## cr18154-guatemalabundle ## Source details **Canonical URL:** [cr18154-guatemalabundle](https://www.imf.org/-/media/files/publications/cr/2018/cr18154-guatemalabundle.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18154-guatemalabundle.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18154-guatemalabundle.pdf.json) --- ### Major findings and macroeconomic outlook - Main challenge: raising living standards; income per capita grew at an average rate of 1.2 percent over the past decade; poverty at 60 percent of the population; extreme poverty 23 percent. - Recent slowdown: remittances sustained private consumption, but growth decelerated due to weak confidence, insufficient contribution of budget spending to growth, and court-mandated suspensions of mining activities; slowdown broad-based across employment, private consumption, investment, and credit growth. - Growth outlook: - Growth projected to rise to 3.6 percent by 2019, peak at 3.8 percent in 2020, and under unchanged policies slow to 3.6 percent by 2023. - Output gap estimated at negative 0.4 percent of potential output in 2018, closing in 2020. - Investment low: 14.7 percent of GDP in 2016. - Inflation and monetary stance: - Central bank target range: 4±1 percent; headline inflation mostly within range except short-lived food-driven bouts. - Core inflation mostly below the lower bound in 2017 and, as of February 2018, is falling. - Food and non-alcoholic beverages share of CPI basket: 28.75 percent. - Fiscal outcomes and execution: - Government deficit remained low at 1.3 percent of GDP in the past two years, about ½ percentage points below the budget target. - Delays in updating the household census and procurement paralysis reduced execution of means-tested social transfers and public investment. - External position: - Terms of trade gains and remittance upsurge improved the current account since 2015, with a modest REER appreciation. - Staff projections: CA should gradually shift to a deficit of -1.3 percent of GDP by 2023. - EBA results: CA gap about 4½ percent of GDP in 2017 (cyclically-adjusted CA balance of 1½ percent of GDP and a CA norm of -3.1 percent); staff adjusts assumptions and assesses a CA gap of around 2½ percent of GDP and an undervaluation of the REER of around 15 percent. - Risks: - Domestic: binding spending limits, under-execution of spending, delay in judiciary decisions affecting mining operations. - Global: abrupt tightening of global financial conditions, potential future restrictions on financial transfers from the U.S., increased deportations from the U.S., broader global retreat from trade openness. ### Authorities’ views (summary) - Acknowledge need for wide-ranging reforms to raise living standards but expect electoral timing to delay major reforms. - Authorities estimate a lower negative output gap of 0.2 percent that closes by year-end and view inadequate fiscal support as a minor risk. - Authorities see no significant REER misalignment and attribute recent REER appreciation to remittances and trade gains. - Authorities acknowledge need for increased spending on education, health, and infrastructure and emphasize importance of legal certainty to improve execution rates. - Authorities consider limited space for further monetary easing but remain open to re-evaluate cuts if downside risks materialize and inflation expectations remain anchored. ### Policy recommendations — recalibrating the policy mix - Overall guidance: - Macroeconomic policy should support demand, ideally via a supplementary budget and improved ability to execute growth-enhancing social and infrastructure programs. - If fiscal support is insufficient and growth/inflation underperform, consider further monetary policy accommodation. - A. Fiscal policy to better support growth: - Support a pending supplementary budget to raise spending by up to ½ percent of GDP, focused on capital spending. - Increase spending by around 1 percent of GDP annually starting next year, centered on a few high-impact programs pursuing the SDGs. - Guatemala has substantial fiscal space to accommodate higher spending through a temporary increase in the deficit; over the medium term higher spending should be funded through higher revenues and a comprehensive tax reform. - Improve execution without diluting governance by: - shifting the General Comptroller’s activities toward preventive capacities and concurrent auditing; - providing clear interpretation of procurement norms and unified criteria to protect public employees from arbitrary auditor decisions; - using the Vice Ministry for Transparency to coordinate and supervise procurement; - adopting a medium-term budget framework including a national investment strategy embedded within a multi-year investment budget. - Box: