## _cr0609 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr0609 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0609.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0609.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0609.pdf.json) --- ### Overview - Assessment of fiscal transparency practices in Guatemala against the IMF Code of Good Practices on Fiscal Transparency based on: - discussions with the authorities and other organizations; - the authorities’ response to the IMF fiscal transparency questionnaire; and - other sources of information. - The IMF Manual on Fiscal Transparency is referenced for further explanation of terms and concepts. ### Progress in fiscal transparency (key developments) - Systems adoption and rollout: - Integrated Financial Administration System (SIAF) adopted by all institutions in the Executive Branch and more than half of decentralized and autonomous agencies. - SIAF-MUNI introduced in 36 municipalities by 2004, with a plan to extend coverage to almost 100 municipalities by end-2005. - SIAFITO-MUNI used in almost all municipalities. - Government Audit System (SIAF-SAG) developed by the Office of the Comptroller General of Accounts (CGC). - Obligatory adoption of the Public Sector Procurement and Contracting Information System (GUATECOMPRAS). - Expected outcomes from systems adoption: - Modernization of budget, treasury, and accounting procedures. - Improved management and control of public funds. - Preparation of timely budget execution reports. - Facilitation of external audits and increased transparency of public procurement procedures. - Information availability and regulatory changes: - Annual budget and MINFIN website provide increasingly complete information on central government (executive branch) activities, including information on tax expenditure, indebtedness, and multiyear budget scenarios. - Recent regulatory changes include: Municipal Code, Organic Law of the Bank of Guatemala, Law on Banks and Financial Groups, Financial Supervision Law, Law on Free Foreign Exchange Trading, and the Law governing the CGC. ### Main areas needing improvement (mission’s principal recommendations) - Institutional and reporting coverage: - Adopt an institutional classification of public entities conforming to international standards and adapt budget and reporting coverage to match that classification. - Prepare consolidated public sector budgets and accounts. - Budgeting and performance: - Improve multiyear budgeting, tie budgets to performance indicators and goals, and link multiyear frameworks to the annual budget preparation process (practice initiated for the 2006 budget). - Contingencies and quasi-fiscal activities: - Identify, quantify, and report contingencies and quasi-fiscal activities. - Budget amendment powers and expenditure management: - Clarify the powers to amend budgets between the executive and legislative branches. - Gradually reduce the use of funds and fiduciary instruments for expenditure management. - Public procurement and municipal governance: - Reduce the number of activities and entities exempted from the law on public procurement and the use of GUATECOMPRAS. - Precisely demarcate spheres of competence of the central government, development councils, and municipalities on investment prioritization. - Establish clear and easily verifiable criteria for distributing transfers to municipalities. - Create more robust enforcement mechanisms for reporting of budgets and municipal debt. - Tax administration and external control: - Guarantee legal protection of the tax administration from political interference. - Strengthen external control through enhanced training in the use of information systems, wider dissemination of findings, and stricter monitoring of audit recommendations. ### Definition of government activities and institutional coverage - Legal definition: - By law, Guatemala’s public sector comprises the central government, nonfinancial public enterprises, public financial institutions, and local governments. - Central government composition and budgetary practice: - Central government comprises central administration, decentralized nonbusiness agencies, autonomous nonbusiness agencies, and social security institutions. - The central administration includes the legislative branch (Congress of the Republic), the judicial branch (headed by the Supreme Court of Justice), constitutional bodies, and the executive branch (President and Vice President) with 6 secretariats, 17 support agencies, and 13 ministries. - The GFSM concept of central government coincides with the central administration in the Manual of Budget Classifications for the Public Sector of Guatemala (MCPSP). - From the standpoint of budget and fiscal statistics, the relevant government concept corresponds to the executive branch of central government. - Budget approval and submission practices: - Congress approves the budget of central government institutions comprising the executive branch only. - Legislative and judicial branches and autonomous agencies prepare and approve their own draft budgets per their organic laws. - Decentralized agencies must submit draft budgets via MINFIN for executive consideration; the executive must issue government resolutions approving them by December 15 prior to the fiscal year (Article 40, Organic Budget Law). - Constitution (Articles 134 and 237) and the LOP require these agencies (and municipalities) to submit budgets to the executive branch and to Congress for information and inclusion in the PGIEE. - Municipalities often do not comply; municipal governments approve budgets at end-December and only some submit them to the executive at the start of the fiscal year. - Financial dependence and governance of agencies: - Decentralized and autonomous agencies are financed almost entirely by central government grants; boards are appointed by the president or ministers; autonomy is often functional rather than financial. - Report finds no justification for excluding decentralized and autonomous agencies from the regular budget process. - Debt contracting and guarantees: - Decentralized and autonomous agencies may contract debt within individual ceilings established by MINFIN; in some cases, the national government guaranteed their debt. ### Public enterprises: scope, fiscal risks, and monitoring - Current holdings and post-privatization: - Government owns nine nonfinancial public enterprises and stocks in two nonfinancial private enterprises; also owns four financial institutions (two banks and two nonbank institutions—one in the process of liquidation). - Privatizations in the second half of the 1990s substantially reduced the scope of the government’s enterprise sector. - Financial performance and fiscal risks: - With the exception of port authorities and INDE, seven nonfinancial enterprises are small, almost all show losses and require government transfers. - Financial enterprise CHN is in financial distress, partly due to forced mergers in 2002 and 2003. - No government entity is responsible for monitoring enterprise performance and coordinating policy. - INDE quasi-fiscal activities undermining finances: - Until 2004 granted electricity rate subsidies for households consuming fewer than 300 kWh per month; currently subsidy applies for households consuming below 100 kWh per month. - Average residential consumption is about 100 kWh per month; 99 percent of residential clients qualified for the social rate. - The subsidy was estimated at around US$60 million a year. - INDE grants private distribution concessions without recovering investment costs, builds transmission lines to nonprofitable areas, pays for works and electricity from other countries in border zones, and signed guaranteed electricity purchase contracts with private generating companies at rates far above market price during rationing. - These subsidies are not offset by central government transfers; government funds rural electrification using proceeds from privatization of distribution companies. - Recommendation: - Enterprises that pose fiscal risks for the government should be monitored and consolidated in fiscal reports. ### Privatization practices and transparency (selected observations) - Privatizations used ad hoc mechanisms: some direct sales, others public tender. - Public competitive bidding used to sell the two INDE distribution companies; GUATEL’s assets were sold directly in a nontransparent operation. - Some contracts indexed to oil price and U.S. dollar exposed INDE to high contract risks. - Distribution of enterprise earnings varies: Puerto Quetzal allows sharing among government, some municipalities, and workers; INDE must reinvest all earnings; GUATEL’s rules do not provide earnings distribution to municipalities. All rules stipulate allocations to workers, reinvestment, and retirement reserves. ### Government relations with the central bank (BANGUAT) and financial public sector - Institutional arrangements: - Monetary, exchange, and credit policy determined by the Monetary Board chaired by the President of Bank of Guatemala; membership includes ministers and other appointed representatives (Article 132 of the Constitution). - Chair appointed by the President of the Republic for a four-year term; chair reports to congress twice a year. - Legal prohibitions and practices: - Constitution forbids BANGUAT from financing the government; in practice BANGUAT has not financed government operations but engages in other quasi-fiscal activities and does not pay interest on government deposits. - BANGUAT collects fees for fiduciary services and as financial agent of the state but does not remunerate the government’s deposits at the bank. - Past quasi-fiscal operations and fiscal implications: - Between 1998 and 2001, BANGUAT provided credits amounting to Q 4,531 million to banks placed under government administration; BANGUAT has recovered Q 2,476 million. - According to the Organic Law of the Bank of Guatemala (Decree No. 16–2002), the government had to cover losses accumulated through December 2001 by issuing long-term debt instruments (operation not approved by Congress); accumulated losses through 2001 were estimated at Q 16 billion, for which the bank is scheduled to receive an overall 100-year bond. - Net annual shortfalls from monetary and exchange policy in later years were Q 905.3 million in 2002, Q 963.7 million in 2003 and Q 1,063.1 million in 2004. - Bank’s executives estimate it needs an additional capital injection of Q 500 million to achieve sound capital adequacy ratios. - Fee structure: - Article 55 of the Organic Law establishes BANGUAT shall not pay interest on public sector deposits held at the bank. - Bank charges a fee of one quarter of one percent (1/4 of 1 percent) per year on the balance of outstanding T-bills, on the last business day of each month, excluding issues placed on the international financial market. - Management commission ranges from 0.25 percent and 1.0 percent a year on the balance of the assets in trust funds. ### Fiscal relations between branches of government and budget authority - Timeline and procedural rules: - MINFIN must submit draft budget to congress at least 120 days before the fiscal year. - Congress must approve, amend, or reject the draft no later than 30 days prior to the start of the fiscal year (November 30). - If not approved, the prior year’s budget in effect on December 31, modified by congress, takes effect. - Legislative powers and examples of amendments: - Congress has unlimited power to amend the draft budget and has frequently modified aggregate income, expenditure, and fiscal balance; in some years, congress increased expenditure by as much as 20 percent. - Historical examples: - 2001: congress reduced income, expenditure, and the deficit in the draft 2001 budget by 7.8 percent, 9.1 percent, and 11.0 percent respectively; in the same year it approved expenditure increases of approximately 11.9 percent vis-à-vis the initially approved amounts. - 