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InterviewsNovember 3 2008

Juan Fuentes

The Guatemalan economy has big potential, particularly in fuel and food production. The country’s minister of finance talks about his fiscal reform programme and intent to create a sustainable tax base. Writer John Rumsey.
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Q  What are your expectations for growth in Guatemala?

A Official estimates for growth are being revised downwards but should not fall to less than 4%. Guatemala is not the most affected in the region by the deceleration, and the Economic Commission for Latin America and the Caribbean estimates central America will grow by 5% in 2008 and 4.5% in 2009.

The biggest risks to our economy are exogenous. Central America is a net importer of food and fuel and although Guatemalan remittances are continuing to grow, they are doing so more slowly. The only sector that is performing poorly is textiles, largely due to competition with China; both traditional and non-­traditional exports are growing. This is a very different, diversified economy compared to 20 years ago when we depended more on coffee, bananas and sugar.

We see energy and food production as being two new growth areas. Energy will be produced from hydro, geothermal and wind sources and we share gas reserves with El Salvador. There is a long list of projects being considered by the private sector. In foodstuffs, we are already the main exporter in central America.

Q  Could you outline the plans for your fiscal reform programme?

A We envisage changes both to public expenditure and fiscal modernisation in two stages. The first includes measures on indirect taxation and tax administration and has been presented to Congress. The second stage is for a minimum income tax and we are proposing implementation in 2010. The idea is not to increase rates, and in fact we will reduce the top rate from 31% to 25%, but to eliminate loopholes, strengthen controls and reduce the number of exemptions.

The idea is to have a workable tax system, reducing the number of bands and the difference between each band and limiting deductions and exemptions. We are working closely with the Inter-American Development Bank on this. This income tax reform will be more difficult but is crucial for a sustainable tax base.

Q  What would be a desirable tax t­ake?

A Tax revenues are equivalent to 12% of gross domestic product and by 2011 we expect to increase that to 13.2%. That was the target decided at the time of the peace agreements 10 years ago and we have had a lot of difficulty in getting there. This is an incremental process and it is very difficult to establish an ideal rate.

We are working to make public expenditure more transparent with more control over trust funds that are not controlled directly by government. We have created a vice-ministry of transparency within our ministry and aim to provide much more information on public contracts, including the criteria on which they are decided and a list of all the bidders.

We are also putting in place a budget by results, trying to evaluate efficiency of public spending and link public expenditure to targets in health, education and security. The initiative is supported by the EU and involves our ministry as well as ministries of planning and security, health and education. It will be a simple scheme with three targets for each department. It is clearly difficult but we are making progress.

Q  How is Guatemala mitigating inflation on the poor?

A Guatemala has not introduced unsustainable subsidies or ineffective administrative measures, we are moving to a system of subsidies targeted at vulnerable communities. We have introduced a cash transfer programme which took ideas from Brazil and Mexico and covers the poorest municipalities and families. The cost totalled GTQ150m ($20.2m) through to September of this year, a relatively modest amount, but will increase to GTQ1bn next year. The scheme will cover 300,000 families in 90 municipalities.

Q  How important is it for Guatemala to receive an investment grade rating?

A We consider it important. Crucial factors are fiscal reform and relations between the private and public sector. There has historically been a conflict between implementing tax reform and developing good relations with the private sector, which we now have, and we expect that will make tax reforms easier. But we do not intend to bring down debt much as it is already at a sustainable level and one of the lowest in Latin America.

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