IMF Executive Board Concludes 2019 Article IV Consultation with Guatemala
IMF News, June 17, 2019
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- Published: June 17, 2019
Background and recent performance
- Growth 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.
- 2018 macroeconomic outcomes:
- Inflation remained subdued at 3¾ percent.
- Overall fiscal deficit of around 1.8 percent of GDP.
- Public debt at around 25 percent of GDP.
- External position remained solid as continued strong remittances offset the worsening terms of trade and trade balance.
- Banking sector: liquid and well-capitalized; nonperforming loans remained at low levels and well-provisioned.
Near-term outlook and projections
- Growth:
- Growth is projected to peak at 3.7 in 2021, before converging to its potential rate of 3½ percent by 2024.
- Near-term growth prospects are positive aided by supportive fiscal and monetary policies.
- Inflation:
- Projected to remain within the 4±1 percent target.
- Fiscal:
- Fiscal deficit expected to widen to 2.4 percent next year, enabling a cumulative fiscal impulse of 0.6 percent of GDP over 2019−20.
- Monetary:
- Monetary policy would remain accommodative over the near term and proceed with a gradual normalization thereafter.
- External sector:
- Current account balance expected to deteriorate to -1½ percent of GDP by 2024.
- Foreign reserves would remain within comfortable ranges.
- Risks:
- Tilted to the downside, 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.
Executive Board assessment (endorsing staff appraisal)
- Overall assessment:
- 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 projected to accelerate and peak in 2021, propelled by a further fiscal impulse, exports recovery and stronger investment momentum, before converging to 3½ percent by 2024.
- Inflation is set to reach the mid-point of the target band as spare capacity narrows.
- External position remains stronger than the level implied by medium-term fundamentals and desirable policies, but the gap is expected to narrow by 2024.
- Policy stance:
- Fiscal and monetary policies’ support of demand should continue in the near term, considering prevailing spare capacity.
Fiscal policy recommendations
- Reverse the decline in revenues and keep up spending execution.
- Raise tax collections and enhance spending efficiency to expand fiscal space; 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.
- Rationalize tax incentives and exemptions.
- As spending is scaled up, prioritize investments generating the strongest positive externalities and with highest potential for cost recovery and private sector participation.
- Consider a comprehensive tax reform subsequently to finance well-planned spending, given the scale of existing infrastructure and social gaps.
Monetary policy and financial markets
- Maintain accommodative monetary conditions as the output gap closes amid well-anchored inflation expectations.
- Over the medium term, normalization should be gradual and data-dependent as the economy reaches potential (2021 by staff estimates).
- Enhancements to inflation targeting could be considered to strengthen monetary transmission:
- (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;
- (iii) further refining the forward-looking communication strategy.
Structural reforms, governance, and anticorruption
- Expedite agenda to promote a thriving business environment:
- Restore legal certainty for large-scale investment projects.
- Spearhead the PPP framework, pass the road infrastructure bill, and further ease issuance of construction licenses to bolster investment.
- Create an export promotion agency and expedite customs procedures with El Salvador and Mexico to enhance exports potential.
- Anticorruption:
- Government should reaffirm commitment to the anti-corruption agenda.
- Strengthen the Attorney General’s Office and judicial capacities; preserve legal and institutional progress and existing capabilities; fortify investigative and prosecutorial competences and reduce judicial backlog.
- Staff welcomes authorities’ plans to extend coverage of the public prosecutor’s office and to consolidate its financial independence.
- A preventive anticorruption strategy should strengthen procurement and the AML/CFT frameworks, reduce red tape, improve contract enforcement, and increase transparency of tax exemptions.
Financial inclusion and FinTech
- Build on a sound financial system by promoting financial inclusion:
- Operationalize the 2016 microfinance law.
- Set in motion simplified bank accounts and credit bureaus.
- Create an interinstitutional Commission to coordinate implementation of a National Strategy for Financial Inclusion to promote FinTech solutions.
- Authorities’ intention to explore regulatory responses via a sandbox approach that balances technological innovation with financial stability is welcome.
Selected Economic and Social Indicators (as presented)
- 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 — Key table excerpts (annual percent change, unless otherwise indicated)
- Real GDP: 2015: 4.1; 2016: 3.1; 2017: 2.8; 2018: 3.4; 2019 (proj): 3.5
- Consumer prices (end of period): 2015: 4.2; 2016: 5.7; 2017: 2.3; 2018: 3.8
- M2: 2015: 9.4; 2016: 6.6; 2017: 8.4; 2018: 6.9; 2019 (proj): 7.7
- Credit to the private sector: 2015: 12.8; 2016: 5.9; 2017: 7.0
- Saving and Investment (percent of GDP)
- Gross domestic investment: 2015: 14.0; 2016: 13.3; 2017: 11.8; 2018: 12.0
- Private sector investment: 2015: 12.3; 2016: 11.7; 2017: 11.0; 2018: 10.9; 2019 (proj): 10.8
- Public sector investment: 2015: 1.3; 2016: 1.2; 2017: 1.1; 2018: 1.0
- Gross national saving: 2015: 13.8; 2016: 14.8; 2017: 13.4; 2018: 12.6; 2019 (proj): 13.7; 2020 (proj): 14.5; 2021 (proj): 13.6
- External saving: 2015: 0.1; 2016: 0.3; 2017: 0.0; 2018: -0.5; 2019 (proj): -0.9; 2020 (proj): -1.1
- External sector (percent of GDP)
- Current account balance: 2015: -0.2; 2016: 1.5; 2017: 1.6; 2018: 0.8; 2019 (proj): 0.6; 2020 (proj): 0.1
- Trade balance (goods): 2015: -8.7; 2016: -7.6; 2017: -7.9; 2018: -9.3; 2019 (proj): -10.0; 2020 (proj): -10.2
- Exports (percent of GDP): 2015: 17.0; 2016: 15.4; 2017: 14.7; 2018: 14.1; 2019 (proj): 13.9
- Imports (percent of GDP): 2015: 25.7; 2016: 23.0; 2017: 22.6; 2018: 23.4; 2019 (proj): 23.8
- Of which: remittances (percent of GDP): 2015: 10.7; 2016: 13.2
- Net International Reserves
- Stock in months of next-year NFGS imports: 4.5; 4.9; 5.8; 6.1; 5.4
- Stock over short-term debt on residual maturity: 1.8; 2.1; 2.4; 2.2; 2019 (proj): 2.?
- Public finances (central government; percent of GDP)
- Revenues: 10.4; 10.5
- Expenditures: 12.1; 12.9
- Current: 10.0; 9.9
- Capital: 2.5; 2.7
- Primary balance: 0.4
- Overall balance: -1.4; -1.8; -2.2; -2.4
- Financing of the central government balance: 1.4
- Net domestic financing: 1.7
- Of which: use of government deposits: -0.1
- Central Government Debt: 24.2; 24.0; 24.7; 25.4; 26.0
- External: 11.6; 11.5
- Domestic 1/: 12.5; 13.0; 15.9
- Memorandum items:
- GDP (US$ billions): 63.8; 68.7; 75.6; 78.4; 80.7; 85.6
Source: IMF Executive Board Concludes 2019 Article IV Consultation with Guatemala (Press Release No. 19/222), June 17, 2019.
