Guatemala: Staff Concluding Statement of the 2022 Article IV Mission
April 8, 2022
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: The Guatemalan economy rebounded strongly in 2021 and should return to its pre-pandemic growth trend in 2022. The banking sector remains solid overall with pandemic-related measures appropriately phased out last year. The outlook thus remains broadly positive but is subject to elevated external risks. Sustaining the recovery and addressing longstanding social and infrastructure needs is paramount to boost inclusive growth. Continuing reforms to improve the business climate are essential to further strengthen the outlook and the resilience to various shocks (including climate change-related).
- In the near term , monetary policy should remain data-driven to maintain inflation expectations anchored. Greater exchange rate flexibility can help absorb shocks. The fiscal stance is appropriate, and policy should remain agile to shield the vulnerable against possible further acute food and energy price increases.
- In the medium-term , fiscal space should be created to close social and infrastructure gaps within a sound medium-term fiscal framework. Building on recent digitalization efforts that have improved transparency and efficiency, further strengthening the institutional capacity to support a result-based approach would help attain the authorities’ targets embodied, for example, in the 2020-24 General Policy of the Government. Ongoing efforts on transparency and governance, improvements in infrastructure, education and financial inclusion, as well as initiatives to favor entrepreneurship and address labor market informality should continue in order to improve inclusive growth.
Strong Economic Momentum amid Significant Development Needs and Elevated Risks
1. The Guatemalan economy was remarkably resilient during the pandemic, but long-standing social and infrastructure gaps remain. The authorities’ swift, comprehensive and coordinated policy response in 2020 laid the foundations for the strong recovery. Also supported by a favorable external environment (including the continued inflow of family remittances), real GDP growth is estimated at around 8 percent in 2021 while inflationary pressures were mostly contained, as temporary pandemic and climate-related factors in 2020 faded rapidly. Significant tax administration gains reduced the overall fiscal balance and created fiscal space, while monetary policy remained accommodative. Despite such resilience, social indicators likely deteriorated during the pandemic, as was the case in other countries, and longstanding infrastructure and social gaps persist.
2. The strong recovery is set to continue . Growth is projected at around 4 percent in 2022, supported by fiscal and monetary policies, continued recovery of lagging sectors (such as tourism), and a resilient U.S. economy—spurring strong remittances. Over the medium-term, growth is expected close to potential (around 3½ percent). Inflation is projected to increase in 2022 in line with global inflationary pressures but should remain within the target of the Monetary Authority. The current account surplus is expected to decline, reflecting a higher import bill amid elevated global commodity prices, while international reserves are expected to continue to exceed comfortable levels.
3. There are significant, mostly external, downside risks. The Guatemalan economy faces these risks from a position of strength. Nonetheless, the outlook is subject to unusually high uncertainty, mostly stemming from external factors, including from new COVID-19 variants. De-anchoring of inflation expectations in advanced economies, continued global supply chain disruptions and potential changes to investor risk sentiment could lead to an abrupt tightening of global financial conditions. Elevated and volatile commodity prices, amplified by the war in Ukraine, introduce new uncertainty and could accelerate global inflationary pressures and slowdown external demand. Price pressures on basic goods could affect the most vulnerable.
Building Upon the Post-COVID Recovery…
4. The authorities’ policy mix is well placed to support the recovery in 2022. With a well-entrenched recovery, near-term policies will need to be carefully calibrated to sustain economic momentum while remaining agile to evolving macroeconomic and social conditions.
- Monetary policy normalization must be carefully calibrated amid tighter global financial conditions, and remain data driven to continue anchoring inflation expectations. A clear and consistent communication strategy will help guide market expectations. Greater exchange rate flexibility can also help absorb external shocks.
- The fiscal stance embodied by the approved 2022 budget is appropriate. Announced initiatives to mitigate the impact of higher import prices using fiscal space created in 2021—including gas, oil-related products, small farmers’, and electricity subsidies—are temporary and should consistently aim to target the vulnerable. The authorities should stand ready to temporarily re-deploy some of the 2020 social measures if economic conditions worsen.
… While Addressing Social and Infrastructure Gaps through Fiscal Policy
5. Accelerating efforts to address longstanding social gaps is crucial . Further increasing tax revenues and improving spending efficiency to create fiscal space is necessary to close these gaps. In this regard, staff welcomes recent tax administration improvements (customs, tax administration enforcement, and digitalization such as electronic invoicing or tax declaration forms that have facilitated audits). These efforts should be complemented by rationalizing tax incentives and exemptions. Staff welcome the pilot program to collect data on poverty, nutrition, and housing conditions on six municipalities and encourage its expansion to enhance the scope and targeting of social transfers. The authorities are also conducting a household survey which should allow them to better gauge social needs and calibrate Guatemala’s social safety net. Meanwhile, priority social spending could be scaled up using existing fiscal space and leveraging upon the experience gained with the Bono Familia program.
