Guatemala: Fiscal Challenges Await New President

By ICEFI and CLALS*

Guatemalan President Alejandro Giammattei is sworn in, January 14, 2020

Guatemalan President Alejandro Giammattei is sworn in, January 14, 2020/ US Embassy Guatemala/ Flickr/ Creative Commons/ https://bit.ly/2GeHS0U

Guatemalan President Alejandro Giammattei, inaugurated on January 14, faces a deeper public finance crisis than previously estimated, putting even greater pressure on him to undertake fiscal reforms and start the slow and difficult process of fiscal stabilization and recovery.

  • The Giammattei administration has inherited a fiscal mess from former President Jimmy Morales, during whose four-year administration public spending on principal social needs didn’t surpass 8 percent of GDP (7.9 percent in 2019). Despite slow, slight growth in the education budget in 2015-2019 and a growing population, the number of students enrolled at the elementary and high school level actually contracted. Spending on health – in a country with half of its children suffering from chronic malnutrition, one of the lowest health service levels, and one of the highest infant and maternal mortality rates in the world – remained around 1 percent of GDP. The military budget under Morales, however, expanded considerably, allowing the Armed Forces to purchase weapons and a ship and to at least try repeatedly to buy military aircraft.

The fiscal situation is worsened by the persistent inability of the national tax authority (SAT) to achieve its collection goals for almost a decade, as well as by the array of amnesties and fiscal privileges approved by the National Congress in 2015-19. As a result, the Morales administration ran up fiscal deficits from 1.1 percent of GDP in 2016 to 2.5 percent in 2019 – accelerating the increase in the stock of public debt from 24.7 percent of GDP in 2017 to 27.0 percent in 2019 – Guatemala’s highest in recent history.

  • Making things worse, the debt was principally handled through issuance of Treasury Bonds sold on the national and international markets at terms – higher rates and shorter maturity periods – less favorable to the Guatemalan government. Last September Congress passed a law, supposedly to formalize cattle growers and ranchers (a sector well known for not paying taxes), that many observers say is so badly written that it opens the door to more tax fraud and even money laundering by powerful drug cartels. ICEFI and even some members of Congress note this has the potential to cause even greater revenue losses in 2020.

Budgetary pressures seem very likely to continue rising this year, further complicating the new president’s challenges. The Constitutional Court in late November ruled that the Executive Branch must correct the way it calculates the transfers that the Constitution requires the Central Government make to the municipalities, the Judiciary, the San Carlos University (Guatemala’s only public university), and the federated and non-federated sports institutions. If this ruling is confirmed, it will generate a huge increase in those organizations’ budgets, seriously exceeding the government’s current fiscal capacity by more than US$1 billion (1.2 percent of GDP).

  • ICEFI’s analysis shows that the only way for the new government to overcome the public finance crisis is to undertake far-reaching fiscal reform – revitalization of tax administration, a credible fight against corruption and tax evasion, and correcting budget priorities. For a government more inclined to pro-business and liberal economic thinking, such reforms may represent a considerable political challenge.
  • President Giammattei also inherited a difficult political situation from his predecessor, whose conflict with the UN-supported International Commission against Impunity in Guatemala (CICIG) and whose alliance with persons widely believed to be involved in corruption further undermined popular confidence in the government. The new president will be judged harshly if he fails to demonstrate early on a commitment to fight corruption, increase transparency, and make government more accountable. Accusations that he himself has been involved in corruption are already arising. He faces these tough economic and political challenges – with diminished resources, fiscal chaos, and with the previous administration’s allies considerably strengthened – at a time that Guatemala can ill afford to continue to stumble from crisis to crisis.

January 23, 2020

* The Instituto Centroamericano de Estudios Fiscales conducts in-depth research and analysis on the region’s economies. Data and charts supporting this article can be found by clicking here. This is the fourth in a series of summaries of its analyses on Central American countries. The others are here, here and here.

Guatemalan President’s Mid-term Exam: A Failing Grade?

By Ricardo Barrientos*

Guatemala Otto Pérez Molina President / Photo credit: World Economic Forum / Foter.com / CC BY-NC-SA

Guatemalan President Otto Pérez Molina / Photo credit: World Economic Forum / Foter.com / CC BY-NC-SA

President Pérez Molina’s second annual report to the nation last week at Guatemala’s National Theater featured statistics on the government’s progress, but it may be better remembered for an incident in which a protester threw white powder in the face of Vice President Roxana Baldetti.  A number of opposition deputies boycotted the session, and protestors outside drew headlines.  The President touted specific accomplishments, but his overarching plans –structured in three “pacts” welcomed even by the opposition – have fallen short of expectations.

  • The President in his speech said malnutrition has declined, but critics say that the Zero Hunger Pact is mostly unimplemented and chronic malnutrition persists. National surveys and several studies report that half of all Guatemalan children face a life with deficits in their abilities to learn and be competitive.
  • The Security, Justice and Peace Pact – expected to be a strong point for a former Guatemalan army general with a reputation as an “iron fist guy” – has fallen short.  Pérez Molina said the national homicide rate has dropped from 39 to 34 per hundred thousand inhabitants, but the National Institute of Forensic Sciences has reported a slight increase in murders in the capital and surrounding area.  Crime and insecurity remain a daily reality for Guatemalans, fueling popular frustration that Pérez Molina is not meeting one of his top campaign promises.
  • The Fiscal Pact for Change is also not delivering desired results.  According to Icefi, public finances are in crisis, not because of an external economic shock (2009-2010) or because tax reforms failed to increase revenues (corporate taxes rose 35 percent in 2013).  Rather, corruption is fueling fiscal shortfalls. According to President Pérez Molina and in Vice-President Baldetti’s own words, the influence of organized crime over the Customs System, whose duties and VAT on imports account for one third of Guatemalan tax revenues, is hampering collection.

For a student, a bad grade on a mid-term exam is an alert that things are not going well – but that a serious effort in the second half can save the course and achieve success.  For Pérez Molina, serious effort from now on is going to require more than a speech and applause at the National Theater.  The final exam for him and his government looms large on the horizon: elections will take place in September 2015, and campaigning will be well advanced in 2014. Voters are influenced by their daily reality, not an official report of success and accomplishments more reminiscent of Alice in Wonderland than real life Guatemala.  The President knows the clock is ticking.

Ricardo Barrientos is a senior economist at the Central American Institute for Fiscal Studies (Icefi).