrative support the exchange of information related to international Assistance in Tax Matters. taxation, as evidenced by the Borrower’s Executive Agreement No. 26-2014. 37. Guatemala has the lowest government revenues in the world relative to the size of the economy, mainly due to low tax collection. The total revenue of the central government is around 12 percent of GDP, of which around 11 percent of GDP is tax revenues.4 Guatemala’s tax-to-GDP ratio compares poorly to the Central American average of 13.5 percent and to the LAC average of 17 percent. While other countries with low tax-to-GDP ratios have significant non-tax revenue resources, Guatemala does not. As a result, general government revenues have been below 13 percent. Low revenues limit the capacity of the State to provide adequate basic public goods and services. 38. The tax reform supported by DPL1 represented the first comprehensive tax policy reform approved in many years. As part of its Fiscal Pact, the Government pushed through an important package of tax reform, including the Antievasión II Law, which introduced a number of measures strengthening tax administration; and (ii) the Actualización Tributaria Law, which made important changes to the tax rates, tax bases and other aspects of the existing system. Both laws are fundamentally based on the proposals developed by a non-partisan group of economists in 2008 (Grupo Promotor del Diálogo Fiscal), representing broad-based consensus. While the direct revenue impact of the reforms has been modest so far, the reforms are an important step in                                                              4 World Bank staff estimates that the structural tax-to-GDP ratio for Guatemala is around 10.4 percent. 12   promoting progressive tax policy and strengthening the tax administration, which will reinforce the system in the long run. 39. It is worth noting that prior to the 2012 tax reform, only piecemeal fiscal reforms and temporary taxes had been passed, causing very little impact. Notably, previous fiscal reforms in Guatemala were challenged in the Constitutional Court and subsequently reversed. Temporary taxes were passed, but they either expired quickly or were rolled back at the end of the presidential mandate. This cycle of temporary taxes has been exacerbated by sector-specific laws amplifying exceptions and weakening progressivity. 40. Similar to previous reforms, the tax reform supported by DPL1 was subject to claims of unconstitutionality, but contrary to the historical precedent, the overall reform was kept in place. As most articles of the tax reform became effective in January 2013, some groups representing specific interests put forward claims demanding the suspension of specific articles of the reform. In summary, one of every three articles was challenged by claims of unconstitutionality (68 articles out of 258 articles that comprise both tax reform laws), of which only 9 were amended by the Constitutional Court.None of the amended articles affected the technical structure of the tax reform. One aspect of the reform that was amended (by the Executive) was the reform to the tax on the circulation of motor vehicles, which represents about 0.2 percent of GDP.5 As noted in the poverty and social impact assessment (PSIA) below, overcoming these legal challenges and the full implementation of these policies sets a foundation for long-term improvements in shared prosperity. 41. At the time that DPL1 was prepared, the proposed measures were expected to yield an increase in tax revenues equivalent to about 1 percentage point of GDP. However, as noted in the program document of DPL1, tax revenues are affected by many factors beyond policy. Hence the attribution of changes in this result indicator to the policies being supported in this operation was necessarily imperfect. 42. An analysis of the estimated revenue impact of the tax reform identified that the bulk of the increase would come from direct taxes (over two-thirds of the estimated increase can be attributed to the effect of the income tax reform). This estimate represents a substantial shift as Guatemala’s tax system relies heavily on indirect taxes6, especially the value added tax (VAT), which suggests a regressive tax structure. This DPL series supports a more equitable tax system through the widening of the tax base subject to income tax, a reduction of tax exemptions and a simplification of the tax rates for salaried workers. 43. In 2013, the impact of the tax reform represented a small, but positive change in increasing the progressivity of the tax system in the long run. The tax collection of 2013 shows an increase in the weight of direct taxes of 10 percent in comparison to 2012 and an increase of over 20 percent compared to a decade ago. While the magnitude of the impact of the tax reform may be modest, the shift toward greater progressivity in taxation demonstrates the consolidation of reforms and strengthening of the tax system. Also, in 2012 Guatemala made                                                              5 Although the inclusion in the Actualización Tributaria Law envisaged a doubling of the tax on the circulation of motor vehicles (ISCV), the June 2013 Congress Decree 1-2013 granted a 50 percent discount on this tax. 6 Income tax revenues remain hampered by low tax bases, evasion and economic informality. 13   paying taxes easier for companies by introducing a new electronic filing and payment system called “Declaraguate” (https://declaraguate.sat.gob.gt). 44. With support from DPL2, the Government adopted necessary regulations for implementing the tax reform. The Government issued regulations for the income tax reform; the VAT reform; and the tax reform on the first registration of motor vehicles. 45. The adopted regulations of the new Income Tax (Agreement No. 213-2013) support a more progressive tax system. Taxes will be charged based on the source of income levied by companies or individuals, that is, depending on whether they are the result of labor, profit activities or capital and profits. The regulations came into effect in May 2013 and specify several issues that are not clearly indicated in the law. For instance, they clarify the simplification of the regime applicable to salaried employees in order to increase the complying tax base and lower the possibility of obtaining a return of VAT based on invoices. For the first time, the reform incorporates the charge of dividends as capital income, among other things.7 46. The adopted regulations for the VAT (Agreement No. 5-2013) introduce additional requirements in order to reduce tax evasion and improve tax collection. The regulations facilitate the application of the special invoice for exports. VAT and income tax are directly withheld from the producer, avoiding reporting failure and tax evasion by intermediaries. The regulations also include the requirements that small taxpayers must meet regarding their invoices and states that the SAT will publish a list of withholding VAT agents in order to clarify whether taxpayers have an obligation to retain VAT or not. 47. The adoption of the regulation for the new tax on Motor Vehicles First Registration IPRIMA (Agreement No 133-2012), replaced import tariffs and is expected to make revenues more stable over the medium-term. This law abolishes the discretion of the customs staff by clearly defining the basis on which the tax is to be calculated. A table for determining the tax for vehicles will be issued by the SAT based on market values. Before, the value taxed was based on the billing price the importer presented, which wassignificantly lower than the real market value of the cars. 48. Furthermore, in November 2013 the Organic Law of the SAT was amended (Legislative Decree 13-2013) to enhance its organizational structure. This law replaces a 15- year old law and includes procedures for the renewal of its Board of Directors. Since the creation of the SAT in 1998, there have not been mechanisms for the renewal or rotation of its Board of Directors, which diminishes the dynamism of the decision-making process, particularly with regards to tax administration. The new law contains an important change to the selection of the Board of Directors in line with international practices. 49. In November 2013, to improve customs administration, Guatemala adopted a National Customs Law (Legislative Decree 14-2013), which aligned its Customs Code to the Central American standard. With the approval of the Antievasión II Law, the Government had aligned its legislation on customs sanctions to the Uniform Central American Customs Code                                                              7 It also includes items relating to international income, raises the rate of the simplified tax regime to 7 percent and decreases the rate for the general regime to 25 percent. 14   (CAUCA). The respective regulation (RECAUCA) was also issued by the Government, but prior to the approval of the National Customs Law it these could not be implemented because it needed to be validated in the local legal framework. The National Customs Law validates the implementation of the RECAUCA, fully aligning Guatemala’s Customs Code to the CAUCA, and also strengthening and simplifying the sanctions system. The National Customs Law includes the definition of customs infringements and related sanctions, the regulation of suspension and cancellation of customs licenses and procedures against fraud and contraband. 50. Guatemala also enhanced transparency related to international taxation by signing an additional tax information exchange agreement with Australia, and joining the OECD Multilateral Convention of Mutual Administrative Assistance in Tax Matters. On May 15, 2012, the Minister of Finance signed tax information exchange agreements with Denmark, Finland, Iceland, Norway, Sweden, Greenland, and the Faroe Islands. Under these agreements, the signatory parties committed to providing information that could be relevant for the control of taxpayer obligations in the other party’s jurisdiction. In September 26, 2013, an additional bilateral agreement of exchange of information was signed with Australia. Furthermore, Guatemala has advanced the implementation of information exchange agreements with Costa Rica. Finally, since December 2012, Guatemala is part of the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters, based on which, as of end-2013, the country is able to exchange information with more than 60 signatory countries upon request. Despite being able to exchange information with these countries, ratification of the Convention by Congress is necessary to use the information for legal taxation matters. This prior action aims to enhance transparency related to international taxation. When the DPL was designed, Guatemala was on the OECD ‘grey list’ of countries that had not yet implemented internationally recognized tax standards. Following the signing of the Multilateral Convention, Guatemala was taken off the OECD ‘grey list’. 51. Additionally, in 2014 the Government created the Department of International Taxation inside the Ministry of Public Finance to facilitate information exchange related to international taxation. This department is responsible for generating the statistical information at a global level for conducting comparative studies with countries of interest to Guatemala. It also analyzes the exchange of information agreements and international conventions. Operation Pillar 2: Enhancing Budget Management and Increasing the Results Orientation of Public Spending 52. A second component of the Government’s fiscal pact is the improvement in the quality of public expenditures. Beyond tax reforms, this DPL also supports greater fiscal progressivity by enhancing accountability in how public resources are spent, which will be crucial in ensuring that scarce resources achieve better results. 15   Indicative Trigger(s) for DPL2 Prior action(s) for DPL2 The Government has expanded the Prior Action 4: To improve budget management and implement a application of the results-based results-based methodology of public expenditures, the Borrower has: management approach, in particular (a) adopted a legal framework for results-based budgeting, as strengthening the monitoring and evidenced by Legislative Decree No. 13-2013; (b) complied with the evaluation framework. requirements to expand the application of results-based budgeting to the Borrower’s Ministry of Economy and the Ministry of Sports and Culture; and (c) established operating and coordination mechanisms for results-based budgeting in the Borrower’s Ministry of Public Finance and the Ministry of Public Health and Social Assistance. Prior Action 5: To strengthen budget management and the transparency of public expenditures, the Borrower has: (a) mandated the use of the Single Treasury Account to process budget transactions; (b) mandated that all entities that execute projects with public funds adequately report their activities to the Borrower’s Ministry of Public Finance; (c) introduced regulations to strengthen the monitoring and evaluation of loans and grants to, and trust funds managed by, public entities; and (d) mandated that all public entities use the SIAF to consolidate budgetary and financial information, as evidenced by Legislative Decree No. 13-2013. 53. The Government is aware that the implementation of systemic reforms such as RBB is a long term process that will require support and commitment from subsequent governments. The first phase of the DPL supported the Ministry of Health and Social Assistance’s (MOHSA) RBB pilot with regard to selected sub-programs. The second phase of the RBB mechanism will be improved and expanded to include other ministries in 2014, supported by the second phase of the DPL. In subsequent years, the Government plans to include more ministries and programs. Consolidation and scaling-up of a results-focused approach in public financial management with the objective of increasing the effectiveness of public spending, represent a continuation of long-term Government priorities that date back to the 2009- 2011 DPL series and that will enable the Government to address development challenges more effectively, particularly given the limited fiscal space. 54. A key policy supported by this DPL is the adoption of a new Organic Budget Law in November 2013, which replaced a 17 year-old law and that includes a series of improvements in budget management and transparency. First, the new Organic Budget Law mandates the use of a Single Treasury Account (Cuenta Única del Tesoro, CUT), a unified structure of government bank accounts that was previously not regulated and is a key step towards strengthening the management and control of Government’s cash resources to ensure that (i) all tax and non-tax revenues are collected and payments are made correctly, in a timely manner; and (ii) government cash balances are optimally managed to reduce borrowing costs. Second, it introduced new regulations to enhance fiscal policy management, including the management of public debt. For instance, the new Organic Budget Law expands the definition of the public sector to include all government agencies, state-owned enterprises, local governments, non-governmental organizations that receive or manage public funds, as well as trust funds constituted with public funds. In addition, the Law specifies principles and processes for loan guarantees, establishes procedures to issue Treasury Bonds, and requirements for disbursements for all public entities. The Law also enhances the comprehensiveness of the information included in budget documentation. Third, the Law mandates that all public entities (including central 16   government, local governments, and state-owned enterprises and entities) use the Integrated Financial Information System (SIAF) to consolidate budgetary and financial information, which is expected to significantly enhance the capacity of the government to track revenues and expenditures. 