Ambassador brings together President Colom and private

C O N F I D E N T I A L GUATEMALA 001033 SIPDIS E.O. 12958: DECL: 2019/12/24 TAGS: PGOV PREL KDEM ECON EFIN GT SUBJECT: Ambassador brings together President Colom and private sector leaders DERIVED FROM: DSCG 05-1 B, D ¶1. (C) Summary: The Ambassador hosted a meeting December 8 designed to facilitate dialogue between Guatemala's influential private sector and President Colom. The four-hour meeting began as a therapeutic airing of grievances. The President stressed in detail his frustration with how the private sector had used the Rosenberg murder to weaken him, and he listed his government's achievements in Guatemala's economic situation. The private sector disputed any manipulation of the Rosenberg affair; they raised concerns about the First Lady's 2011 candidacy, and frustration that dialogue had ended with the government. The President agreed to increased dialogue and promised to review the issues raised by the business sector and discuss the issue again on December 9. (Note: The President met December 9 with Jorge Montenegro, head of the Coordinating Committee for the Chambers of Agriculture, Commerce, Industry and Finance, CACIF. During this meeting he pledged to continue dialogue with the private sector but not to withdraw or amend the tax legislation. End note). The Ambassador told the group that the Guatemalan state is grossly underfinanced and needs more resources. That said, there needs to be greater transparency and consensus on the use of the resources. The meeting provided both sides an opportunity to clear the air and reestablish a more productive working relationship. The President promised to use his influence to avoid the violent demonstration on December 10 (they did not take place) and to set up four joint working groups on the private sector proposals. The meeting underscored USG interest in dialogue as Guatemala enters a confrontational 2011 election campaign. We will look at including the First Lady in a subsequent meeting. End Summary The Tax Package ¶2. (U) The tax package was submitted by the administration in late November and contains rate increases for the Guatemalan stamp tax, income tax and "solidarity" tax (known as the ISO, this tax is similar to an alternative minimum tax). It would also establish a per-minute tax on cellular telephone calls. The Finance Ministry estimated that it would raise approximately Q3.5 billion ($427 million) in tax revenues. These revenues would be primarily devoted to paying teachers' salaries and purchasing medicine for �0A;hospitals and clinics. ¶3. (C) The GOG asserts that without the tax package, the government would be forced to lay-off up to 25,000 teachers, doctors and emergency workers and curtail transfers to municipalities. The USG resident Treasury advisor and budget expert believes that these assertions are almost certainly a political tactic, since the current budget law allows the government the ability to move funds from ministry to ministry without consultation. By threatening cuts in the sensitive education and health fields, the GOG hopes to increase political pressure on Congress to pass the tax increase legislation. The Treasury advisor also noted that the tax increase would not address fundamental limitations to Guatemala's ability to raise tax revenues including increasing the capacity to enforce the tax code and expanding the tax base. Government-Private Sector relations strained ¶4. (C) Relations between the public and private sector have been strained since the May 2009 posthumous allegations by lawyer Rodrigo Rosenberg that the Colom Administration had plotted his murder. The private sector and opposition tended to believe the allegations; a few tried to use the affair to weaken Colom; Colom perceived that a large portion of the private sector sought to overthrow him. (Comment: We believe Colom's view was exaggerated, and was driven by his ineffective political intelligence apparatus. End Comment). Relations deteriorated sharply beginning in November 2009 when the Colom administration submitted to Congress a controversial proposal to increase taxes without consulting the private sector. The private sector immediately and strongly opposed the tax increase and mounted lobbying efforts and a media campaign to defeat the proposal. The government countered with its own lobbying and media and threatened, through proxy groups, to organize protests to increase pressure to pass the legislation. The resulting environment was one of mutual distrust. ¶5. (C) During the week of November 30, sharp public remarks by private sector leaders and similarly confrontational language by the First Lady over the weekend of December 5 and 6, intensified the antagonistic relationship between the President and his administration on one hand and private sector leaders on the other. The Ambassador decided to facilitate a meeting on December 8 in an effort soften the rhetoric on both sides and restart constructive dialogue. ¶6. (C) At this meeting, President Colom was joined by Roberto Alejos (President of Congress),Gustavo Alejos (Colom's private secretary) and Carlos Meany (Minister of Energy). The private sector was represented by the President and Vice President of CACIF, the Presidents of the Chambers of Agriculture and Industry as well as representatives from most of Guatemala's most influential and wealthy families. While the meeting was conducted in polite terms, private sector representatives repeatedly told Colom that the only reason they had agreed to the meeting was that the Ambassador was hosting it and had agreed to be a witness. Private Sector Complaints ¶7. (C) Private sector representatives reiterated concerns about the tax proposal and presented Colom with a detailed presentation