6. The authorities should enhance the infrastructure governance framework with a view to increasing high-quality investments and achieving long-term inclusive development . Successful planning, allocation, and implementation phases of public investment management demand a clear regulatory and institutional framework, robust coordination across levels of governments and sustainable performance throughout the life cycle of the asset. Building on recent transparency and digitalization achievements, staff recommend the authorities participate in the IMF’s Public Investment Management Assessment (PIMA) program to establish a standardized diagnostic of their investment framework along a set of concrete recommendations. In this regard, the authorities of the Ministry of Finance agree to participate in this program to improve public investment planning in Guatemala with a focus on resilience. In addition, while staff welcome the announcement of increasing the infrastructure budget, the authorities could benefit from strengthening their long-term strategic infrastructure vision with a focus on projects with highest inclusive growth potential and supported by a medium-term fiscal framework.
7. The long-standing and very prudent fiscal policy in Guatemala—a result of policies adopted within the existing normative framework and budget evaluation and programming—has supported macroeconomic stability and allowed fiscal sustainability even without an explicit fiscal anchor. Nevertheless, it is important to continue making improvements in multi-annual budget planning to ensure that the achievements made to date are maintained and to fortify the provision of public goods and services that will contribute to poverty reduction, as well as to the expansion and improvement of productive infrastructure to strengthen the country’s competitiveness. On this regard, staff recommends technical assistance to strengthen medium-term fiscal policy.
Boosting Medium-Term Growth
8. The government rightly aims to enhance the business climate and promote investment opportunities to boost economic growth. Reforms improving the judiciary and legislative environment remain important. In that regard, broad-based transparency and digitalization efforts undertaken across the public administration are welcomed. The passage of the law to facilitate insolvency procedures should promote firm creation. Formalizing part-time work—particularly important for female labor force participation—could help lift formalization and create economic opportunities. In addition, staff encourage the authorities to expedite the implementation of the 2020-2024 General Policy of the Government, and the Economic Recovery Plan. A results-based approach could help ensure these and other efforts fully translate into sustainable and concrete outcomes for all Guatemalans.
9. The banking system remains sound, but reforms to improve the supervisory and regulatory framework should be expedited. The amendments to the Banking and Financial Groups Law—which incorporate international standards that support financial stability—and the draft law on AML/CFT—which aligns with FATF standards—are pending approval by Congress. Fintech can boost inclusive growth and financial inclusion, even though they present risks to the financial system. Nonetheless, they also imply risks to financial stability if regulation and supervision are not up to date with related current and future initiatives. Staff welcome the preparation of the legal framework for Fintech and e-money to address legal, supervisory, and regulatory challenges and encourage their speedy implementation. In addition, the adoption of the new Securities Market Law is also important to strengthen the necessary foundations for the development of financial markets and, at the same time, to strengthen the corresponding supervisory and regulatory framework.