SDG engagement and financing: - Development outcomes lag peers: poverty 60 percent; extreme poverty 23 percent; high prevalence of stunting in children under 5; infant and maternal mortality rates well above LAC averages; over 40 percent of the population without access to safe drinking water. - Ministry of Planning mapped K’atun 2032 into SDGs and 10 National Priorities, but costing and revenue mobilization largely unaddressed. - Fund engagement to focus on costing the spending needed to achieve the SDGs and reconciling long-term vision with a medium-term spending and financing strategy. - Preliminary local think tank estimate: additional expenditure needs at 3.7 percent of GDP by 2021. - B. Further monetary accommodation: - Consider further reductions in the policy rate if growth and inflation disappoint relative to central bank forecasts; policy rates adjusted for expected inflation are negative and below estimates of the neutral policy rate. - If activity indicators have not strengthened by mid-year and inflation risks remain to the downside, the central bank should be open to further lowering policy rates. - Recent laws on microcredit, collateral, and securitization of accounts receivable should help monetary policy transmission. ### Higher potential growth — revenue and tax policy - Revenue mobilization target: - Permanently raise revenues to at least 15 percent of GDP to accommodate needed social and infrastructure spending. - Tax administration improvements and a comprehensive tax reform should be accompanied by higher execution capacity and spending efficiency. - Tax administration measures (potential yield): - Reinforce VAT controls with risk-based auditing. - Strengthen large-taxpayer office management. - Improve use of tax information to correct non-compliance. - Enhance tax collection enforcement (including through easier implementation of bank secrecy provisions). - Implement customs post-clearance audit program. - These measures can at best yield additional revenues of 1 percent of GDP. - Tax reform options to raise around 3½ percent of GDP in additional revenues: - Increase PIT rates. - Simplify the corporate income tax. - Raise indirect taxes. - Reduce tax exemptions. - Redirect some existing tax expenditures to improve health and pension coverage. ### Spending efficiency, budget flexibility, and SDG-targeted spending - Budget rigidity: - Ninety percent of spending allocated ex-ante by Constitutional or other legal provisions. - Recommendations: scale back revenue earmarking and mandatory spending floors; couch spending objectives within a medium-term budget framework; evaluate program performance ex-post. - Reorient health and education provision: - Shift input mix away from personnel costs toward greater capital outlays. - Better align pay with performance; reform Laws on the Civil Service and Salaries in Public Administration. - Complete public-sector personnel census to identify and eliminate ghost positions (supported by EU and World Bank, CICIG observer). - Additional revenues should target high-impact SDG programs, including: - Expanding preventive and primary health care, especially in rural areas. - Increasing access to nutrition, water and sanitation services. - Broadening coverage of Mi Bono Seguro (covers less than 30 percent of extreme poor). - Expanding pension coverage (pension scheme covers less than 20 percent of elderly population); parametric reforms needed. - Expanding pre-primary education and investing in teacher training and school facilities. - Maintaining and expanding roads network. - Implementation priorities: improved coordination among line Ministries; systematic ex post performance evaluation as part of annual budgetary exercise. - Authorities’ views: committed to tax administration efforts but noted political constraints with presidential elections; agree integral fiscal reform should include better spending efficiency, procurement transparency, civil service reform, and broadening the tax base. ### Infrastructure — roads (Box 2) - Infrastructure investment declined from 3.1 percent of GDP in 2008 to 0.6 percent in 2015 (Latin America average: 3.7 percent). - Capital stock in 2015 about one-half of other emerging and developing economies. - Road system metrics: - 16,457−km network provides about 1 meter of roads per inhabitant and 151 meters per square km (against 3.7 and 413 meters, respectively, in CAPDR). - Logistics and transport performance: - World Bank Logistics Performance Index fell from 77 in 2014 to 111 in 2016 (out of 160 countries). - Average transport speed to ports and other destinations: 37 km per hour (international average: 60 km per hour). - Average time and cost to transport a standardized shipment from warehouse to domestic port of