55. DPL1 supported the implementation of a pilot of RBB for the health sector that is focused on maternal and child health and nutrition results based on the “First 1000 days of Life Initiative” under the Zero Hunger Pact, a larger multi-sectoral program8. Prior to this pilot, public financial resources in Guatemala have been distributed mainly based on historical budgeting, with a slight increase for inflation. In the health sector, in particular, regional allocations were based on certain indicators: human resources, number of beds, and number of health establishments9. Poorer regions with already unequal representation were assigned the lowest amount of funds regardless of population increase or epidemiological profile. As a result, the allocation criteria used for health expenditures ended up reinforcing historical trends as well as inequalities across regions. It is expected that the introduction of the pilot RBB in health and nutrition in priority municipalities, which were selected based on their nutritional status under the Zero Hunger Pact, will improve the resource allocation among sub-national governments. 56. The MOHSA’s RBB pilot is considered a key step toward aligning resource allocations with sectoral priorities. Under the Zero Hunger Pact the Government developed a plan that aims to reduce chronic malnutrition and prevent and mitigate seasonal hunger. In particular, the plan seeks to reduce chronic malnutrition in children less than 5 years of age by 2.5 percentage points annually between 2012 and 2015. It also includes strategies to improve the health status of women of reproductive age and children less than two years of age, based on the evidence that improving the first 1000 days of life enables young children to attain their growth potential. 57. In order to operationalize the pilot RBB, the Ministry of Finance (MINFIN) and MOHSA signed a Results-based Management Agreement in 2012 with targets for nutrition and maternal health, providing for a significant increase in the budget allocated to these two priorities. In the RBB pilot, MOHSA prioritized three sub-programs under its preventive health program (Program 12): immunization, prevention and control of malnutrition, and reproductive health. Budgetary allocations to these three sub-programs increased by 188 percent from 2011 to 2012. In 2013, the MINFIN changed the budget categories and it was not possible to directly compare changes in assigned budgets to each health sub-program per the 2011 and 2012 sub-program categories. Nonetheless, the total 2013 budget allocated (Q663,866,018) for sub-programs directly related to nutritional and maternal health targets increased by 41.6 percent from 2012 (Q468,563,755). Since the 2014 budget was not approved by end November 2013, the 2013 budget remains effective to date.                                                              8 The SESAN coordinates the Zero Hunger Program with the support of several ministries including the Ministries of Social Development; Health, Education; Agriculture, Communication, Infrastructure and Housing; as well as the private sector and civil society organizations. 9 Public Expenditure Review 2012; WB Health Policy Note 2012.  17   Table 4: Budget allocated to the priority health sub-programs (Quetzales): 2011 and 2012 Sub-Program 2011 2012 Change 2011-2012 (%) Vaccinations 97,103,733 277,051,555 185 Prevention and control of malnutrition 23,684,204 45,192,430 91 Prevention and control of reproductive health 41,627,677 146,319,770 251 Total 162,415,614 468,563,755 188 Source: Ministry of Public Finance. 58. The RBB’s first phase laid the groundwork for operationalizing and monitoring the process. In order to better adjust services to respond to the needs of the target population, the initial phase of the RBB implementation produced (1) a resource gap analysis (financial, human resources, water and sanitation, medicines, and equipment) in 83 of the 166 prioritized municipalities10 in 12 Health Areas, in coordination with Secretariat of Food and Nutritional Security (SESAN), as well as (2) a situational analysis (production, human resources, inventory of supplies, equipment and infrastructure) of 17 Nutritional Recuperation Centers in 8 Health Areas. In addition, work teams within MOHSA and in the departments and municipalities were oriented and trained on the RBB process, and their work structured to enable them to deliver on the RBB commitments. Furthermore, the MOHSA updated the primary care registration system of the Health Management Information System (SIGSA), the ministry’s principal information system, and the vaccination cards for children to be able to measure and report on indicators included in the RBB agreement. The MOHSA also supported the development and implementation of an alert and response system for the timely detection of acute malnutrition and reduction of maternal-neonatal mortality through the use of mobile technology in 500 communities in 97 priority municipalities, in coordination with the private sector, external partners, and SESAN, and updated the Extension of Coverage Program (PEC) information system.11 59. To improve the coordination of the Management for Results Process, the MOHSA also established an Internal Technical Working Group (GTTI in Spanish) via ministerial decree in May 2013. The GTTI is responsible for promoting good institutional practices that contribute to harmonizing and operationalizing MOHSA activities. 60. Aside from procedural and institutional improvements, the RBB approach also demonstrated positive results in key maternal and child health and nutrition indicators. While it is recognized that reducing chronic malnutrition usually takes time, other national level results for several child and maternal health and nutrition indicators were positive. In particular,                                                              10 The number of prioritized municipalities refers to those that have the highest prevalence of chronic malnutrition in the country―166 municipalities were rated as having a "high" incidence, of which 83 have a "very high" incidence. The complete list of prioritized municipalities can be found at www.sesan.gob.gt. 11 Of the 166 municipalities prioritized by the Zero Hunger Plan, the 83 classified with a “very high” incidence of chronic malnutrition have an estimated rural population of 64 percent and the remaining 83 prioritized municipalities with a “high” incidence of chronic malnutrition have an estimated rural population of 63 percent. At the national level, the rural population is estimated at 52 percent, which reflects greater vulnerability in rural areas. The municipalities prioritized by the Zero Hunger Plan are located in 18 of 22 departments of Guatemala. For instance, of these 18 departments, 10 have a rural population of 60 percent or more, with the highest rural populations in Alta Verapaz (77 percent), Chiquimula and San Marcos (73 percent each). In addition, 8 departments have at least 50 percent of indigenous population, with the highest concentration in Totonicapán (97 percent), Sololá (96.5 percent) and Alta Verapaz (89.7 percent). 18   the MOHSA achieved 92.3 percent of its target for growth monitoring of children less than 5 years old, 92.4 percent of its target for micronutrient supplementation of children less than 5 years old, and 91.7 percent of its target for institutional deliveries. The MOHSA, in coordination with SESAN and Government Ministries, also coordinated efforts to provide nutritional interventions and treatment in 850 communities in 22 departments that identified 1,194 children with acute malnutrition. The four main indicators12 used to monitor the RBB process in the 83 municipalities prioritized for the first phase of the RBB implementation under the Zero Hunger Pact increased from 2011 (baseline) to 2013. Table 6. Progress in key RBB Health and Nutrition Indicators: 2011 to 2013 Indicators 2011 2013 Change (baseline), % % 2011-2013 % of children ≤ 1 year old whose growth was 37.5 48.5 2.9% monitored per established guidelines % of children ≥ 6 months and ≤ 1 year in the 83 4.7 16.1 242% prioritized municipalities who received micronutrient supplementation per the established guidelines % of children ≥ 6 months and ≤ 1 year old in the 83 12.9 26.4 104% prioritized municipalities who received Vitamin A supplementation per established guidelines % of women in the 83 prioritized municipalities who had 14 12.9 -7.8% institutional births assisted by a qualified professional Source: World Bank staff estimates based on MOHSA and Ministry of Public Finance, RBB progress report. 61. As a result of the initial RBB implementation experience and with the view of expanding results-oriented budgeting in other ministries, the Ministry of Finance will strengthen the legal basis and institutional coordination and support mechanism for RBB. The MINFIN, recognizing the importance of establishing regulations to implement results based management in all ministries, will revise the Budget Law accordingly. In addition, it will support the implementation of the RBB mechanism by assigning MINFIN staff to work closely with the MOHSA. It will also initiate implementation of the RBB mechanism in two additional ministries (Culture and Economy) that have expressed their willingness to participate in 2014. 62. The MOHSA has prepared a strategy for 2014-19, and an operational plan for 2014 and 2015 that is based on, and supports, the RBB approach. This strategy has 7 pillars: (i) strengthening the three levels of care and the integration of the service delivery network; (ii) reforming the health sector regulatory framework; (iii) training, development of human resources, and research; (iv) governance; (v) implementation of the regionalization of technical and financial management; (vi) strengthening access to safe water and sanitation; and (vii) quality assurance. Aside from strengthening service delivery in priority municipalities it aims to train 100 percent of all primary health care staff in the correct use of the information system, including registration of primary care data by 2014. By 2015, it seeks to have 100 percent of all Health District Municipalities and hospitals implement results-based management based on cost centers. This is a welcome, yet ambitious (in terms of timing) undertaking since the need to improve the availability, quality, and timeliness of cost and production of data were also highlighted in the PER (2013) and the ongoing Health Non-Lending Technical Assistance                                                              12 For practical purposes and to be aligned with the indicators included in the MINFIN and MOHSA results agreement, the DPL series will use these indicators to track progress. 19   Functional Review. In terms of establishing a single health information system (SUI, in Spanish) the MOHSA’s targets are the following: (i) 50 percent of the Health Areas and their districts operate SUI for registering consumption of medicines and other inputs by end of 2014, and (ii) reaching 100 percent of the Health areas and their districts by end of 2015. The MOHSA has presented and discussed its Plan with the National Health Council and plans to present it to the President of Guatemala. Going forward, it would be essential for the MOHSA and MINFIN to discuss said Plan and ensure that it is feasible and could be adequately supported by a budget. Operation Pillar 3: Improving the Coordination and Management of Social Policies Indicative Trigger(s) for DPL2 Prior action(s) for DPL2 MIDES has established the National Prior Action 6: To improve the management of social policies, the System of Social Information, including Borrower has established a social information system (SISO) in the the Unique Beneficiary Registry. Borrower’s Ministry of Social Development, including: (a) information on social programs and policies related to beneficiaries, geographic coverage and type of program; and (b) a single beneficiary registry (RUU) that includes information on beneficiaries for at least 75 social programs. The Government has launched a program Prior Action 7: To support the implementation of the Zero Hunger to roll-out Zero Hunger offices in Plan, the Borrower has established 120 COMUSANES during 2012 prioritized municipalities. and 2013 in prioritized municipalities with the highest incidence of chronic malnutrition. 63. Social spending has expanded in recent years, but remains low as a share of GDP. Social spending has gradually increased from 32.2 percent of total public expenditures in 2007 to 38.3 in 2013. However, as a share of GDP, Guatemala’s social spending ranks lowest in Central America. This level of public spending represented 5.4 percent of GDP in 2013, compared to 4.3 percent in 2007. This gradual increase reflects both the commitments made under the Peace Accords in 1996, and a strong social sector focus by the last administrations. Furthermore, in recent years Guatemala has taken important steps towards expanding coverage of social programs addressing the poor and the vulnerable.13 For instance, the largest social program is the CCT program Mi Bono Seguro (formerly known as Mi Familia Progresa), which supports over 770,000 households living below the poverty line. As further described below, the proposed DPL supports the enhancement of monitoring of social programs with the creation of the Social Information System. 64. This DPL series supports the adoption of the Zero Hunger Pact, which aims at tackling chronic malnutrition. Child malnutrition rates in Guatemala are among the highest in the world. Chronic malnutrition among children under five years of age reached 49.8 percent in 2008/09, but rates are as high as 89 percent among the indigenous population. This high rate of                                                              13 Guatemala has a range of programs that vary in their objectives, target population, and type and level of benefits. These include the conditional cash transfer Mi Bono Seguro (annual spending of about US$100 million), which covers over 770,000 of rural households living below the poverty line. The second largest social program is Mi Bolsa Segura, a US$13 million program that provides a bundle of essential food items to over 205,000 mothers in poor urban areas across 17 municipalities. Jovenes Protagonistas (formerly Escuelas Abiertas) is a program that provides social and training activities for adolescents and youth in marginal and high violence urban areas – thus addressing the key development challenge of improving citizen security. Although smaller in size (US$3 million) it reaches almost 37,000 youth in Guatemala. Other programs like Comedor Seguro (US$4 million) and Beca Segura (US$3 million) finance eateries and education tuition for the poor and vulnerable. 20   malnutrition has a direct impact on child mortality, as well as a negative impact on intellectual and physical development. It is critical for Guatemala to make the best use of available resources in order to accelerate advances in human development outcomes. 65. The Ministry of Social Development (MIDES) was created in 2011 to run key social programs and enhance the coordination of social policies. MIDES was established with support from DPL1 to ensure greater coherence in public social policy. Indeed, prior to the creation of the MIDES, a large number of institutions were independently responsible for the strategy and operations of the different social programs. In that context coordination among agencies was difficult and costly. MIDES is currently responsible for social programs representing annual expenditures of more than US$124 million. These programs are aimed at breaking the intergenerational transmission of poverty, building human capital, mitigating food insecurity, and addressing the need of the vulnerable youth. Overall, MIDES’ social programs cover more than 40 percent of the Guatemalan population (poverty rate is around 50 percent). 66. While evidence suggests that targeted social programs in Guatemala have helped alleviate poverty, the impact of existing social programs can be enhanced by improving monitoring and targeting systems, and by exploiting synergies among them. As noted earlier, fiscal constraints often result in budgetary uncertainty which consequently affects the performance of social programs. For example, Bono Seguro payments in rural areas have been irregular, which in turn has weakened compliance with required co-responsibilities (i.e., Bono Seguro provides cash payments to poor families that meet certain behavioral requirements, or co- responsibilities, generally related to children’s health care and education). The Government has started an individual registration for programs like Bolsa Segura and will implement a socioeconomic assessment of participating households to ensure they are targeted based on observable needs. Other programs, like Jovenes Protagonistas, are being revised to strengthen capacity building for the youth at risk. These developments suggest that the quality of spending in social programs could be significantly improved, starting with ensuring a regular flow of resources, better targeting, and improvement of internal processes. 67. To enhance the monitoring and evaluation of social programs and to ensure synergies across existing programs, the Government has created a national Social Information System, which includes a Single Beneficiary Registry. The Single Beneficiary Registry (RUU) was created with support from DPL1 and currently consolidates information of beneficiaries from 75 programs across Government agencies, including Bono Seguro and Bolsa Segura. The RUU is part of an effort to develop a comprehensive national Social Information System, a platform where public policies and programs can be monitored and examined across different Ministries and levels of intervention (school, municipalities, and households).14 The RUU is expected to play a significant role in exploiting synergies across Government agencies that deliver social programs. The RUU is accessible to, and uses information from, the Ministries of Finance, Public Health and Social Assistance, Education, and Social Development, as well as from the Planning Secretariat and the Statistics Institute. This is expected to help decision makers to better assess the effectiveness of social policies across the country.                                                              14 The RUU includes information organized by individual beneficiaries, geographic coverage and type of program. In the medium-term, MIDES plans to expand the registry system to assess coverage between rural and urban areas. 21   68. Furthermore, MIDES has established an agreement with the Ministry of Agriculture (MAGA) to enhance the coordination of social policies using the Single Beneficiary Registry. Through this agreement, MAGA is delivering agricultural extension services to Bono Seguro beneficiaries (women heads of households in rural areas and indigenous communities). In particular, MIDES is using the RUU to define the target population, and MAGA delivers training through its network of 3,000 extension workers. Similarly, the Ministry of Labor has established an agreement with the National Training Institute to deliver productive training to households in municipalities prioritized in the Zero Hunger Plan. Notably, the RUU is being used to monitor program efficiency (for instance, by reducing duplications of beneficiaries). In turn, the centralizing of the financial management of programs is likely to give rise to cost savings and to improve budget transparency. 69. Over the medium-term, the Government plans to further strengthen the coordination of social policies. For instance, the authorities are advancing measures to promote cross-sectoral synergies of agriculture, labor, and education programs, with the objective of enhancing the productivity of participants. The Government has established Specialized Cabinets (Gabinetes Específicos), which focus on improving inter-ministerial coordination for specific social programs in areas like rural development, youth employment, and gender equality. For example, the MIDES-MAGA Agreement was discussed in the Rural Development Cabinet and tackles the need to strengthen rural productivity of Bono Seguro beneficiaries, reduce food insecurity and malnutrition, and open opportunities for graduating better-off households towards productive programs. While this represents a strong institutional basis for coordination, the other requirements on predictable financing, better targeting, improved content and closer monitoring and evaluation are necessary conditions to ensure impact on the poor. 70. DPL2 continues to support efforts to reduce chronic malnutrition by advancing the implementation of the Zero Hunger Pact. The Zero Hunger Pact has four levels of intervention: national, departmental, municipal and community. To support the implementation of the Pact, the Government has established 161 Municipal Councils of Food and Nutritional Security or COMUSANES (Consejos Municipales de Seguridad Alimentaria y Nutricional)15 in prioritized municipalities with the highest incidence of chronic malnutrition, of which 120 were established during 2012 and 2013. The COMUSANES are integrated with representatives of the municipalities, government institutions, NGOs and civil society. These councils support the institutionalization of the National Policy for Nutritional Security and enhance coordination between MIDES and SESAN in priority areas (in cooperation with MAGA). Overall, the COMUSANES are responsible for monitoring the implementation of nutritional security at the local level. It is expected that the establishment of these councils in priority municipalities will help avoid duplication of efforts and maximize synergies for social policies. Of the 166 municipalities prioritized with high or very high prevalence of chronic malnutrition, around 97 percent have active COMUSANES. As noted earlier, the estimated rural population in these 166 municipalities is around 64 percent, compared to a rural population of 52 percent at the national level. At the national level, out of a total of 366 municipalities, 95 percent have established COMUSANES.                                                              15 The COMUSANES were created by Decree 32-2005, which states that at the municipal and community levels, the Urban and Rural Nutritional Security Councils will form committees to promote the fulfillment of the strategic objectives of nutritional security, with their own programs, projects and activities in coordination with SESAN. 22   71. In addition to progress noted in Pillar 2 on the Zero Hunger Pact results indicators (reduction of maternal and child mortality, and chronic malnutrition), there have been notable achievements related to inter-ministerial coordination on social policies. These include: (i) the completion of a resource-gap analysis (financial, human resources, water and sanitation, medicines and equipment) in 83 of the 166 prioritized municipalities in 12 health areas, in coordination with SESAN; (ii) the development and implementation of an alert-and- response system for the timely detection of acute malnutrition and reduction of maternal- neonatal mortality through the use of mobile technology in 500 communities in 97 priority municipalities, in 10 health areas in coordination with the private sector (Tigo Foundation), external partners (UNICEF and UNDP), and SESAN; (iii) the identification and treatment of 1,194 acute malnourished children in 850 priority communities in 22 departments in coordination with SESAN and other Government ministries; and (iv) the establishment of a working group/communication mechanism between MOHSA and MINFIN to improve results based management implementation. 72. This DPL series also supported the creation of the Economic and Social Council (CES) which became operational in 2013 and has been promoting policy dialogue and consensus on fundamental issues of public policy. CES was created following a six-year dialogue between civil society and private sector. It was established by Congress as an independent organization, and seeks to provide a platform to propose and support public policies and legislative initiatives, and provide advice to the Government on economic and social matters. Represented by the business community, cooperatives, and trade unions, this initiative has been welcomed as an opportunity to forge consensus on national policy priorities. CES has also been providing training to its members on public policy issues, as an effort to strengthen the capacity and participation of CES members. CES is chaired by an elected president (with one vice- president from each of the three represented groups), and managed by an executive secretary. Resolutions can only be passed if at least six representatives from each group vote in favor, thereby preventing one group from dominating its decisions. In 2013 CES became part of the Ibero-American Network of Social and Economic Councils. Over the medium term, CES plans to enhance its analytical capacity to propose public policies. Table 4: Prior Actions and Analytical Underpinnings Prior actions Analytical Underpinnings Strengthening Tax Administration and Tax Policy Prior Action 1: To raise tax revenues, the Borrower has: (a) issued  Guatemala IAMTAX Diagnostic (WB implementing regulations for: (i) the income tax (ISR) reform, as 2014) evidenced by the Borrower’s Executive Agreement No. 213-2013; (ii)  Revenue mobilization in Developing the value added tax (VAT) reform, as evidenced by the Borrower’s Countries (IMF 2011) Executive Agreement No. 5-2013; and (iii) the tax reform for the new tax on motor vehicles first registration (IPRIMA), as evidenced by the Borrower’s Executive Agreement No. 133-2012; and (b) improved the organizational structure of the Tax Administration Superintendence in line with international practices, as evidenced by Legislative Decree No. 13-2013. 23   Prior actions Analytical Underpinnings Prior Action 2: To strengthen the Tax Administration  Guatemala IAMTAX Diagnostic (WB Superintendence in alignment with the Central American Uniform 2014) Customs Code (CAUCA) and the Regulations of the Central  Forum on Tax Administration: American Uniforms Customs Code (RECAUCA), the Borrower Working smarter in restructuring the approved the National Customs Law through the enactment of administration, in compliance, and Legislative Decree No. 14, 2013, including: (a) a definition on through legislation (OECD 2012) customs infringements and related sanctions; (b) the regulation of the suspension and cancellation of customs licenses; and (c) the establishment of procedures against fraud and contraband. Prior Action 3: To increase transparency and exchange of  Guatemala IAMTAX Diagnostic (WB information on international taxation, the Borrower has: (a) signed an 2014) additional tax information exchange agreement with the  Tax Administration in OECD and Commonwealth of Australia, dated September 26, 2013; (b) signed Selected Non-OECD Countries the Convention on Mutual Administrative Assistance in Tax Matters (OECD 2008, Comparative on December 5, 2012; and (c) created an international taxation unit Information Series) within the Borrower’s Ministry of Public Finance to support the exchange of information related to international taxation, as evidenced by the Borrower’s Executive Agreement No. 26-2014. Enhancing Budget Management and Increasing the Results Orientation of Public Spending Prior Action 4: To improve budget management and implement a  Public Expenditure Review (WB 2013) results-based methodology of public expenditures, the Borrower has:  Guatemala Public Expenditure and (a) adopted a legal framework for results-based budgeting, as Financial Accountability (2013) evidenced by Legislative Decree No. 13-2013; (b) complied with the  Guatemala Poverty Maps for 2006 and requirements to expand the application of results-based budgeting to 2011 the Borrower’s Ministry of Economy and the Ministry of Sports and Culture; and (c) established operating and coordination mechanisms for results-based budgeting in the Borrower’s Ministry of Public Finance and the Ministry of Public Health and Social Assistance. Prior Action 5: To strengthen budget management and the  Public Expenditure Review (WB 2013) transparency of public expenditures, the Borrower has: (a) mandated  Guatemala Public Expenditure and the use of the Single Treasury Account to process budget transactions; Financial Accountability (2013) (b) mandated that all entities that execute projects with public funds  Guatemala Poverty Maps for 2006 and adequately report their activities to the Borrower’s Ministry of Public 2011 Finance; (c) introduced regulations to strengthen the monitoring and  Cadena, Lucchetti and Scott (2013), La evaluation of loans and grants to, and trust funds managed by, public Evolución de la Pobreza y la entities; and (d) mandated that all public entities use the SIAF to Desigualdad en Guatemala. consolidate budgetary and financial information, as evidenced by Legislative Decree No. 13-2013. Improving the Coordination and Management of Social Policies  Prior Action 6: To improve the management of social policies, the  Public Expenditure Review (WB 2013) Borrower has established a social information system (SISO) in the  Human Development Policy Notes for Borrower’s Ministry of Social Development, including: (a) New Government (2011) information on social programs and policies related to beneficiaries,  Guatemala Poverty Assessment - Good geographic coverage and type of program; and (b) a single beneficiary Performance at Low Levels (2009) registry (RUU) that includes information on beneficiaries for at least 75 social programs. Prior Action 7: To support the implementation of the Zero Hunger  Human Development Policy Notes for Plan, the Borrower has established 120 COMUSANES during 2012 New Government (2011) and 2013 in prioritized municipalities with the highest incidence of  Guatemala Poverty Assessment - Good chronic malnutrition. Performance at Low Levels (2009) 24   LINK TO CAS AND OTHER BANK OPERATIONS 73. The proposed DPL bears strong links to the Country Partnership Strategy (CPS), presented to the Board jointly with the First Programmatic DPL in this series in 2012. In accordance with the Government’s wishes, the CPS (Report No. 69229-GT) includes two pillars that are highly aligned with the Government’s own priorities and two transversal themes. Within the framework of the CPS, the proposed DPL will continue to be a key instrument influencing CPS outcomes in the first pillar (strengthening public policies for social development). This includes enhancing budget management16 and improving results in the social sectors. 74. The DPL program supports CPS pillars. The program supports the Government’s agenda to promote growth, social development, and transparency, in line with the Peace Accords, all of which represent key themes of the CPS. The fiscal agenda is expected to enhance the capacity of tax and customs administration in the long-term. In terms of social development, the DPL highlights institutional measures to strengthen RBB practices and social policy coordination through improved targeting and monitoring and evaluation systems to ensure the greatest possible impact of public expenditures in terms of poverty reduction and shared prosperity. It is worth mentioning that the First DPL was given a moderately unsatisfactory rating in the Implementation Supervision Report that was prepared in June 2013. This rating was given due to the fact that the Guatemalan Congress had not yet approved the DPL1 at that time, and there had been delays in the collection of data for results indicators for pillar 2 and pillar 3. Since mid-2013, however, the authorities have made important progress in collecting data for the results indicators, and progress has advanced across all areas of the operation. As a result, the Government is now on track to achieve the results indicators specified in the policy matrix. 