2002: cuts of 4.9 percent, 8.5 percent and 30 percent (income, expenditure, deficit respectively). - 2003 (election year): expenditure raised by 9.4 percent, entailing increasing the proposed deficit by approximately 70 percent. - Draft 2004 budget was not approved; draft 2005 had revenues increased in 1 percent, expenditures in 2 percent and the deficit in 8.6 percent. - President has veto power; congress may override with two-thirds majority; veto has never been exercised in practice. - Executive amendment authority and practice: - Articles 238 and 240 of the Constitution and Article 32 of the LOP regulate inter- and intra-institutional amendments. - Article 32 of the LOP authorizes the executive to make budget amendments, including inter-institutional transfers, provided they do not affect the ceiling approved by congress. - Frequent executive amendments mean the approved budget has become less of a benchmark for public policies. ### Fiscal relations among different levels of government and municipal finances - Municipal competencies (Municipal Code Decree No. 12–2002; Decentralization Law Decree 14–2002): - Management of pre-school and primary education, literacy and bilingual education programs; regulation and provision of municipal public utilities; construction and maintenance of urban streets; licensing of public construction works; the police; and environmental management. - Decentralization Law contemplates reassigning health and social work functions to municipalities (Article 7) without timetable or amounts. - Municipal transfers and revenue sources: - Municipalities receive transfers from: - constitutional contribution equivalent to 10 percent of the state’s general ordinary revenue; - 1.5 percentage points of the VAT rate; - a percentage of vehicle tax revenue; - Q 0.20 of revenue from the tax on each gallon of gasoline; - a percentage of the real estate tax (Impuesto Único sobre Inmuebles—IUSI). - Allocation criteria for the first four sources: 25 percent shared equally; 25 percent in proportion to population; 25 percent in proportion to ordinary income per capita; 15 percent in proportion to number of villages and hamlets; 10 percent in inverse proportion to ordinary income per capita. - The first four sources have accounted for approximately 1.2 percent of GDP in recent years. - Fiscal issues at municipal level: - Distribution criteria reduce incentives for municipalities to increase their tax effort and depend on municipal-reported own revenues that are not systematically verified. - Criteria can produce unpredictable changes and high volatility in transfers. - Municipalities do not have tax autonomy; tax structures are obsolete; many municipal taxes date from over 25 years ago. - Municipal Tax Code has not been approved. ### Legal and administrative framework for budget management and tax administration - Budget legal framework: - Constitution regulates principles: legality, universality, unity, publication, non-earmarking of revenue, gross budget, and annual budget principles; provides for an LOP to regulate the budget system and determines minimum required content. - LOP regulates budget, accounting, treasury, and public credit systems; no text specifies required PGIEE coverage or detailed content/coverage of the multiyear budget despite Article 8 requiring preparation of a multiyear budget. - Obligations to publish PGIEE regulations and decentralized/autonomous agencies’ regulations in the Diario Oficial exist, but consolidated budgets and outturn reports for the public sector are not developed and not complied with. - Budget coordination and extrabudgetary activities: - Many institutions that should be part of central government per IMF GFSM definition are not included in the regular budget process. - Part of the budget is channeled through funds and trust fund mechanisms for which no reports are produced; use of funds and trusts reduces transparency and increases treasury cash management costs. - Grants from bilateral agencies are sometimes initially not reflected in the budget and later regularized. ### Tax legislation, tax expenditures, and tax administration (summary) - Legal framework and instability: - Procedural and penalizing regime set in the Tax Code (Decree No. 6–91); each tax is governed by a specific decree; no unified compilation. - Tax reform proposals over seven years aimed at 12 percent of GDP tax effort; several proposals declared unconstitutional causing instability. - Example: Decree No. 03–04 suspended nine articles and required amendments to 14 articles. - Tax exemptions and expenditures: - Personal income tax deduction lump sum Q 36,000; other exemptions include social security contributions, Christmas bonuses, bonus 14, educational establishments, export processing zones. - VAT exemptions include exports and sales of food in cantonal markets for under Q 100. - No public information on individual taxpayer exemptions. - Tax expenditures reported since 2003; estimated at Q 29,537 million (equivalent to 12.7 percent of GDP) for 2005 using the static foregone fiscal revenue method; estimates made by the SAT. - Tax administration and taxpayers’ rights: - SAT is a decentralized institution with autonomy and uses a single taxpayer identification number (NIT). - Taxpayers’ rights include hearings, means of proof (Article 142), appeals, and judicial recourse; administrative timelines specified (30 days for adjustments hearing, 10 days for penalties, 10 business days for appeal, 3 business days for petition to higher authority, 30 days for authority resolution). - Civil service, anti-corruption, and governance gaps: - Law on the Civil Service (Decree 1748–68) exists but does not apply to many institutions with own laws. - Law on Integrity and Responsibilities of Civil Servants (Decree No. 89–2002) requires sworn asset/debt declarations; Deputy comptroller’s office of integrity in the CGC verifies compliance. - Significant legal gaps: criminal law does not define illicit enrichment nor contemplate influence-peddling and international bribery. ### Public availability of fiscal information, budget coverage, and fiscal risks - Reporting and transparency: - Volume of fiscal information made public has increased; reporting established relates mainly to budget execution every four months and at year-end. - PGIEE and outturn are public documents (Constitution Article 237); executive must send analytical report on budget execution every four months (Article 183.w). - MINFIN fiscal transparency page and SIAF website publish fiscal information regularly. - Guatemala is taking steps to participate in the GDDS; complies with most recommendations except government finance statistics coverage (does not encompass consolidated central government or general government) and does not compile monthly output indices. - Budget scope and contingent liabilities: - Budget documents cover only the executive branch of central government; no consolidated general government information or inclusion of own resources of decentralized, autonomous, and social security agencies. - Draft 2005 budget presents fiscal information for three prior and two subsequent years; multiyear budget shows projections for 2005 through 2007. - Budget documents do not contain information on contingent liabilities; no requirement to remit a report on these liabilities with the budget. - Contingent liabilities identified by the mission: debt with national government guarantees approximately US$100 million; CHN’s capitalization needs equivalent to US$80 million; FONTIERRAS delinquent portfolio totals almost US$14 million. - Quasi-fiscal activities by public enterprises (especially INDE) may be important but are not reported and government does not compensate the enterprises for these activities. ### Debt data publication and government financial assets - Debt data publication and coverage: - MINFIN and BANGUAT publish public debt information on their websites; data are kept up to date. - Data provided are gross figures, distinguishing domestic and external debt and between securitized debt and loans; information provided on debt service. - Debt and deficit data are reconciled; reports are monthly. - Municipalities are required by Municipal Code (Article 115) to submit monthly debt data to MINFIN, but in practice this obligation is not met. - Decentralized and autonomous agencies do not provide MINFIN with information on their operations despite LOP (Article 62). - Details and limitations: - External debt is reported by lending institution, debtor, contractual terms, and in dollars (converting other currencies to U.S. dollar); external public debt guaranteed by the government is also reported. - Domestic debt is only partially recorded (includes only securities issued—treasury bills and bonds) and is reported by instrument and maturity. - No TSA exists; the treasury account in BANGUAT does not include resources of decentralized and autonomous agencies nor those of state-established trusts, preventing efficient liquidity management. - Government financial assets and equity holdings: - No information published on the government’s financial assets. - No figures compiled on the government’s equity shares in private enterprises; MINFIN has only book values and that information is not published. - Government is a shareholder in EEGSA, EXMIBAL, and BANRURAL; INDE owns stock in ORSUNIL. - Information on other government financial assets published only annually in aggregate in the government balance sheet. ### Budget preparation, macro framework, and medium-term planning - Budget calendar and classification: - Institutions prepare preliminary draft budgets and present them to MINFIN by June 15 each year. - Executive must submit draft budget to congress no fewer than 120 days prior to the fiscal year (by September 2); congress must act by November 30. - Decentralized agencies submit draft budgets for executive approval by December 15; autonomous agencies approve own budgets and submit them for information and incorporation. - Budgets classified by institution, expenditure item, economic classification, purposes and functions, sources of financing, and geographical location; economic classification consistent with the 1986 edition of IMF’s GFSM. - Macroeconomic framework transparency: - Budget preamble provides analysis of scenarios and brief explanations of macroeconomic projections provided by BANGUAT, which does not publish methodologies or quantitative model parameters. - Information insufficient to form an opinion on technical quality of fiscal forecasts, though forecasts have generally been close to outcomes. - Medium-term budgeting: - Since 2003, multiyear budget included in documents; 2005 budget included a 2005–07 exercise. - Multiyear exercise not based on explicit numerical medium-term fiscal objectives; projections largely based on availability of current revenue and lack sensitivity analysis. - For draft 2006 budget, changes require public entities to undertake multiyear expenditure programming (2006–08) consistent with medium-term objectives. ### Budget execution, accounting, internal controls, and financial management systems - Accounting and SIAF/SICOIN: - Central government accounting done through Integrated Accounting System (SICOIN), part of SIAF, comprising budget, accounting, treasury, and public credit modules. - LOP requires recording execution at commitment, accrual, and payment stages; in practice controls are exercised mainly over payments and accrual accounting operates with cash-basis criteria. - Payment quotas set by MINFIN allow commitments and accruals to be recorded simultaneously, leading to non-recording of floating debt and payment arrears. - Coverage and systems limitations: - SIAF coverage incomplete: 22 out of 37 decentralized and autonomous agencies use SIAF. - No adequate public debt risk management system; absence of a TSA and legal restrictions on BANGUAT’s treasury account coverage prevent efficient liquidity management. - Internal