export: 1.61 minutes/km and US$2.52/km (compared to 1.07 minutes/km and US$1.16/km in Mexico). - Cost estimates and financing: - Preliminary estimates suggest paving dirt roads and closing the gap in meter of roads per inhabitant cost about 3½−4 percent of 2017 GDP for the next 20 years (IDC Group estimate). - Both private and public disbursements likely needed; limit contingent fiscal risks from PPPs. ### Labor market informality and social protection - Informality high: 70 percent of total employment, resulting in low coverage for social protections, high poverty, and low productivity. - Policy measures to reduce informality: - Bring minimum wage closer to regional standards by adopting objective criteria and conditioning increases on reduction in informality. - Raise productivity via education, rural roads, and irrigation. - Foster apprenticeship schemes (e.g., Mi Primer Empleo) and vocational training. - Set minimum remuneration for part-time work to increase overall employment. - Extend health and pension systems to self-employed and microenterprises (15 percent of workers precluded from social security). - Supporting facts: - About 60 percent of full-time workers (73½ percent of private-sector workers) receive salaries lower than the minimum wage (ENEI 2017, INE). - One in four employees are functionally illiterate (UNICEF, 2015). Only 3 percent of workers have a secondary school degree. ### Exchange rate policy and FX intervention - Authorities expressed reservations about reclassification of de facto exchange rate assessment. - FX intervention rationale: smooth exchange rate adjustment without affecting trend; address insufficient hedging and possible herd behavior. - Realized intervention one-sided due to positive balance of payments shocks from terms of trade and remittances. - Central bank expectation: flows would start weakening or reversing by mid-year and intervention scaled back. - Authorities reiterated commitment to a more flexible exchange rate to allow it to act as an adjustment mechanism. ### Financial sector resilience, supervision, and AML/CFT - System assessment: sound and well-regulated; banks well capitalized, sufficient liquidity, low nonperforming loans. - Staff stress test assumptions and results: - Credit risk: assumes 3.3 percent of performing loans become non-performing in system-wide shock and 6½ percent in sectoral shock to manufacturing, trade, and non-bank financial sectors. - Interest rate risk: assumes a 2 percent increase in nominal interest rates. - Exchange rate risk: assumes a 12 percent depreciation of the bilateral USD exchange rate. - Liquidity shock: assumes a 10 percent per day withdrawal of demand deposits and a 3 percent per day withdrawal of time deposits. - Reverse stress test indicators: System CAR < 10; 9 banks with CAR <10 in a simulated 1/2 market share scenario. - FX loan exposure: - 44 percent of FX loans are to unhedged borrowers. - 17 percent of total loans are FX loans to unhedged borrowers. - Recommendations: - Further tighten prudential requirements on FX loans to unhedged borrowers (higher provision, risk-weighting, collateral) and enhance supervision of underwriting standards. - Gradual move toward Basel III standards. - Strengthen macroprudential framework: develop systemic risk indicators and designate responsibility for macroprudential regulations. - Implement consolidated supervision and harmonize consolidation procedures with international standards. - Reinforce supervision of cooperatives and microcredit institutions. - New banking law under consideration merits support to strengthen bank resolution and depositor protection. - Support plan to establish inter-ministerial committee on financial inclusion, balancing social and financial stability goals. - AML/CFT: - Adopt revised AML/CFT bill (endorsed in 2014) to expand reporting entities, enhance preventive measures, establish risk-based obligations, secure supervisor protection, and enhance interaction with law enforcement. - Strengthen risk-based AML/CFT supervision for offsite and onsite activities. - Ensure transparency on ultimate beneficial ownership of corporate vehicles. ### Staff appraisal — macroeconomic and policy priorities - Political context: mid-2017 political crisis weakened confidence and prospects for structural reforms. - Growth forecast: rise to 3.6 percent by 2019, driven by better U.S. growth, accommodative monetary conditions, and normalization in government spending capacity. - Policy priorities: - Support supplementary budget to raise spending by up to ½ percent of GDP in 2018, focused on capital spending and execution. - Monetary policy attuned to weakening inflation; be open to lowering policy rate if activity indicators weak and inflation risks to the downside by