75. World Bank Analytical and Advisory Activities are supporting the DPL program, both on the fiscal and social sectors. Since its approval in 2012, the fiscal reform has struggled to achieve the anticipated results. In order to better understand the dynamics of reform implementation and strengthen tax and customs administrations, the Bank is pursuing additional interventions in an effort to improve the fiscal outcomes envisaged in this operation. At the request of the Government, in 2014 the Bank implemented the IAMTAX assessment tool, which provides a comprehensive and systematic assessment of overall tax administration performance comprising over 45 indicators, allowing international benchmarking and transfer of best practices, and facilitating monitoring and implementation of specific actions to strengthen tax performance. Furthermore, in support of pillar 2, the World Bank has been implementing a Health System NLTA, to undertake a functional review and terms of reference for the Health System Strengthening Master Plan that focuses on improving infrastructure, human resource strengthening, and monitoring and evaluation systems. This Master Plan is expected to help sustain ongoing achievements beyond the current administration. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 76. The design of the DPL series benefited from an extensive process of consultations during the preparation of the CPS, and key policy objectives supported by DPL2 are broadly supported by Guatemalans. During the CPS consultation process in 2012, the Bank                                                              16 Data on budget disbursements is public and can be consulted online (http://www.minfin.gob.gt). 25   engaged closely with different private sector, civil society, and development partners to discuss innovative ways to incorporate key themes of the CPS into future interventions, such as gender, transparency and citizen security. Among those that participated in the consultation process were stakeholders from the Grupo de Diálogo (G-13) which includes bilateral as well as multilateral donors, representatives of various private sector associations, universities, think tanks, women’s groups, indigenous organizations, and youth associations. In particular, both the Fiscal Pact and the Zero Hunger Pact have undergone extensive dialogue with civil society over the past decade as part of Guatemala’s increasing focus on social sectors following the 1996 Peace Accords. The creation of the CES, supported by this DPL series, is also the result of extensive consultation and reflects a broad spectrum of Guatemalan society. 77. The Bank collaborates closely with the IMF. An Article IV Consultation was completed in August 2013. The IMF stressed the importance of pursuing structural reforms to promote long-term inclusive growth, including increasing the tax-to-GDP ratio to support priority public spending. The IMF Board welcomed revenue-enhancing efforts which are being supported as part of this DPL series, and advocated for maintaining an adequate fiscal stance, which will require protecting the inroads made under the tax reform. 78. The proposed operation was also prepared in coordination with the Inter-American Development Bank (IADB). The IADB is preparing a Policy-Based loan of US$ 300 million in parallel to the World Bank. The Loan is scheduled to be approved in the first semester of 2015, supporting reforms in the social sector and other areas to be defined. The teams coordinated the design of the policy matrix to avoid duplicating efforts and ease the reporting and monitoring burden of the authorities. V. OTHER DESIGN AND APPRAISAL ISSUES POVERTY AND SOCIAL IMPACT 79. Government actions supported in this DPL are expected to have positive poverty and social impacts (see Annex 4). The analysis carried out on the potential impacts of the reforms supported under DPL1, and the analysis presented in Annex 4 suggest a positive or neutral impact for the reforms supported under this operation. 80. Reforms related to tax policy and tax administration are expected to make the tax system more progressive. The impact of tax reforms is expected to affect mainly the upper decile of the income distribution and is unlikely to have a direct impact on the poor and vulnerable. Simulations using the latest household survey for Guatemala suggest that the direct impact of the changes in the tax code will likely be felt only among the top income decile. The tax reform also aims to increase the share of direct taxes, which has the potential of making the tax system more progressive. Furthermore, strengthening tax policy and tax administration, and enhancing the results orientation of the budget - central objectives of this DPL series - will help the Government deliver a more ambitious social contract and expand economic opportunities for all citizens. Measures aimed at improving the transparency of international taxation are not expected to directly impact poverty or the distribution of income. However, positive indirect effects could occur, through an improved business environment and more employment 26   opportunities in the formal sector. As noted in Annex 4, Guatemalan workers from low-income households are disproportionally represented in the informal sector and have lower earnings. 81. Measures related to social protection programs are expected to generate significant, positive impacts for the poor. The size of this impact depends on the quality of targeting of these programs. The development of tools to improve the monitoring and evaluation of social programs, including advances in Results-Based Management and the Single Beneficiary Registry are important milestones in the promotion of shared prosperity in Guatemala. Analysis using the latest household survey (ENCOVI 2011) as well as the latest National Maternal and Infant Health Survey (ENSMI 2008-09) suggest potential positive impacts of improving Results-Based Management. In this regard, evidence from other countries emphasizes the positive impacts of RBB as a tool to reduce poverty and promote shared prosperity, including: (i) an informed budget that enhances the transparency and accountability of public resources; and (ii) an enhanced monitoring and evaluation system, in particular with regards to social programs. 82. Improving the coordination of social policy is also expected to promote shared prosperity in Guatemala. Pillar 3 of the proposed DPL aims to support Government efforts to tackle infant malnutrition and maternal mortality in geographic areas with high malnutrition rates, and to improve the monitoring and evaluation framework and the unique registry of beneficiaries. Indeed, the implementation of the Zero Hunger Plan through the COMUSANES and the creation of the Single Beneficiary Registry will help ensure that households receive all benefits for which they are eligible. The introduction of new inter-ministerial coordination mechanisms is also expected to improve welfare of vulnerable groups. A better targeted social program is expected to be more progressive as it will help ensure that the resources will be channeled to those in most need, who will benefit the most from public social expenditures. Indeed, the use of the recently completed Poverty Maps17 could substantially help to increase the effectiveness of targeting mechanisms. Similarly, focusing the budget on results according to social needs greatly improves its progressive nature. ENVIRONMENTAL ASPECTS 83. The measures supported under the proposed DPL are not likely to have significant effects on the environment, forests or other natural resources. The increase in the taxes on motor vehicles (prior action 1) is unlikely to have a negative significant impact on emissions and air pollution since the taxes are paid as a lump sum annually and are not on a per use basis, thereby providing limited incentives to have an effect on the use of vehicles. Policy actions in the areas of tax administration, public expenditure, and social policy are not likely to have either significant positive or negative environmental impacts. PUBLIC FINANCIAL MANAGEMENT, DISBURSEMENT AND AUDITING ASPECTS 84. The Public Expenditure Financial Accountability, published in 2013, indicates that the fiduciary environment in Guatemala is adequate, as evidenced by the improvements in public expenditure management systems made over the previous decade, and the actions                                                              17 A nation-wide Poverty Map was completed in 2006. A rural Poverty Map was completed in 2011. 27   taken by the Government to continue increasing transparency. However, some challenges remain. The authorities continue strengthening the public fiduciary control framework to tackle fiduciary issues in many key areas identified by the report. Although Guatemala has advanced substantially in modernizing its Public Financial Management during the last decade - which was supported by the Bank-financed Third Integrated Financial Management Additional Financial Project, and the trust fund Support to the General Auditor’s Office to improve fiscal controls - some significant weaknesses remain such as budget rigidity, control of arrears (floating debt), or Trust Funds monitoring. 85. The Guatemala Government has made continuous efforts to improve its Public Financial Management System. Approved in October 212, the anti-corruption law increased penalties for existing crimes and included new crimes such as illicit enrichment, traffic of influence, and illegal charging of commissions. The Government amended the Organic Budget Law in October 2013 to improve public expenditure management, aiming to prevent the emergence of new arrears through the enactment of stricter sanctions, increased budget flexibility, improvements in cash management, and enhanced controls of trust funds. A revenue reform and an anti-tax evasion law were approved in early 2012 as well. The Government’s main challenges are to reach a reliable estimate of the outstanding stock of domestic payment arrears, to implement measures for their elimination, and to establish a sound mechanism for Trust Funds monitoring and oversight through the General Auditor’s Office. The General Auditor’s Office has also been empowered to calculate the outstanding stock of arrears. 86. The proposed loan will follow the World Bank’s disbursement procedures for development policy loans. Once the loan is approved by the Board and becomes effective (including compliance with the disbursement conditions), the proceeds of the loan will be deposited by IBRD in an account designated by the Borrower and acceptable to the Bank at the Central Bank of Guatemala at the request of the Borrower. The Borrower shall ensure that upon the deposit of the loan proceeds into said account, an equivalent amount is credited in the Borrower’s budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited to the budget management system and provide certification of its deposit if the Bank request it. If the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, IBRD will require the Borrower to, promptly upon notice from IBRD, refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The administration of this loan will be the responsibility of the Ministry of Finance. 87. The foreign exchange control environment of the Central Bank is adequate and, according to the last available IMF Assessment Report, an external auditing system is in place and international foreign currency reserves are managed according to prudent international practice. The external audit for the last two years provided a clean opinion and was prepared according to accounting regulations of the organic law that differs from the Interim Financial Reports in: (i) credits to collect from the Government registered at face value; (ii) fixed assets without fair value periodic reevaluation; and (iii) adjustments of income and expenses of previous years that should be adjusted on the relevant fiscal year instead on the year of adjustment if significant. 28   MONITORING AND EVALUATION 88. The MINFIN is responsible for the implementation of the program supported by the DPL series. As the main implementing agency, MINFIN will coordinate with other Government ministries and agencies involved in the implementation of the series, in particular MIDES, SAT, MOHSA and the CES. Together with MINFIN, these institutions will collect the necessary data to assess implementation progress and report it to the Bank. VI. SUMMARY OF RISKS AND MITIGATION 89. Macroeconomic Risk: This risk derives in part from a potential deterioration in the external environment, in particular if global uncertainty translates into weaker demand and employment in the United States. In the last crisis Guatemala was affected mainly through a direct channel of commercial and trade relations. As the United States economy continues to improve, a potential risk for Guatemala derives from higher investor risk aversion towards middle-income countries, following the US Federal Reserve’s tighter monetary policy. If the risk was to materialize, rigidities and delays in Congressional approval of official external financing could act as a compounding factor. Additional risks to the economic outlook are posed by a potential spike in oil prices (caused by supply disruptions or other factors) and in case the recent rise in global food prices continues unabated. Authorities are aware that fiscal adjustment through expenditure cuts and reforms aimed at improving revenue management would be necessary to mitigate macroeconomic risks. However, if revenue collection does not improve, cutting expenditures in a context of moderate growth and high inequality could negatively impact the poor and vulnerable. The relatively strong foreign-exchange reserve position provides the Government with instruments necessary to maintain macroeconomic stability. Macroeconomic risk is also mitigated by the reform program and medium-term framework supported by this operation, which envisages the creation of fiscal space and the reduction of the fiscal deficit so as to regain buffers with which to respond to a potential new global crisis. 90. Political and Legal Risks: The polarized political climate in Guatemala could affect the approval in Congress of further reform efforts and of multilateral loans. Concerning the tax reform, legal claims were submitted before the Constitutional Court challenging the constitutionality of parts of the tax reforms. As noted above, these legal claims did not affect the technical structure of the reform and the core objectives of the reform have been kept in place. Nonetheless, new legal claims could be presented in the future. To mitigate this risk, and especially given that previous tax reform efforts were reversed because of such legal challenges, the authorities followed an extensive consultation process on policy reforms. In particular, the fiscal reform builds on efforts started over a decade ago and on which a broad consensus in Guatemalan society had been reached. In particular, the tax reforms draw heavily on a proposal developed in 2008 by a group of 40 economists from across the political spectrum. Aware of likely legal challenges the authorities relied upon internal and independent expertise on constitutional tax law to prepare the tax reform. 91. Institutional Risk: Institutional weaknesses may affect the implementation of some of the measures supported by the operation. In particular, the effectiveness of the tax reforms depends on the ability of the tax administration to apply and enforce the new provisions. 29   Mitigating measures include donor support aimed at strengthening tax administration, including analytical and advisory activities by the World Bank. 92. Natural Disaster Risk: Guatemala is highly vulnerable to multiple natural disasters risks. According to the World Bank's Natural Disaster Hotspot study, Guatemala ranks 5th among countries with the highest economic risk exposure to three or more hazards. Guatemala is ranked as a high-risk country due to the vulnerability of its GDP to multiple hazards, with 83 percent of Guatemala's GDP located in areas at risk. Guatemala is one of the most densely populated countries in Latin America, with approximately 13 million inhabitants in a territory of 108,890 square kilometers. During 1902-2005, Guatemala experienced 62 natural disasters that affected about 6 million people. For instance, recent World Bank Analytical and Advisory Activities found that Agatha, a tropical storm that hit Guatemala in 2010, reduced consumption by 6 percent among affected households one year after the disaster, pushing many households into poverty. This risk is being mitigated by reforms aimed at improving Guatemala’s capacity to implement a disaster risk management framework. The Bank is also supporting Guatemala to assess fiscal policy instruments to respond to natural disasters. A 2013 study funded by the Bank notes that fiscal policy can play an active role in reducing social and territorial risk in four specific areas: (i) the reduction of activities which increase environmental risk; (ii) improvements in social and economic expenditures that will minimize the risk of natural events; (iii) improvements in policies and investment in environmental protection and; (iv) counter- cyclical policies which have an active role in the reconstruction phase of natural disasters. 