audit and control: - LOP makes highest authority responsible for internal control; each organization must have an internal audit unit (UDAI). - UDAI reports are not made public; although established in almost all institutions, some are not yet effective and lack autonomy. ### Public procurement transparency and exceptions - Procurement framework: - Law on Government Contracting applies broadly; four contracting systems regulated: - public bidding: contracts over Q 900,000 (requires publication in Official Gazzette and a large newspaper); - price quotation: contracts less than Q 900,000 but more than Q 10,000 (at least three pro forma); - direct purchase: contracts less than Q 10,000; - open contract system: purchases without bidding from qualified suppliers after price comparisons. - Existence of four systems encourages fragmentation of larger contracts. - Government Resolution 80–2004 amended regulations to require prior publication and arrangement in GUATECOMPRAS of notices, invitations to bid and related information; information must be made public through www.guatecompras.gt. - Exceptions and limited coverage: - Law not applied in some enterprises/institutions governed by laws establishing their own contracting systems. - Article 44 establishes exceptions to bidding obligation (safeguard borders, states of emergency, goods for dependencies abroad, arms purchases, purchases of real estate, provision of individual professional services, and others). - Exemptions from bidding, but not from price quotations, apply to studies, designs, supervision of technical works and services, scientific/artistic/literary works, electoral campaign events, and similar cases. ### Civil service system, staffing, and reform needs - Fragmentation and discretionary practices: - Article 108 of the Constitution subjects state employment relations to the Law on the Civil Service except for agencies with special laws. - Many institutions have their own civil service laws; hiring requirements usually not publicly disclosed; selection procedures discretionary. - Compensation dominated by seniority and discretionary criteria; lack of performance evaluations; civil service post assessment system not applied since 1989, producing salary differentials between 100 and 200 percent for similar jobs. - No single government source reports actual number of government employees; ONSEC indicated "172,895 positions for the central government and 2,665 for the decentralized entities administered by it." - Authorities are preparing a draft law to reform the current system. ### Accounting, reporting, timeliness, and reliability of fiscal data - SICOIN reporting and legislative interaction: - SICOIN can produce immediate intra-annual reports on central government budget execution (excluding some decentralized and autonomous agencies); decentralized/autonomous agencies using SICOIN can report their outturn. - President must send congress an analytical report on budget execution every four months (Article 183.w); ministries must deliver activity and budget execution reports in February each year. - Decentralized and autonomous agencies report every four months; budget outturns and financial statements must be sent to congress by March 31 with a copy to MINFIN. - No obligation to publish these reports, though MINFIN publishes central government budget execution information on its website; the legislative branch does not debate these reports. - Timeliness of audited accounts and reconciliation: - MINFIN prepares PGIEE outturn and closing of fiscal year accounts "within the first three months of each year" and sends it to the CGC. - CGC issues an opinion "within two months" and a report "within 150 days of the close of the fiscal year"; audited accounts available "within five months after the end of the fiscal year." - SIAF accrual accounting used by executive branch and some decentralized/autonomous agencies; remaining institutions use prior systems. Daily reconciliation of budgetary and accounting data occurs through SIAF but does not cover autonomous and decentralized agencies’ resources. - Performance-based budgeting: - Performance-based budgeting approach introduced with preparation of the 2006 budget; budget rules amended to include strategic institutional objectives, operational objectives, and targets for expenditure programs linking financial inputs with output indicators. ### External oversight: CGC and INE capacities and limitations - Comptroller General of the Accounts (CGC): - CGC independent, technical, decentralized; approves its own budget; selection via collegial applications committee submitting six candidates to congress. - Comptroller may be dismissed only by congress for negligence, crime, or unsuitability; may not be re-elected. - CGC has jurisdiction over whole public sector; Organic Law (Decree No. 31–2002) expanded audit functions. - CGC staff approximately "700 people, 180 of whom have degrees." - CGC faces limited human resources, partial audit coverage, limited capacity to use SIAF effectively, limited capacity to investigate illicit enrichment, and audit findings are published "not in detail" with no strict monitoring of recommendations. - SIAF-SAG expected to increase audit efficiency, contingent on technical capacity improvements. - National Institute of Statistics (INE): - INE granted technical independence but lacks financial autonomy and board composition may impair autonomy. - INE does not compile fiscal statistics (MINFIN does), National Accounts (BANGUAT does), nor monthly output figures; human and physical resources insufficient even to produce inflation index. ### IMF staff comments: progress and remaining gaps - Positive developments highlighted: - Regulatory changes clarified intergovernmental fiscal relations, strengthened banking supervision and capital of financial institutions, reduced risk of fiscal contingencies, and promoted CGC strengthening. - Multiyear budgets prepared and linked to the annual budget process for the 2006 draft budget. - Rigorous estimates of tax expenditures made available on MINFIN and SAT web pages. - Well defined accounting system exists; adoption of SIAF across executive branch and many decentralized/autonomous agencies modernized procedures. - Adoption of SIAF-MUNI by 36 municipalities in 2004 and almost 100 in 2005, and SIAFITO-MUNI in almost all municipalities, will improve municipal resource management and national monitoring. - Development of SIAF-SAG and obligatory adoption of GUATECOMPRAS will facilitate external audits and contracting transparency. - Remaining core gaps (summary): - Guatemala still does not meet core requirements of the Code on fiscal transparency in several areas, notably in government definition and consolidation, complete fiscal reporting, contingent liabilities reporting, multiyear budget quality, separation of budget amendment powers between branches, reduction of extrabudgetary funds and trusts, clearer subnational finance rules, and stronger external controls. ### Core recommended reforms (ordered by priority) - Government definition and consolidation: - Adopt a government definition conforming to international standards and broaden budget and reporting coverage accordingly. - PGIEE should cover all fiscal activity of the central government; budget documents should consolidate all institutional budgets of the central government. - Periodic budget execution reports should have the same coverage as the PGIEE. - Implementation of SIAF in all decentralized and autonomous agencies should permit consolidation. - Accounting and reporting improvements: - Improve accounting practices by recording commitment, accrual, and payment when they occur to calculate floating debt. - Increase budget documentation content: complete information on consolidated public sector, identification and quantification of contingencies and quasi-fiscal activities, parameters and assumptions used in macrofiscal models, complete fiscal risk reports, fiscal sustainability analysis, and statement of medium-term fiscal policy objectives. - Multiyear budgeting and performance: - Improve the quality of the multiyear budgeting exercise and continue fine-tuning performance-based budgeting changes introduced for 2006. - Executive-legislative budget relations: - Clarify separation of functions and responsibilities between executive and legislative branches in connection with the budget; clearly demarcate Congress’s powers to amend budgets. - Extrabudgetary mechanisms and investment coordination: - Gradually reduce use of social funds and trusts for resource management. - Distinguish clearly spheres of competence of central government, development councils, and municipalities regarding public investment selection. - Consolidate and strengthen the national public investment system (SNIP) with complete coverage and medium-term information; improve strategic planning. - Governance, protections, and subnational finance: - Protect the superintendency of tax administration from political interference by granting job stability to principal executives and specifying dismissal grounds. - Improve monitoring of subnational governments’ finances and produce consolidated general government reports; enforce municipal debt authorization and reporting using the municipal code and SIAF-MUNI/SIAFITO-MUNI information. - Establish clear and consistent criteria for assigning transfers to municipalities based on needs and tax capacity and disclose calculation information and results. - Procurement, civil service, and external control strengthening: - Increase transparency in government contracting by reducing exemptions from contracting law and use of GUATECOMPRAS. - Submit a new draft civil service law to congress to replace regulations since 1968 and establish transparent selection and compensation criteria based on merit and capacity. - Strengthen external controls through enhanced training in use of information systems and stricter monitoring of audit recommendations. - Legal and implementation considerations: - Some recommendations require legal changes and constitutional amendments; many require changes to fiscal management processes. *Source: Excerpt from IMF country report content unit _cr0609.