mid-year. - Integral fiscal reform: tax administration, tax policy changes, and increased spending efficiency targeted to high-impact SDG projects. - Expand social protection and combat informality. - Improve business climate and governance to raise investment and private-sector job creation. - Greater exchange rate flexibility to allow exchange rate to play adjustment role; continue de-dollarization efforts and foster domestic capital markets. - Develop macroprudential policies, implement consolidated supervision, reinforce bank resolution; in Basel III adoption prioritize mitigating interest rate and FX liquidity risks. - Strengthen AML/CFT to maintain domestic banks’ access to international financial system and support anti-corruption efforts. ### Recent economic developments and key macro figures (selected projections and series) - Real GDP historical and projections (2007–2023): 6.3 (2007), 3.3 (2008), 0.5 (2009), 2.9 (2010), 4.2 (2011), 3.0 (2012), 3.7 (2013), 4.2 (2014), 4.1 (2015), 3.1 (2016), 2.8 (2017), 3.2 (2018), 3.6 (2019), 3.8 (2020), 3.7 (2021), 3.6 (2022), 3.6 (2023). - Consumer prices (end of period) series (2007–2023): 8.7, 9.4, -0.3, 5.4, 6.2, 3.4, 4.4, 2.9, 3.1, 4.2, 5.7, 4.2, 3.5, 3.5, 3.7, 3.8, 4.0. - Central government revenue (percent of GDP) series (2007–2023): 12.8, 12.0, 11.1, 11.2, 11.6, 11.6, 11.6, 11.5, 10.8, 11.0, 10.8, 10.9, 10.9, 11.0, 10.9, 11.0, 11.0. - Central government overall balance (percent of GDP) series (2007–2023): -1.4, -1.6, -3.1, -3.3, -2.8, -2.4, -2.1, -1.9, -1.4, -1.1, -1.3, -1.4, -1.7, -1.8, -2.0, -2.1, -2.2. - Central government debt (percent of GDP) series (2007–2023): 21.3, 20.1, 22.9, 24.1, 23.7, 24.3, 24.6, 24.3, 24.2, 24.5, 24.7, 24.8, 25.1, 25.5, 25.9, 26.3, 26.7. - Current account balance (US$ millions, 2013–2023 projections): -1,351 (2013), -1,230 (2014), -96 (2015), 1,023 (2016), 1,134 (2017), 922 (2018), 577 (2019), 212 (2020), -264 (2021), -800 (2022), -1,416 (2023). - Remittances (US$ millions, 2013–2023): 5,246, 5,699, 6,461, 7,354, 8,338, 8,964, 9,367, 9,789, 10,180, 10,587, 11,011. - Net IIP position: negative 22½ percent of GDP (described as small by regional standards). - Net international reserves (stock in millions of U.S. dollars, 2013–2017): 6,433 (2013), 6,587 (2014), 7,077 (2015), 8,321 (2016), 10,578 (2017); projections shown constant at 11,078 (2018–2023 in one table). ### External Sector Assessment (Annex I) — key findings - CA flipped into surplus in 2016, rising to 1½ percent of GDP (improvements in non-oil trade balance 0.9 percent of GDP, energy balance 0.5 percent of GDP, remittance inflows 0.6 percent of GDP). - CA for 2017 estimated at 1½ percent of GDP. - Remittances grew by over 13 percent in both 2016 and 2017; remittances share of GDP rose from 10.1 percent in 2015 to 11.0 percent in 2017. - Staff expectation: remittances moderate and trade deficit widen; CA back into deficit by the end of forecast period: -1.3 percent of GDP by 2023. - REER appreciated by 6 percent in 2016 and 5½ percent in 2017; NEER appreciated around 3 percent in both 2016 and 2017. - FDI inflows stable at around 2 percent of GDP up to 2015, decreased to 1.4 percent of GDP in 2017; forecast to stay below 1½ percent of GDP. - Staff EBA-based assessment: - EBA cyclically-adjusted CA norm: -3.1 percent of GDP. - Adjustments imply CA gap of 2.4 percent of GDP and corresponding REER undervaluation of about 15½ percent. - Under EBA-lite ES, CA norm that stabilizes net IIP at region’s weighted average is -3.6 percent of GDP implying similar CA gap of 2.3 percent. - Reserve adequacy: - NIR end-2017 at 173 percent of composite ARA EM metric (above Fund recommended 100−150 percent for floating FX). - Under stabilized FX regime comparable metric: 114 of ARA EM metric. - Reserves coverage: greater than 3 months of imports; greater than 20 percent of broad money; greater than 100 percent of short-term external debt. - NIR increased from 4½ months of imports in 2015 to 5.7 months at end-2017; expected to reach 4.2 months over medium term. ### Debt dynamics, fiscal sustainability, and scenarios - SAT reforms expected to yield at most an additional 1 percentage point of GDP in revenues over five years. - Scenario framework: - Scenario 1 (baseline): overall fiscal deficit assumes 1.4 and 1.7 percent of GDP in 2018 and 2019, respectively, and 2.1 percent of GDP between 2020-23. - Scenario 2 (temporary relaxation): temporary relaxation (5 years) of overall deficit to 2½ percent of GDP. - Scenario 3 (permanent relaxation): primary balance consistent with permanent relaxation of overall deficit to 2½ percent of GDP until 2075. - Scenario 4 (historical averages): real GDP growth, real interest rate and primary balance remain at historical averages over past ten years. - Main