The mission would like to thank the Guatemalan authorities for their cooperation and open discussions throughout our virtual visit between March 28 to April 8.
Table. Guatemala: Selected Economic Indicators
|
Est. |
Projections |
||||||||
|
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
|
|
(Annual percentage change, unless otherwise specified) |
|||||||||
|
Output |
|||||||||
|
Real GDP |
3.9 |
-1.5 |
8.0 |
4.0 |
3.6 |
3.5 |
3.5 |
3.5 |
3.5 |
|
Domestic demand (contribution, percent)1 |
5.5 |
-2.2 |
13.0 |
2.5 |
3.2 |
3.9 |
3.9 |
3.8 |
3.9 |
|
External demand (contribution, percent) |
-1.6 |
0.7 |
-5.0 |
1.5 |
0.4 |
-0.4 |
-0.4 |
-0.3 |
-0.4 |
|
Output gap (percent of potential GDP) |
0.2 |
-3.9 |
-0.4 |
-0.1 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Consumer and Relative Prices |
|||||||||
|
Inflation (average) |
3.7 |
3.2 |
4.3 |
4.4 |
4.3 |
4.2 |
4.0 |
4.0 |
4.0 |
|
Inflation (end of period) |
3.4 |
4.8 |
3.1 |
4.8 |
4.5 |
4.0 |
4.0 |
4.0 |
4.0 |
|
Real effective exchange rate ("+" = real appreciation) |
1.5 |
3.3 |
… |
… |
… |
… |
… |
… |
… |
|
Terms of trade |
5.1 |
7.4 |
-7.0 |
-3.3 |
-4.5 |
-1.2 |
-1.3 |
-1.4 |
-1.5 |
|
Money and Credit |
|||||||||
|
M2 |
9.6 |
18.9 |
11.6 |
7.1 |
7.5 |
7.3 |
7.0 |
7.0 |
7.0 |
|
Credit to the private sector |
4.9 |
6.4 |
12.7 |
6.9 |
7.2 |
7.2 |
7.2 |
7.2 |
7.2 |
|
(Percent of GDP, unless otherwise specified) |
|||||||||
|
External |
|||||||||
|
Current account |
2.3 |
5.5 |
2.7 |
0.1 |
0.4 |
0.8 |
0.9 |
1.0 |
0.9 |
|
Trade balance (goods and services) |
-10.3 |
-8.0 |
-14.0 |
-15.8 |
-15.2 |
-14.3 |
-13.7 |
-13.2 |
-12.8 |
|
Export (goods and services) |
17.7 |
16.9 |
17.6 |
19.7 |
19.5 |
18.9 |
18.3 |
17.8 |
17.2 |
|
Import (goods and services) |
27.9 |
24.9 |
31.6 |
35.5 |
34.7 |
33.2 |
32.0 |
31.0 |
30.0 |
|
Remittances |
13.6 |
14.6 |
17.8 |
17.1 |
17.0 |
16.5 |
16.0 |
15.5 |
15.0 |
|
Financial account ("+" = net lending) |
1.3 |
4.4 |
2.3 |
0.1 |
0.4 |
0.8 |
0.9 |
1.0 |
0.9 |
|
Net International Reserves |
|||||||||
|
Net international reserves (US$ billion) |
13.8 |
18.5 |
20.9 |
… |
… |
… |
… |
… |
… |
|
Stock in months of next-year NFGS imports |
8.6 |
8.2 |
7.8 |
… |
… |
… |
… |
… |
… |
|
Central Government Finances |
|||||||||
|
Total revenue |
11.2 |
10.7 |
12.4 |
12.3 |
12.0 |
11.8 |
11.7 |
11.6 |
11.6 |
|
of which: tax revenue |
10.6 |
10.1 |
11.8 |
11.6 |
11.4 |
11.2 |
11.0 |
11.0 |
11.0 |
|
Expenditure |
13.5 |
15.6 |
13.6 |
14.6 |
14.0 |
13.8 |
13.6 |
13.5 |
13.5 |
|
of which: capital |
2.7 |
3.0 |
2.4 |
2.7 |
2.6 |
2.5 |
2.5 |
2.5 |
2.5 |
|
Primary balance |
-0.6 |
-3.2 |
0.6 |
-0.6 |
-0.3 |
-0.2 |
-0.2 |
-0.1 |
-0.1 |
|
Overall balance |
-2.2 |
-4.9 |
-1.2 |
-2.3 |
-2.0 |
-1.9 |
-1.9 |
-1.8 |
-1.8 |
|
External financing, net |
1.2 |
1.7 |
0.8 |
1.0 |
0.7 |
0.6 |
0.5 |
0.4 |
0.3 |
|
Domestic financing, net |
1.1 |
3.2 |
0.4 |
1.3 |
1.3 |
1.4 |
1.4 |
1.4 |
1.5 |
|
Central Government Debt |
|||||||||
|
General government gross debt |
26.5 |
31.5 |
30.9 |
30.6 |
30.7 |
30.5 |
30.4 |
30.2 |
30.1 |
|
External |
11.8 |
13.5 |
12.9 |
13.3 |
13.3 |
13.0 |
12.6 |
12.2 |
11.8 |
|
Domestic2 |
14.7 |
18.0 |
17.9 |
17.3 |
17.3 |
17.5 |
17.8 |
18.0 |
18.3 |
|
Memorandum items |
|||||||||
|
Nominal GDP (QTZ billion) |
592.8 |
599.2 |
663.0 |
709.8 |
763.3 |
819.2 |
876.7 |
938.4 |
1,004.4 |
|
Nominal GDP (US$ billion) |
77.0 |
77.6 |
85.7 |
… |
… |
… |
… |
… |
… |
|
US$ exchange rate (average) |
7.70 |
7.72 |
7.74 |
… |
… |
… |
… |
… |
… |
|
International price of oil (US$ a barrel) |
61.4 |
41.3 |
69.1 |
106.8 |
92.6 |
84.2 |
78.5 |
74.7 |
72.5 |
|
Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections. |
|||||||||
|
1 Includes statistical discrepancy. |
|||||||||
|
2 Does not include recapitalization of obligations to the central bank. |
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