* ### EXECUTIVE SUMMARY ### _cr0609 - EXECUTIVE SUMMARY ### Overview - This report provides an assessment of fiscal transparency practices in Guatemala in light of the IMF Code of Good Practices on Fiscal Transparency, based on: - discussions with the authorities and other organizations; - the authorities’ response to the IMF fiscal transparency questionnaire; and - other sources of information. - The IMF Manual on Fiscal Transparency is referenced for further explanation of terms and concepts. ### Progress in fiscal transparency (key developments) - Adoption and rollout of financial management and procurement systems: - Integrated Financial Administration System (SIAF) adopted by all institutions in the Executive Branch and more than half of decentralized and autonomous agencies. - Municipal version SIAF-MUNI introduced in 36 municipalities by 2004, with a plan to extend coverage to almost 100 municipalities by end-2005. - SIAFITO-MUNI used in almost all municipalities. - Government Audit System (SIAF-SAG) developed by the Office of the Comptroller General of Accounts (CGC). - Obligatory adoption of the Public Sector Procurement and Contracting Information System (GUATECOMPRAS). - Expected outcomes from systems adoption: - Modernization of budget, treasury, and accounting procedures. - Improved management and control of public funds. - Preparation of timely budget execution reports. - Facilitation of external audits and increased transparency of public procurement procedures. - Information availability and regulatory changes: - Annual budget and MINFIN website provide increasingly complete information on central government (executive branch) activities, including information on tax expenditure, indebtedness, and multiyear budget scenarios. - Recent regulatory changes include: Municipal Code, Organic Law of the Bank of Guatemala, Law on Banks and Financial Groups, Financial Supervision Law, Law on Free Foreign Exchange Trading, and the Law governing the CGC. - These changes have clarified intergovernmental fiscal relations, relations between the government and the central bank, strengthened banking supervision and capital of financial institutions, reduced fiscal contingency risks, and redefined CGC structure and functions. ### Main areas needing improvement (mission’s principal recommendations) - Institutional and reporting coverage: - Adopt an institutional classification of public entities conforming to international standards and adapt budget and reporting coverage to match that classification. - Prepare consolidated public sector budgets and accounts. - Budgeting and performance: - Improve multiyear budgeting, tie budgets to performance indicators and goals, and link multiyear frameworks to the annual budget preparation process (practice initiated for the 2006 budget). - Contingencies and quasi-fiscal activities: - Identify, quantify, and report contingencies and quasi-fiscal activities. - Budget amendment powers and expenditure management: - Clarify the powers to amend budgets between the executive and legislative branches. - Gradually reduce the use of funds and fiduciary instruments for expenditure management, which detract from budget transparency. - Public procurement and municipal governance: - Reduce the number of activities and entities exempted from the law on public procurement and the use of GUATECOMPRAS. - Precisely demarcate spheres of competence of the central government, development councils, and municipalities on investment prioritization. - Establish clear and easily verifiable criteria for distributing transfers to municipalities. - Create more robust enforcement mechanisms for reporting of budgets and municipal debt. - Tax administration and external control: - Guarantee legal protection of the tax administration from political interference. - Strengthen external control through enhanced training in the use of information systems, wider dissemination of findings, and stricter monitoring of audit recommendations. ### Definition of government activities and institutional coverage - Legal definition: - By law, Guatemala’s public sector comprises the central government, nonfinancial public enterprises, public financial institutions, and local governments. - Central government composition and budgetary practice: - The central government comprises: central administration, decentralized nonbusiness agencies, autonomous nonbusiness agencies, and social security institutions. - The central administration includes the legislative branch (Congress of the Republic), the judicial branch (headed by the Supreme Court of Justice), constitutional bodies, and the executive branch (President and Vice President) with 6 secretariats, 17 support agencies, and 13 ministries. - The GFSM concept of central government coincides with the central administration in the Manual of Budget Classifications for the Public Sector of Guatemala (MCPSP). - From the standpoint of budget and fiscal statistics, the relevant government concept corresponds to the executive branch of central government. - Budget approval and submission practices: - Congress approves the budget of central government institutions comprising the executive branch only. - Legislative and judicial branches and autonomous agencies prepare their own draft budgets and approve them per their organic laws. - Decentralized agencies must submit draft budgets via MINFIN for executive consideration; the executive must issue government resolutions approving them by December 15 prior to the fiscal year (Article 40, Organic Budget Law). - Constitution (Articles 134 and 237) and the LOP require all these agencies (and municipalities) to submit their budgets to the executive branch and to Congress for information and inclusion in the PGIEE. - Municipalities often do not comply with submission requirements; municipal governments approve budgets at end-December and only some submit them to the executive at the start of the fiscal year. - Financial dependence and governance of agencies: - Decentralized and autonomous agencies do not operate on the market; they perform government functions and are financed almost entirely by central government grants. - Boards are appointed by the president or ministers; autonomy is often functional rather than financial. - Given these characteristics, the report finds no justification for excluding decentralized and autonomous agencies from the regular budget process. - Debt contracting and guarantees: - Decentralized and autonomous agencies may contract debt within individual ceilings established by MINFIN; in some cases, the national government guaranteed their debt. ### Public enterprises: scope, fiscal risks, and monitoring - Current public enterprise holdings: - The government currently owns nine nonfinancial public enterprises and stocks in two nonfinancial private enterprises; it also owns four financial institutions, two of which are banks and two nonbank institutions—one of which is in the process of liquidation. - Post-privatization landscape: - Privatizations in the second half of the 1990s substantially reduced the scope of the government’s enterprise sector. - Financial performance and fiscal risks: - With the exception of port authorities and INDE, the remaining seven nonfinancial enterprises are small and almost all show losses and require government transfers to operate. - One financial enterprise, CHN, is in financial distress, partly due to forced merger with two undercapitalized financial institutions (in 2002 and 2003). - There is no government entity responsible for monitoring enterprise performance and coordinating policy to meet enterprise needs. - Examples of enterprise statuses and actions: - PROLAC was handed over to a cooperative for management. - FEGUA ceased performing its principal function and administers a concession to the private sector. - ZOLIC lost all its assets. - Quasi-fiscal activities and INDE: - INDE carries major quasi-fiscal activities that have seriously undermined its financial position: - Until 2004 granted electricity rate subsidies for households consuming fewer than 300 kWh per month (required to have a “social rate”); currently subsidy applies for households consuming below 100 kWh per month. - Grants private distribution concessions for works in poor and remote areas without recovering investment costs. - Builds transmission lines to nonprofitable areas and pays for works and electricity provided by other countries in border zones. - During rationing, signed guaranteed electricity purchase contracts with private generating companies at rates currently far above market price. - These subsidies are not offset by central government transfers; government funds rural electrification using proceeds from privatization of distribution companies. ### Earnings transfers and governance of public enterprises - Dividend and profit distribution rules: - Clear rules govern transfers of public enterprise earnings to the government, but they are specific to each enterprise and can be amended by congress. - Profits distribution rules are set forth in each enterprise’s organic law passed by congress and can be changed by congress at will. - Dividend policies are heterogeneous and some amendments reflect political pressures rather than corporate strategy. - Fiscal reporting recommendation: - The report notes that enterprises that pose fiscal risks for the government should be monitored and consolidated in fiscal reports. *EXECUTIVE SUMMARY — _cr0609* ### 7. There is no legal framework to govern privatization. Some privatization processes ### _cr0609 - 7. There is no legal framework to govern privatization. Some privatization processes ### Privatization practices and transparency - The enterprises were privatized using ad hoc mechanisms; in some cases they were sold directly and in others via a public tender. - Public competitive bidding was used to sell the two distribution companies belonging to INDE. - GUATEL’s assets were sold directly in an operation that, like the railroad concession, is not considered transparent. - In the telecommunications sector, there were specific rules for the frequency band auctions. - Social-rate electricity facts: - Average residential consumption is about 100 kWh per month. - 99 percent of residential clients qualified for the social rate. - The subsidy was estimated at around US$60 million a year. - Contract risk note: - In some contracts, INDE took high risks, since they are indexed to the price of oil and to the U.S. dollar. - Distribution of enterprise earnings: - Puerto Quetzal enterprise has rules allowing the government, some municipalities, and the workers to share earnings. - INDE has to reinvest all of them. - GUATEL’s rules do not provide for earnings to be distributed to municipalities. - All distribution rules stipulate earnings be distributed to the workers, for reinvestment, and for the retirement reserve. ### Legal framework and procedures governing the nonfinancial private sector - Governing statutes and decrees cited: - Commercial Code (Decree No. 2–70 of January, 1970). - Law on Banks and Financial Groups (Decree No. 19–2002). - General Law of Electricity (Decree No. 93–96). - General Law of Telecommunications (Decree No. 94–96). - Transportation Law (Decree No. 253). - Foreign Investment Law (Decree No. 9–98). - Hydrocarbons Law (Decree No. 109–83). - Obstacles faced by businesses and investors: - Excessive number of requirements, lack of key information, and difficulty of enforcing contracts owing to the slow pace and unpredictability of the judicial system. - Regulation of public utilities is incomplete and is used to subsidize users. - Consultation and rulemaking: - There is no legal obligation to submit draft private sector regulations to prior hearing procedures. - Interested parties are generally consulted prior to approval. - Business environment metrics and issues: - Time to start a business in Guatemala: 39 days (regional average: 70 days). - Liquidating a business (adjudication of bankruptcy) takes 4 years (regional: 3.7 years). - Noted problems: high notarial costs, lack of guaranteed borrower access to credit-record data, lengthy and numerous court procedures, lack of publication of financial data and ownership, no obligation for external audit, labor legislation from 1961 with rigidities leading to high dismissal costs and strong job stability protections. ### Government relations with the central bank (BANGUAT) and financial public sector - Institutional arrangements: - Determination of monetary, exchange, and credit policy is the responsibility of the Monetary Board. - The Monetary Board is chaired by the President of Bank of Guatemala and comprises: the president of the bank (appointed by the President of the Republic), the ministers of public finance, economy, and agriculture, livestock and food, one member elected by the Congress of the Republic, one member appointed by the business associations, one representative of the private banks, and one member elected by the Higher Council of the University of San Carlos de Guatemala (Article 132 of the Constitution). - The chair is appointed by the President of the Republic for a four-year term; terms overlap with two successive government terms. The chair reports to congress twice a year. - Legal prohibitions and practices: - According to the constitution, BANGUAT is not allowed to finance the government. - In practice, BANGUAT has not financed government operations, but it engages in other quasi-fiscal activities and does not pay interest on government deposits. - BANGUAT collects fees for fiduciary services and as financial agent of the state but does not remunerate the government’s deposits at the bank. - Past quasi-fiscal operations and fiscal implications: - Between 1998 