scenario findings: - Fiscal position sustainable long-run under all scenarios; debt ratio higher under permanent relaxation. - Baseline: debt-to-GDP stabilizes at 24.7 percent of GDP; debt-to-revenue around 215 percent. - Temporary relaxation: debt-to-GDP stabilizes at 30 percent; debt-to-revenue 262 percent. - Permanent relaxation: debt stabilizes at 33 percent; debt-to-revenue 286 percent. - Under all scenarios debt-to-GDP does not exceed 60 percent benchmark for market access countries. - Stochastic simulation: - Median debt forecast reaches about 25 percent of GDP, almost identical to baseline. - 95 percent upper confidence interval reaches 29 percent of GDP; restricted simulation yields 95 percent upper interval of 30 percent. - Key baseline projection figures (selected): - Nominal gross public debt: 23.0 (2015), 24.2 (2016), 24.0 (2017), 23.2 (2018), 23.1 (2019), 23.3 (2020), 23.7 (2021), 24.1 (2022), 24.7 (projection). - Public gross financing needs (percent of GDP): 3.6 (2015), 2.8 (2016), 2.6 (2017), 2.3 (2018), 2.1 (2019), 2.3 (2020), 2.6 (2021), 2.7 (2022), 2.9 (projection). - Real GDP growth (percent): 3.7 (2015), 4.1 (2016), 3.1 (2017), 2.8 (2018), 3.2 (2019), 3.6 (2020), 3.8 (2021), 3.7 (2022), 3.6 (projection). - Inflation (GDP deflator, percent): 5.2 (2015), 3.2 (2016), 3.9 (2017), 4.9 (2018), 4.5 (2019), 3.7 (2020), 3.5 (2021), 3.6 (2022), 3.7 (projection). - Effective interest rate (percent): 7.1 (2015), 6.9 (2016), 6.5 (2017), 6.3 (2018), 6.6 (2019), 6.9 (2020), 7.1 (2021), 7.3 (2022), 7.5 (projection). ### Tax administration, past recommendations, and implementation - SAT committed reforms expected to yield at most 1 percentage point of GDP over five years. - 2016 recommendations: strengthen SAT controls, review tax system to raise revenue by at least 3½ percent of GDP in the longer term, reduce revenue earmarking, improve fiscal transparency. - Implementation highlights: - Taxpayer Register prioritized; VAT control strategy introduced; updated web portal and model-office for taxpayer services. - Index of audit efficiency increased from 58 percent (2016) to 64 percent (August 2017). - Proposed 2016 tax reform withdrawn due to lack of political support. - Limited progress on reducing revenue earmarking. - Actions on fiscal transparency: action plan for GFSM 2014, open government data portal, publication of fiscal risks, progress on consolidated nonfinancial public sector data. ### Technical assistance, data, and planned activities - IMF and World Bank planned activities (March 2018–July 2019) include IMF Article IV consultation (March 2018) and multiple TA missions (Revenue Administration and Governance; Tax Policy; Macroprudential Policy; Monetary Policy Implementation & Operations; Government Finance; National Accounts; among others). - World Bank work program includes DPF on governance and malnutrition, IPF on tax administration transparency and efficiency. - IADB portfolio as of March 2018: Approved total US$784.0 million, undisbursed US$559.7 million; pipeline includes US$200 million for 2018 (health US$100 million and infrastructure US$100 million). - Statistical issues: - National accounts rebasing to 2013 planned for completion 2018 and dissemination Q1 2019. - CPI weights from 2009–10 ENIGFAM. - Unemployment estimated biannually only. - Monetary and financial statistics reported monthly to STA; efforts to expand FSI coverage for OFCs. - External statistics: migrated to BPM6; Reserves Data Template disseminated; participation in CDIS; recommendation to participate in CPIS. ### Fund relations, safeguards, and institutional data (selected) - Membership: Joined December 28, 1945, Article VIII. - Quota: 428.60 (SDR Million). - Exchange rate arrangement: - Since March 1994 based on an interbank foreign exchange market. - Effective January 1, 2018, fluctuation margin increased to 0.80 percent (previously 0.75 percent). - In March 2018 de facto exchange rate arrangement reclassified as “stabilized” from “floating”. - Reference exchange rate as of March 28, 2018: Q7.40 per U.S. dollar. - Safeguards: Bank of Guatemala assessment completed September 2009 (IMF Country Report No: 09/143). - Recent policy rate history (authorities’ statement): cut by 100 basis points in 2015 (from 4 percent to 3 percent); additional cut of 25 basis points in November 2017; current policy rate reported as 2.75 percent. ### Requests for information and coordination - IMF team requests to be kept informed of progress in macro-critical structural reform areas when milestones are reached (and at least semi-annually). - World Bank requests to be kept informed of IMF assessments and progress in macro-critical reform areas. - Joint IMF–World Bank planned activities and TA schedule covering March 2018–July 2019 (detailed list of TA topics and provisional timings provided). *Source: cr18154-guatemalabundle — selected IMF staff report content.