Guatemala continues to progress in important aspects of fiscal policy transparency, according to the International Monetary Fund's (IMF) 2006 Report on Observance of Standards and Code (ROSC) on Fiscal Transparency. However, further improvements are required in order to achieve compliance with the IMF's Code of Good Practices on Fiscal Transparency. Of special importance is the adoption of internationally accepted standards for classifying public entities, the expansion of budget documentation, the redefinition of executive and legislative fiscal functions, and improvements in the evaluation and selection procedures for public investment. The 2006 IMF ROSC also suggested that there should be formal limits to the opportunity to amend the budget, once it has been approved, and called for an expansion of the Integrated Financial Administration System's (SIAF) coverage to include all the entities that comprise the general government. In addition, the IMF called for the establishment of legal protections against political interference in tax administration; the introduction of transparent, merit-based hiring; a reduction of the number of entities and activities that are exempt from the Procurement Law, and the strengthening of the external audit function.

General Overview

The IMF's 2006 ROSC for Fiscal Transparency determined that Guatemala had progressed in fiscal transparency in a number of important ways, but still had much room for improvement. On the plus side, Guatemala has introduced modern fiscal management systems at the national and local level to control and record government transactions. Additional important improvements were the introduction of greater clarity in the relationship between the government and the Central Bank (CBG) and the enhancement of the CBG's autonomy. The Office of the Controller General of Accounts (CGC) has been restructured as well, and a multi-year, performance-based budget framework was introduced. A new automated procurement system, known as GUATECOMPRAS, was introduced to enhance transparency in the public procurement process. Finally, the Ministry of Finance (MoF) website offered greater public access to fiscal information. However, the IMF report also noted that there was a need to classify public entities according to international standards; clarify the relations between the government and the central bank; develop a performance-based multiyear budget; enhance transparency of public procurement procedures; and provide more useful fiscal information on the MoF website.

The 2006 IMF ROSC further observed that Guatemala needed to identify and report any contingencies and quasi-fiscal activities and commit to a gradual reduction of the use of funds and fiduciary instruments for expenditure management. It also had to precisely specify the spheres of competence of the central government, the development councils, and the municipalities with regard to investment prioritization, and it needed to guarantee legal protection of the tax administration from political interference. Guatemala also had to establish clear and easily verifiable criteria for distributing transfers to the municipalities and more effectively enforce budget and debt reporting requirements on municipalities. The ROSC called for an enhanced training program in IT systems for appropriate government staff, closer monitoring of the implementation of audit recommendations, and a greater effort at broad public dissemination of fiscal data at all levels of government.

In 2006, the IMF also published its Article IV Consultations report. Here, the IMF staff noted that the extension of coverage by the Integrated Financial Management System (SIAF) had contributed to greater fiscal transparency, as had the expansion of reporting on public sector procurement activities. The Article IV Consultations report further noted that low public debt and deficits and progress in the structural reform program were directly attributable to the implementation of prudent macroeconomic policy.

According to J. Lavarreda and L. Bolanos, reporting for the International Budget Project's (IBP) 2006 Open Budget Initiative (OBI), Guatemala earned a rating of 46 (out of 100). The Guatemalan government publishes only four of the seven budgetary documents that the IBP considers fundamental: the Executive's Budget Proposal, In-Year reports, Year-End reports, and Auditor's Reports. It does not produce a Citizens' Budget or a Mid-Year Review, and while it does produce a Pre-Budget Statement, this is not made publicly available. Lavarreda and Bolanos note that "citizens require both access to information and opportunities during the budget's considerations to use that information to ensure their informed participation in budget debates."

In 2006 the Economic Commission for Latin America and the Caribbean (ECLAC) reported that tax revenues were improved through modifications to the tax code that reduced evasion rates. This led to a 7% real-term growth rate in tax receipts, even in the face of CAFTA-mandated tax cuts. The 2006 government deficit, initially projected to reach 1.8% of GDP, in fact rose to 2.5%, largely do to unanticipated recovery costs related to Tropical Storm Stan (October 2005). The ECLAC report projected that, for 2007, GDP would grow 5.1%, inflation would fall between 4% and 6%, and the government deficit would be 1.8% of GDP (p. 95).

In a 2007 Public Information Notice (PIN) from the IMF announcing the completion of the 2006 Article IV Consultation with Guatemala, it was noted that, for the first time in several years, inflation had fallen to below Guatemala's target of 6%. The IMF attributed this and other positive indicators to Guatemala's successful implementation of prudent fiscal policy, ongoing reforms in the area of tax administration, and an expansion of the Integrated Financial Management System, as well as the fact that CAFTA-DR came into effect in mid-2006. The PIN noted that Guatemala had recently hosted a technical mission for assistance in moving forward with additional tax reforms aimed at further improving revenues. Guatemala does not subscribe to the IMF's Special Data Dissemination Standard (SDDS), but in 2004 became a subscriber to the General Data Dissemination System (GDDS).

The Principles

Clarity of roles and responsibilities.