and 2001, BANGUAT provided credits in the amount of Q 4,531 million to banks ultimately placed under government administration; of that amount, BANGUAT has recovered Q 2,476 million. - According to the Organic Law of the Bank of Guatemala (Decree No. 16–2002), the government had to cover losses accumulated through December 2001 by issuing long-term debt instruments (operation not approved by Congress); accumulated losses through 2001 were estimated at Q 16 billion, for which the bank is scheduled to receive an overall 100-year bond. - Net annual shortfalls resulting from monetary and exchange policy in subsequent years were only partially absorbed by the government; net shortfalls of the past three years were, respectively, Q 905.3 million in 2002, 963.7 million in 2003 and 1063.1 million in 2004. - The bank’s executives estimate it needs an additional capital injection of Q 500 million to achieve sound capital adequacy ratios. - Fee structure: - Article 55 of the Organic Law establishes that BANGUAT shall not pay interest on public sector deposits held at the bank. - In return for acting as the state’s financial agent, the bank charges a fee of one quarter of one percent (1/4 of 1 percent) per year on the balance of outstanding T-bills, on the last business day of each month, excluding the equivalent in quetzals of issues placed on the international financial market. - Management commission ranges from 0.25 percent and 1.0 percent a year on the balance of the assets in trust funds. ### Fiscal relations between branches of government and budget authority - Constitutional and procedural timing: - MINFIN must submit the draft budget to congress at least 120 days before the beginning of the fiscal year. - Congress must approve, amend, or reject the draft no later than 30 days prior to the start of the next fiscal year (November 30). - If the budget has not been approved, the budget in effect on December 31 of the prior year, modified or adjusted as required by congress, will again take effect. - Legislative powers and executive constraints: - The legislative branch has unlimited power to amend the draft budget (cuts or increases) and may amend general standards governing execution; powers have frequently been used to modify aggregate income and expenditure figures and the fiscal balance. - In some years, congress increased expenditure by as much as 20 percent. - The president has overall veto power over the budget approved by the legislative branch, but congress may override it with a two-third majority vote of the total number of members; in practice, this veto has never been exercised. - Historical budget manipulation examples: - 2001: Congress reduced income, expenditure, and the deficit in the draft 2001 budget by 7.8 percent, 9.1 percent, and 11.0 percent respectively; in the same year it approved expenditure increases of approximately 11.9 percent vis-à-vis the initially approved amounts. - 2002: Cuts of 4.9 percent, 8.5 percent and 30 percent (income, expenditure, deficit respectively). - 2003 (election year): Expenditure raised by 9.4 percent, entailing increasing the proposed deficit by approximately 70 percent. - Draft 2004 budget was not approved by congress; draft 2005 had revenues increased in 1 percent, expenditures in 2 percent and the deficit in 8.6 percent. - Executive authority on budget amendments: - Articles 238 and 240 of the Constitution and Article 32 of the LOP regulate inter- and intra-institutional amendments. - Article 238.b delegates to the LOP regulation of cases in which funds may be transferred within the total allocated to each agency; item transfers shall be reported immediately to Congress and to the CGC. - Article 32 of the LOP authorizes the executive to make budget amendments, including inter-institutional transfers, provided they do not affect the ceiling approved by congress. - Ministries may make intra-institutional amendments without altering funding sources, transfers between investment programs, or personnel allocations; otherwise MINFIN resolution required. - Inter-institutional transfers require a government resolution (Acuerdo Gubernativa) issued by the President of the Republic and endorsed by the heads of the institutions concerned. - Frequent executive amendments mean the approved budget has become less of a benchmark for public policies. ### Fiscal relations among different levels of government and municipal finances - Municipal competencies: - Municipal Code (Decree No. 12–2002) and Decentralization Law (Decree 14–2002) define municipalities’ roles: (i) management of pre-school and primary education, literacy and bilingual education programs; (ii) regulation and provision of municipal public utilities including drinking water, sewerage, street lighting and cleaning; (iii) construction and maintenance of urban streets; (iv) licensing of public construction works; (v) the police; and (vi) environmental management of the municipality’s natural resources (Title V, Chapter I of the Municipal Code). - General Law of Decentralization (Decree No. 14–2002) contemplates reassigning health and social work functions to municipalities (Article 7) but does not establish a timetable or amounts to be transferred. - Municipal transfers and revenue sources: - Municipalities receive transfers from: - (i) a constitutional contribution, equivalent to 10 percent of the state’s general ordinary revenue; - (ii) 1.5 percentage points of the VAT rate; - (iii) a percentage of vehicle tax revenue; - (iv) Q 0.20 of revenue from the tax on each gallon of gasoline; and - (v) a percentage of the real estate tax (Impuesto Único sobre Inmuebles—IUSI). - Additionally, they receive cofinancing from the social funds and development councils for investment projects. - Criteria in the Municipal Code allocate the first four sources as: (i) 25 percent shared equally among municipalities; (ii) 25 percent in proportion to the population of the municipality; (iii) 25 percent in proportion to ordinary income per capita; (iv) 15 percent in proportion to the number of villages and hamlets; and (v) 10 percent in inverse proportion to ordinary income per capita. - The first four sources have accounted for approximately 1.2 percent of GDP in recent years. - Fiscal issues at municipal level: - Distribution criteria reduce incentives for municipalities to increase their tax effort and depend on municipal-reported own revenues that are not systematically verified. - The criteria can produce unpredictable changes and high volatility in transfers. - Municipalities do not have tax autonomy; tax structures are obsolete with many taxes unlikely to yield much revenue. - Many municipal taxes date from over 25 years ago; problems include weak implementation of IUSI, little use of contributions for improvements, and public utility rates set below cost. - Only the municipal tax on street lighting has been dynamic and covered costs. - The Municipal Tax Code, designed to strengthen capacity to generate own revenues and reduce dependency on central government transfers, has not been approved. ### Legal and administrative framework for budget management and tax administration - Budget legal framework strengths and shortcomings: - The constitution regulates principles: legality, universality, unity, publication, non-earmarking of revenue, gross budget, and annual budget principles; it provides for an LOP to regulate the budget system and determines minimum required content. - The LOP regulates budget, accounting, treasury, and public credit systems, detailed in the regulations. - No text specifies the required PGIEE coverage or the objective, content, and coverage of the multiyear budget despite Article 8 of the LOP requiring preparation of the multiyear budget. - Legal framework includes few provisions on transparency; obligation to publish regulations approving the PGIEE and those of decentralized and autonomous agencies in the Diario Oficial is required, but consolidated budgets and outturn reports for the public sector are not developed and not complied with. - Budget coordination and extrabudgetary activities: - Many institutions that should be part of central government per IMF GFSM definition are not included in the regular budget process (autonomous and decentralized agencies and the legislative and judicial branches). - Part of the budget is channeled through funds and trust fund mechanisms to execute a large part of the funds for which no reports are produced. - Use of funds and trusts reduces transparency, creates rigidities within the budget, and increases cash management costs to the treasury. - Grants from bilateral agencies are sometimes initially not reflected in the budget, spent, and subsequently regularized by amendments. *Source: Excerpt from IMF country report content unit _cr0609 - 7.* ### 19. Tax legislation is complex, comprehensive, and scattered over a wide range of rules ### _cr0609 - 19. Tax legislation is complex, comprehensive, and scattered over a wide range of rules ### Legal framework and instability - Procedural and penalizing regime set forth in the Tax Code (Decree No. 6–91), but each tax is governed by a specific decree; no single rule or regulation compiles them or guarantees consistency. - Tax reform proposals over the past seven years aimed at achieving a tax effort of 12 percent of GDP; several proposals have been declared unconstitutional, forcing alternative proposals and creating regulatory instability. - Example: Decree No. 03–04 (amending the Tax Code on third-party information and means of proof) was challenged, resulting in suspension of nine articles and amendment requirements for 14 articles; former ministers describe a “constitutional padlock” preventing changes to tax regulations. - Sworn tax return mechanism is the general rule; only one case applies a presumed tax-base system. - Jurisprudence is weak: no arrangements exist for tax auditors to establish jurisprudence via committee consultations, leading to differences in interpretation. ### Tax exemptions and tax expenditures - Number and scope of tax exemptions are considerable; cannot be granted on a case-by-case basis. - Major income tax exemptions/deductions include: - Lump sum of Q 36,000 (personal income tax deduction) - Social security contributions - Exemptions on Christmas bonuses, bonus 14, and personal expenses - Educational establishments and government institutions - Export processing zones (empresas maquiladoras) and free trade areas - VAT major exemptions: exports and sales of food in cantonal markets for under Q 100. - No public information on individual taxpayer exemptions. - Tax expenditures have been reported since 2003 in budget documents and on the MINFIN and SAT websites; calculated once a year but methodology is not explained. - Tax expenditures estimated at Q 29,537 million (equivalent to 12.7 percent of GDP) for 2005, using the static foregone fiscal revenue method; estimates made by the SAT. ### Tax administration, institutional structure, and information powers - Powers and limitations to request third-party information and enforce tax arrears are set forth in the Tax Code (Decree No. 6–91). - Treatment of much audit information as confidential hampers collection of tax debts. - Superintendency of Tax Administration (SAT) established as a decentralized institution with functional, economic, technical, and administrative autonomy; own legal status, patrimony, and resources; authority and jurisdiction throughout the national territory; structured according to function. - Single taxpayer identification number (NIT) used by all tax administration units and for all taxes. - SAT workplace regulations (Resolution No. 7–98 of December 1998; Internal Rules of Procedure Resolution No.2–98) include disciplinary code, general principles and policies for issuing regulations, and personnel administration procedures. - Resolution No. 142–2000 issued a code of ethics for public servants in the SAT to foster an institutional culture opposed to corrupt