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.
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.
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.
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.
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Guatemala: Selected Economic and Social Indicators |
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I. Social and Demographic Indicators |
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Population 2018 (millions) |
17 |
Gini index (2014) |
49 |
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Percentage of indigenous population (2016) |
41 |
Life expectancy at birth (2017) |
74 |
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Population below the poverty line (Percent, 2014) |
59 |
Adult illiteracy rate (2017) |
19 |
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Rank in UNDP development index (2017; of 189) |
127 |
GDP per capita (US$, 2017) |
4,470 |
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II. Economic Indicators |
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Projections |
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|
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
|
|
(Annual percent change, unless otherwise indicated) |
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|
Income and Prices |
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|
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 |
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|
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) |
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|
Saving and Investment |
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|
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 |
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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 |
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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 |
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(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 |
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|
Central Government |
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|
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 |
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|
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: |
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|
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 |
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Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections. |
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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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