93. The overall risk to the achievement of the program development objectives is rated as moderate. The Government has shown strong commitment to the DPL objectives and is committed to closely monitoring its expected results. As noted earlier, however, the speed of reform implementation may vary across policy areas as the Government may face competing political priorities or implementation capacity constraints. 30   ANNEX 1: POLICY AND RESULTS MATRIX Prior Actions for DPL1 Indicative Prior Actions for DPL2 Results Indicators (completed) Triggers for DPL2 (end-2014) Pillar 1: Strengthening Tax Administration and Tax Policy To raise tax revenues, the Borrower has: The Government To raise tax revenues, the Borrower has: (a) issued Increase in the income tax-to-GDP (a) (i) widened the tax base subject to has issued the implementing regulations for: (i) the income tax (ISR) ratio (baseline: 2011=2.7%; target: income tax, through the reduction of the implementing reform, as evidenced by the Borrower’s Executive 2014=3.2%). Please see number of tax exemptions; (ii) simplified regulation for the Agreement No. 213-2013; (ii) the value added tax explanation in the main text the tax rates for salaried workers; and (iii) reforms of the ISR, (VAT) reform, as evidenced by the Borrower’s regarding attribution. increased the tax rate on the circulation of IPRIMA, and IVA. Executive Agreement No. 5-2013; and (iii) the tax land, sea and air vehicles (ISCV), as reform for the new tax on motor vehicles first Increase in the tax base (number of evidenced by Legislative Decree 10-2012; registration (IPRIMA), as evidenced by the Borrower’s effective tax payers making direct and (b) reformed the value added tax Executive Agreement No. 133-2012; and (b) improved payments to SAT) by at least 10 (VAT) regime for small taxpayers by the organizational structure of the Tax Administration percent from 2011 to 2014 expanding the eligibility criteria for this Superintendence in line with international practices, as (baseline: 2011=1,441,246; target: VAT regime, as evidenced by Legislative evidenced by Legislative Decree No. 13-2013. 2014=1,585,370). Decree 4-2012. The Government To strengthen the Tax Administration Superintendence Increase in the amount of To strengthen the control authority of the has issued the in alignment with the Central American Uniform administrative sanctions in the area Tax Administration Superintendence, the implementing Customs Code (CAUCA) and the Regulations of the of customs in line with the Borrower has: (a) introduced the regulation for the Central American Uniforms Customs Code National Customs Law (baseline: requirement of bank-based transactions National Customs (RECAUCA), the Borrower approved the National 2013=0; target: 2014=4 million above a certain threshold amount to be Law. Customs Law through the enactment of Legislative quetzales). eligible for tax declaration purposes, as Decree No. 14, 2013, including: (a) a definition on evidenced by Legislative Decree 4-2012; customs infringements and related sanctions; (b) the Increase in the number of countries and (b) aligned the Borrower’s sanctions regulation of the suspension and cancellation of with which Guatemala has a legislation on customs to the Central customs licenses; and (c) the establishment of signed framework to exchange tax American Uniform Customs Code procedures against fraud and contraband. related information (baseline: (CAUCA), as evidenced by Legislative 2011=0; target: 2014=60); and the Decree 10-2012. The Government To increase transparency and exchange of information number of countries with which has: (i) signed an on international taxation, the Borrower has: (a) signed Guatemala is exchanging tax To increase transparency and exchange of additional five tax an additional tax information exchange agreement with related information, upon request, information on international taxation ,the information sharing the Commonwealth of Australia, dated September 26, through information sharing Borrower has: (a) signed a separate tax agreements; (ii) 2013; (b) signed the Convention on Mutual agreements or through the OECD information exchange agreement with submitted to Administrative Assistance in Tax Matters on December Multilateral Convention, in line Seven Countries, as evidenced by the Tax Congress twelve 5, 2012; and (c) created an international taxation unit with the Global Forum’s standards Information Exchange Agreements; (b) tax information within the Borrower’s Ministry of Public Finance to of transparency and exchange of introduced the concept of transfer pricing sharing support the exchange of information related to tax information (baseline: 2011=0; 31   Prior Actions for DPL1 Indicative Prior Actions for DPL2 Results Indicators (completed) Triggers for DPL2 (end-2014) in the valuation of transactions between agreements; and international taxation, as evidenced by the Borrower’s target: 2014=5). Related Parties (partes relacionadas), as (iii) has joined the Executive Agreement No. 26-2014. evidenced by Legislative Decree 10-2012; OECD Multilateral and (c) signed a memorandum of Convention on understanding with the United States of Mutual America, dated May 30, 2012, which Administrative provides for the exchange of relevant tax Assistance in Tax information between both countries Matters. concerning the declared value of imports and exports. Pillar 2: Enhancing Budget Management and Increasing the Results Orientation of Public Spending To improve budget management and The Government To improve budget management and implement a Increase in the percentage of implement a results-based methodology of has expanded the results-based methodology of public expenditures, the children under 1 year old in 83 public expenditure, the Borrower’s application of the Borrower has: (a) adopted a legal framework for prioritized municipalities who Ministry of Public Finance and Ministry of results-based results-based budgeting, as evidenced by Legislative receive the appropriate growth Public Health and Social Assistance have management Decree No. 13-2013; (b) complied with the promotion package of services for signed a results-based management approach, in requirements to expand the application of results-based their age which include weight and agreement, dated June 28, 2012, whereby particular budgeting to the Borrower’s Ministry of Economy and height check-ups (baseline: the Borrower commits to, inter alia, strengthening the the Ministry of Sports and Culture; and (c) established 2011=37.5 percent; target: allocate budget towards meeting specific monitoring and operating and coordination mechanisms for results- 2014=50 percent). targets for reproductive and nutritional evaluation based budgeting in the Borrower’s Ministry of Public health programs for calendar year 2012. framework. Finance and the Ministry of Public Health and Social Increase in the percentage of the Assistance. total budget under the results- based budgeting framework To strengthen budget management and the (baseline: 2011=0 percent; target: transparency of public expenditures, the Borrower has: 2014=9 percent). (a) mandated the use of the Single Treasury Account to process budget transactions; (b) mandated that all entities that execute projects with public funds adequately report their activities to the Borrower’s Ministry of Public Finance; (c) introduced regulations to strengthen the monitoring and evaluation of loans and grants to, and trust funds managed by, public entities; and (d) mandated that all public entities use the SIAF to consolidate budgetary and financial information, as evidenced by Legislative Decree No. 13-2013. 32   Prior Actions for DPL1 Indicative Prior Actions for DPL2 Results Indicators (completed) Triggers for DPL2 (end-2014) Pillar 3: Improving the Coordination and Management of Social Policies To improve the coordination in the design MIDES has To improve the management of social policies, the Increase in the percentage of and implementation of social policies, the established the Borrower has established a social information system beneficiaries across all social Borrower has: (a) created the Ministry of National System of (SISO) in the Borrower’s Ministry of Social programs that are included in the Social Development (MIDES), as Social Information, Development, including: (a) information on social Unique Beneficiary Registry evidenced by Legislative Decree 1-2012, including the programs and policies related to beneficiaries, (baseline: 2011=0; target: 2014=80 dated January 24, 2012, and published in Unique Beneficiary geographic coverage and type of program; and (b) a percent). the Borrower’s Official Gazette on Registry. single beneficiary registry (RUU) that includes February 7, 2012; and (b) adopted the Zero information on beneficiaries for at least 75 social Increase in the percentage of the Hunger Plan, as evidenced by the programs. population in the country CONASAN Resolution 01-2012, dated represented by an active June 19, 2012. To support the implementation of the Zero Hunger COMUSAN that is in charge of Plan, the Borrower has established 120 COMUSANES coordinating the implementation of To strengthen the participation of trade during 2012 and 2013 in prioritized municipalities with the Zero Hunger Pact at the local unions, cooperatives and the business the highest incidence of chronic malnutrition. level (baseline: 2011=25 percent; sector in public economic and social The Government target: 2014=90 percent). Please policy-making, the Borrower has created has launched a see explanation in the main text the Economic and Social Council (CES), as program to roll-out regarding the rural-urban evidenced by Legislative Decree 2-2012, Zero Hunger dimension of the COMUSANES. dated January 24, 2012 and published in offices in the Borrower’s Official Gazette on prioritized CES holds regular meetings to February 23, 2012. municipalities. discuss public policies, and has issued consensus resolutions on policy issues in Guatemala that have been supported by its members. 33   ANNEX 2: LETTER OF DEVELOPMENT POLICY MINISTE:RIO De FINANZAS PUBLICAS GUATeMALA. C. A. 2 ~ ABR 201~ Senor Hasan Tuluy Vicepresidente para America Latina y El Caribe Banco Mundial Washington D.C., USA Estimado Sefior Tuluy: El Gobiemo de Ia Republica de Guatemala dirigido por el Presidente Otto Perez Molina ha fijado como una de sus principales metas promover el desarrollo econ6mico sostenible y equitativo que responda a las necesidades de toda la poblaci6n, pero en particular las de aquellos que viven en situaci6n de extrema pobreza. En ese sentido, el compromiso de Ia actual Administraci6n se centra en avanzar en el cumplimiento de los Acuerdos de Paz y en las metas establecidas dentro de los Objetivos del Milenio. Con ese prop6sito, Ia actual Administraci6n de Gobiemo esta implementando un plan que se ha denominado "Agenda del Cambio", el cual establece entre otros, las acciones prioritarias para promover el desarrollo econ6mico y social en el pais, a traves de Ia implementaci6n de 5 Ejes: 1) Seguridad Democnitica y Justicia, 2) Desarrollo Econ6mico Competitivo, 3) Infraestructura Productiva y Social para el desarrollo, 4) Inclusion Social, y 5) Desarrollo Rural Sustentable. En ese contexto, y con el prop6sito de dar cumplimiento a la Agenda del Cambio, se ha planteado los 3 pactos de naci6n siguientes: i) El Pacta "Hambre Cera" que es una estrategia conjunta de atenci6n a Ia desnutrici6n cr6nica y Ia inseguridad alimentaria; ii) El Pacta par Ia Seguridad, la Justicia y la Paz que tiene como objetivo garantizar Ia vida de las personas, Ia familia, Ia libertad y la justicia mediante Ia protecci6n integral con acciones de prevenci6n, control y rehabilitaci6n que generen ambientes seguros en el hogar, Ia escuela, el trabajo yen los lugares de recreaci6n; y, iii) El Pacta Fiscal para el Cambia que persigue establecer acciones encaminadas a Ia mejora de Ia transparencia y calidad del gasto, la promoci6n del crecimiento econ6mico, el combate al contrabando y Ia evasion tributaria, la actualizaci6n tributaria y Ia asignaci6n prioritaria de los recursos. 34   MINIST~RIO D~ FINANZAS. PUBLICAS GUATt:MALA. C. A. La estrategia de asistencia acordada con el Banco Mundial para el periodo 2013-2016, contempla, entre otros aspectos, el acompafiamiento y apoyo a Ia implementaci6n del Plan de Gobierno referido, a traves del otorgamiento de dos Prestamos Programaticos de Politica de Desarrollo, con el objetivo de crear espacio fiscal y ampliar las oportunidades para los segmentos mas vulnerables de Ia sociedad. Desde Ia aprobaci6n del primer prestamo por parte del Banco, el Gobierno ha mostrado avances continuos en las areas clave definidas en Ia matriz de implementaci6n del Programa, raz6n por la cual se encuentra en capacidad de solicitar Ia negociaci6n y aprobaci6n del Segundo Prestamo, por un monto de US$340.0 millones. AI igual que la operaci6n anterior, este prestamo apoyara los esfuerzos del Gobierno de Guatemala en tres areas de politica claves: (i) Fortalecer Ia administraci6n tributaria y Ia politica fiscal; (ii) Incrementar Ia calidad del gasto publico; y (iii) Mejorar Ia coordinaci6n y Ia gesti6n de Ia politica social. A continuaci6n se detallan los principales avances registrados en dichas areas: I. Fortalecer Ia administracion tributaria y Ia politica fiscal. Un objetivo clave del Programa de Gobierno es mantener unas finanzas publicas disciplinadas y ordenadas, que a Ia vez coadyuven al desarrollo y a Ia disminuci6n de Ia pobreza del pais, y no comprometan su estabilidad macroecon6mica con deficit fiscales elevados e insostenibles. De esa cuenta, el Congreso de Ia Republica por medio de Decreto No. 04-2012 aprob6las Disposiciones para el Fortalecimiento del Sistema Tributario y el Combate a Ia Defraudaci6n y al Contrabando. Asimismo, por medio del Decreto No. 10-2012, se aprob6 la Ley de Actualizaci6n Tributaria, que contempla entre otros, una nueva ley del Impuesto Sobre Ia Renta; y, una Ley sobre la primera matriculaci6n de vehiculos automotores terrestres. En consonancia con las medidas adoptadas, el Gobierno ha emitido la reglamentaci6n de implementaci6n de: a) Ia reforma del Impuesto sobre Renta por medio del Acuerdo Gubernativo No; 213-2013; b) Ia reforma del Impuesto sobre el Valor Agregado a traves del Acuerdo Gubernativo No. 5-2013; y, c) Ia reforma del Impuesto sobre Ia primera matricula de vehiculos, por medio del Acuerdo Gubernativo No. 133-2012. Ademas, se ha mejorado Ia estructura organizativa de Ia Superintendencia de Administraci6n Tributaria (SAT), como se evidencia en el Libro II del Decreto No. 13-2013, que contempla las reformas al Decreto No. 1-98, Ley Organica de Ia Superintendencia de Administraci6n Tributaria, y sus Reformas. 