Guatemala's priority: economy. Stabilization plan pushes social woes to back burner

``When I took over the presidency of the Central Bank, I did not realize the depth of the country's financial crisis.'' Five months later, Guatemala's top banker, Frederico Linares, is very familiar with the problems he faces. In line with his reputation as ``a soul brother of Milton Friedman [the well-known American monetarist],'' as one foreign economic observer puts it, he has cajoled President Vinicio Cerezo Ar'evalo into taking a conservative stabilization plan that has pushed social welfare onto the back burner.

The electorate's hopes for higher living standards soon, officials acknowledge, will not be borne out. ``The people expected results in three or four months, but our problems are not soluble that quickly,'' warns Economy Minister Lizardo Sosa. ``I can't tell the people not to worry, that things will be better immediately. Because they won't.''

The ruling Christian Democratic Party's ``social and economic reordering plan,'' which went into force in early June, has three aims, says Mr. Sosa: to lay the basis for democracy, to deal with the ``overwhelming social problems,'' and to bring the economy under control.

But it is clearly the last goal that is uppermost in the government's mind. After growing steadily for several decades, Guatemala's economy ran into trouble in the late 1970s. It was hit by the world recession, falling prices for its main exports (coffee, cotton, sugar), and political turmoil at home and in neighboring El Salvador and Nicaragua.

To mask its problems, the government drew deeply on its reserves and borrowed heavily abroad. The price of those policies is now becoming clear.

The economy has been stagnant or shrinking since 1981, ``and it would be unrealistic to expect any real growth this year,'' says one foreign economic analyst.

The budget deficit has been rising, and is expected to increase again this year to 3.5 percent of the gross domestic product from 2.5 percent in 1985, says Deputy Economy Minister Antonio Blanco.

Meanwhile, inflation is conservatively estimated at 30 percent, and $600 million in foreign debt payments fall due this year, which will eat up half the country's projected export earnings. Guatemala has one of the lowest foreign debts in Latin America -- $2.2 billion.

One of the key pillars of the new economic plan is a bid to shore up Guatemala's unsteady currency, the quetzal, by simplifying the multiple exchange-rate system, which is undermined by a roaring black market. While the official rate of one quetzal to the United States dollar will be retained for foreign debt payments, all import and export business will now be done at the rate of 2.5 quetzales to the dollar. Banks will set their rates daily according to supply and demand.

This, Mr. Linares hopes, will set Guatemala on the path to a unified exchange rate in the foreseeable future.

At the same time, Mr. Cerezo's government has set about controlling its fiscal gap by imposing a temporary 35 percent tax on exports, which is due to net $500 million this year. Much of that money, Mr. Blanco says, will go toward paying a decent interest rate on domestic debt contracted by the Bank of Guatemala. In recent years, it has paid only 1.5 percent interest to bondholders.

In a drive to curb inflation to 15 percent this year, the Central Bank is seeking to drain 350 million quetzales out of circulation -- one of the major reasons no economic growth is seen for 1986.

The only sop thrown to trade unions, to sweeten these stringent financial measures, is a 100 million quetzal program to create 40,000 temporary jobs. But this, union leaders say, is a drop in the ocean of Guatemala's 40 percent unemployment.

Cerezo says his team did not design its economic plan in order to please the private sector. Business leaders have given the new steps only guarded approval.

``The new government is a realistic one,'' says a foreign diplomatic observer. ``They realize they have to live with an extremely powerful private sector which is going to approach things very, very carefully. If Vinicio [the President] wants to survive, he cannot confront them.''

Chamber of Commerce President Peter Lamport hinted at the danger of future confrontation, however, when he wondered aloud at a recent public debate what sort of new taxes would replace the temporary export duties. One senior economic official indicated in an interview that the government is planning higher levies on profits and property, which could prove controversial.

But higher taxes somewhere will be essential if the government is to narrow its fiscal deficit, which is the only serious problem expected to arise should the government seek credit from the International Monetary Fund, as is likely.

The IMF canceled its last agreement with Guatemala in 1984, when only half of the 114 million ``special drawing rights'' had been disbursed, because of the government's noncompliance with the terms of the standby loan.

But there is ``a good possibility'' of a new IMF deal by 1986 end, an economic observer says. Though the IMF ``would like to see currency unification now, all price controls lifted, and market forces setting interest rates, that is not politically in the cards.'' Guatemala thinks it has a plan the IMF should accept, he adds.

The value of an IMF agreement, observers agree, would lie as much in the possibilities that would open up for foreign debt rescheduling with private banks, as in the money the fund might offer. Linares hopes to roll over $200 million of the $600 million repayments due this year, and that, says one analyst, ``is the plum on the IMF horizon.''

But even should IMF talks bog down financial officials are reasonably confident that they can make it through this year with the some $250 million in loans they have nailed down, and the windfall of rising coffee prices and falling oil bills.

Blanco says Guatemala's coffee earnings will almost double from last year's $300 million total, while oil's nose dive will save the country some $60 million in imports. Although these factors will put a healthier glow on the financial accounts and offer hopes of a stronger economic performance next year, they are of little consolation to the man in the street. Second of four parts. Next: Role of Catholic Church