Public Information Notice: IMF Concludes Article IV Consultation with Guatemala

December 29, 1999

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 16, the Executive Board concluded the Article IV consultation with Guatemala.1


During the 1990s Guatemala has recorded growing per capita income and some progress in improving social conditions, but extreme poverty continues to be widespread and the income distribution is highly skewed. With the signing of the UN sponsored peace accords in December 1996, the authorities outlined a program to mobilize domestic resources to address social problems and raise human capital and productivity, thus creating conditions to put the economy on a higher growth path. The government's social program has moved at a slower-than-anticipated pace because of lagging mobilization of resources and some problems of implementation capacity.

The macroeconomic setting improved in 1995-96 reflecting the pursuit of prudent fiscal and monetary policies, supported by trade and exchange system liberalization and by financial sector reform. In 1997 the authorities shifted to expansionary fiscal and monetary policies in an attempt to promote faster economic growth. On the fiscal side, rising social expenditure was not matched by increased revenue and the position of the combined public sector shifted progressively from equilibrium in 1996 to a deficit of more than 2 percent of GDP in 1998. Monetary policy was eased first by the nonrollover of maturing open market paper, and in 1998 by a gradual reduction of reserve requirements. Nonetheless, as a result of an increase in public sector deposits at the central bank associated with privatization proceeds, net international reserves rose by US$240 million (gross reserves were 2.8 months of imports in December 1998).

From 1996 to 1998, the expansion in domestic demand resulted in an increase in the rate of real GDP growth (to more than 5 percent in 1998), but also in a widening of the external current account deficit (to 5½ percent of GDP in 1998). Because of the curtailment of banks' external credit lines in the wake of the turmoil in international financial markets, declining prices for Guatemala's main exports, and the adverse effects of Hurricane Mitch, downward pressures on the quetzal intensified beginning in the third quarter of 1998

Developments in 1999 point to a slowdown in economic activity to 3½ percent, while the 12- month inflation rate is projected at slightly above 5 percent by year's end, the current account deficit is estimated to narrow to about 5 percent of GDP, and the deficit of the combined public sector is expected to widen further.

Regarding monetary policy, the central bank reduced reserve requirements further and extended loans to several banks and other financial institutions. To moderate the resulting downward pressure on the quetzal, the central bank sold foreign currency in the market. The quetzal depreciated by 17 percent in real effective terms between June 1998 (when the real effective exchange rate peaked) and October 1999; this depreciation offset the real appreciation of the quetzal that had occurred during the previous two years. Since September, monetary policy has been tightened as interest rates on open market paper have been raised gradually, which has helped to secure a roll-over of the amounts falling due and a slow down in the banking system credit to the private sector. In addition, beginning in October the central bank discontinued its selling of foreign exchange in the market and the net international reserve position has started to recover.

In the structural area, 80 percent of the state power company (EEGSA), the telephone company, and the national distribution company were privatized in 1998. In addition, the authorities are implementing a computerized financial management framework (IFMS) aimed at modernizing key areas of budgeting, cash management, auditing, and procurement in the public sector. The national assembly approved a law creating a deposit insurance scheme for small depositors and establishing a general framework to deal with weak banks, and reformed the banking law to strengthen prudential regulation and supervisory oversight; however, these laws are currently under a constitutional appeal.

Executive Board Assessment

Directors commended the authorities for the progress achieved since the UN sponsored peace accords, in reforming the financial sector, liberalizing the trade and exchange systems, and modernizing the public sector, including through the privatization of public enterprises. They expressed concern about the relaxation of monetary and fiscal policies since 1997—the latter resulting mostly from increases in social and peace-related expenditure—which has been compounded during the last year by adverse external shocks, and has weakened the international reserve position. However, Directors recognized that the monetary policy stance has recently been reversed.

Directors stressed that a critical challenge facing the new administration that will take office in January 2000 will be to carry out corrective fiscal measures promptly. Monetary and fiscal policies should be kept tight so as to reduce pressures on the financial system and the exchange rate. The social and institutional reforms agreed under the peace accord need to be implemented to secure the needed financial support from the international community.

