IMF Executive Board Concludes 2022 Article IV Consultation with Guatemala

June 7, 2022

Washington, DC
:
The Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation

[1]

with Guatemala

[2]

on June 6, 2022 and considered and endorsed the staff appraisal without a
meeting on a lapse-of-time basis.

The remarkable resilience of the Guatemalan economy during the pandemic has
almost returned the level of GDP to its pre-pandemic projected trend, in
response to an unprecedented level of policy support, an early reopening of
the economy, and a favorable external environment, including from strong
remittances. Growth rebounded strongly to 8 percent in 2021, while
inflationary pressures were contained, as temporary pandemic and
climate-related factors in 2020 faded rapidly. The primary fiscal balance
moved into surplus in 2021 largely due to better-than-expected tax revenues
(including significant tax administration gains). The current account
surplus declined to 2.5 percent of GDP in 2021, as continued strength in
remittances was more than offset by a substantial increase in imports and
weaker terms of trade. The banking sector remains solid overall with
pandemic-related measures appropriately phased out last year. Despite the
economy’s resilience, social indicators likely deteriorated during the
pandemic and longstanding infrastructure and social gaps remain.

The outlook remains favorable. Growth is projected at 4 percent in 2022
supported by a still favorable policy mix, a recovery of lagging sectors,
favorable credit conditions, and the resilience of the U.S. economy
spurring robust remittances. Thereafter, growth is projected to stabilize
at its pre-COVID potential rate of 3½ percent by 2023. Driven by external
price pressures, inflation is projected to increase but remain within the
target band (4 ± 1 percent), averaging 4.4 percent in 2022. The current
account is projected to move into deficit (around ½ percent of GDP) in GDP
in response to higher import prices and slower growth in remittances.

Risks to growth remain tilted to the downside. The Guatemalan economy faces
a highly uncertain external outlook, including from the war in Ukraine.
De-anchoring of inflation expectations in advanced economies, continued
global supply chain disruptions, and potential changes to investor risk
sentiment could all lead to an abrupt tightening of global financial
conditions. Elevated and volatile commodity prices introduce additional
uncertainty and could accelerate global inflationary pressures and slowdown
external demand. Social discontent could be triggered by rising food and
energy prices affecting the most vulnerable.

Executive Board Assessment

The Guatemalan economy was remarkably resilient during the pandemic and the
near-term outlook is favorable, but long-standing social and infrastructure
gaps remain. Underpinned by a favorable external environment and the
authorities’ swift, comprehensive, and coordinated policy response in 2020
that laid the foundations for a strong recovery. Real GDP grew 8 percent in
2021 and is projected to grow around 4 percent in 2022 and then converge to
its potential rate of 3½ percent. While inflationary pressures were mostly
contained in 2021, inflation is projected to rise in 2022 in line with
global inflationary pressures but should remain within Banguat’s inflation
target range. The external position remains stronger than the level implied
by medium-term fundamentals and desirable policies, but the gap is expected
to narrow. Despite such resilience, social indicators likely deteriorated
during the pandemic and longstanding infrastructure and social gaps
persist.

With a well-entrenched recovery, near-term policies need to be carefully
calibrated to sustain economic momentum but remain agile to evolving
macroeconomic and social conditions. The fiscal stance in 2022—including
the temporary measures announced to mitigate the impact of higher import
prices and the increase in the infrastructure budget—are appropriate. If
economic conditions worsen, authorities should consider temporarily
re-deploying some of the targeted 2020 social measures. Monetary policy
normalization must be carefully calibrated amid tighter global financial
conditions, and remain data driven to maintain inflation expectations
anchored. A clear and consistent communication strategy will help guide
market expectations, while greater exchange rate flexibility can also help
absorb external shocks. The SIB should continue to closely monitor
nonperforming loans and any potential financial stability risks, including
those stemming from tighter global financial conditions.

Accelerating efforts to address long-standing social gaps is crucial while
maintaining fiscal sustainability. Increasing tax revenues further and
improving spending efficiency to create fiscal space is necessary to close
these gaps. In that regard, SAT should build upon recent tax administration
improvements. On the spending side, reforms should focus on increasing
budget flexibility, bolstering the cost-effectiveness of procurement,
improving the coverage and quality of public services, and rationalizing
tax incentives and exemptions. Authorities could further strengthen their
long-term strategic infrastructure vision with a focus on projects with
highest inclusive growth potential. To support these efforts, while
maintaining the long-standing and very prudent fiscal policy in Guatemala,
additional upgrades to its medium-term fiscal framework could be explored
such as on multi-annual budget planning and the formalization of an
explicit fiscal anchor.

