IMF Executive Board Concludes 2024 Article IV Consultation with Guatemala
IMF News, August 2, 2024
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- Published: August 2, 2024
Recent developments and baseline projections
- Economic growth moderated to an estimated 3.5 percent in 2023 (4.2 percent in 2022).
- CPI inflation decelerated 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).
- Central government's primary fiscal balance closed in surplus in 2023; overall deficit was at 1.3 percent of GDP, below the three percent deficit approved under the amended 2023 budget.
- 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.
- Baseline scenario (assuming higher capital spending is approved):
- Projected growth of 3.5 percent in 2024 and gradually attaining 3.8 percent in the medium term.
- Inflation expected to remain within the target.
- Budget to close with a primary fiscal surplus in 2024, but with an overall deficit of two percent from 2025 onwards.
- Current account surplus expected to narrow gradually over time due to higher government spending, large—although decelerating—remittance inflows and strong imports.
- International reserves expected to remain solid in the near term.
Executive Board assessment and macroeconomic stability
- The Guatemalan economy shows stability and soundness: inflation on target, ample international reserves, contained fiscal deficits, and a low public debt-to-GDP ratio.
- Implementation of urgent reforms in infrastructure, human capital investment, and governance is necessary to support productive sectors and secure higher sustained and inclusive growth.
- Slowing exports and limited foreign investment underscore the urgency of reforms.
- The administration’s structural reform agenda, if successfully executed, could boost potential growth well above the staff’s baseline scenario.
Key risks
- Risks to outlook remain with a downside skew.
- Dependence on remittances conditions robustness of private consumption to the U.S. Hispanic labor market; greater impact on the most vulnerable population.
- Other risks: lack of progress on the economic agenda (growth below potential and possible resurgence of social unrest), increased volatility in commodity prices, natural disasters, and major cyber-attacks.
- Under a reform fiscal policy scenario, consistency in monetary, exchange rate, and fiscal policies will be particularly important.
Fiscal policy, public finances, and debt
- Guatemala needs to boost revenue while bolstering the quantity and quality of spending to meet hefty investment needs (infrastructure, education, health, malnutrition).
- Tax revenues remain among the lowest in the world; a structural increase in tax collection requires a comprehensive tax reform and better spending.
- Recommended fiscal stance:
- Support temporary up-to three percent fiscal deficits, anchored in a two percent deficit over the medium-term.
- Higher spending and temporarily larger fiscal deficits should be accompanied by a medium-term multi-year agenda of strategic transformation projects with clear timelines, greater transparency, efficiency, and quality of spending.
- With domestic financing costs rising, mission recommended developing the domestic capital market (developing the secondary debt market and yield curve and communicating with investors).
- Public finances (selected figures from table):
- Revenues: 10.7, 12.3, 12.6, 12.8 (percent of GDP across years shown).
- Expenditures: 15.6, 13.7, 13.8, 14.5, 14.8 (percent of GDP across years shown).
- Primary balance: -3.2, 0.4 (percent of GDP across years shown).
- Overall balance: -4.9, -1.2, -2.0 (percent of GDP across years shown).
- Central Government Debt: 31.5, 30.6, 29.0, 27.2, 26.8, 27.0, 27.3, 27.4 (percent of GDP across years shown).
- GDP (US$ billions): 77.7, 86.5, 95.6, 104.4, 111.8, 120.0, 128.7, 138.3, 148.5, 159.5 (across years shown).
Monetary, exchange rate, and financial sector recommendations
- Monetary policy:
- Changes in the leading interest policy rate should continue to be data-driven.
- Banguat should move forward with reforms to strengthen monetary policy transmission mechanisms and the interbank market to improve the effectiveness of the policy rate and liquidity management.
- Continued development of FX and hedging, debt, and financial markets to allow private sector market-risk and climate-risk management.
- Advocate for a solvent Central Bank capable of conducting monetary liquidity management, maintaining price stability, and confronting future challenges.
- Financial sector:
- Banking sector remains liquid and profitable and shows resilience to shocks, but close monitoring of vulnerability build-up is warranted.
- Support for approval and implementation of credit regulations of the Superintendency of Banks.
- Urgent need for approval of a new banking law (updating the 2002 Law on Banks and Financial Groups) aligned with international standards for regulatory, supervisory, and crisis management practices.
- Improve communication with markets through publication of risk assessments and bank balance sheets using international accounting standards.
Structural reform priorities (actions recommended)
- Pass sound legislation:
- A good competition law that includes investment aspects.
- Infrastructure and ports laws.
- Revision of the Public Private Partnerships (PPP) and Free Trade Zone laws.
