Press Release No. 09/285

Press Release: Statement by an IMF Mission to Guatemala

August 17, 2009

Mr. Alejandro Lopez-Mejia, chief of the International Monetary Fund mission to Guatemala, issued the following statement in Guatemala City:

“An International Monetary Fund (IMF) staff mission visited Guatemala on August 3-14, 2009 to conduct the first review of the Stand-By Arrangement approved last April (see Press Release No. 09/142). The mission met with President Alvaro Colom; Minister of Finance Juan Alberto Fuentes Knight; Central Bank President María Antonieta de Bonilla; Superintendent of Banks Edgar Barquín; other members of the economic cabinet, and representatives of the private sector.

“The mission commended the authorities for meeting all the end-June 2009 quantitative performance criteria. In addition, the mission observed that the inflation rate decreased below 1 percent (below the lower end of the inflation band set in the program) as a result of the fall in commodity prices and weak domestic demand. With the rebound of those prices in the second semester, inflation is expected to reach about 1.5 percent by end-2009. The mission noted that the external position had evolved favorably; the exchange rate has remained broadly stable and international reserves have increased. The mission underscored the importance of the amendments to the Banking Law sent to Congress on June 25, 2009, which are necessary to further strengthen the financial system.

“The global financial crisis has had a negative impact on Guatemala and the region. Output growth is projected at around 0.4 percent in 2009, with some downside risks. The fall in exports, tourism receipts, and remittances has been more than offset by the decrease in imports. As a result, the external current account deficit is projected at 1.6 percent of GDP in 2009, significantly below the deficit of 4.8 percent observed in 2008. Lower credit demand also reduced debt-creating flows.

“The authorities have adequately balanced the benefits of adopting a countercyclical fiscal policy with the importance of maintaining public debt at sustainable levels. Tax revenue decreased due to the economic slowdown and the fall in imports, and public capital spending would increase to avoid a more severe economic slowdown. As a result, the fiscal deficit of the central government could reach 3.4 percent of GDP in 2009 and 3.0 percent of GDP in 2010. In turn, the deficit of the consolidated public sector would reach 3 percent of GDP in 2009, and 2.6 percent of GDP in 2010. To ensure that public debt is on a sustainable path, the authorities are strengthening their efforts to increase the tax base. These efforts include the approval of the tax reform, currently being discussed in Congress.

“The gradual relaxation of monetary policy has been adequate. The central bank has reduced its interest rate by 250 basis points since end-2008. The mission acknowledged that real interest rates should remain positive, thus recommending that monetary policy continues to be adjusted gradually in line with developments in domestic demand and medium-term inflation projections. The flexible exchange rate has helped mitigate the negative impact of the global economic crisis and has enhanced the effectiveness of monetary policy. The discretionary interventions in the foreign exchange market will continue, with the goal of avoiding excessive volatility of the exchange rate.

“The Guatemalan authorities reiterated their intention to continue treating the Stand-By Arrangement with the IMF as precautionary. The IMF mission expects that the IMF Executive Board will conclude the first review of the Stand-By Arrangement by end-September 2009.”