The government rightly aims to enhance the business climate and promote
investment opportunities to boost economic growth. The passage of the law
to facilitate insolvency procedures should promote firm creation. The
recently introduced Construction Single Window, which eases the issuance of
construction licenses, and the government’s efforts to boost affordable
housing and streamlining the PPP framework to expedite key identified
infrastructure projects, should bolster private investment. Formalizing
part-time work could further help lift formalization. In addition, staff
encourage authorities to expedite the implementation of the 2020-2024
General Policy of the Government, and the Guatemala No Se Detiene Plan to
improve the business climate, and security. On the governance and
anti-corruption fronts, reforms improving the judiciary and legislative
environment, including strengthening the Attorney General’s Office, remain
important. In that regard, broad-based transparency and digitalization
efforts undertaken across the public administration are welcomed. A
results-based approach could help ensure these and other efforts fully
translate into sustainable and concrete outcomes for all Guatemalans.

The banking system remains sound, but reforms to improve the supervisory
and regulatory framework should be expedited. The Banking and Financial
Groups and AML/CFT laws, which align regulations with Basel III and FATF
standards respectively, are pending Congress approval. Staff encourage the
speedy implementation of the legal framework for Fintech and e-money, which
is well underway, and welcome the adoption of the new Securities Market
Law, which will support the development of financial markets while
strengthening the supervisory and regulatory framework.

[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.

Table 1. Guatemala: Selected Economic and Social Indicators

					Projections
	2018	2019	2020	2021	2022	2023


	(Annual percent change, unless otherwise indicated)
Income and Prices
Real GDP	3.4	4.0	-1.8	8.0	4.0	3.6
Consumer prices (average)	3.8	3.7	3.2	4.3	4.4	4.3
Consumer prices (end of period)	2.3	3.4	4.8	3.1	4.8	4.5
Monetary Sector
M2	9.4	9.6	18.9	11.6	7.1	7.5
Credit to the private sector	7.0	4.9	6.4	12.7	6.9	7.2
	(In percent of GDP, unless otherwise indicated)
Saving and Investment
Gross domestic investment	13.8	14.3	13.3	17.0	16.2	15.1
Private sector	12.2	12.4	12.2	14.7	15.0	14.0
Public sector	1.5	1.9	1.3	1.0	1.2	1.1
Gross national saving	14.7	16.7	18.2	19.5	15.8	15.7
Private sector	14.9	16.8	21.6	19.1	16.5	16.1
Public sector	-0.2	-0.1	-3.4	0.4	-0.7	-0.4
External saving	-0.9	-2.4	-4.9	-2.5	0.4	-0.6
External Sector
Current account balance	0.9	2.4	4.9	2.5	-0.4	0.6
Trade balance (goods)	-10.9	-10.3	-8.1	-12.7	-14.8	-13.9
Exports	13.2	12.9	13.0	14.4	15.4	14.7
Imports	24.0	23.2	21.2	27.1	30.1	28.6
Of which: oil & lubricants	4.0	3.8	2.5	4.1	5.6	4.9
Trade balance (services)	0.2	0.0	-0.3	-1.5	-1.3	-1.1
Other (net)	11.5	12.6	13.4	16.8	15.7	15.6
Of which: remittances	12.6	13.6	14.6	17.8	16.9	16.9
Capital account balance	0.0	0.0	0.0	0.0	0.0	0.0
Financial account balance (Net lending (+))	0.5	1.8	4.2	2.4	-0.4	0.6
Of which: FDI, net	-1.1	-1.0	-1.0	-3.9	-1.3	-1.3
Errors and omissions	-0.4	-0.6	0.0	-0.2	0.0	0.0
Change in reserve assets (Increase (+))	1.3	2.3	4.1	3.3	0.0	0.0

Net International Reserves
(Stock in months of next-year NFGS imports)	6.5	8.6	8.0	7.7	7.7	7.5
(Stock over short-term debt on residual maturity)	1.9	2.4	3.6	3.3	3.4	3.2

Public Finances
Central Government
Revenues	11.3	11.2	10.7	12.4	12.3	12.0
Expenditures	13.2	13.4	15.6	13.5	14.6	14.0
Current	10.6	10.7	12.6	11.2	12.0	11.5
Capital	2.6	2.7	3.0	2.4	2.7	2.6
Primary balance	-0.3	-0.6	-3.2	0.6	-0.6	-0.3
Overall balance	-1.9	-2.2	-4.9	-1.2	-2.3	-2.0

Financing of the central government balance	1.9	2.2	4.9	1.2	2.3	2.0
Net external financing	0.1	1.2	-0.3	0.8	1.0	0.7
Net domestic financing	1.8	1.1	2.5	0.4	1.3	1.3

Central Government Debt	26.4	26.4	31.5	30.8	30.5	30.5
External	11.5	11.7	13.5	12.9	13.3	13.3
Domestic 1/	14.9	14.7	18.0	17.9	17.2	17.2

Memorandum Items:
GDP (US$ billions)	73.3	77.2	77.6	86.0	91.3	96.3
Output gap (% of GDP)	-0.1	0.4	-3.9	-0.4	-0.1	0.0

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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