* ### 1. Embracing the Sustainable Development Goals _________________________________________________8 ### 1. Embracing the Sustainable Development Goals _________________________________________________8 ### Major findings and macroeconomic outlook - Raising living standards is the main challenge: income per capita grew at an average rate of 1.2 percent over the past decade and is insufficient to meaningfully reduce poverty, currently at 60 percent of the population; extreme poverty is 23 percent. - Recent slowdown: strong remittance inflows sustained private consumption, but growth decelerated due to weak confidence, insufficient contribution of budget spending to growth, and court-mandated suspensions of mining activities. Slowdown has been broad-based across employment, private consumption, investment, and credit growth. - Outlook: - Growth is projected to rise to 3.6 percent by 2019, peak at 3.8 percent in 2020, and under unchanged policies slow to 3.6 percent by 2023. - Output gap estimated at negative 0.4 percent of potential output in 2018, closing in 2020. - Investment is low: 14.7 percent of GDP in 2016. - Inflation: - Central bank target range is 4±1 percent; headline inflation has been within this range except for short-lived food-driven bouts. - Core inflation mostly below the lower bound in 2017 and, as of February 2018, is falling. - Food and non-alcoholic beverages represent 28.75 percent of the CPI basket. - Fiscal outcomes and execution: - Government deficit remained low at 1.3 percent of GDP in the past two years, about ½ percentage points below the budget target. - Delays in updating the household census and procurement paralysis reduced execution of means-tested social transfers and public investment. - External position: - Terms of trade gains and remittance upsurge improved the current account (CA) since 2015, accompanied by a modest REER appreciation. - Staff projections: CA should gradually shift to a deficit of -1.3 percent of GDP. - EBA CA methodology results: CA gap about 4½ percent of GDP in 2017 (cyclically-adjusted CA balance of 1½ percent of GDP and a CA norm of -3.1 percent). Staff adjusts these assumptions and assesses a CA gap of around 2½ percent of GDP and an undervaluation of the REER of around 15 percent. - Risks: - Domestic: binding spending limits, under-execution of spending, delay in judiciary decisions affecting mining operations. - Global: abrupt tightening of global financial conditions, potential future restrictions on financial transfers from the U.S. (remittances), increased deportations from the U.S., and a broader global retreat from trade openness. ### Authorities’ views summarized - Authorities acknowledge need for wide-ranging reforms to raise living standards but expect electoral timing to delay major reforms. - Authorities estimate a lower negative output gap of 0.2 percent that closes by year-end and view inadequate fiscal support as a minor risk. - Authorities see no significant REER misalignment and attribute recent REER appreciation to remittances and trade gains. - Authorities acknowledge need for increased spending on education, health, and infrastructure and emphasize the importance of legal certainty to improve execution rates. ### Policy recommendations — recalibrating the policy mix - Overall guidance: - Macroeconomic policy should support demand, ideally via a supplementary budget and improved ability to execute growth-enhancing social and infrastructure programs. - If fiscal support is insufficient and growth/inflation underperform, consider further monetary policy accommodation. - A. Fiscal policy to better support growth - Support a pending supplementary budget to raise spending by up to ½ percent of GDP, with a focus on raising capital spending. - Increase spending by around 1 percent of GDP annually starting next year, centered on a few high-impact programs pursuing the Sustainable Development Goals (SDGs). - Guatemala has substantial fiscal space to accommodate higher spending through a temporary increase in the deficit; over the medium term higher spending should be funded through higher revenues and a comprehensive tax reform. - Improve execution of spending without diluting governance objectives by: - shifting the General Comptroller’s activities toward preventive capacities and concurrent auditing; - providing a clear interpretation of procurement norms and applying unified criteria to protect public employees from arbitrary auditor decisions; - using the newly created Vice Ministry for Transparency to coordinate and supervise entities involved in procurement; - adopting a medium-term budget framework that