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IMF Executive Board Concludes 2019 Article IV Consultation with Guatemala

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Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with Guatemala







June 17, 2019















On June 10, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
with Guatemala

[1]

and considered and endorsed the staff appraisal without a meeting.

[2]

Background

Underpinned by a strong macroeconomic framework, fundamentals remain
solid. Growth has revived since mid-2018 after three years of weaker
performance supported by strong remittances and private consumption, a
positive fiscal impulse, and a turnaround in credit and investment. In
2018, inflation remained subdued at 3¾ percent, and the overall fiscal
deficit and public debt ratios stayed at moderate levels of around 1.8
percent and 25 percent of GDP. The external position remained solid as
continued strong remittances offset the worsening terms of trade and
trade balance. The banking sector continued to be liquid and
well-capitalized, and nonperforming loans remained at low levels and
well-provisioned.

Near-term growth prospects are positive aided by supportive fiscal and
monetary policies. Growth is projected to peak at 3.7 in 2021, before
converging to its potential rate of 3½ percent by 2024, while inflation
is projected to remain within the 4±1 percent target. The fiscal
deficit is expected to widen to 2.4 percent next year, enabling a
cumulative fiscal impulse of 0.6 percent of GDP over 2019−20, while
monetary policy would remain accommodative over the near term and
proceed with a gradual normalization thereafter. The current account
balance is expected deteriorate to -1½ percent of GDP by 2024,
nonetheless foreign reserves would remain within comfortable ranges.
Risks to outlook are titled to the downside coming primarily from a
growth slowdown in the U.S. and other regional trade partners, and,
domestically, from lagged implementation of business climate reforms
and anticorruption efforts.

Over the medium term, higher and more inclusive growth is key to
meaningfully lift Guatemalans’ living standards, while preserving the
strong macroeconomic buffers. Ongoing efforts to improve spending
execution capacities, reverse the decline in tax collections, secure a
more efficient and agile use of public resources, and foster a
prosperous business environment, should continue to promote private
sector growth and the attainment of the SDGs.

Executive Board Assessment

In concluding the 2019 Article IV Consultation with Guatemala,
Executive Directors endorsed staff’s appraisal, as follows:

The outlook is positive amidst strong fundamentals, but efforts to
raise potential growth remain a priority to improve living standards.
Building consensus to implement long-delayed business climate and
public sector reforms is key to promote private sector growth and
social and infrastructure spending conducive to the attainment of the
SDGs.

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Near-term growth is poised for a rebound. Growth is projected to
accelerate and peak in 2021, propelled by a further fiscal impulse,
exports recovery and stronger investment momentum, before converging to
its potential rate of 3½ percent by 2024. Inflation is set to reach the
mid-point of the target band as spare capacity narrows. The external
position remains stronger than the level implied by medium-term
fundamentals and desirable policies, but the gap is expected to narrow
by 2024.

Fiscal and monetary policies’ support of demand should continue in the
near term, considering prevailing spare capacity.
Fiscal policy needs to reverse the decline in revenues and keep up
spending execution. The accommodative monetary conditions should continue as the output gap
closes amid well-anchored inflation expectations. Over the medium term,
as the economy reaches potential (2021 by staff estimates), the path
for normalization should be gradual and data-dependent.

Over the medium term, fiscal policy should preserve macroeconomic
stability while undertaking more productive spending. Raising tax
collections and enhancing spending efficiency is necessary to expand
fiscal space. To this aim, SAT should redouble efforts to fight tax
evasion. Spending efficiency reforms should increase the coverage and
quality of public services provided, bolster the cost-effectiveness of
procurement, increase budget flexibility, and rationalize tax
incentives and exemptions. As spending is scaled up, the authorities
should prioritize those investments generating the strongest positive
externalities and with the highest potential for cost recovery and
private sector participation. A comprehensive tax reform should be
subsequently considered to finance well-planned spending, given the
scale of the existing infrastructure and social gaps.

Building on a strong monetary policy management, additional
enhancements to inflation targeting could be considered. A stronger
monetary transmission would result from (i) enhancing FX flexibility;
(ii) expanding the use of the treasury and/or central bank bills, while
fostering the adoption of the securities market law and the
dematerialization of securities; and (iii) further refining the
forward-looking communication strategy.

The authorities’ agenda to promote a thriving business environment is
commendable and should be expedited. Planned initiatives to restore
legal certainty for large-scale investment projects are vital to
improve investors’ confidence. Spearheading the PPP framework, passing
the road infrastructure bill, and further easing the issuance of
construction licenses are also important bolster investment. The
creation of an export promotion agency
and more expedited customs procedures with El Salvador and Mexico
can enhance exports potential.    

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The government should reaffirm its commitment to the anti-corruption
agenda. Strengthening the Attorney General’s Office and judicial
capacities should be focal points, with efforts aimed at preserving the
legal and institutional progress, and existing capabilities, and
further fortifying the investigative and prosecutorial competences and
reducing the judicial backlog.
Staff welcomes the authorities’ plans to extend the coverage of the
public prosecutor’s office and to consolidate its financial
independence.
Complementing these efforts, a preventive anticorruption strategy
should strengthen the procurement and the AML/CFT frameworks, reduce
red tape, improve contract enforcement, and increase the transparency
of tax exemptions.