practices. ### Taxpayers’ rights and administrative procedures - Taxpayers’ rights set forth in the Tax Code: right to a hearing to express agreement or disagreement with tax authority adjustments or penalties; right to produce means of proof allowed by law (Article 142); right to appeal for reversal or reconsideration; ultimate right to judicial recourse. - Tax authority must attend queries from persons with a personal and direct interest regarding application of the code and tax laws; replies are not resolutions, are binding only for the concrete case, and must be issued within 60 business days. - Administrative procedure timelines: - For adjustments, taxpayer has a 30-day hearing period (non-extendable) to express agreement/disagreement. - For penalties, the period is 10 days. - Taxpayer may file an appeal for annulment or reconsideration within 10 business days from last notification. - If annulment is denied, taxpayer can petition higher administrative authority within three business days; authority issues a resolution within 30 days. - Final recourse is to the courts. ### Civil service code of conduct and anti-corruption gaps - Law on the Civil Service (Decree 1748–68) establishes obligations and prohibitions, but does not apply to many institutions with their own law. - Constitution includes bans and liabilities (e.g., ban on holding more than one government post, Article 112; civil and criminal liabilities, Article 155). - Law on Integrity and Responsibilities of Civil Servants and Government Employees (Decree No. 89–2002) requires sworn asset/debt declarations on taking and leaving post for officials handling assets or earning a monthly salary above a certain amount; obligation also applies to contractual personnel. - Deputy comptroller’s office of integrity in the CGC verifies compliance and checks veracity of declarations. - Executive branch ethical standards (Government Resolution No. 197 of July 13, 2004) issued recently to align with interamerican convention against corruption and Peace Agreements. - Significant legal gaps: Guatemalan criminal law does not define illicit enrichment, nor does it contemplate influence-peddling and international bribery, impeding the fight against corruption. ### Public availability of fiscal information and budget coverage - Volume of fiscal information made public has increased; reporting established under existing regulations relates mainly to budget execution every four months and at year-end. - Constitution establishes PGIEE and its outturn as public documents (Article 237) and requires the executive branch to send Congress an analytical report on budget execution every four months (Article 183.w). - PGIEE and decentralized/autonomous agencies’ budgets must be published in the Official Gazzette; Law on the CGC requires disclosure of audited agencies and auditors’ findings (Article 9). - Fiscal information accessible via SIAF website and MINFIN website; MINFIN fiscal transparency page publishes fiscal information regularly. - Guatemala is taking steps to participate in the General Data Dissemination System (GDDS); complies with most GDDS recommendations except coverage of government finance statistics (does not encompass consolidated central government or general government) and does not compile monthly output indices. ### Budget scope, multi-year data, contingent liabilities, and quasi-fiscal activities - Budget documents only cover the executive branch of central government; do not provide consolidated general government information or include own resources of decentralized, autonomous, and social security agencies. - Total public expenditure under PGIEE excludes expenditure of decentralized, autonomous, and social security agencies financed with own resources; covers constitutional contributions and legally mandated items; defense expenditure fully reported, though reporting restrictions exist on active service numbers and armament purchased. - For local governments, PGIEE includes only information on national government transfers. - Draft 2005 budget presents fiscal information for three years prior and two subsequent years, with differing degrees of disaggregation; multiyear budget shows projections for 2005 through 2007. - Budget documents do not contain information on contingent liabilities; no requirement to remit a report on these liabilities with the budget. - Contingent liabilities identified include: loan securities granted to municipalities and decentralized/autonomous agencies; fiscal risk from possible bailout/capitalization needs for National Mortgage Bank (CHN); risk attached to FONTIERRAS’ delinquent portfolio; nonexistence of reserves to pay GUATEL’s pension debt or that of San Carlos de Guatemala University; INFOM’s delinquent portfolio; labor and contractual claims on the state. - No official estimate of the value of contingencies; mission obtained figures: debt with national government guarantees approximately US$100 million; CHN’s capitalization needs equivalent to US$80 million; FONTIERRAS delinquent portfolio totals almost US$14 million. - Quasi-fiscal activities by some public enterprises (especially INDE) may be important but are not reported and government does not compensate the enterprises for these activities. *Source: _cr0609 - 19. Tax legislation is complex, comprehensive, and scattered over a wide range of rules* ### 29. Complete data are published on central government debt, but they are not ### _cr0609 - 29. Complete data are published on central government debt, but they are not ### Debt data publication and coverage - Both the MINFIN and BANGUAT publish information on public debt on their websites (www.banguat.gob.gt, and www.transparencia.minfin.gob.gt), and that information is kept up to date. - The data provided are gross figures, distinguishing between domestic and external debt and between securitized debt and loans. - Information is also provided on debt service. - Debt and deficit data are reconciled. - Municipalities are required by the Municipal Code (Article 115) to submit monthly data to the MINFIN on current domestic and external loans and on the amount of debt outstanding, but in practice that obligation is not met. - Decentralized and autonomous agencies do not provide the MINFIN with information on their operations, despite the requirement in the LOP (Article 62). ### Details and limitations in debt reporting - External debt (central government) is reported by lending institution, debtor, contractual terms, and in dollars (by converting loans denominated in other currencies to U.S. dollar). - External public debt in which the government of the republic, through the MINFIN, figures as the guarantor is also reported. - Domestic debt is only partially recorded, as it includes only that contracted by issuing securities (treasury bills and bonds). - Domestic debt is reported by instrument and maturity. - Reports of securitized public debt project future debt servicing obligations; for external public debt, debt servicing projections are calculated but not included in reports. - In all cases, reports are monthly. - No TSA exists; the treasury account in BANGUAT does not include the resources of the decentralized and autonomous agencies, nor those of the trusts established by the state in financial institutions, which prevents efficient liquidity management. ### Government financial assets and equity holdings - No information is published on the government’s financial assets. - No figures are compiled on the government’s equity shares in private enterprises. - The MINFIN has no information on the equity shareholdings as such; only on the book value of the shares. That information is not published. - The government is a shareholder in EEGSA, EXMIBAL, and BANRURAL; INDE owns stock in ORSUNIL. - The stocks of these enterprises are not traded on the stock exchange. - Information on the government’s other financial assets (bonds, and so on) is published only annually in aggregate terms as part of the government balance sheet. ### Budget preparation: process, calendar, and classification - The executive issues budget policies and general guidelines based on the BANGUAT’s estimate of macroeconomic trends. - Institutions prepare preliminary draft budgets and present them to the MINFIN by June 15 of each year. - According to Article 183.j of the Constitution and Article 23 of the LOP, the executive branch, via the MINFIN, must submit the draft budget to congress no fewer than 120 days prior to the start of the fiscal year (by September 2 of each year). - Congress must approve, amend, or reject the draft by no later than 30 days before the start of the following fiscal year (by November 30). - Decentralized agencies submit draft budgets for approval by the executive by December 15 of each year. - Autonomous agencies approve their own budgets and submit them each year to the executive and to congress for their information and incorporation. - Budgets use the following classifications: by institution, by expenditure item; by economic classification, by purposes and functions, by sources of financing; and by geographical location. - The economic classification is consistent with the 1986 edition of the IMF’s GFSM. - Some program expenditures are not adequately disaggregated (example: pre-school education or physical education), limiting measurable activity classification. ### Investment planning and coordination weaknesses - Investment projects included in the budget must be registered in the National Public Investment System (SNIP) and submitted to SEGEPLAN for evaluation if to be included in the Public Investment Program (PIP). - SEGEPLAN does not evaluate all projects it receives. - The SNIP does not include projects developed by funds, by decentralized and autonomous agencies, or international cooperation projects, whose value greatly exceeds that of projects registered in the SNIP. - The PIP may be radically altered by congress, which can modify government priorities. - Annual work plans (POA) are largely formalities and are not based on strategic planning by institutions. - There is no proper coordination between the MINFIN and SEGEPLAN to foresee implications for current (operating and maintenance) expenditure of new investments and investments already under way. ### Macroeconomic framework, forecasts, and transparency - The key indicator for formulating fiscal policy is the central government’s fiscal balance (excluding decentralized and autonomous agencies); the central government’s primary balance and current balance are also periodically calculated. - No fiscal information is produced on the autonomous and decentralized agencies, or for the municipalities. - Budget forecasts and macroeconomic assumptions are clearly set out in the budget documents, but models used to estimate them are merely described without quantitative parameter information. - The budget preamble (Part II) provides analysis of recent economic outlook scenarios and brief explanations of how macroeconomic projections were generated; these projections are provided by BANGUAT, which does not publish information on the methodologies used. - Part VI of the draft law (multiyear budget) mentions independent variables used to make fiscal projections, but no quantitative data are provided on model parameters. - The information provided is insufficient to form an opinion regarding the technical quality of fiscal forecasts, though they have generally been close to actual outcomes. ### Medium-term planning and fiscal risk analysis - Since 2003, a multiyear budget has been included in the budget documents presented to congress. - The 2005 budget included a 2005–07 exercise (Part VI of the draft) covering possible effects on revenue of administrative changes in the SAT and in tax and foreign trade policies, and possible effects of new investments on recurrent operating and maintenance expenditure. - The multiyear exercise is not based on an explicit and numerical definition of medium-term fiscal