IMF Executive Board Concludes 2009 Article IV Consultation with GuatemalaPublic Information Notice (PIN) No. 10/07
January 20, 2010
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, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Guatemala.1
The Guatemalan economy was negatively affected by the global crisis, but there are signs that the economy is beginning to recover. After growing 5.8 percent during 2006–07, on average, economic growth decelerated to 4.0 percent in 2008 and continued to slow down in 2009. The global crisis affected the Guatemalan economy through a decline in exports, remittances, tourism receipts, and net private capital inflows. Annual inflation fell to
-0.6 percent in October, from 9.4 percent at end-2008, reflecting weak demand and the decline in commodity prices. Despite the external shock, domestic and external stability have been preserved and the authorities are treating an 18-month Stand-By Arrangement as precautionary.2
The authorities’ economic policies in 2009 have aimed at safeguarding macroeconomic stability and mitigating the impact of the global crisis. The authorities’ strategy has consisted in adopting moderately countercyclical policies, maintaining exchange rate flexibility, advancing reforms to further strengthen the financial sector, and refocusing public expenditures toward social and infrastructure spending (as set out in the National Program of Emergency and Economic Recovery).
Fiscal policy has struck a reasonable balance between supporting demand and preserving public debt sustainability. The fiscal deficit of the central government reached 1.4 percent of gross domestic product (GDP) in January–September of 2009 due to a decline in revenues of about 7.5 percent and an increase in spending (mainly social and infrastructure expenditure). The government’s financing requirements were met through domestic bond issuance, use of government deposits at the central bank, and external loans from multilaterals. At end-2009, the central government deficit is expected to reach 3.4 percent of GDP, up from 1.6 percent of GDP in 2008.
Monetary conditions were eased gradually in 2009 to support the economic recovery and avoid disorderly adjustments in the exchange rate. As inflationary pressures eased, the central bank reduced its policy interest rate by 275 basis points to 4.50 percent (7.25 percent at end-2008). The nominal exchange rate has depreciated by 6½ percent since end-2008, contributing to cushion the impact of the global crisis. The central bank has intervened occasionally to smooth exchange rate volatility.
Despite the economic slowdown, the financial sector has remained sound. In the face of the global crisis, several measures were adopted to reduce the risks to the financial system, including continuous onsite supervision, temporary and enhanced liquidity provisioning mechanisms, and tighter provisioning requirements. While nonperforming loans have risen and profitability declined, liquidity and solvency ratios have remained adequate. As banks’ deposits are growing and credit is stagnant, overall liquidity is ample, inducing banks to repay foreign credit lines.
Executive Board Assessment
Executive Directors commended the authorities for their strong performance under the Fund-supported program, which has helped preserve macroeconomic stability and mitigate the impact of the global crisis. Directors welcomed the prospect of a gradual recovery and the declining downside risks as global financial conditions stabilize. They noted nevertheless that Guatemala’s near-term outlook is subject to the pace of recovery in the United States, calling for continued vigilance. Over the longer term, raising growth and reducing poverty while safeguarding fiscal sustainability require a comprehensive strategy, including measures to raise revenues and structural reforms aimed at enhancing the business environment.
Directors emphasized that fiscal policy should continue to strike a balance between supporting domestic demand and keeping public debt dynamics in check. They endorsed the authorities’ deficit target of 3.1 percent of GDP for 2010 and called on them to continue working with Congress to ensure prompt approval of a law to finance the expenditure plans. To stabilize the public debt-to-GDP ratio and to address long-standing weaknesses in education, health, security, and infrastructure, it will be important to strengthen tax administration and implement a comprehensive package of revenue-enhancing measures.
Directors supported the gradual easing of monetary policy. They encouraged the authorities to remain vigilant in their conduct of monetary policy, standing ready to adjust the policy rate as needed, and to continue improving communications with the market in order to anchor better inflation expectations. Directors stressed the need to strengthen the interest rate channel of monetary transmission, by further developing public and private securities markets and enhancing monetary operations.
Directors welcomed the commitment to a flexible exchange rate, pointing to its crucial role in cushioning the impact of external shocks and strengthening the credibility of the inflation-targeting framework. They noted the staff’s assessment that the real effective exchange rate may be somewhat overvalued, and supported the authorities’ intention to limit intervention in the foreign exchange market to smoothing out excessive volatility, allowing exchange rate movements to be driven by fundamentals. Directors encouraged the authorities to press ahead with structural reforms aimed at improving external competitiveness.
Directors emphasized that advancing the banking sector reform agenda remains a high priority. Recent efforts to strengthen supervision and regulation of the financial sector have contributed to its resilience in the face of the global crisis. Congressional approval and decisive implementation of the proposed amendments to the banking law would help reduce risks from offshore operations and connected lending, enhance the enforcement power of supervisors, and improve bank resolution procedures. Directors welcomed plans to implement regulations on liquidity and foreign credit management in early 2010.