In light of Guatemala's low tax burden, Directors considered that fiscal efforts would need to focus on increasing tax revenues. They commended the authorities for their efforts to improve tax administration through the creation of the Superintendency of Tax Administration, and actions to increase import valuation. However, Directors saw a need to strengthen significantly tax revenue in 2000 and set the stage for achieving the tax ratio of 12 percent of GDP in 2002 as targeted in the peace accords. In this regard they underscored that a credible tax effort would include adjustments in both indirect and direct taxes. Directors also emphasized the need to remove earmarking practices to facilitate the elimination of unproductive outlays, and to keep the government wage bill under control.

Directors noted that monetary policy shifted to an expansionary stance since 1997 and that sales of foreign exchange by the central bank did not prevent recurrent pressures on the quetzal. They encouraged the authorities to continue with the recent tightening of monetary policy by stepping up open market operations, but stressed that reliance on such policies without a serious effort to reduce the fiscal deficit would work at cross purposes with the aim of achieving a high and sustained rate of economic growth. Directors also underscored that the central bank should continue to refrain from intervening in the foreign exchange market, except for market smoothing. The maintenance of macroeconomic stability within a flexible exchange rate policy should be sustained by tighter fiscal and monetary policies, wage restraint and, structural reforms to increase labor productivity.

Directors encouraged the authorities to act expeditiously to implement the already approved legislation that establishes a general framework to deal with weak financial institutions, and that strengthens the supervisory oversight of the financial system. Moreover, Directors stressed the need for further improvement in the supervision and regulation of the financial system, and they urged the authorities to proceed with a proper evaluation of financial institutions and to regulate and supervise financial groups on a consolidated basis.

Directors welcomed Guatemala's advances on structural reform. They encouraged the authorities to move ahead with plans to privatize the port and airport services and to reform the social security system. Directors recommended that future privatization proceeds be used to repay expensive public debt, and recapitalize the central bank, or be set aside in a capital fund with interest earnings used to finance social expenditure.

Directors underscored the need to strengthen the statistical base, particularly in the areas of public sector revenue and expenditure, balance of payments, and the banking sector.

Guatemala: Selected Economic Indicators

1995 1996 1997 Prel.

Output and prices (annual percentage changes)
GDP at constant prices 4.9 2.9 4.4 5.1 3.4
GDP deflator 8.7 8.9 8.2 6.8 6.6
GDP per capita 2.0 0.0 1.5 2.2 0.5
Consumer prices (end of period) 8.6 10.8 7.1 7.5 5.0
Investment and savings (in percent of GDP)
Gross national savings 11.0 9.8 10.5 10.5 9.4
Gross domestic investment 15.1 12.7 14.0 16.0 14.6
Public finance (in percent of GDP)
Combined public sector balance
(-deficit ) 1/
-0.9 -0.1 -0.6 -2.1 -2.8
Overall balance of the nonfinancial public sector (deficit -) 0.1 1.1 0.2 -1.7 -2.5
Foreign financing -0.2 0.1 1.9 1.6 2.3
Domestic financing 0.2 -1.2 -2.1 0.1 0.2
Nonfinancial public sector savings 3.0 4.3 4.4 3.7 2.7
Central government revenue 8.6 9.2 9.2 9.9 9.8
Of which
Tax revenue 2/ 7.9 8.7 8.8 8.9 9.3
Central government expenditure 9.5 9.4 10.1 12.2 12.9
External sector
Exports of goods and nonfactor services 19.1 17.6 17.9 18.2 19.2
Imports of goods and nonfactor services -25.4 -22.5 -23.6 -26.5 -26.9
Current account of the balance of payments -4.1 -2.9 -3.5 -5.5 -5.2
External public debt (end of period) 16.0 15.2 14.7 15.2 17.8
Gross liquid reserves (in months of next year's imports of
goods and services) 1.8 2.0 2.2 2.8 2.4
Money and credit (annual percentage changes) 3/
Liabilities to private sector (banking system) 14.7 13.7 15.5 13.3 10.0
Net domestic assets of the banking system 17.2 10.8 9.1 9.7 10.7
Of which
Credit to nonfinancial public sector -3.5 -4.4 -6.7 -11.1 0.5
Credit to private sector 19.9 7.5 13.5 19.4 11.6

Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates.

1/ Includes central bank losses.
2/ These figures result from subtracting from the tax revenue, as officially reported, the VAT reimbursement. In accordance with the official definition, tax revenue is estimated at 9.8-9.9 percent of GDP in 1999.
3/ In relation to the stock of liabilities to the private sector at the beginning of the period.

1Under 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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100