on how an increased ISO tax (from 1% to 2% of gross revenues) would reduce competitiveness of Guatemalan businesses, particularly in the retail sector. (Note: According to Treasury experts, this is true. End note). They highlighted that 2,600 entities in Guatemala pay 85% of the taxes, and that the pending tax reform would only increase the contribution from the same contributors. In addition, the state is losing between Q10 and Q12 billion ($1.2 billion to $1.5 billion) in tax revenue due to smuggling and evasion. Even small steps to close this gap could make the tax increase unnecessary. Beyond taxes, private sector leaders complained about lack of communication from the government, inconsistent policy direction and failure to follow through on promises. They also raised their growing concern about confrontational discourse designed to create a polarized "rich versus poor" political environment. According to the business leaders, the First Lady and a small group of left-wing advisors within the presidency were responsible for the divisive tone. Private sector leaders citied the involvement of controversial presidential advisor Orlando Blanco in organizing protests planned for December 10. These protests, according to the private sector leaders, had the potential to be dangerous and represented the worst kind of populist politics. ¶8. (C) The President responded to the tax argument by saying that the government had immediate revenue needs and that the reform was needed to make up the shortfall. In the absence of increased tax revenues, the GOG would be obligated to layoff up to 25,000 public employees - primarily teachers, doctors and firemen. He would welcome increased dialogue, including on tax evasion, smuggling, transparency and how to improve the tax proposal. However, while important, results in these areas would take time and the government had immediate needs. ¶9. (C) Private sector representatives continued to press Colom to withdraw the tax reform (scheduled for a vote two days later) and open discussions on how to improve the proposal. Colom waffled, saying that it would be politically difficult as mayors, the teachers union, and his economic cabinet were all pressing for the tax package. He also said that he would review the concerns presented by CACIF and get respond the next day (December 9). ¶10. (C) Colom did not respond to charges that left-wing advisors were creating a divisive environment and described the First Lady as "just another functionary" in his government. He said that she was not necessarily a presidential candidate and the press, which was influenced and financed by the private sector, had gone out of its way to vilify her. He agreed that demonstrations threatened for December 10 to pressure for passage of the tax increase were dangerous. Colom claimed the groups involved were not from the government, but that he would take measures to reduce the potential for violence (Note: On December 9, Colom publicly called on the groups not to demonstrate and only about 50 demonstrators protested on December 10. End note). ¶11. (C) MULTIGUA partners Juan Luis Bosch and Dionisio Gutierrez proposed that the government and private sector put aside mutual recriminations and start a new relationship based on communication and credibility. Gutierrez urged that the government and all sectors of society agree on a national agenda, in which fiscal reform could be worked out. Ambassador weighs in ¶12. (C) The Ambassador told all present that the USG supports dialogue, transparency, and consensus on tax issues. He highlighted that the Guatemalan state is underfinanced and that the USG is not opposed to new taxes. However, both sides should review proposals more carefully to ensure that they address fundamental fiscal problems as well as transparency and accountability. To bring the meeting to a close, the Ambassador summarized the private sector requests of the President. First, whether the President was willing to discuss amendments to the tax reform to address private sector concerns; and second, whether he was willing to engage in an informal dialogue on a variety of issues of national importance including security and economic issues. The President reiterated his pledge to review private sector concerns over the tax issue, but did not promise to hold up the legislation. He also agreed that ongoing dialogue was necessary and would look forward to it. Both sides agreed in principle to meet again, though no date was set, and voiced satisfaction that dialogue had resumed. ¶13. COMMENT: (C) The meeting allowed both sides to vent their frustrations and created an opportunity for dialogue. This will be particularly important as Guatemala approaches a confrontational 2010-2011 electoral campaign. The meeting also made clear that the USG is not in either side's pocket, and that the USG is committed to dialogue and communications. While the Colom Administration and the private sector will likely continue to have strong differences on policy issues, regular meetings between the two sides could serve to minimize miscommunication and mutual distrust. While both sides were pleased that dialogue had resumed and pledged to continue meeting, some of the private sector representatives were disappointed by what they felt was a lack of candor by the President. They pointed specifically to assertions that he could not influence the groups organizing protests and that the First Lady was not interested in being a candidate for President as examples. End Comment. ¶14. (C) The Embassy will continue to look for opportunities to keep major players talking. Based on a conversation the First Lady had with the Ambassador and DAS Reynoso, we will propose another meeting with the participation of the First Lady. MCFARLAND