Press Release No. 24/301

IMF Executive Board Concludes 2024 Article IV Consultation with Guatemala

August 2, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guatemala and endorsed the staff appraisal without a meeting on a lapse-of-time basis.

The 2024 Article IV Consultation for Guatemala met the established Executive Board criteria for lapse-of-time consideration: (i) there are no acute or significant risks, or general policy issues requiring Board discussion; (ii) policies or circumstances are unlikely to have a significant regional or global impact in the near term; and (iii) the use of Fund resources is not under discussion or anticipated.

Recent Developments

Guatemala has continued to maintain its solid track record of macroeconomic policies, with economic growth moderating to an estimated 3.5 percent in 2023 (4.2 percent in 2022) and CPI inflation and inflationary pressures decelerating from a 9.9 percent peak year-on-year in February 2023 to 3.6 percent in June 2024, within the monetary policy target (4 percent +/- 1 percentage point). In the election year 2023, the central government's primary fiscal balance closed in surplus, and the overall deficit was at 1.3 percent of GDP, below the three percent deficit approved under the amended 2023 budget. The current account surplus widened to 3.1 percent of GDP in 2023, driven by large remittances and an improved trade balance, despite lower exports and imports.

Risks to the outlook remain but, in the baseline scenario (assuming higher capital spending is approved), the economy is projected to grow by 3.5 percent in 2024 and gradually attain 3.8 percent in the medium term. Inflation is expected to remain within the target, the budget to close with a primary fiscal surplus in 2024, but with an overall deficit of two percent from 2025 onwards. Guatemala needs important and urgent investments to close gaps in infrastructure, education, health, and social needs. With higher government spending in the near term, the current account surplus will be expected to narrow gradually over time, driven by large—although decelerating—remittance inflows and strong imports and international reserves to remain solid in the near term. However, improvements in the business climate, governance, and legal certainty will be essential to further attract foreign investments. The implementation of the government’s pro-growth and anti-corruption reform agenda could boost potential growth well above the staff’s baseline scenario.

Executive Board Assessment[1]

The Guatemalan economy continues to show stability and soundness thanks to a legacy of prudent monetary and fiscal policies—with the inflation rate on target, ample international reserves, contained fiscal deficits, and a low public debt-to-GDP ratio. However, in line with the country’s objectives, the administration needs to advance in the structural reform agenda to continue to support economic growth and increase it in the medium term. The implementation of urgent reforms in the areas of infrastructure, human capital investment, and governance cannot wait if it is to support the country's productive sectors and secure higher sustained and inclusive growth. Slowing exports and limited foreign investment underscore the urgency of reforms.

The country's outlook remains favorable, with risks skewed to the downside. Guatemala’s dependence on remittances conditions the robustness of private consumption to the U.S. Hispanic labor market conditions, with greater impact on the most vulnerable population. This dependence makes Guatemala’s monetary and exchange rate policies more complex and costly. Other risks to the economy would include a lack of progress on the economic agenda, with economic growth below potential and the possible resurgence of social unrest. Increased volatility in commodity prices and the scourge of natural disasters or major cyber-attacks are other risks on the horizon. Successful execution of the administration's structural reform agenda could lead to higher inclusive and sustainable growth potential.

With hefty investment needs, Guatemala will need to boost revenue while bolstering the quantity and quality of spending. Guatemala needs more tax collection to continue advancing on its path to development. Important progress has been made, but tax revenues are still among the lowest in the world, making it difficult to address the country's pressing needs (e.g., infrastructure, education, health, and malnutrition) without increasing the sovereign debt substantially. Continuity in tax administration, approval of legal protections for public officials in the fulfillment of their mandate, and improved communication with taxpayers, are some necessary measures to advance. However, a structural increase in tax collection will require of a comprehensive tax reform in the future as well as better spending. In this regard, higher spending and temporarily larger fiscal deficits should be accompanied by a medium-term multi-year agenda of strategic transformation projects (in infrastructure, education, health, and social programs) for the country, with a clear timeline for objectives, greater transparency, efficiency, and quality of spending. It is in this context, the country team supports temporary up-to three percent fiscal deficits, anchored in a two percent deficit over the medium-term. Guatemala's debt-to-GDP ratio is low and projected to be sustainable if the administration’s expansionary fiscal reform agenda were to be approved in Congress. With domestic financing costs on the rise, the mission recommended developing the domestic capital market—developing the secondary debt market and yield curve and communicating with investors.

Higher growth and absorption of capital flows into the country requires gradual strengthening of the monetary and exchange rate policy frameworks. Changes in the leading interest policy rate should continue to be data-driven. At the same time, it is important for Banguat to move forward with reforms that will strengthen the effectiveness of the policy rate and liquidity management by strengthening the monetary policy transmission mechanisms and the interbank market. Under a reform fiscal policy scenario, consistency in monetary, exchange rate, and fiscal policies will play a particularly important role. In addition, it is important to continue advancing in the development of FX and hedging, debt, and financial markets that allow the private sector to manage market risks, as well as to provide tools for climate risk management. The mission continued to advocate for a solvent Central Bank that capable of conducting monetary liquidity management, maintaining price stability, and confronting future challenges.

An inclusive and sound financial sector guided by prudential principles should further support Guatemala’s economic development efforts. The banking sector remains liquid and profitable and shows resilience to shocks, but close monitoring of the build-up of vulnerabilities is warranted. The approval of the credit regulations of the Superintendency of Banks, as well as the follow-up on their implementation and effectiveness, is a step forward in strengthening the sector. The approval of a new banking law (updating the 2002 Law on Banks and Financial Groups) is also urgently needed; it should be aligned with international standards of regulatory, supervisory, and crisis management practices, and provide supervisory authorities with the necessary tools to monitor risks and vulnerabilities that could affect Guatemala's financial system, as well as to be able to respond, if necessary. Improving communication with the markets through the publication of risk assessments and of bank balance sheets using international accounting standards should also feature high on the agenda.

Advancing in the implementation of the pro-growth reform agenda will require:

• Passing sound legislation, including a good competition law that includes investment aspects, an infrastructure and ports laws, the revision of the Public Private Partnerships (PPP) and Free Trade Zone laws, as well as the civil servants and procurement reforms are essential for the economy to take off. Also, to improve legal certainty consistent with international best practices, internal practices, and structures in the legislation process (e.g., the review of draft legal texts by specialized teams and the unification of criteria in the application of legislation in court) need to be addressed.
• Improving competitiveness via an active policy in favor of the formal labor market, greater digitalization and innovation, and a clear gender strategy. The implementation of the goals established in the 2024-27 financial inclusion strategy will help reduce social gaps.
• Strengthening governance with the publication of a national anti-corruption plan and medium-term strategy to combat impunity with a timetable for implementation and measurement indicators. The approval of legislation aligning Guatemala's anti-money laundering law with Financial Action Task Force (GAFI/FATF) standards cannot wait longer, given the evaluation based on effective compliance of the Law by 2027.

Staff recommends that the next Article IV consultation takes place on the standard 12-month cycle.

[1] 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.