Underpinned by a strong macroeconomic framework, fundamentals
remain strong and growth prospects are positive aided by supportive
fiscal and monetary policies. Over the medium term, higher and more
inclusive growth is key to meaningfully lift Guatemalans’ living
standards. Building consensus on long-awaited business climate and
public sector reforms would promote private sector growth and the
attainment of the Sustainable Development Goals (SDGs).
An Improving Outlook Aided by a Supportive Policy Mix
Near-term growth is poised for a rebound amidst well-anchored
Growth has revived since mid-2018 after three years of weaker
performance. Staff projection is for 3.4 percent in 2019 propelled by a
positive fiscal impulse, exports recovery after last year’s slump due
to weaker terms of trade, and investment momentum. Growth would 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 current account balance is expected deteriorate to -1½
percent of GDP by 2024, nonetheless foreign reserves would remain
within comfortable ranges.
2. Risks to the outlook are tilted to the downside.
External risks originate from a growth slowdown in the U.S. and other
regional trading partners. The main domestic risk stems from lagged
implementation of business climate reforms and drifting anti-corruption
efforts, which would dampen investment prospects. On the upside, the
timely creation of a government-sponsored agency, alongside the
deepening of existing trade agreements, would invigorate exports
Fiscal and monetary policy support to demand is appropriate and
should extend into the near term.
In line with Fund’s advice, the macroeconomic policy mix has been
geared towards supporting demand.
The fiscal deficit is expected to widen to 2.2 percent of GDP by
year-end, and to 2.4 percent next year, enabling a cumulative
fiscal impulse of 1 percent of GDP over 2018−20. Spending momentum
from easier awarding of government projects, and from the Ministry
of Finance’s closer coordination with the General Comptroller
office and with executing agencies, should extend into the near
term. Going forward, as the economy operates near its potential,
the deficit is set to stabilize around its historical mark of about
Accommodative monetary conditions allowed for a turnaround in
credit since mid-2018 in tandem with domestic demand. The
accommodative stance should continue as the output gap closes amid
well-anchored inflation expectations. Gradual normalization should
follow suit as the economy grows above potential (2021 by staff
projections). Banguat’s strong monetary policy management has been
paramount to anchoring inflation expectations and, going forward,
additional enhancements to the inflation targeting could be
considered, including greater FX flexibility (as observed in 2018),
secondary market development (via the adoption of the securities
market law and the dematerialization of securities), and
refinements to the forward-looking communication strategy, building
on a proven record of anchoring inflation expectations.
Lifting Potential Growth and Living Standards through Public Sector
and Business Environment Reforms
With the demographic dividend materializing over the next two
decades, lifting potential growth is a priority to achieve economic
success and social cohesion. This calls for wide-ranging public
sector and business climate reforms.
Well-targeted and productive infrastructure and social spending
would promote private sector growth and key SDGs.
The authorities should prioritize those investments generating the
strongest externalities (such as water and sanitation services,
preventive and primary healthcare, pre-primary education programs and
teachers’ training) and with the highest potential for cost recovery
and private sector participation (e.g., transportation infrastructure).
Congress approval of multi-year loans for education, health, food
security, justice, infrastructure, and water and sanitation, will
enable the incorporation of these priorities into a medium-term
budget framework. As spending is scaled-up, more focus should be
placed on performance-based budgeting through strengthened
monitoring and evaluation, as steered by the Secretary of Planning.
The scale of the infrastructure and social gaps is large and
calls for additional financing, starting with greater spending
efficiency and revenue mobilization.
In so doing, the authorities should aim for creating
additional fiscal space while preserving the debt-to-GDP ratio broadly
stable. This would preserve a stable macroeconomic framework conducive
to private sector growth.
Public financing management.
The authorities are generating savings via a sound public debt
strategy, including 20-year, and small-denomination, bond
issuances. To cushion against unexpected shocks, the authorities
have put in place a risk management financial strategy, including
an emergency fund, contingent credit lines, and natural disaster
Public sector reforms.