- Civil servants and procurement reforms.
- Improve internal practices and structures in the legislation process (e.g., review of draft legal texts by specialized teams and unification of criteria in application of legislation in court).
- Improve competitiveness:
- Active policy in favor of the formal labor market, greater digitalization and innovation, and a clear gender strategy.
- Implementation of the goals established in the 2024-27 financial inclusion strategy to help reduce social gaps.
- Strengthen governance:
- Publication of a national anti-corruption plan and medium-term strategy to combat impunity with a timetable and measurement indicators.
- Approval of legislation aligning Guatemala's anti-money laundering law with Financial Action Task Force (GAFI/FATF) standards is urgent given the evaluation based on effective compliance of the Law by 2027.
Selected economic and social indicators (exact values as reported)
- Population 2023 (millions): 17.6
- Gini index (2014): 48.3
- Percentage of indigenous population (2018): 43.8
- Life expectancy at birth (2021): 68.7
- Population below the poverty line (Percent, 2023): 55.1
- Adult illiteracy rate (2022): 16.0
- Rank in UNDP development index (2022; of 189): 136
- GDP per capita (US$, 2023): 5,933
- Income and prices (annual percent change, selected):
- Real GDP: -1.8 (2020), 8.0 (2021), 4.2 (2022), 3.5 (2023), 3.6 (2024), 3.7 (2025), 3.8 (2026)
- Consumer prices (average): 3.2 (2020), 4.3 (2021), 6.9 (2022), 6.2 (2023), 4.0 (2024)
- Consumer prices (end of period): 4.8 (2020), 3.1 (2021), 9.2 (2022)
- Monetary sector:
- M2: 18.9 (2020), 11.6 (2021), 11.1 (2022), 6.8 (2023), 8.9 (2024), 8.1 (2025), 8.2 (2026)
- Credit to the private sector: 6.4 (2020), 12.7 (2021), 15.8 (2022), 14.9 (2023), 12.0 (2024), 10.0 (2025), 8.5 (2026)
- Saving and investment (percent of GDP, selected):
- Gross domestic investment: 13.5 (2020), 16.8 (2021), 16.5 (2022), 16.4 (2023), 16.3 (2024), 16.6 (2025), 16.7 (2026), 16.9 (2027), 17.0 (2028)
- Private sector investment: 12.4 (2020), 14.6 (2021), 15.1 (2022), 14.7 (2023), 15.0 (2024), 15.2 (2025)
- Public sector investment: 1.3 (2020), 1.5 (2021), 1.7 (2022), 1.8 (2023)
- External sector (selected):
- Current account balance: 5.0 (2020), 2.2 (2021), 2.8 (2022), 2.3 (2023), 1.9 (2024), 0.9 (2025), 0.5 (2026), 0.0 (2027)
- Trade balance (goods): -8.1 (2020), -12.6 (2021), -14.9 (2022), -13.7 (2023), -14.1 (2024), -14.3 (2025), -14.4 (2026), -14.7 (2027), -14.6 (2028)
- Exports: 13.0 (2020), 14.3 (2021), 12.5 (2022), 11.2 (2023), 10.8 (2024), 10.5 (2025), 10.2 (2026)
- Imports: 21.2 (2020), 26.9 (2021), 29.8 (2022), 26.2 (2023), 26.1 (2024), 25.8 (2025), 25.5 (2026), 25.2 (2027), 24.8 (2028)
- Other (net) / of which: remittances: 16.2, 18.2, 18.3, 18.0 / 17.7, 19.4, 19.2, 19.2 (values as presented)
- Financial and capital accounts balance (Net lending (+)): 1.6, 0.8, 2.5 (selected)
- of which: FDI (net): -1.0, -3.5, -0.7, -0.8, -1.1
- Net International Reserves (Stock in months of next-year NFGS imports): 7.6 (value shown)
- Public finances (central government, percent of GDP, selected):
- Current: 11.8, 11.9 (values shown)
- Capital: 3.0, 2.4, 2.6, 2.9 (values shown)
- Memorandum items:
- Volume of exports and services (annual percentage change): -7.5, 7.5, 3.4 (selected)
- Volume of imports and services (annual percentage change): -5.8, 19.5, 5.9, 6.0, 5.4, 5.3, 4.7 (values shown)
- Output gap (% of GDP): -3.3, 0.1 (values shown)
Procedural note
- The Executive Board concluded the Article IV consultation and endorsed the staff appraisal without a meeting on a lapse-of-time basis, meeting the Executive Board criteria for lapse-of-time consideration.
Press Release No. 24/301 — August 2, 2024, IMF Communications Department.