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The Guatemalan Constitution defines the government sector as comprising the central government nonfinancial public entities, public financial institutions, and local governments. Under the rubric of central government is found the central administration, decentralized non-commercial entities, autonomous non-commercial agencies, and agencies dedicated to the provision of social services. According to the 2006 IMF ROSC, the definitions of these elements are not yet fully adapted to reflect the definitions employed in the Government Finance Statistics Manual (GFSM).

The respective budgetary roles of congress and the executive branch are set forth in the Constitution. However, the 2006 IMF report notes that the Constitution inadequately addresses the conduct of fiscal policy. By law, the executive branch drafts a budget that is passed on to Congress by the Ministry of Finance 120 days prior to the inception of the subject budget year. Congress then has 90 days to approve, amend, or reject the draft. Should the budget fail to win approval, the prior fiscal year's budget remains in effect, subject to congressional modification. There are no limits to the degree to which Congress may amend the submitted budget. The executive does have veto power over the budget returned by Congress, but this can be overridden by a 2/3ds congressional majority. According to the IMF's 2006 ROSC, this makes accountability for fiscal policy very problematic.

The Guatemalan Constitution and the Organic Budget Law only require congressional approval of the executive branch's budget. Both the legislative and judicial branches draft and approve their own budgets, as do the autonomous and agencies. The decentralized agencies draft their individual budgets, but these must be approved by the executive.

According to the 2006 IMF ROSC, the privatization of government-owned entities, of which there are only a few, is not governed by any legislation. The privatization process is largely non-transparent. The legal underpinning that allocates the roles and duties of government institutions below the central government level are the Municipal Code (Decree No. 12, 2002) and the Decentralization Law (Decree 14, 2002). However, the 2006 ROSC found that "the distribution of transfers to the municipalities under the constitution and other specific laws is based on ambiguous criteria, and the data on own revenues needed to apply them are not systematically verified" (p. 6).

The Guatemalan Constitution addresses the broad principles of the budget process, while the Organic Budget Law provides more specific regulatory guidance. However, the 2006 ROSC notes that nowhere is there to be found a clear statement of the elements of revenues and expenditures that are required to be covered in the budget document. As noted above, definitions employed in the GFSM are not consistently applied in Guatemalan budget documents.

According to the 2006 ROSC, "tax legislation is complex, comprehensive, and scattered over a wide range of rules and regulations" (p. 13). The Law on Civil Service sets forth a clear code of conduct, but it is not consistently enforced, and many institutions are exempt from its provisions. The Guatemalan Constitution provides some guidance for public officials regarding conflicts of interest. Article 112 of the Constitution prohibits a single individual from holding multiple governmental positions, and Article 136 permits government employees to refuse to obey illegal orders. Article 155 establishes the liabilities of government officials and staffers in the course of doing their jobs, which Article 195 does the same for ministerial councils.

Open budget processes

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The 2006 IMF ROSC declared that, in Guatemala, "the budget process is transparent and its presentation is consistent with international standards" (p. 36). The process calls for the executive to use the CBG's estimate of macroeconomic trends to develop its policies and general guidelines, which also form the basis for the various government entities to develop their individual draft budgets. These drafts must be received by the MoF no later than June 15. The ROSC found, however, that the budget makes no provision to include data on the autonomous and decentralized agencies, or information as to amendments that may be added during and following the approval process in congress. In addition, the ROSC noted that investments are inadequately handled. According to the ROSC, "investment projects included in the budget must be registered in the National Public Investment System (SNIP) and submitted to an evaluation by SEGEPLAN if they are to be included in the Public Investment Program (PIP)" (pp. 20-21). However, registration does not necessarily imply evaluation, and not all projects actually registered. For instance, projects carried out by the decentralized and autonomous agencies and projects involving an international cooperative effort are not registered. The ROSC noted that public investments are inadequately prioritized, and that, during the budget process, current and capital expenditures are not coordinated. The ROSC called for the inclusion of most investment projects of the National Public Investment System projects in the budget, and that these projects undergo rigorous evaluation.

According to the 2006 IMF ROSC, "The key indicator for formulating fiscal policy is the central government's fiscal balance, an indicator that is monitored throughout the year" (p. 21). Whereas the macroeconomic assumptions underlying the budget, and forecasts based on the budget, are generally clearly described, the budget document does not provide information on the models used to develop them. Nor does it contain any statement of medium-term objectives or sustainability with regard to fiscal policy. Since 2005 there has been an effort to provide a multiyear budget-projection exercise that attempts to evaluate possible outcomes based on changing variables.

The 2006 IMF ROSC notes that there is only one fiscal rule that is legally mandated. According to this law, "debt may only be contracted to finance investment expenditure" (p. 23). All other fiscal rules are discretionary. Legislation does exist that governs accounting procedures, but its application is inconsistent. The Organic Budget Law establishes accounting procedures for the entire public sector with the intent of maintaining control over the budget at every stage of execution, but the ROSC notes that "in actual practice, the fact that controls are only exercised over the payments stage (the Ministry of Finance establishes maximum monthly expenditure quotas for each institution) has meant that the institutions habitually record commitment and accrual at the same time" (p. 23).