35   MINISTE:RIO DE: fiNANZAS PUBLICAS GUATIC:MALA. C. A. Asimismo, el Congreso de la Republica a traves del Decreto No. 14-2013 aprob6la Ley de Aduanas, con el objeto de establecer reglamentos y procesos para fortalecer la administraci6n aduanera alineado con el Reglamento del C6digo Aduanero Unifonne Centroamericano (RECAUCA). Por otro lado, con el objeto de aumentar Ia transparencia y el intercambio de infonnaci6n en el ambito tributario intemacional, el Gobiemo ha continuado las acciones para suscribir otros convenios de intercambio de infonnaci6n tributaria con los lineamientos del Foro Global. De esa cuenta, el Gobiemo finn6 un acuerdo bilateral con Australia el 26 de septiembre de 2013 y se uni6 a Ia Convenci6n Multilateral de Ia OCDE sobre la Asistencia Administrativa Mutua en Materia Fiscal, el 5 de diciembre de 2012. Asimismo, se ha creado una Unidad de Intercambio de Infonnaci6n Tributaria dentro de este Ministerio, para apoyar el intercambio de infonnaci6n relacionada con Ia tributaci6n intemacional, conforme lo establece el Acuerdo Gubernative No. 26-2014, Reglamento Orgaruco Intemo del Ministerio de Finanzas Publicas. II. Mejora de Ia Gestion del Presupuesto y Aumento de Ia Orientacion hacia los Resultados del Gasto Publico: El Gobiemo de Guatemala esta comprometido en continuar fortaleciendo los procesos presupuestarios a fin de incrementar Ia eficiencia y efectividad de las instituciones publicas, para que atiendan la demanda actual y futura de sus servicios prestados con el fin de no descuidar las coberturas de atenci6n a los grupos mas vulnerables (protecci6n del presupuesto social) y, por otro lado, dinamizar las inversiones focalizandolas en proyectos y programas prioritarios. Por medio del Decreto No. 13-2013, que contempla las refonnas al Decreto No. 10i-97, Ley Organica del Presupuesto, el Gobiemo estableci6 Ia nonnativa para Ia implementaci6n de Ia gesti6n por resultados en todos los ministerios. De esa cuenta, como parte de Ia implementaci6n progresiva de Ia Planificaci6n y Presupuesto por Resultados, por medio del Acuerdo Gubemativo No. 544-2013, se estableci6 que las instituciones publicas interesadas en incorporarse durante Ia ejecuci6n al uso del Modulo de Presupuesto por Resultados (PpR), deben enviar nota dirigida a este Ministerio. Resultado de ello, por medio de comunicaciones del 3 de diciembre de 2013 y 7 de enero de 2014, el Ministerio de Cultura y Deportes y el Ministerio de Economia, respectivamente, manifestaron su interes en utilizar dicho modulo. Tambien se cre6 un mecanismo de implementaci6n entre los Ministerios de Finanzas Publicas y de Salud Publica y Asistencia Social para fortalecer Ia gesti6n por resultados en el Sector Salud. 36   MINISTE:RIO DE: FINANZAS PUBLICAS GU ATeMALA. C. A . Por otro lado, para reforzar la transparencia y Ia rendicion de cuentas de Ia gestion financiera publica, por medio del Decreto No. 13-2013, que contempla las reformas al Decreto No. 101-97, Ley Orgaruca del Presupuesto, el Gobiemo impulso entre otros: a) la creacion de la Cuenta Unica del Tesoro; b) se instruyo que todas las entidades que utilicen fondos publicos para ejecutar proyectos reporten de forma adecuada sus actividades a este Ministerio; c) se introdujeron regulaciones para fortalecer el monitoreo y evaluaci6n de prestamos y donaciones extema para todas las entidades publicas; y, d) se instruy6 que todas las entidades publicas utilicen el Sistema Integrado de Administracion Financiera (SIAF), para consolidar Ia informacion presupuestaria y financiera. III. Mejorar Ia coordinaci6n y el manejo de Ia politica social. El Congreso de la Republica por medio del Decreto No. 01-2012, aprob6 Ia creaci6n del Ministerio de Desarrollo Social (MIDES), como una dependencia del Organismo Ejecutivo, a quien corresponde Ia rectoria de las politicas·publicas ·orientadas a mejorar el nivel de bienestar de las personas y grupos sociales vulnerables, que sufren de exclusion y viven en situacion de pobreza y pobreza extrema, generando oportunidades y capacidades que les permitan mejorar sus vidas en forma positiva y duradera, mediante Ia coordinacion, articulaci6n y trabajo en alianza con otras instituciones publicas, privadas y de Ia sociedad civil, en el marco de protecci6n de los derechos humanos y constitucionales. Para mejorar Ia gestion de Ia politica social, el MIDES establecio el Sistema de Informacion Social (SISO) a traves de una plataforma que incluye: a) informacion sobre los programas y politicas sociales en relaci6n con los beneficiarios, Ia cobertura geognifica, y los gastos por tipo de servicio social y por nivel institucional; y, b) un Registro Unico de Usuarios (RUU), que incluye informacion individual sobre los beneficiarios deal menos 75 programas sociales. Por otro lado, el Gobiemo de Ia Republica de Guatemala, consciente que la dimension del problema de Ia inseguridad alimentaria y nutricional requiere de una intervenci6n integral de acciones y actores publicos, privados y de Ia sociedad, lanz6 el "Plan Hambre Cero", como un esfuerzo conjunto, integral, armonizado, articulado y con pertinencia social y cultural. Este Plan se fundamenta en el concepto de Seguridad Alimentaria y Nutricional expresado en Ia Ley del Sistema Nacional de Seguridad Alimentaria y Nutricional, Decreto No. 32-2005 del Congreso de Ia Republica 37   38   Translation of the Letter of Development Policy MINISTRY OF PUBLIC FINANCE GUATEMALA, C. A. April 24, 2014 000459 Mr. Hasan Tuluy Vice President for Latin America and the Caribbean World Bank Washington D.C., USA Dear Mr. Tuluy: One of the priorities for the Government of Guatemala, under the leadership of President Otto Pérez Molina, is to promote sustainable and equitable economic development that responds to the needs of the entire population, but particularly those who live in conditions of extreme poverty. In this regard, the commitment of the current administration is to advance in complying with the Peace Accords and the Millennium Development Goals. With this aim in mind, the current Government Administration is implementing a plan that has been called “Agenda for Change” which, among other things, establishes priority actions to promote the economic and social development of the country through the implementation of five pillars 1) Democratic Security and Justice; 2) Competitive Economic Development; 3) Productive and Social Infrastructure for Development; 4) Social Inclusion; and 5) Sustainable Rural Development. The following three national pacts have been proposed in this context and for the purpose of complying with the “Agenda for Change”,: (i) the “Zero Hunger” Pact that is a joint strategy to address chronic malnutrition and food insecurity; (ii) the Pact for Security, Justice and Peace that seeks to ensure the lives of individuals and families, secure freedom and justice through comprehensive protection with prevention, control and rehabilitation actions leading to safe environments at the home, the school, the workplace and places for recreation, and (iii) The Fiscal Pact for Change that seeks to establish actions aimed at improving transparency and the quality of spending, promote economic growth, combat contraband and tax evation, update taxes, and the prioritary allocation of resources. The Country Assistance Strategy agreed to with the World Bank for the period 2013 – 2016 includes, inter alia, support for the implementation of the Government Plan mentioned above by granting two Development Policy Programmatic Loans for the purpose of developing the fiscal framework and expanding opportunities for the most vulnerable segments of society. Since the approval of the first loan by the Bank, the Government has shown ongoing progress in key areas defined in the Program´s implementation matrix, and for this reason is in the position to request the negotiation and approval of the Second Loan for US$340 million. Like the previous operation, this loan will support the Guatemalan Government efforts in three key policy areas: (i) the strengthening of tax administration and tax policy; (ii) increasing the quality of public spending; and (iii) improving the coordination and management of social policies. 39   Below we outline the progress accomplished in those areas: I. Strengthening the tax administration and tax policy. A key objective of the Government’s program is to maintain disciplined and orderly public finances which in turn promote development and poverty reduction in the country, without compromising macroeconomic stability through high and unsustainable fiscal deficits. Thus, through Decree No. 04-2012 Congress approved the Provisions to Strengthen the Tax System and to Combat Fraud and Smuggling. In addition, the Tax Law Update was approved through Decree No. 10-2012, which includes, among other measures, a new income tax law, as well as a law for the first registration of motor vehicles. In line with these measures, the Government has issued regulations to implement: (a) the income tax reform through Government Resolution No. 213-2013; (b) the amendment of Value Added Tax payment rules through Government Resolution No. 5-2013; and, (c) the reform of the tax for vehicles’ first registration, through Government Resolution No. 133-2012. It has also improved the organizational structure of the Superintendence of Tax Administration (SAT), as shown in Book II of Decree No. 13-2013, which provides for amendments to Decree No. 1-98, Organic Law of the Superintendence of Tax Administration and its Amendments. In addition, through Decree No. 14-2013 the Congress approved the National Customs Law, for the purpose of establishing rules and processes to strengthen Customs Administration in line with the Regulations to the Central American Uniform Customs Code (RECAUCA). Furthermore, in order to increase transparency and information exchange in the area of international taxes, the Government continues to carry out actions to sign other tax information sharing agreements based on the Global Forum guidelines. The government signed a bilateral agreement with Australia on September 26, 2013 and joined the OECD Multilateral Convention on Mutual Administrative Assistance on Tax Issues on December 5, 2012. It has also created a Tax Information Exchange Unit within the Ministry of Public Finance to support the exchange of information related to international taxation, as provided by Government Resolution No. 26-2014 on the Internal Organic Regulations of the Ministry of Finance. II. Improved Budget Management and Increased Results-based Public Spending: The Government of Guatemala is committed to continue to strengthen budget processes in order to increase the efficiency and effectiveness of government agencies to meet current and future demand for their services in order to not neglect care coverage for the most vulnerable groups (social protection budget) and, on the other hand, to promote investment by focusing on priority projects and programs. By Decree No. 13-2013, which provides for amendments to Decree No. 101-97 Organic Budget Law, the Government established the rules for the implementation of results-based management in every ministry. Thus, as part of the progressive implementation of its Results-based Planning and Budgeting, Government Resolution No. 544-2013 decreed that public agencies interested in joining the Results-based Budget Module while executing the budget must state so in a letter to the Ministry. As a result of this, on December 3, 2013 and January 7, 2014, the Ministry of Culture and Sports and the Ministry of Economy, respectively, expressed an interest in using this module. An implementation mechanism between the Ministries of Finance and of Public Health and Social Assistance was also created to strengthen results-based management in the health sector. 40   On the other hand, in order to strengthen transparency and accountability in public financial management, the Government undertook the following actions through Decree No. 13-2013 which provides for amendments to Decree No. 101-97, the Organic Budget Law: (a) the creation of the Single Treasury Account; (b) instructed all institutions using public funds to execute projects to properly report their activities to the Ministry of Finance; (c) the introduction of regulations to strengthen the monitoring and evaluation of external loans and grants to all public entities; and, (d) the instruction of all public entities to use the Integrated Financial Management System (SIAF) to consolidate budget and financial information. III. Improve social policy coordination and management. By Decree No. 01-2012, the Congress of the Republic of Guatemala approved the creation of the Ministry of Social Development (MIDES), as an agency of the executive branch responsible for steering public policies aimed at improving the welfare of people and vulnerable social groups who suffer from exclusion and live in poverty and extreme poverty, by creating opportunities and capabilities to make positive and lasting improvements in their lives through coordination, articulation and work in partnership with other public, private and civil society organizations in the context of protecting people’s human and constitutional rights. To improve social policy management, the Ministry of Social Development established the Social Information System (SISO) through a platform that includes: (a) information on social programs and policies relating to beneficiaries, geographical coverage, and costs by type of social service and by institutional level; and, (b) the Single Registration of Beneficiaries (RUU), which includes individual information on the beneficiaries of at least 75 social programs. Furthermore, aware that the magnitude of the food and nutrition insecurity problem requires comprehensive intervention actions and the participation of the public, private and social stakeholders, the Government of the Republic of Guatemala, launched the "Zero Hunger Plan" as an integrated, harmonized, coordinated and culturally relevant social and collaborative effort. This Plan is based on the concept of food and nutrition security expressed in the Law for Food and Nutritional Security, Decree No. 32-2005 of Congress. Article 34 on Decentralization in the Decree mentioned above, provides that at departmental, municipal and community levels, Urban and Rural Development Councils will form specific Food Security and Nutrition (SAN) committees to promote compliance with the objectives of the SAN Policy and its Strategic Plan, with their respective programs, projects and activities, in coordination with SESAN. In this context and in order to support the implementation of the Zero Hunger Pact, the Government has established 161 Municipal Councils of Food and Nutrition Security (COMUSANES) in priority municipalities with the highest rates of malnutrition. Thus, the Government of the Republic of Guatemala is highly committed to the promotion and implementation of the necessary measures to achieve higher sustainable economic growth, increased productive investment, prioritized in the areas of health and social protection, as well as to strengthening transparency and efficiency in public spending management, all for the purpose of increasing economic development and improving the quality of life of the Guatemalan population, especially the most vulnerable groups. In this context, the financial support from the World Bank through the Second Programmatic Development Policy Loan for US$340 million is particularly relevant and is part of the funding strategy of the General Budget of the Nation. 41   Acknowledging the World Bank for its continuous support, I take this opportunity to express my appreciation. Sincerely, Maria Castro Minister of Public Finance   42   ANNEX 3: FUND RELATIONS ANNEX GUATEMALA-ASSESSl\IENT LETTER FOR THE WORLD BANK APRIL, 2014 This letter updates the assessment ofmacroeconomic conditions made in the staffreport for the 2013 Article IV consultation, 11·hich was discussed by the IMF Executive Board on July 25, 2013. 1 A staffvisit followed in November, 2013. I11e next Article IV Consultation is e:o.pected to be concluded in mid- September 2014. A WB/Fund FSAP update is taking place this year, with a mission having visited Guatemala in March. 1. Afacroeconomic conditions are stable. Supported by healthy private constunption, real GDP grew about 312 percent in 2013 (the estimated potential growth) and is projected to expand armmd the same rate in 2014, maintaining the output gap broadly closed. Inflation stayed within the target band of3 - 5 percent in 2013, decreasing markedly in early 2014. The ctment account deficit worsened modestly from 212 to 3 percent ofGDP between 2012 and 2013. largely financed by FDI, and is expected to return to 2012 levels in 2014 owing mainly to higher prices for c01mnodity exports. There have been no net capital outflows despite higher U.S. yields, and international reserves are adequate. 