policy objectives; fiscal objectives are defined generically (maintenance of capital expenditure and public debt levels compatible with the commitments of the Fiscal Pact). - Medium-term sector objectives are not spelled out. - The exercise cannot yet be used as a reference point for the annual budget process and does not contribute to evaluation of fiscal sustainability because almost all components of expenditure were projected on the basis of availability of current revenue. - The exercise does not include a sensitivity analysis of the impact of changes in macroeconomic variables and other fiscal risks on government finance in the short and medium term. - For the draft 2006 budget, changes were introduced so that public entities would undertake multiyear expenditure programming (2006–08) consistent with their medium-term objectives; it is hoped this will remedy weaknesses. ### Fiscal rules and budget content distinctions - The only fiscal rule established by law states that debt may only be contracted to finance investment expenditure. - Other benchmark rules (Peace Agreements and the Fiscal Pact) establish that social expenditure must be an increasing percentage of total expenditure, that tax effort must be 12 percent of GDP, and that public investment must be kept at a minimum of 4 percent of GDP; application of these rules is discretionary and politically dependent. - The budget documents do not distinguish clearly between the costs of programs under way and the costs of new expenditure proposals; new programs and projects are mentioned in explanatory statements, but their costs are not clearly separated from ongoing program costs. ### Budget execution, accounting, and internal controls - Accounting in the central government is done through the Integrated Accounting System (SICOIN), which guarantees internal consistency of entries; SICOIN is the information system of SIAF and comprises four modules: budget, accounting, treasury, and public credit. - The LOP requires the whole public sector to record budget execution at the commitment, accrual, and payment stages; its regulations clearly define commitment and accrual. - In practice, controls are exercised mainly over the payments stage: the MINFIN establishes maximum monthly expenditure quotas for each institution, and institutions habitually record commitment and accrual at the same time. - Accrual accounting thus operates with cash-basis criteria in practice; major payments arrears in recent years are not reflected in the accounts because accruals are registered when a payment authorization is issued. - According to the Budget Execution Programming Manual, the payment quota approved for an agency shall be the maximum accrual amount; commitments may be entered for that amount, which has led to simultaneous recording of accruals and payments and non-recording of floating debt and payment arrears. ### Financial management coordination and coverage of systems - Implementation of SIAF has improved public financial administration (budget, accounting, treasury subsystems), but coverage is incomplete: SIAF comprises 22 out of 37 decentralized and autonomous agencies. - There is no adequate system for managing public debt (a risk management system), short, medium, or long term. - The absence of a TSA and legal restrictions on BANGUAT's treasury account coverage prevent efficient liquidity management. ### Internal audit and control effectiveness - The LOP makes the highest authority in each public sector institution responsible for internal control systems in line with standards established by the CGC. - Each organization must have an internal audit unit (UDAI) to evaluate operations and outcomes after execution and to check internal controls, information reliability, compliance with standards, safekeeping of assets, economic and efficient use of resources, and compliance with objectives. - UDAIs prepare an annual audit schedule, approved by the highest authority and sent to the external control body for coordination. - UDAI reports are forwarded to the highest authority of the audited entity and copied to heads of inspected areas and to the CGC; they are not made public. - Although UDAIs have been established in almost all institutions, some are not yet effective per CGC reports; controls established have proved insufficient in practice. - Units’ dependence on the highest authority in the institution limits their autonomy. ### Public procurement transparency and systems - Public procurement rules are clear and well known; recent changes increased transparency. - The Law on Government Contracting applies to government agencies, decentralized and autonomous institutions, executing units, municipalities and state and municipal public enterprises. - Four contracting systems are regulated: - public bidding: contracts worth over Q 900,000; requires publication in the Official Gazzette and another large-circulation newspaper; - price quotation: contracts worth less than Q 900,000 but more than Q 10,000; requires at least three pro forma; - direct purchase: contracts worth less than Q 10,000; - open contract system: allows purchases without bidding or price quotation from suppliers with open contracts after qualification and price comparisons. - The existence of four systems depending on contract value encourages fragmentation of larger contracts. - The law provides for establishment of a Register of Contracts in the CGC, which is still pending. - Government Resolution 80–2004 amended Article 8 of the regulations to require institutions, prior to procedures defined in law, to publish and arrange in GUATECOMPRAS the notices and invitations to bid and all information related to purchases, sales, and contracting; information must be made public through www.guatecompras.gt. - GUATECOMPRAS enables monitoring of competitive procurement processes and allows government suppliers to ascertain the status of payments pending. *Italic: IMF staff report content unit _cr0609 - 29. Complete data are published on central government debt, but they are not* ### 42. The law provides for important exceptions to the obligation to use bidding and ### _cr0609 - 42. The law provides for important exceptions to the obligation to use bidding and ### Procurement law and exceptions - The Law on Contracting is not applied in some enterprises and institutions "by virtue of the laws that created them, which established their own contracting systems." - Article 44 of the Law establishes exceptions to the obligation to use bidding and price quotation, including: - need to safeguard borders or territorial integrity - states of emergency - goods or services for dependencies abroad - arms purchases - purchases of real estate - provision of individual professional services - other cases - Exemptions from bidding, but not from price quotations, apply to: - studies, designs, and supervision of technical works and services - scientific, artistic, or literary works - electoral campaign events - and so on ### Civil service system: fragmentation and discretionary practices - Constitutional and legal framework: - Article 108 of the Constitution: relations of the state and its decentralized and autonomous agencies with their employees governed by the Law on the Civil Service, "with the exception of those agencies governed by special laws and provisions." - Decree 1748 of May 2, 1968, approving the Law on the Civil Service and its regulations. The Labor Code also applies, on a supplemental basis. - Heterogeneity and exemptions: - "A large number of institutions have their own civil service laws." - Some groups are exempt in institutions governed by the Civil Service Law; in others rules governing appointments do not apply. - Subsequent rules and regulations have been adopted that go beyond and contradict the Framework Law. - Hiring and selection weaknesses: - Hiring requirements are usually not publicly disclosed. - Selection procedures "leave much to the discretion of the contracting party." - Many public institutions lack job profiles or lists of requisites for specific posts. - Law allows exams without candidate presence, assessing skills on the basis of documents; exams are general, not related to specific position. - Compensation and incentives: - Compensation system dominated by seniority and discretionary criteria. - Lack of performance evaluations. - Wage increase policy "designed to give more to lower levels" has "eliminated incentives for good performance and promotion." - Prior notice requirement used to ensure job stability. - Civil service post assessment system has not been applied since 1989, resulting in salary differentials "of between 100 and 200 percent for similar category jobs." - Institutional roles and data weaknesses: - Management split: national civil service office (ONSEC) enforces law; national civil service board promotes improvements and settles claims. - No single government source reports actual number of government employees; available figures refer to authorized posts, not filled positions, and do not include all employee categories. - Public Servants Information System is "incomplete and unreliable" and cannot prevent dual jobs, illegal appointments, or appointments of disqualified persons. - ONSEC indicated "172,895 positions for the central government and 2,665 for the decentralized entities administered by it." - Reform efforts: - Authorities are preparing a draft law to reform the current system. ### Tax administration: internal controls and political vulnerability - Internal audit and controls: - The SAT has an internal audit directorate reporting directly to the superintendent, with an internal audit subdirectorate and financial and operational audit and information systems and research audit departments. - Objective: verify management procedures are carried out in accordance with the Organic Law of the SAT, internal rules, and technical administrative manuals. - Legal protection and political risk: - SAT granted legal status of a decentralized agency, professionally trained staff, and specially earmarked funds "2 percent of all the revenue it collects." - No legal rule guaranteeing job stability for the Superintendent. - Article 27 of the Organic Law of the SAT (Decree No. 1–98): grounds for dismissing the superintendent include acts contrary to the best interests of the SAT, negligence, and failure to achieve collection targets established in annual agreements with the executive. - There have been "three superintendents between 2001 and 2003," and in 2003 the SAT was involved with incidents of corruption. ### Accounting, reporting, and budget execution systems - SICOIN capabilities: - SICOIN can produce immediate intra-annual reports on central government budget execution (excluding some decentralized and autonomous agencies). - Decentralized and autonomous agencies that work with SICOIN can likewise report their budget outturn. - SICOIN is consistent and integrated into the budget classification; financial statements are linked to budget accounts through conversion matrices that perform accounting entries automatically when expenditure is executed (accrued and paid). - SIAF defines phases of expenditure (commitment, accrual, payment) and can provide disaggregated information by revenue and expenditure category. - Reporting and legislative interaction: - Article 183.w of the Constitution: President must send congress, every four months, the analytical report on budget execution. - Each ministry must deliver a report on its activities and budget execution in February of each year. - Decentralized and autonomous agencies report budget execution every four months; their budget outturn and financial statements must be sent to congress by March 31 of each year, with a copy to the MINFIN. - There is no obligation to publish these reports, though MINFIN publishes central government budget execution information on its website. - The legislative branch does not debate these reports. - Timeliness of audited accounts: - MINFIN prepares the PGIEE outturn and closing of fiscal year accounts "within the first three months of each year" and sends it to the CGC. - The CGC issues an opinion "within two months," which it sends to congress for approval or rejection. - The CGC issues its opinion and report within "150 days of the close of the fiscal year." - Audited accounts are available "within five months after the end of the fiscal year." - Coverage and reconciliation gaps: - SIAF accrual accounting is used by the executive branch and some decentralized and autonomous agencies; remaining institutions still use prior accounting systems with different principles and standards. - Budgetary and accounting data are reconciled automatically every day through SIAF, but reconciliation of fiscal data with monetary accounts is restricted to the "common fund" (the treasury account) and does not cover resources of autonomous and decentralized agencies. - Performance-based budgeting: - A performance-based budgeting approach was introduced with preparation of the 2006 budget. - Budget rules amended to include strategic institutional objectives, operational objectives, and targets for expenditure programs to link financial inputs (executed expenditure) with output indicators (goods and services). ### Integrity of data processes and budget reliability - Reliability of budget presented for approval: - "The budget sent by the Executive Branch to the Legislative Branch for approval is not a reliable indicator of actually observed revenue and expenditure." - Powers of both congress and the executive to amend the budget are used extensively, so the approved budget cannot be taken as a good indicator of fiscal policy. - Disclosure of differences and public information: - Differences between budgeted amounts and outturns are disclosed to the public and legislature via reports on execution of the PGIEE, the fiscal transparency portal, and SICOIN reports. - Budget amendments approved by congress are published in the Official Gazette and on congress’s website. - Since 2004 MINFIN website includes information on interinstitutional budgetary transfers approved by the executive branch. - Budget documents do not provide information on previous years comparing the budget submitted with the one approved and with the outturn; they provide information only on expenditure carried out. - Accounting policy statements: - Accounting policy statements are not included in either the budgets or their outturns, "because SIAF’s accounting standards are public." ### External oversight: CGC and INE capacities and limitations - Comptroller General of the Accounts (CGC): - Under the Constitution, the CGC is independent, technical, and decentralized; it approves its own budget. - Selection of the comptroller: collegial system via an applications committee, which submits six candidates to congress for election by absolute majority. - The collegial procedure is intended to depoliticize the position but is "not transparent" and does not guarantee election of the most suitable person. - The comptroller may be dismissed only by congress and for negligence, committing a crime, or unsuitability, and may not be re-elected. - CGC has jurisdiction over the whole public sector and any person, entity, or institution receiving state funds. - Organic Law of the CGC (Decree No. 31–2002) expanded audit functions to include assets, liabilities, revenue, expenditure, management criteria of honesty, effectiveness, transparency, economy, and fairness; safeguarding transparency and promoting modernization of internal audits. - The comptroller must report on activities to congress whenever required and ex officio, twice a year. - CGC capacity constraints: - CGC staff approximately "700 people, 180 of whom have degrees." - Limited human resources lead to partial audit coverage; major institutions may go without in-depth audits for several years. - CGC has limited capacity to use SIAF productively or to investigate illicit enrichment. - Audit findings are published, but "not in detail," and there is no strict monitoring of recommendations. - Fines are imposed for regulatory breaches, but the extent of recovery of lost public funds is unknown. - Introduction of the SIAF-SAG information system expected to increase audit efficiency, contingent on technical capacity improvements at CGC. - Legislative engagement with external audits: - The Legislature does not debate external audit reports in depth. - National Institute of Statistics (INE): - Organic Law grants INE technical independence, but lack of financial autonomy and board composition (representatives of ministries and manufacturing associations) may impair autonomy. - INE does not compile fiscal statistics (MINFIN does), National Accounts (BANGUAT does), nor monthly output figures. - One of INE’s few periodic products is its report on inflation. - Human and physical resources at INE are insufficient even to produce the inflation index. ### IMF staff comments: progress and remaining gaps - Positive developments: - Recent regulatory changes (Municipal Code, Organic Law of the BANGUAT, laws related to financial activities, and the law governing the CGC) clarified intergovernmental fiscal relations, strengthened banking supervision and the capital of financial institutions, reduced risk of fiscal contingencies, and promoted strengthening of the CGC. - Preparation of multiyear budgets, linked for the first time to the annual budget process in the preparation of the 2006 draft budget, is an important step to enhance annual budget quality. - Rigorous estimates of tax expenditures have been made and are made available to the public on MINFIN and SAT web pages. - A well defined accounting system with principles and standards exists, which, if strictly adhered to, would enable timely and reliable fiscal reports. - Adoption of SIAF by all institutions in the executive branch and more than half the decentralized and autonomous agencies has modernized budget, treasury, and accounting procedures and enabled timely budget execution reports. - Adoption of SIAF-MUNI by 36 municipalities in 2004 and almost 100 in 2005, and use of SIAFITO-MUNI in almost all municipalities, will improve municipal resource management and national monitoring. - Development of the SAG by the CGC will facilitate external audits. - Obligatory adoption of GUATECOMPRAS by much of the public sector will increase transparency in contracting processes. - The annual budget and MINFIN website provide increasingly complete information on central government activities, including information on tax expenditures, debt, and multiyear budget scenarios. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 59. However, Guatemala still does not meet the core requirements of the Code on ### 59. However, Guatemala still does not meet the core requirements of the Code on fiscal transparency in several areas. ### Core requirements and recommended reforms (ordered by priority) - Adopt a definition of government that conforms to international standards and broaden budget and reporting coverage in line with that new definition. - Recommendation: With the current institutional structure of the public sector, the general government sector would consist of central government (which corresponds to what the Manual on Budget Classifications now calls “Central Administration”) and the local governments. - Recommendation: The central government would consist of the central administration (which is nowadays referred to as “central government”) and the decentralized agencies (which include the decentralized nonbusiness agencies, the autonomous nonbusiness agencies, and the social security institutions). - In keeping with the new definition, the PGIEE should cover all fiscal activity of the central government, and the budget documents should show a consolidation of all the institutional budgets of the central government. - Recommendation: Periodic budget execution reports should have the same coverage as the PGIEE. - Implementation note: It is hoped that implementation of SIAF in all decentralized and autonomous agencies will permit this consolidation. - Improve accounting practices, recording the different states of expenditure—commitment, accrual, payment—as and when they occur, so that the floating debt can be calculated. - Increase and improve the contents of budget documentation: - Provide more complete information on the fiscal activity of the government and the consolidated public sector. - Identify, quantify, and report contingencies and quasi-fiscal activities. - Report information on the parameters and assumptions used in the macrofiscal models utilized in preparing the budget. - Produce a complete report on fiscal risks, analysis of fiscal sustainability, and a statement on the objectives of medium-term fiscal policy. - Improve the quality of the multiyear budgeting exercise. - Regarding performance-based budgeting, the authorities must continue to fine-tune the changes introduced into the budget preparation rules and system for 2006. - Clarify the separation of functions and responsibilities between the executive and legislative branches in connection with the budget. - Recommendation: Clearly define and demarcate the powers of the Congress of the Republic to amend budgets, since they disturb the whole process of preparing and executing the budget and prevent clear assignment of responsibilities for fiscal matters. - Gradually reduce the use of social funds and trusts for resource management, as they detract from transparency in the budget process and prevent efficient management of liquidity. - Distinguish clearly the specific spheres of competence of the central government, the development councils, and the municipalities regarding public investment selection. - Strengthen external controls by enhanced training in the use of information systems and by stricter monitoring of audit recommendations. - Increase transparency in government contracting: - Reduce the number of activities and entities that are exempt from application of the law on contracting and the use of GUATECOMPRAS. - Submit to congress the new draft civil service law, to replace the regulations in force since 1968, and establish transparent selection and compensation criteria for civil servants, based on merit and capacity. - Consolidate and strengthen the national public investment system and strengthen coordination among the entities responsible for formulating current and capital expenditure budgets. - Recommendation: Build a SNIP with complete coverage and containing medium-term information to serve as supporting material for the multiyear budget. - Recommendation: Improve institutions’ strategic planning exercises. ### Institutional governance, protections, and subnational finance - Protect the superintendency of tax administration from political interference. - Recommendation: Grant job stability to the principal executives and specify more precise grounds for dismissal. - Improve monitoring of subnational governments’ finances and produce reports on the consolidated general government. - Recommendation: Establish mechanisms to enforce municipal debt authorization and reporting obligations using the municipal code and information gathered through SIAF-MUNI and SIAFITO-MUNI, and consolidate with central government information. - Establish clear and consistent criteria for assigning transfers to municipalities: - Recommendation: Base transfers on needs and tax capacity and disclose the information used to calculate them as well as the results obtained. ### Legal and implementation considerations - Legal changes are needed for the implementation of various recommendations; some require constitutional amendments. - Many recommendations only require changes to fiscal management processes. *Source: IMF staff assessment (excerpt)._cr0609 - 59. However, Guatemala still does not meet the core requirements of the Code on* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0609.pdf_