Public financial administration remains poorly handled, although the introduction of the Integrated Financial Administration System (SIAF) has provided some improvement, according to the IMF's 2006 ROSC. The system is not yet fully deployed, however, with only 22 of the 37 decentralized and autonomous agencies participating in it. Internal control of public sector institutions is not optimally effective, despite what appears to be an adequate regulatory framework. The CGC sets the standards for internal controls in the public sector, but the responsibility for applying them rest with the head of individual institutions, each of which must maintain an internal audit unit.

Transparency problems in the public procurement arena have been significantly ameliorated by recent adoption of an automated procurement system, GUATECOMPRAS. The Law on Government Contracting governs procurement practices by the public sector. Recently, competitive bidding has been adopted in some areas of procurement. According to the IMF's 2006 ROSC, this could be extended further, to include more areas of government.

Article 183 of the Guatemalan Constitution requires the president to submit quarterly reports on budget execution to the congress. Individual ministries must submit annual budget reports. The decentralized and autonomous agencies submit both quarterly and annual reports. However, none of these documents are subject to congressional debate, nor need they be published. However, according to the IMF's 2006 ROSC, the MoF has made the central government's budget reports available on its website.

Public availability of information.

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The 2006 IMF ROSC noted that "the volume of fiscal information made public has increased" (p. 16). The Guatemalan Constitution requires that quarterly budget execution reports be filed by the executive with congress, in addition to an end-of-year report. Similar quarterly and end-of-year reports are provided to congress by the decentralized and autonomous agencies. Beginning in 2005, the budget document also included historical and projected data. Thus the 2005 budget contained information for the period from 2002 through 2007. The IMF's 2006 report notes that "the general explanatory statement for the draft 2005 budget... compares the disaggregated budget outturn figures for the central administration in 2002 and 2003, showing the differences in absolute amounts and as a percentage of GDP" (p. 18). Missing from the budget is data on contingent liabilities. Complete debt data is available only for the central government, not for the lower levels of government or for the decentralized or autonomous agencies. The government does not provide data on financial assets. Guatemala does not yet subscribe to the IMF's SDDS, but in December 2004 subscribed to the GDDS.

J. Lavarreda and L. Bolanos, who compiled the 2006 Open Budget Index, rated Guatemala at only 46 percent in its provision of budget data to the public. They found that the Guatemalan government publishes only four of the seven budgetary documents that the IBP considers fundamental: the Executive's Budget Proposal, In-Year reports, Year-End reports, and Auditor's Reports. It does not produce a Citizens' Budget nor a Mid-Year Review, and while it does produce a Pre-Budget Statement, this is not made publicly available. Lavarreda and Bolanos note that "citizens require both access to information and opportunities during the budget's considerations to use that information to ensure their informed participation in budget debates."

Independent assurances of integrity.

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The Guatemalan Congress and the executive branch have broad powers to amend the budget, both during and after the approval process. The IMF's 2006 ROSC found that this power is used so extensively that the actual budget document is a poor indicator of the fiscal policy that is ultimately followed. Reports on the execution of the budget include statements of the difference between budget allocations and actual outturns, making this information available to both the public and the congress. Budget reports are provided that offer a comparison of the original approved budget and the ultimate, amended form. Congress publishes its amendments on its website and in the Official Gazette. Budget execution reports are also produced by the Integrated Budget System The MoF offers data on its website pertaining to budget transfers across institutions carried out with the approval of the executive branch. The IMF's 2006 ROSC notes that there is no prior-year comparative data on discrepancies between the approved budget and outturns. Historical data is limited to actual expenditures.

According to the IMF's 2006 ROSC, neither the approved budget nor later documents include a policy statement regarding the accounting standards and methods employed. This is justified by the fact that the standards of the SIAF are publicly available. The ROSC noted a shortcoming in the reconciliations process, in that not all government accounts are covered. Although daily reconciliations are carried out on budget and accounting data, this procedure is limited to the treasury account, and is exclusive of the accounts of the autonomous and decentralized agencies.

External audits are governed by the Guatemalan Constitution, which stipulates that the process is independent of the executive. All public sector accounts are subject to external audit. The CGC is constitutionally established as the agency responsible for the audit function, and it is responsible for establishing its own budget. Congress selects the Comptroller from a roster of six candidates submitted by an applications committee. However, the IMF's 2006 ROSC cautions that there is no transparency to the nominations process and the standards by which candidates are nominated are not publicly disclosed. The ROSC also notes that the professional staff of the CGC is inadequate to successfully complete its tasks. Several years may go by without a complete audit of major governmental institutions. While audit reports are published, they are scant in the details they offer. The CGC has not got the capacity to fully exploit the potential of the SIAF. While it has the authority to levy fines, there is no effective means of monitoring this activity. The IMF's 2006 ROSC expressed the hope that the expansion of the SIAF will alleviate these problems.

The National Institute of Statistics (INS) is intended to be independent of the national government, but the IMF's 2006 ROSC notes that this is not legally guaranteed, and it lacks financial autonomy. Further hindering its independence is the composition of its board of directors, all of whom are drawn from either government ministries or industrial organizations. The actual compilation of fiscal statistics is done by the MoF, not the INS, nor does the Institute compile the national accounts, which is the task of the CBG.