2. Public finan ces are solid, though efforts to strengthen revenue should continue, and weaknesses persist in the budget p rocess. The 2013 deficit of the central govenunent was about 2 percent of GDP, below the budgeted 212 percent of GDP. This resulted from expenditure cutbacks caused by political vvrangling in congress- exacerbated by legal requirements for separate congressional authorization ofloans- that delayed approval of World Bank and IADB financing. Congress failed to pass a budget for 2014. Thus, expenditures will be executed on the basis of the 2013 budget, with some additional congressionally-approved spending on health and education. The fiscal stance is essentially neutral. which is appropriate with the deficit anticipated to rise only marginally tlus year and output at potential. Efforts should continue to improve implementation of the 2012 tax refonn-estimated to have yielded so far much less than expected because of legal challenges and admi1ustrative problems-to provide for more infrastructure and social spending. Budget arrears of around % percent of GDP remain unresolved. with a full audit still pending. Amendments to the Organic Budget Law to enhance transparency and efficiency of public spending are important, as is the inclusion of official financing in congressional approval of the budget. 3. Foreign exchange (FX) intervention has remained low and monetlll)l policy has beenlarge~v steady. FX intervention, tmder a rules-based framework, tapered off in 2012- 13 as non-FDI inflows moderated somewhat and by end-20 13 the quetzal appreciated slightly in nonunal tenus relative to the U.S. dollar. As noted earlier, Guatemala has been largely inunune to the adverse impact of U.S. exit from unconventional monetary policies experienced by other EMs. The downtick of inflation in early 2014 was in part driven by temporary price falls in food prices. The authorities have made only nunor adjustments to the monetary policy rate over the last year (ctmently at 4.75 percent), implying a broadly neutral stance, which is deemed appropriate under ctment conditions. A gradual increase in the flexibility of the exchange rate would be desirable. 4. The finan cial system appears to be sound, but efforts to strengthen bank regulation and supervision should continue. Bank credit has been expanding fast, especially in FX loans, but it slowed toward the end of2013. Banking system liquidity appears to be adequate, while capital comfortably exceeds regulatory requirements and non-perfomung loans are low. Nevertheless, improvements are needed in consolidated supervision and a gradual move to Basel III standards for capital and liquidity is advisable. 1 See IMF Countly Repon 13/247 issued 011 August 2, 2013. posted 011 tile IMF cotmtly page (lmp ://www.imf.org/extemal/comltly/GTM/index.iltm).   43   ANNEX 4: POVERTY AND SOCIAL IMPACT ANALYSIS The measures supported under the proposed DPL are likely to have positive social and poverty impacts in Guatemala. Strengthening Tax Administration and Tax Policy Fiscal revenues in Guatemala are very low, but further compounding the issue is the fact that the current tax structure relies too heavily on indirect taxes, which reduces the progressivity of the system (Figure 1). Not only tax revenues are low but most of the tax collection comes from indirect taxes. While 32.5 percent of tax revenues are collected through indirect taxes in the OECD countries, a much larger fraction of the fiscal revenues is raised through indirect taxes in LAC and Guatemala (52 and 57 percent, respectively). In 2013, 66 percent of total tax revenues in Guatemala were levied through indirect taxes. Relying markedly on taxes for which income has no bearing can place too much of the tax burden on the poor. In fact, direct taxes are found to be more progressive in several countries in LAC, while indirect taxation has a small effect on income inequality, undermining the redistributive capacity of the fiscal system on the revenue side (World Bank 2014). Figure 1. Tax Revenue Composition, 2010 Source: World Bank (2014) based OECD Stats: 2010 Tax Data Base. Note: Other includes corporate taxes, social security contributions, payroll taxes, property taxes and other sources. Building on the poverty and social impact assessment prepared for DPL1, the impact of the tax reforms is expected to mainly impact the upper decile of the income distribution and is unlikely to have a direct impact on the poor and vulnerable. Simulation analysis of the distributional impact of the tax reform using the latest household survey for Guatemala (ENCOVI 2011) shows that the direct impact of the changes in the tax code will likely be felt only among the top income decile. Indirectly, the creation of fiscal space made possible by the 44   tax reforms supported by this operation is likely to be pro-poor to the extent that the increase in expenditure is geared towards social spending.   The direct impact on inequality and household welfare is not expected to be strong. Concerning the changes in tax rates for salaried workers, the reform in the income tax effectively increased the minimum income above which individuals are taxed, from Q36,000 to Q60,000 due to the single deduction. However, the household survey data suggests that over 90 percent of salaried workers have annual incomes below the Q60,000 floor. Also, the income tax reform aimed to simplify the number of tax brackets (from four to two) and rates, as well as to decrease substantially the actual tax rate. Analysis conducted under DPL1 suggests that the impact of the income tax reform on inequality, measured by the Gini coefficient, is expected to be small and that the effect of the tax reform will only be felt in the top income decile. It is worth mentioning that the World Bank team is currently working with the Tax Administration Agency and the Ministry of Finance to conduct an in-depth study on the distributional effects of the 2012 tax reform using micro data from tax declarations. Figure 2. Proportion of workers in the informal Figure 3. Average monthly labor income (in and formal sector, by income quintiles Quetzales) by income quintiles 100 6,000 8.9 20.4 5,206 29.5 80 41.4 5,000 60.6 60 4,000 91.1 40 79.6 3,000 70.5 58.6 1,936 20 39.4 2,000 1,412 1,049 0 1,000 615 Q1 Q2 Q3 Q4 Q5 0 Informal Formal Q1 Q2 Q3 Q4 Q5 Source: World Bank staff estimations using SEDLAC data (CEDLAS and the World Bank) Furthermore, planned reforms intended to reduce fraud and smuggling are likely to have positive effects on the overall economy, including better opportunities for low-income families. Customs processes, regulations, and sanctions to curb fraud and contraband are expected to improve the business environment, foster more competition, and strengthen entrepreneurship and job creation. The positive effects will probably be more evident in the formal sector which can result in the generation of more and better jobs. More formal jobs can in turn create opportunities for low-income households to work in high-productivity jobs and thus contribute to, and benefit from, stronger economic growth. This is of special importance considering that workers from low-income households are disproportionally represented in the 45   informal sector and, in part as a result of that, have lower earnings (Figures 2 and 3). Additionally, reforms to align customs administration with regional regulations and practices are likely to reinforce these positive effects through more intra-regional trade of goods and services. Enhancing Budget Management and Increasing the Results Orientation of Public Spending and Improving the Coordination and Management of Social Policy Low public revenue collection and limited effectiveness and efficacy of public expenditures in Guatemala limit the capacity of the State to provide sufficient and quality basic public goods and services. Public spending in key sectors such as education and health remain low by regional standards. In 2011, for instance, Guatemala spent 3 percent of the GDP in education, which is considerably lower than the rest of the countries in Central America and the average for LAC (five percent). Similarly, health public spending was 2.3 percent of the GDP, lower than the rest of countries in Central America and LAC as a whole (3.7 percent) (Figure 4). Figure 4. Public expenditure in health and education, circa 2011 (a) Education (b) Health 7.00 8.00 7.62 6.27 6.00 7.00 4.83 6.00 5.52 5.46 5.00 4.57 5.00 4.29 4.15 4.00 3.50 3.42 4.00 3.76 2.97 3.00 3.00 2.39 2.00 2.00 1.00 1.00 0.00 0.00 CRI LAC NIC PAN SLV GTM CRI PAN NIC SLV HND LAC GTM Source: World Development Indicators Unsurprisingly, underinvestment in key social sectors translates into unsatisfactory development outcomes, particularly in the areas of health and nutrition. Despite achieving some progress in recent years, infant mortality in Guatemala, at 27.4 per 1,000 live births, is almost twice as big as the rate for LAC (16.8). Similarly, almost one in two children under five is malnourished in Guatemala compared to 12.8 percent in LAC. Deficits in the education sector, particularly in secondary and tertiary education, are also evident (Table 1). 46   Table 1. Development outcomes in Guatemala and LAC, in 2000, 2005 and 2011 Guatemala LAC Indicator 2000 2005 2011 2000 2005 2011 School enrollment, primary (% net) 85.6 93.7 92.8 92.8 94.2 93.8 School enrollment, secondary (% net) 26.9 35.4 46.4 65.8 71.4 76 Life expectancy at birth, total (years) 67.7 69.6 71.3 71.4 72.7 74.2 Mortality rate, infant (per 1,000 live births) 39.9 33.4 27.4 27.3 21.4 16.8 Mortality rate, under-5 (per 1,000 live births) 50.6 41.3 33.1 32.8 25.4 20.0 Malnutrition prevalence, height for age (% of children under 5) 50.0 54.3 (*) 48 (**) 17.4 14.9 12.8 (***) Source: World Development Indicators. Note: (*) is from 2002, (**) is from 2009, and (***) is from 2010 Figure 5: Prevalence of chronic malnourish children in Guatemala and selected countries Malnutrition prevalence, height for age (% of children under 5 years) 60 54.3 50 50 48 40 30 28.2 27.2 23 22.6 20.6 19.1 20 17.5 13.6 12.8 12.7 11.7 10.1 10 7.1 5.6 2 0 Source: World Development Indicators and World Bank staff estimates based on data from national authorities. In addition to being modest, coverage of basic goods and services is often unequal, which limits the set of economic opportunities for some groups of people, particularly the most vulnerable. The chances of attaining a fully productive life are largely determined by access to basic and quality goods and services, particularly during childhood and in early adulthood. The Human Opportunity Index (HOI) measures how equitable is the access to these basic goods and services (for instance, education, water, electricity and sanitation) according to individual 47   circumstances that are not under a child’s control, such as place of residence, gender, and education of the household head. Computed for children 16 or younger to remove effort or choices, it shows that Guatemala ranks poorly within the LAC Region in terms of access to basic opportunities (World Bank 2014). The HOI for school enrollment and quality of education is among the lowest compared to other regional countries. Furthermore, low levels of equal access to water and sanitation in Guatemala are alarming since access to these services have a strong influence in other childhood opportunities, such as health and education (Figure 6). Figure 6. Human Opportunity Index – Access to Water and Finishing 6th Grade on Time, 2012 (a) Water 100 80 60 40 20 0 El Salvador Colombia Ecuador Paraguay Peru Mexico Uruguay Nicaragua Costa Rica Honduras Guatemala Brazil Chile Argentina Bolivia Dominican Republic (b) Finishing 6th grade on time 100 80 60 40 20 0 El Salvador Colombia Peru Ecuador Paraguay Costa Rica Uruguay Mexico Nicaragua Honduras Guatemala Brazil Panama Chile Argentina Bolivia Dominican Republic HOI Coverage Source: World Bank (2014) using SEDLAC data (CEDLAS and the World Bank). Note: The figure shows the HOI for LAC countries in 2012, or the nearest year in cases in which 2012 data are unavailable. Access to water was calculated using non-harmonized versions of the household surveys. Inequitable access and quality of basic goods and services translate into weak social outcomes among the poor and low-income households. Micro-data for Guatemala shows that 48   basic endowments such as education, health, and nutrition tend to deteriorate as family incomes are lower. School attainment among household heads, a measure of human capital accumulation, is close to four times higher in the fifth quintile of the income distribution relative to the first quintile (8.2 v. 2.3 years of schooling, respectively). Similarly, at 2.6 years of education on average, the school attainment for family heads in the bottom 40 percent is substantially low (Figure 6). The incidence of malnutrition in children is also closely correlated with family income. As shown in Figure 7, the percentage of Guatemalan children in primary school with low-weight-for-height increases with the poverty rate of the municipality. Figure 7. Average years of schooling of Figure 8. Rural poverty headcount and household head by income quintile, 2011 malnutrition 9 8.2 1 8 7 .8 Rural Poverty Headcount 6 4.7 5 3.5 .6 4 2.6 2.8 3 2.3 2 .4 1 0 Bottom Q1 Q2 Q3 Q4 Q5 .2 40% 0 20 40 60 80 100 % Children with low weight-for-height Source: World Bank staff estimations using Source: World Bank staff estimations using rural poverty SEDLAC data (CEDLAS and the World Bank)  map 2011 and data from anthropometric census, 2008. Note: Children in primary school  In this context, and given the high food insecurity in Guatemala, prior actions under the policy areas of “improving the quality of expenditure” and “improving the coordination and management of social policy” focus on the targeting of expenditures, and are expected to have positive impacts on poverty reduction and shared prosperity. The prior actions focus on improving targeting mechanisms, particularly in relation to the monitoring of the Zero Hunger Pact, that aim to tackle infant malnutrition and maternal mortality in geographic areas with high malnutrition rates and to improve the overall results-orientation and coordination of social policies. Indeed, countries that have adopted performance-based budgeting and management instruments are likely to increase the efficiency of public expenditures, which could largely benefit the poor and vulnerable. Efforts to increase public budget and management transparency have been adopted in several countries in the region. Cross-sectional data for LAC seem to suggest that among countries with similar levels of public expenditures in the social 49   sector, those that have adopted results-based budgeting mechanisms achieve better social outcomes. For instance, infant mortality rate is lower, and secondary school enrollment higher, in countries such as Chile, Colombia, Argentina, Uruguay or Brazil, which have adopted results- based budgeting more broadly, as opposed to countries like Guatemala, Honduras, and Nicaragua (Figure 9 and Figure 10). It is expected that an improvement in the efficiency of public expenditures will benefit more the poor and vulnerable, since they are the ones with the weakest social outcomes. Figure 9. Average years of schooling of Figure 10. Rural poverty headcount and household head by income quintile, 2011 malnutrition Note: Countries shown in diamonds (squares) have adopted results-based budgeting above (below) the LAC average Source: WDI Creating additional fiscal space and enhancing the effectiveness of public expenditures, both supported by this DPL series, can help Guatemala close gaps across regions. An examination of the execution of public expenditures in Guatemala shows that actual expenditures are not sufficiently pro-poor. While the levels of poverty vary considerably across municipalities in Guatemala, public resources do not seem to be spent more than proportionally in areas with the largest fraction of people in need. As shown in Figure 8, there is not a clear association between public expenditures (measured by the total public expenditures per capita) and the incidence of poverty (measured by the moderate poverty headcount and extreme moderate poverty) across municipalities. While budget execution is probably partly constrained by low capacity in the poorer municipalities, additional resources and mechanisms to track their allocation and efficiency could help address these disparities. 50   Figure 11. Total Public Expenditure and Poverty Headcount at the Municipality Level (a) Moderate poverty (b) Extreme Poverty Source: World Bank, 2014 Stronger social protection and risk management systems are necessary to protect the well- being of vulnerable households affected by severe natural shocks. The geographic location of Guatemala makes it prone to frequent and high-intensity geological and weather-related shocks such as earthquakes, volcanic eruptions, droughts, storms, and hurricanes. In fact, the Global Climate Risk Index places Guatemala in the 12th place worldwide according to the number of extreme weather events recorded between 1991 and 2010. The largest most recent event, Tropical Storm Agatha, which hit the country in 2010 and dropped the largest rainfall since 1963, illustrates well the high vulnerability of the population –particularly low income families– to natural risks. An impact analysis found that the storm reduced the overall per capita consumption among affected households by close to 6 percent (Figure 11). The fall in consumption forced households to cut back on food expenditures, which could further deteriorate food security and increase malnutrition. Affected households in urban areas, the most hardly hit by the shock, saw an increase of over 5 percentage points in the poverty rate. 51   Figure 12. Impact estimates of the effect of Agatha on Household Per Capita Consumption Source: World Bank, 2014 Improving targeting mechanisms for public spending is a necessary step to accelerate poverty reduction in Guatemala. A clear example is the CCT “Mi Bono Seguro” (formerly known as “Mi Familia Progresa”) that Guatemala started to implement in 2008 to alleviate poverty among the poorest and encourage investments in the human capital of children of poor families. According to program rules, families are deemed eligible on the basis of a proxy-means system that is intended to channel resources to the poorest segments of the rural population. Coverage expanded considerably over time so that the program currently serves about one out three households in Guatemala, with a significant coverage in rural areas. However, the targeting effectiveness of the program can be improved substantially. Cross-referencing the ranking of municipalities according to the share of the population covered by the CCT program (a value of 1 indicates the municipality with highest coverage) with extreme poverty rates at the municipality level, shows a positive but weak correlation. While rural municipalities with higher rates of extreme poverty show on average slightly higher coverage than the rest of rural municipalities, it is possible to find many municipalities with above-average extreme poverty rates that also have relatively low coverage of the CCT program (Figure 12). The benefits of strengthening the targeting of public social spending are substantial (Figure 11). Simple simulations of geographically targeting a hypothetical lump sum public transfer intervention (equivalent to 0.5 percent of the GDP) at different levels of disaggregation illustrate the gains in terms of poverty reduction. The analysis draws from the 2011 rural municipal poverty map to show that geographic targeting at the municipal level would reduce poverty by an additional 5 percentage points, compared to a geographic targeting at the department level. The relative reduction in poverty is even larger (12 percentage points) when compared to a system that provides uniform transfer to the entire population. 52   Figure 13. Extreme Poverty and Coverage of Mi Bono Seguro 0.8 0.7 0.6 Poverty Rate in 2011 0.5 0.4 0.3 0.2 0.1 0.0 300 250 200 150 100 50 0 Ranking of coverage Source: Own calculation based on administrative data, ENCOVI 2011, and Rural Municipality Census (2008-2011). Figure 14. Simulations of Poverty Reduction at Different Levels of Geographic Targeting   Source: World Bank staff calculations based on the Guatemala 2011 poverty map.  High extreme and moderate poverty in Guatemala are the manifestation of glaring shortfalls in terms of human capital, access to markets and economic opportunities, and social and economic inclusion. More than half of the population in Guatemala was deemed poor in 2011, whereas the corresponding value for rural areas is over 70 percent. Not surprisingly, the high levels of poverty are strongly correlated with underlying shortages in other areas that are likely to contribute to such high incidence. For instance, 101 out of the 128 municipalities (79 percent) with levels of illiteracy above the national average have 70 percent or more of their population in conditions of poverty. Likewise, most of the municipalities that have over half of their children malnourished are also the municipalities with the largest fraction of people in poverty. Additionally, municipalities where poverty is rife are those that are father away from the capital city and in which more than half of their population are indigenous, signaling limited access to markets and weak social inclusion (Figure 15). 53   Figure 15. Poverty Headcount and Distance to the Capital City Across Municipalities 54   ANNEX 5: COUNTRY AT A GLANCE (Includes Country Map) Guatemala at a glance 2/27/14 Latin Lo wer Ke y D e v e lo pme nt Indic a t o rs A merica middle Guatemala & Carib. inco me Age distribution, 2012 ( 2 0 12 ) Male (..) Female (..) P o pulatio n, mid-year (millio ns) 15.1 581 2,507 75- 79 Surface area (tho usand sq. km) 109 19,461 20,742 60- 64 P o pulatio n gro wth (%) 2.6 1.2 1.5 Urban po pulatio n (% o f to tal po pulatio n) 50 79 39 45- 49 30- 34 GNI (A tlas metho d, US$ billio ns) 47.1 5,232 4,710 15- 19 GNI per capita (A tlas metho d, US$ ) 3,120 8,999 1,879 GNI per capita (P P P , internatio nal $ ) 4,990 12,008 3,913 0-4 10 5 0 5 10 GDP gro wth (%) 3.0 3.0 4.0 percent of total population GDP per capita gro wth (%) 0.4 1.8 2.5 ( m o s t re c e nt e s t ima t e , 2 0 0 5 – 2 0 12 ) P o verty headco unt ratio at $ 1 .25 a day (P P P , %) 14 6 27.1 Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) 26 10 56.3 Life expectancy at birth (years) 71 74 66 90 Infant mo rtality (per 1,000 live births) 27 16 46 80 Child malnutritio n (% o f children under 5) 13 3 24 70 60 A dult literacy, male (% o f ages 15 and o lder) 81 92 80 50 A dult literacy, female (% o f ages 15 and o lder) 70 91 62 40 Gro ss primary enro llment, male (% o f age gro up) 118 115 107 30 Gro ss primary enro llment, female (% o f age gro up) 114 111 104 20 10 0 A ccess to an impro ved water so urce (% o f po pulatio n) 94 94 87 1990 1995 2000 2011 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 80 81 47 Guatemala Latin America & the Carib bean a N e t A id F lo ws 19 8 0 19 9 0 2000 2 0 12 (US$ millio ns) Net ODA and o fficial aid 73 201 263 394 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2010): United States 17 88 58 105 8 Spain 0 0 15 93 6 Japan 3 5 67 41 4 A id (% o f GNI) 0.9 2.7 1.4 1.0 2 A id per capita (US$ ) 10 23 23 27 0 -2 Lo ng- T e rm E c o no m ic T re nds -4 95 05 Co nsumer prices (annual % change) 10.8 41.0 6.0 3.8 GDP implicit deflato r (annual % change) 10.0 40.5 6.8 2.9 GDP GDP per capita Exchange rate (annual average, lo cal per US$ ) 1.0 4.5 7.8 7.8 Terms o f trade index (2000 = 100) .. .. .. .. 19 8 0 – 9 0 19 9 0 – 2 0 0 0 2 0 0 0 – 12 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 7.0 8.9 11.2 15.1 2.4 2.3 2.5 GDP (US$ millio ns) 7,879 7,650 19,289 50,234 0.8 4.2 3.7 (% o f GDP ) A griculture 24.8 25.9 22.8 11.6 1.2 2.8 3.0 Industry 22.0 19.8 19.8 29.3 -0.2 4.3 2.7 M anufacturing .. .. 21.3 20.3 0.0 2.8 2.7 Services 53.2 54.3 57.4 59.2 0.9 4.7 4.4 Ho useho ld final co nsumptio n expenditure 78.9 83.6 83.9 85.8 1.2 4.6 4.2 General go v't final co nsumptio n expenditure 8.0 6.6 7.0 10.7 2.6 5.1 3.0 Gro ss capital fo rmatio n 15.9 13.6 17.8 14.4 -1.5 7.3 0.4 Expo rts o f go o ds and services 22.2 21 .0 20.2 24.9 -1.8 6.1 2.3 Impo rts o f go o ds and services 24.9 24.8 29.0 35.9 -1.7 9.2 2.1 Gro ss savings .. 11.9 12.4 12.1 No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. a. A id data are fo r 2010. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 55   Guatemala B a la nc e o f P a ym e nt s a nd T ra de 2000 2 0 12 Governance indicators, 2000 and 2012 (US$ millio ns) To tal merchandise expo rts (fo b) 4,224 10,107 To tal merchandise impo rts (cif) 5,924 16,992 Voice and accountability Net trade in go o ds and services -1,705 -5,783 Polit ical stability Current acco unt balance -1,049 -1,447 Regulatory quality as a % o f GDP -5.4 -2.9 Rule of law Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 596 4,508 Control of corruption Reserves, including go ld 1,811 7,063 0.0 25.0 50.0 75.0 100.0 2012 Country's percentile rank (0-100) C e nt ra l G o v e rnm e nt F ina nc e higher values imply better ratings 2000 (% o f GDP ) Source: Worldw ide Governance Indicators (w w w .govindicators.org) Current revenue (including grants) 1 1.0 1 1.6 Tax revenue 10.0 10.9 Current expenditure 9.1 10.8 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2 0 11 Overall surplus/deficit -1.8 -2.4 P aved ro ads (% o f to tal) 34.5 59.1 Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual 31 31 subscribers (per 1 00 peo ple) 14 143 Co rpo rate 25 31 High techno lo gy expo rts (% o f manufactured expo rts) 7.9 4.4 E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 3,948 14,156 A gricultural land (% o f land area) 42 41 To tal debt service 396 2,633 Fo rest area (% o f land area) 39.3 33.6 Debt relief (HIP C, M DRI) – – Terrestrial pro tected areas (% o f land area) 29.0 30.6 To tal debt (% o f GDP ) 20.5 28.2 Freshwater reso urces per capita (cu. meters) 9,281 7,425 To tal debt service (% o f expo rts) 8.5 14.8 Freshwater withdrawal (billio n cubic meters) .. .. Fo reign direct investment (net inflo ws) 230 .. CO2 emissio ns per capita (mt) 0.88 0.78 P o rtfo lio equity (net inflo ws) 0 .. GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) 6.3 6.3 Composition of total external debt, 2012 Energy use per capita (kg o f o il equivalent) 628 691 Short-term, 0 IDA,IBRD, 1,355 2,265 IMF, 308 Wo rld B a nk G ro up po rt f o lio 2000 2 0 11 Other multi- lateral, 3,088 (US$ millio ns) IB RD To tal debt o utstanding and disbursed 296 1,392 Bilateral, 342 Disbursements 51 101 Private, 6,798 P rincipal repayments 13 81 Interest payments 21 54 US$ millions IDA To tal debt o utstanding and disbursed – 0 Disbursements – 0 P riv a t e S e c t o r D e v e lo pm e nt 2000 2 0 12 To tal debt service – 0 Time required to start a business (days) – 40 IFC (fiscal year) Co st to start a business (% o f GNI per capita) – 48.1 To tal disbursed and o utstanding po rtfo lio 118 197 Time required to register pro perty (days) – 23 o f which IFC o wn acco unt 84 195 Disbursements fo r IFC o wn acco unt 21 6 Ranked as a majo r co nstraint to business 2000 2 0 12 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt 9 44 n.a. 80.9 .. n.a. 80.4 .. M IGA Gro ss expo sure 18 0 Sto ck market capitalizatio n (% o f GDP ) 0.9 .. New guarantees 0 0 B ank capital to asset ratio (%) 8.9 9.5 No te: Figures in italics are fo r years o ther than tho se specified. 2/27/14 .. indicates data are no t available. – indicates o bservatio n is no t applicable. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 56   Millennium Development Goals Guatemala With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) G ua t e m a la G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2 0 11 P o verty headco unt ratio at $ 1 .25 a day (P P P , % o f po pulatio n) 39.1 .. 1 1.9 13.5 P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) .. .. 56.0 53.7 Share o f inco me o r co nsumptio n to the po o rest qunitile (%) 2.2 .. 3.5 3.1 P revalence o f malnutritio n (% o f children under 5) 20.7 21 .7 19.6 13.0 G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) .. 74 85 96 P rimary co mpletio n rate (% o f relevant age gro up) .. 48 58 86 Seco ndary scho o l enro llment (gro ss, %) 23 26 38 64 Yo uth literacy rate (% o f peo ple ages 15-24) .. 76 82 87 G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) .. 86 89 95 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) 37 .. 32 30 P ro po rtio n o f seats held by wo men in natio nal parliament (%) 7 13 9 13 G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds Under-5 mo rtality rate (per 1 ,000) 80 63 51 33 Infant mo rtality rate (per 1,000 live births) 60 48 40 27 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 68 83 86 87 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) 160 160 130 120 B irths attended by skilled health staff (% o f to tal) .. 35 41 52 Co ntraceptive prevalence (% o f wo men ages 1 5-49) .. 31 38 54 G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) 0.1 0.3 0.5 0.8 Incidence o f tuberculo sis (per 100,000 peo ple) 74 71 68 61 Tuberculo sis case detectio n rate (%, all fo rms) .. .. .. .. G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) 81 84 87 94 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 62 67 71 80 Fo rest area (% o f land area) 44.3 41.8 39.3 33.6 Terrestrial pro tected areas (% o f land area) 25.9 27.2 29.0 30.6 CO2 emissio ns (metric to ns per capita) 0.6 0.7 0.9 0.8 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) 6.7 6.9 6.3 6.3 G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt Telepho ne mainlines (per 1 00 peo ple) 2.1 2.9 6.0 11.0 M o bile pho ne subscribers (per 1 00 peo ple) 0.0 0.3 7.6 132.0 Internet users (per 1 00 peo ple) 0.0 0.0 0.7 12.3 Ho useho lds with a co mputer (%) .. .. 5.9 17.8 Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 160 140 100 75 120 75 100 50 50 80 25 60 25 40 0 2000 2005 2010 20 0 0 1990 1995 2000 2011 2000 2005 2010 Primar y net enrollm ent ratio Fixed + mob ile subscribers Ratio of girls to boys in prima ry & secondary Guatemala Latin America & the Carib bean education Internet users No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. 2/27/14 Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 57   IBRD 33413R1 91°W 90°W 89°W 88°W G UATEMA LA SELECTED CITIES AND TOWNS DEPARTMENT CAPITALS NATIONAL CAPITAL M E X I CO RIVERS GUATEMALA PAN AMERICAN HIGHWAY MAIN ROADS 18°N 18°N RAILROADS DEPARTMENT BOUNDARIES Paxbán INTERNATIONAL BOUNDARIES 92°W Carmelita n Pedro P E T É N Sa Tikal El Naranjo Melchor L. Petén Itzá de Mencos BELIZE 17°N 17°N Flores Mopán Usum ac La Libertad i nt M EXI C O a To Tuxtla Gutiérrez n sió Pa Sayaxché lá q ui ha ac M Gulf Salinas San Luis of n Honduras cué 16°N Can 16°N n Sarstún Ixcá Barillas iyú Modesto Lívingston Ch Méndez uz Puerto HUEHUETENANGO A L TA V E R A PA Z ta Cr San Barrios . Cahabón Sierra de I Z A B A L QUICHÉ á Mts ele Chajul Cham Ca habón El Estor L. de S gu Izabal Morales a Cob Cobán Huehuetenango Polochic Sier egro N Los Amates SAN ra d e lo Mot agu a MARCOS s Ch u BAJA VERAPAZ Tajumulco TOTONICAPAN Santa Cruz a c ú s Z A C A PA Salam Salamá 15°N (4220 m) Quich Del Quiché EL 15°N San Marcos Totonicap Totonicapán Motagua PROGRESO Zacapa To To S El Progresso O Tonalá O i e G El Progreso AN NG Suchia Quetzaltenango Sololá Solol GUATEMALA Chiquimula EN Tr NA LL AT r SOLOLÁ SOLOL Chimaltenango Z a CHIQUIMULA TE ET te Jalapa HO NDUR AS AL QU Mazatenango L.Atitlan GUATEMALA JALAPA SACATE- Antigua Esquipulas IM Retalhuleu M CH Ocós a d PEQUEZ Guatemala Z UE RETALHULEU r e Q PE Cuilapa Jutiapa TE Escuintla Champerico I CH JUTIAPA SU SANTA ESCUINTLA ROSA 14°N 14°N Sipacate San José Las Lisas SA LVA DO R EL SALVADO 0 20 40 60 Kilometers To La Unión 0 10 20 30 40 50 Miles To La Unión This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information PA CIFIC O CEA N shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 13°N 13°N 92°W 91°W 90°W 89°W 88°W NOVEMBER 2006