Necessary reforms to reap efficiency gains include (i) the laws
on civil service and salaries in the public administration to
public service professionalization (via meritocracy-based
recruitment, incentives, and training); (ii) the procurement law to
bolster cost-effectiveness and balance agility and transparency;
(iii) reduced revenue-earmarking and mandatory spending floors, and
couching spending objectives within a medium-term framework; and
(iv) rationalizing tax incentives and exemptions. Staff recognizes
the authorities’ drive for enhancing fiscal transparency.
- A stronger SAT to reverse the erosion in tax revenues.
Despite reinforced internal audits and the successful implementation of
the Integral Load Control Plan in Puerto Quetzal, tax revenue as a
percent of GDP has declined by around ½ percentage points over 2016−18.
Reversing the decline in tax collection hinges on strengthening the
large taxpayer office management, improving the use of tax information
to address noncompliance, redirecting resources towards risk-based
auditing, and reconsider the lifting of bank secrecy for tax audit
purposes. Regarding the latter, the current suspension, in addition to
denting tax collections, could undermine Guatemala’s compliance with
respect to international transparency treaties.
The authorities’ agenda to promote a thriving business
environment is commendable and should be expedited.
The proposed agenda endeavors to improve the rule of law and the
regulatory framework, which would dynamize investment and exports—both
on a steady decline over time. The adoption of an insolvency law and
other initiatives to restore legal certainty for large-scale investment
projects (e.g. swift incorporation of ILO Convention 169 into
Guatemala’s domestic legal system) are important to strengthen contract
enforcement and improve investors’ confidence. Spearheading the PPP
framework and passing the road infrastructure bill would catalyze
private investments and improve domestic market connectivity and
competitiveness. Efforts aimed at improving the issuance of
construction licenses should continue in order to ease the shortage in
residential housing and promote the development of middle-sized cities.
A government-sponsored exports and investment promotion agency would
foster exports and competitiveness, as would expedited customs procedures with El Salvador and Mexico
building on the successful experience with Honduras.
The government should reaffirm its commitment to the
Withdrawal from CICIG puts a premium on sustaining prior legal and
institutional progress and proceeding with outstanding cases.
Strengthening the Attorney General’s Office and judicial capacities
should be focal points. Therefore, efforts should go
to fortify the investigative and prosecutorial competences and to
reduce the judicial backlog. The authorities’ plans to extend the coverage of the public
prosecutor’s office and to consolidate its financial independence
Furthermore, a preemptive strategy is of the essence to reduce exposure
to corruption and calls for reforms, partly ongoing, to strengthen the
procurement and the AML/CFT framework, reduce red tape, improve
contract enforcement, and increase the transparency of tax exemptions.
Modernizing the Financial System and Enhancing Financial Inclusion
The financial system is healthy, and there is room for further
Banks continue to be well-capitalized and liquid, while nonperforming
loans remain low. The authorities should persevere in their efforts to
align the financial sector with Basel III standards. Initiatives
meriting support include the bill on banks and financial groups, the
draft AML/CFT bill, the securities market law, and the electronic money
The authorities are encouraged to flesh out a National Strategy for
. Last year’s reform of the code of commerce and movable guarantees,
and the recent approval of the factoring law are meant to facilitate
SMEs’ access to credit. Further efforts are needed to operationalize
the 2016 microfinance law, and to set in motion simplified bank accounts and credit bureaus.
The authorities have set up an interinstitutional Commission to
implement a National Strategy for Financial Inclusion. To propel
technological innovation, which includes FinTech solutions, an
analytical center is setup to contemplate a system of regulatory
responses (sandbox) in a way that balances technological innovation
with financial stability.
Building Consensus Towards a Development Strategy
Unleashing higher and more inclusive potential growth calls for a
Building on success in macroeconomic management, Guatemala is well
poised to embrace wide-ranging business climate reforms and an SDG
agenda. The time is ripe for forging a national consensus towards
raising growth prospects and living standards.
The IMF mission would like to thank the authorities for their
outstanding cooperation and open dialogue.