PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE July 26, 2012 Report No.: AB7117 (The report # is automatically generated by IDU and should not be changed) Operation Name Fiscal Space for Greater Opportunities First Programmatic Development Policy Loan Region LATIN AMERICA AND CARIBBEAN Country Guatemala Sector Central government administration (60%); Other social services (40%) Operation ID P131763 Lending Instrument Development Policy Lending Borrower(s) Republic of Guatemala Implementing Agency Directorate of Public Credit, Ministry of Public Finance 8a. Avenida 20-65 Zona 1 Centro Civico Guatemala City Guatemala Tel: 502 2322 8888 ext.11538 Date PID Prepared June 21, 2012 Estimated Date of Appraisal August 13, 2012 Estimated Date of Board September 27, 2012 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Other Decision {Optional} Teams can add more if they wish or delete this row if no other decisions are added Key development issues and rationale for Bank involvement Guatemala has made considerable development progress since the signing of the Peace Accords in 1996. Noteworthy improvements have been achieved with regards to consolidating peace, building democratic institutions, and ensuring political and economic stability. The process of consolidating democratic institutions has recently been strengthened by the peaceful transition to the government of Otto Pérez Molina of the Patriotic Party (Partido Patriota, PP), following the administration of Alvaro Colom of the National Union of Hope (Unión Nacional de la Esperanza, UNE) Party. However, despite these important achievements, poverty and inequality remain high and social indicators remain low compared to other middle income countries. In this context, a long- standing challenge for public policy has been the low level of public revenues and expenditures. Guatemala is among the countries in the region with the lowest tax revenues, and the lowest per capita spending on the social sectors. At around 11 percent of GDP, Guatemala’s tax-to-GDP ratio is well below the Central American average of 13.3 percent, and far lower than the average for all of Latin America (19.2 percent).1 While other countries with low tax-to-GDP ratios have significant non-tax revenue sources, Guatemala does not. As a result, total central government revenues have been below 13 percent of GDP in the past decade. This low level of resources is reflected in the limited public expenditures. The new government has committed itself to an ambitious agenda that aims to address key development challenges facing Guatemala, with a program built around five strategic pillars: (1) democratic security and justice; (2) competitive economic development; (3) productive and social infrastructure for development; (4) social inclusion; and (5) sustainable rural development. The government has also placed strong emphasis on promoting transparency and reducing crime and violence, which are considered to be among the prime obstacles to development in Guatemala. Since taking office, the government has announced three strategic pacts to support the implementation of the five pillars: (i) Fiscal Pact, including tax reforms as well as measures to improve the transparency and quality of public expenditure; (ii) Zero Hunger (Hambre Cero) Pact to reduce chronic malnutrition, emphasizing the first 1000 days of life; and (iii) Security and Justice Pact to tackle the high rates of crime and violence. One of the aims of these pacts is to strengthen the relevant institutions and improve inter-ministerial coordination. Proposed Objective(s) The Program Development Objective of the proposed DPL series is to support the Guatemalan government in creating fiscal space and expanding opportunities for the most vulnerable segments of society. Specifically, the series supports the government in (i) strengthening tax administration and policy; (ii) improving the quality and transparency of public expenditure; and (iii) enhancing the coordination and management of social policy. The proposed DPL is closely linked to the fiscal and the zero hunger pact, and supports two of the five pillars of the government program. Preliminary Description The proposed DPL is expected to be the first in a programmatic series of two operations to support the government's reform agenda in three areas: (i) strengthening tax administration and tax policy; (ii) enhancing the transparency and quality of public expenditure; and (iii) improving the coordination and management of social policy. The first component supports the recently approved package of tax reforms, as well as progress made to improve the legal framework and institutional capacity in the area of international taxation. Together, these reforms are expected to improve tax collections and lead to greater international cooperation on taxation. The second component supports the Government’s efforts to improve the quality and transparency of public expenditure. These reforms are expected to contribute to greater accountability in how public resources are spent, and ultimately help achieve greater efficiency, which would be crucial in assuring that scarce resources achieve 1 OECD (2011). better results. Finally, the third component supports the creation of instruments to better coordinate social programs as well as mechanisms to foster greater consensus on social policies. These measures are designed to improve the effectiveness of social expenditures and thereby achieve better human development outcomes. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts The prior reforms outlined in this document will have different effects on the welfare of households in Guatemala, particularly as a result of tax reform and the improvement in targeting of expenditures. Recent work looking at the impacts of the tax code on revenue generation shows that two of the taxes that most directly affect households are also those estimated to generate the greatest increase in revenues: income tax reform (0.85 percent of GDP increase) and followed by vehicle tax (0.13 percent of GDP increase). Changes in tax rates for salaried workers, however, are not expected to have a strong direct impact on inequality and household welfare. The other component of the tax reform that will most affect households is the change in the small taxpayer rates and conditions of payment. In the area of improving the targeting of expenditures and their results, the proposed operation supports efforts focused on a move to results-based management in general and with specific attention to the improvement of child malnutrition and maternal and infant mortality. Using household survey data, both the ENCOVI 2011 as well as the National Maternal and Infant Health Survey (ENSMI, 2008-09), the team will assess the potential impact that these actions might have on households in the next version of the program document. Environmental Aspects The measures supported under the proposed DPL are not likely to have significant effects on the environment, forests or other natural resources. The change in the taxes on motor vehicles may have a positive impact on emissions and air pollution, assuming that the increase in tax rates and taxable values could provide an incentive for consumers to use private vehicles less frequently. Policy actions in the areas of tax administration, public expenditure and social policy are not likely to have either positive or negative environmental impacts. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 200 Borrower/Recipient IBRD Others (specify) Total 200 Contact point World Bank Contact: Jasmin Chakeri Title: Sr. Country Economist Tel: (202) 458-4882 Fax: (202) 614-1110 Email: jchakeri@worldbank.org Borrower Contact: Mynor Argueta Title: Head of Department, Management and Negotiation of Multilateral Loans Tel: +502-2322-8888 ext. 11538 Email: margueta@minfin.gob.gt For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop