Identifier
Created
Classification
Origin
05GUATEMALA703
2005-03-17 17:36:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Guatemala
Cable title:  

IMF AND FINANCE MINISTRY NOT PURSUING STAND-BY

Tags:  EFIN SENV GT 
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171736Z Mar 05
UNCLAS GUATEMALA 000703 

SIPDIS

SENSITIVE

TREASURY FOR WAFER

E.O. 12958: N/A
TAGS: EFIN SENV GT
SUBJECT: IMF AND FINANCE MINISTRY NOT PURSUING STAND-BY
AGREEMENT; TIME TO MOVE FORWARD WITH TFCA


UNCLAS GUATEMALA 000703

SIPDIS

SENSITIVE

TREASURY FOR WAFER

E.O. 12958: N/A
TAGS: EFIN SENV GT
SUBJECT: IMF AND FINANCE MINISTRY NOT PURSUING STAND-BY
AGREEMENT; TIME TO MOVE FORWARD WITH TFCA



1. (SBU) Summary: Guatemala and the IMF have decided not
to proceed with a new stand-by agreement (SBA). The IMF is
insisting on a commitment to pass fiscal reform legislation
by a given date, which Guatemala does not believe it can
guarantee in the current congressional environment. Both
sides agree that the macroeconomic situation is in good shape
and that an SBA is not needed. Under these circumstances, we
believe the time has come to approve Guatemala's eligibility
for a debt-for-nature swap under the Tropical Forest
Conservation Act. End summary.

No Date Certain for Fiscal Reform, So No SBA
--------------

2. (SBU) An IMF staff mission that arrived in February for
the 2005 Article IV consultation failed to reach agreement
with Guatemala's Ministry of Finance on a new stand-by
agreement (SBA). IMF ResRep Erik Offerdal told EconCouns
that the Fund was pleased by what it found during the visit,
but the two sides could not reach agreement on a timetable
for tax reforms. Offerdal said that the IMF insisted that a
firm date be established for passing tax reforms that would
lead to revenue collections equivalent to at least 12% of
GDP. Finance Minister Bonilla would not commit to such a
date on grounds that the government could not force the
Congress, which it doesn't control, to do its bidding. She
felt that Guatemala had no need for an SBA other than as a
seal of approval that might lower borrowing costs. Setting a
date for tax reform and then missing it because of
congressional politics would send a worse message to markets
than not having an SBA at all. Offerdal said the Fund
mission had sympathy for Bonilla's position but had no
flexibility on getting a near-term date certain for passing
tax reform legislation.

Fund Agrees to Accentuate the Positive...
--------------

3. (SBU) Offerdal said that the Fund agreed to downplay the
lack of agreement on an SBA and speak well of Guatemala's
performance in its public statements. The Fund's subsequent
press release did not mention an SBA at all, noting instead
that economic performance "had improved," "international
reserves rose to record levels," "the budget deficit was
reduced sharply," while "early actions have aimed at
addressing corruption; reducing the size of the military; and
strengthening the public finances." The release also notes
that the "Guatemalan financial system has been strengthened
considerably in recent years." The only comment that wasn't
positive was that "inflation drifted upward to over 9
percent," due both to oil prices and "relatively easy
monetary conditions."

...As Results Exceed Expectations
--------------

4. (U) The latest data we have seen for 2004 indicates net
fiscal revenue collections of 10.3% of GDP, which we
understand would have been a couple of tenths of a percentage
point higher except that the Ministry of Finance made
considerable progress on clearing Portillo-era arrears of
value added tax rebates to exporters. The fiscal deficit was
0.3%, well below original expectations and reflected better
controls over spending. The targets for 2005 are 10.5% for
revenues and 1.8% for the deficit, with the deficit to be
reduced to 1.5% and social spending to increase if and when
additional revenues are mobilized.

Comment: Moving Forward with the TFCA
--------------

5. (SBU) We understand that Washington agencies were
expecting an SBA to be signed early this year and were
waiting for that to happen before approving Guatemalan
eligibility for a debt-for-nature swap under the Tropical
Forest Conservation Act. Now that an SBA is not on the
horizon but the Fund is nevertheless satisfied with
Guatemala's economic performance, we urge Washington to wait
no longer and move ahead with TFCA approval, preferably in
advance of the presentation of the staff report on the
Article IV consultation to the Board, which we understand is
being delayed until May. (Guatemala has not yet been told
about the Article IV delay, so we ask that this information
be held closely for now.)
HAMILTON