Interview with Guatemala’s Minister of Finance, Julio Hector Estrada

November 7, 2017

We last interviewed you in 2016; what has the Ministry achieved since then?

Ministry of Public Finance: Yes, we closed the year with some very important gains. For example, last year was the first in a long-time that Guatemala’s Ministry of Public Finances managed to reach its tax collection targets. That was a huge achievement considering the chaos that had enveloped the SAT [Guatemala’s version of HMRC]. We were also able to secure the international financing that we need, placing bonds at record low interest rates, which was another great plus for the country.

Another big initiative was the open budgeting process, which was launched last year. It has been modified slightly by Congress, so it hasn’t been smooth sailing, but the important thing is that we are bringing some much-needed transparency to public spending. Of course we still have huge challenges in this area because the state needs to do a much better job in providing services to society in key areas such as healthcare, security and education.

But the fact that the large ratings agencies, like Moody’s are maintaining their positive country ratings for Guatemala shows that we have maintained macroeconomic stability. Indeed one of our main challenges is that the currency is too strong, which hurts some exporters. That strength is driven by ever-growing remittances, which have jumped by 16.5% in a year as Guatemalans in the USA have reacted to some of the anti-immigration rhetoric coming from that country.

Many Government departments fail to spend their allocated budgets; how can that be fixed?

MoPF: Part of the problem has already been solved. We have spent the last year improving the legal processes that govern public tenders and purchases. That revision led to delays in the short term but now the new processes are ready they will boost the efficiency of how the state allocates its spending. In 2018 you will see a lot of public investment projects, especially in road and transport.

Another problem that we have had is that the anti-corruption drive meant that many public officials were afraid to sign off on deals in case they would later find themselves linked to a corrupt project. That fear led to a paralysis, with very few contracts being signed. To solve this we have tried to improve public communication about our projects and get civil society involved. For example, we now have a mechanism whereby independent third-parties can visit project sites to check if work is really being carried out. The first ten projects under this new regime are crucial because they will show that the system works and inspire confidence in further projects.

Last year our budget realisation was terrible, because of all of the problems that we outlined, but this year it will close at 85%. Moreover because our new budget system is multi-year you will see a very big pick up in 2018 with heavy investment across this government’s priority areas of health, education, security and infrastructure. If you return in one year, your readers will be able to see tangible results.

Are you worried that the ongoing corruption crisis in Guatemala is hitting the economy?

MoPF: Anyone who thought that Guatemala’s century-old corruption problem could be solved in 12 months really didn’t understand the complexity of the issue. It will take more time and it will cause more political casualties. But our message to your readers is that Guatemala’s economic numbers are still impressive. The political turbulence has not stopped the economy at growing at around 3.3% per year, nor has it impacted the quetzal, which has remained broadly stable against the US dollar. The fact that the crisis has not paralysed the economy, like it would in other countries, says a lot about the inherent strength and stability of the Guatemalan economy.

The Guatemalan private sector is doing a fine job of working through the turmoil and getting on as well as they can. As a government we would love to give them a boost and inject the 1 billion quetzales that we have but haven’t yet been able to invest in public spending. At the end of the day, we can speculate all day about, which politicians might be in trouble or what might happen with the anti-corruption cases, but it won’t impact the overall economy.

Whenever it is finally resolved we will see a positive effect on the Guatemalan economy. Having a cleaner political system can only be good for the business environment.

Several Guatemalan institutions clearly need reform; is it hard to enact change?

MoPF: Yes it is difficult. One of the key challenges is getting the right people. Put simply the government doesn’t pay enough to attract star talent, which makes it harder to make changes at the speed you want. But it’s not impossible. We identify honest, hardworking public sector employees and build them into competent teams around key processes. It takes more time that way but eventually you can transform an organisation through its people.

However, we are not just focusing on personnel. We’re keenly aware that we have just two years left and then a new government will come in. So we are trying to improve the institutions of government. We want to create the right processes and legal environment for these people to work. For example, we realised that the SAT didn’t have key performance indicators to drive the organisation towards certain behavioural patters so we have been developing that. There is now a weekly analysis of the SAT data, which has automatic outcomes according to preset indicators. That means that regardless of who comes or goes the institution now has improved processes.

Guatemala lacks a country-wide development vision; can the Ministry of Public Finances help build one?

MoPF: It’s a fair point – we don’t have a country vision. However, it is pretty complex to implement one as it needs partnership from all of the stakeholders. One area that the Ministry of Finance is leading in is through the Alliance of Prosperity initiative between Honduras, Guatemala and El Salvador. Another building block in this type of country vision will be a new entity that we are creating to handle infrastructure development. It will be separate from the government, although it will have to adhere to certain governance rules, and it will harness private investment for public infrastructure projects. The common theme that both of these schemes have is that we have been leading negotiations with the private sector to create a broad consensus of support.

There are two years left to this government; what would you like to achieve?

MoPF: I hope that we can cement our work in shoring up the SAT. For example, now that we have solved the fundamental problems we would like to take the institution to the next level and re-launch its technological platforms. We are also looking at implementing an environmental-based fiscal reform. The country has serious problems with around 90% of the rivers being contaminated it needs to be addressed. We were looking at ‘green taxes’ but we have also been pleased to see the voluntary response from the private sector. Business associations have suggested recycling schemes and we are looking at how we can shift supply chains so that Guatemala can produce in a more sustainable way. We’ve also involved environmental NGOs who bring an incredible amount of enthusiasm to the project. Our first step is creating a website that can serve as a home for this discussion and we hope to motivate the wider Guatemalan society around green issues.

Finally, on the investment attraction side, we are assembling a public-private organisation that will work to attract international investors. Really you need a top leadership team that can sit down with a board from a multinational and persuade it to invest in Guatemala. Areas like automotive part manufacture and energy offer real opportunities for investors.