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 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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