Building on a sound financial system, the authorities should focus on
promoting financial inclusion. Further efforts are needed to
operationalize the 2016 microfinance law, and to set in motion
simplified bank accounts and credit bureaus. The creation of an
interinstitutional Commission to coordinate the implementation of a
National Strategy for Financial Inclusion represents an opportunity to
promote FinTech solutions. The authorities’ intention to explore
regulatory responses via a sandbox approach that balances technological
innovation with financial stability, is welcome.




Guatemala: Selected Economic and Social Indicators

I. Social and Demographic Indicators

Population 2018 (millions)

17

Gini index (2014)

49

Percentage of indigenous population (2016)

41

Life expectancy at birth (2017)

74

Population below the poverty line (Percent, 2014)

59

Adult illiteracy rate (2017)

19

Rank in UNDP development index (2017; of 189)

127

GDP per capita (US$, 2017)

4,470

II. Economic Indicators

Projections

2015

2016

2017

2018

2019

2020

(Annual percent change, unless otherwise indicated)

Income and Prices

Real GDP

4.1

3.1

2.8

3.1

3.4

3.5

Consumer prices (end of period)

3.1

4.2

5.7

2.3

3.8

4.1

Monetary Sector

M2

9.4

6.6

8.4

9.4

6.9

7.7

Credit to the private sector

12.8

5.9

3.8

7.0

7.0

8.4

(In percent of GDP, unless otherwise indicated)

Saving and Investment

Gross domestic investment

14.0

13.3

11.8

12.0

12.0

12.0

Private sector

12.3

11.7

11.0

10.9

10.9

10.8

Public sector

1.3

1.2

1.1

1.0

1.1

1.2

Gross national saving

13.8

14.8

13.4

12.8

12.6

12.3

Private sector

13.7

14.5

13.4

13.3

13.6

13.4

Public sector

0.1

0.3

0.0

-0.5

-0.9

-1.1

External saving

0.2

-1.5

-1.6

-0.8

-0.6

-0.3

External Sector

Current account balance

-0.2

1.5

1.6

0.8

0.6

0.3

Trade balance (goods)

-8.7

-7.6

-7.9

-9.3

-10.0

-10.2

Exports

17.0

15.4

14.7

14.1

13.9

13.6

Imports

25.7

23.0

22.6

23.4

23.8

23.8

Of which:
oil & lubricants

3.6

3.1

3.4

3.8

3.7

3.8

of which repayment of arrears

Other (net)

8.6

9.0

9.5

10.1

10.6

10.6

Of which:
remittances

10.1

10.7

11.0

12.0

12.8

13.2

Capital account balance

0.0

0.0

0.0

0.0

0.0

0.0

Financial account balance (Net lending (+))

-0.9

0.5

1.2

1.1

0.6

0.3

Of which:
FDI, net

-1.7

-1.6

-1.3

-1.0

-1.0

-1.0

Errors and omissions

-0.7

-1.0

-0.4

0.3

0.0

0.0

Change in reserves assets (Increase (+))

0.7

2.0

3.4

1.2

0.0

0.0

Net International Reserves

(Stock in months of next-year NFGS imports)

4.5

4.9

5.8

6.1

5.7

5.4

(Stock over short-term debt on residual maturity)

1.6

1.8

2.1

2.4

2.4

2.2

Public Finances

Central Government

Revenues

10.8

11.0

10.8

10.6

10.4

10.5

Expenditures

12.3

12.1

12.1

12.3

12.6

12.9

Current

10.1

10.0

9.9

9.9

10.0

10.1

Capital

2.2

2.1

2.2

2.4

2.5

2.7

Primary balance

0.1

0.4

0.1

-0.3

-0.7

-0.9

Overall balance

-1.4

-1.1

-1.3

-1.8

-2.2

-2.4

Financing of the central government balance

1.4

1.1

1.3

1.8

2.2

2.4

Net external financing

0.7

0.8

0.2

0.1

0.4

0.1

Net domestic financing

0.7

0.3

1.1

1.7

1.8

2.3

Of which: use of government deposits

-0.1

-0.5

-0.1

-0.1

0.1

0.2

Rest of Nonfinancial Public Sector Balance

0.2

0.2

0.2

0.2

0.2

0.2

Combined Nonfinancial Public Sector

Primary balance

0.3

0.6

0.3

-0.1

-0.5

-0.7

Overall balance

-1.2

-0.9

-1.1

-1.6

-2.0

-2.2

Central Government Debt

24.2

24.0

23.8

24.7

25.4

26.0

External

11.6

11.5

10.7

10.7

10.6

10.1

Domestic 1/

12.6

12.5

13.0

14.0

14.8

15.9

Memorandum Items:

GDP (US$ billions)

63.8

68.7

75.6

78.4

80.7

85.6

Output gap (% of GDP)

0.8

0.5

-0.1

-0.4

-0.3

-0.1

Sources: Bank of Guatemala; Ministry of Finance; and Fund
staff estimates and projections.

1/ Does not include recapitalization of obligations to the
central bank.


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[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.

[2]

The Executive Board takes decisions under its lapse-of-time
procedure when the Board agrees that a proposal can be considered
without convening formal discussions.


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MEDIA RELATIONS

PRESS OFFICER: Maria Candia

Phone: +1 202 623-7100Email: MEDIA@IMF.org






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