includes a national investment strategy embedded within a multi-year investment budget. - Box: SDG engagement and financing - Guatemala’s development outcomes lag peers: poverty 60 percent, extreme poverty 23 percent, prevalence of stunting in children under 5 among the highest in the world, infant and maternal mortality rates well above LAC averages, and over 40 percent of the population does not have access to safe drinking water. - The Ministry of Planning mapped K’atun 2032 national development plan into the SDGs and 10 National Priorities, but costing of interventions and revenue mobilization strategies remain largely unaddressed. - Fund engagement will focus on costing the spending needed to achieve the SDGs and reconciling the long-term vision with a medium-term spending and financing strategy. - Preliminary local think tank estimate: additional expenditure needs at 3.7 percent of GDP by 2021. - B. Further monetary accommodation - Consider further reductions in the policy rate if growth and inflation disappoint relative to central bank forecasts; policy rates adjusted for expected inflation are negative and below estimates of the neutral policy rate. - If activity indicators have not strengthened by mid-year and inflation risks remain to the downside, the central bank should be open to further lowering policy rates. - Recent laws on microcredit, collateral, and securitization of accounts receivable should help monetary policy transmission. - Authorities view limited space for further easing but are open to re-evaluate cuts if downside risks materialize and inflation expectations remain anchored. ### Higher potential growth — revenue and tax policy - Revenue mobilization target: - Permanently raise revenues to at least 15 percent of GDP to accommodate needed social and infrastructure spending. - Continued tax administration improvements and a comprehensive tax reform should be accompanied by higher execution capacity and spending efficiency. - Tax administration measures (potential yield): - Reinforce VAT controls with risk-based auditing. - Strengthen large-taxpayer office management. - Improve use of tax information to correct non-compliance. - Enhance tax collection enforcement (including through easier implementation of bank secrecy provisions). - Implement a customs post-clearance audit program. - These measures can at best yield additional revenues of 1 percent of GDP. - Tax reform options to raise around 3½ percent of GDP in additional revenues: - Increase PIT rates (could be frontloaded given extremely low current levels). - Simplify the corporate income tax. - Raise indirect taxes. - Reduce tax exemptions. - Redirect some existing tax expenditures to improve health and pension coverage. *International Monetary Fund staff summary of chapter: 1. Embracing the Sustainable Development Goals* ### 15. Revenue mobilization should be supplemented with measures to raise spending ### 15. Revenue mobilization should be supplemented with measures to raise spending ### Spending efficiency and budget flexibility - Ninety percent of spending is allocated ex-ante by either Constitutional or other legal provisions. - Recommendations to make the budget more responsive to spending needs: - Scale back revenue earmarking and mandatory spending floors. - Couch spending objectives within a medium-term budget framework. - Evaluate program performance outcomes ex-post. - Reorient provision of health and education services: - Shift the input mix away from personnel costs and toward greater capital outlays. - Better align pay with performance in the provision of public services. - Reform current regulations of the Laws on the Civil Service and Salaries in Public Administration. - Complete the public-sector personnel census to: - Make the hiring of public officials more transparent. - Provide a better cost-benefit assessment of the current structure of public employment. - The census aims, inter alia, to identify and eliminate ghost positions in the public administration. (Support is being provided by the European Union and the World Bank, with the CICIG as an observer.) ### Additional revenues: targeting high-impact programs for the SDGs - Principle: Spending additional revenues from tax reforms should be geared at high-impact programs in pursuit of the SDGs and would compensate any regressive effects from the tax policy changes. - Suggested programs to receive additional revenues: - Expanding preventive and primary health care, especially in rural areas. - Increasing access to nutrition, water and sanitation services. - Broadening the coverage of the main social assistance program Mi Bono Seguro (which covers less than 30 percent of the extreme poor). - Expanding pension coverage to alleviate adult poverty (currently the pension scheme covers less than 20 percent of the elderly population). Parametric reforms (higher retirement ages and contributions) will also be needed to limit increases in unfunded pension liabilities. - Expanding pre-primary education programs, including childcare, and investing in training teachers and improving school facilities. - Maintaining and expanding the roads network (see Box 2). - Implementation priorities: - Emphasize improved coordination amongst the line Ministries. - Subject programs to systematic ex post performance evaluation as part of the annual budgetary exercise. ### Authorities’ views on revenue mobilization and spending - Authorities reiterated commitment to tax administration efforts but emphasized measures will take time to bear fruit. - Acknowledged need for tax policy changes but noted limited prospects to pass them given fast-approaching presidential elections and political focus on corruption cases. - Agreed an integral fiscal reform would be important to increase buy-in from Congress; such a package would need to include: - Better spending efficiency. - Enhanced transparency of procurement processes. - Civil service reform. - Broadening of the tax base. - Political support could be better garnered with resolute implementation of visible and high-impact spending programs. - Agreement on the need to raise the level and coverage of conditional transfer programs, alongside improved coordination amongst various ministries. - Better targeting would be aided by an expedited completion of the national census and improved monitoring of the eligibility of beneficiaries. ### Box 2 — Overcoming Road Infrastructure Deficiencies (key findings and implications) - Infrastructure investment trend: - Declined from 3.1 percent of GDP in 2008 to 0.6 percent in 2015 (versus a Latin America average of 3.7 percent). - Capital stock: - Capital stock in Guatemala was about one-half of other emerging and developing economies in 2015. - Road system metrics: - 16,457−km network provides about 1 meter of roads per inhabitant and 151 meters per square km (against 3.7 and 413 meters, respectively, in CAPDR). - Logistics and transport performance: - Guatemala’s overall World Bank’s Logistics Performance Index fell from 77 in 2014 to 111 in 2016 (out of 160 countries). - Average transport speed of goods and people to ports and other destinations: 37 km per hour (international average speed: 60 km per hour). - Average time and cost to transport a standardized shipment from warehouse to domestic port of export: 1.61 minutes/km and US$2.52/km (compared to 1.07 minutes/km and US$1.16/km in Mexico). - Economic and welfare impacts: - Poor infrastructure increases logistics costs, constrains market expansion, impedes growth, and impairs import substitution in response to supply-side shocks, resulting in higher food inflation which directly hurts the poor. - Cost estimates and financing: - Preliminary estimates suggest costs associated with paving dirt roads and closing the gap in meter of roads per inhabitant are significant: about 3½−4 percent of 2017 GDP for the next 20 years (as estimated by the Development and Investment Corporation for Central America, IDC Group). - Given scale and need to reconcile private profitability with social goals for rural roads, both private and public disbursements are likely to be needed. - An infrastructure bill is being prepared to consolidate regulations, provide legal certainty on right-of-way acquisition and the legal nature of the contract. - Important to limit contingent fiscal risks from any private-public projects; specific financing vehicles remain unspecified. ### Links to labor market informality, minimum wage, and social protection (summary of related recommendations) - High informality: 70 percent of total employment; results in low coverage for basic social protections, high poverty, and low productivity. - Policy measures to reduce motivations for informality: - Bring the minimum wage closer to regional standards by adopting objective criteria and conditioning future increases on a reduction in informality. - Raise productivity of informal workers through investments in education and by investing in rural roads and irrigation. - Foster apprenticeship schemes, such as Mi Primer Empleo, and other vocational training programs. - Set the minimum level of remuneration for part-time work to achieve an increase in overall employment. - Extend health and pension systems to the self-employed and to microenterprises (at present 15 percent of workers are precluded from participating in the social security system). - Supporting facts cited: - About 60 percent of full-time workers (73½ percent of private-sector workers) receive salaries lower than the minimum wage (ENEI 2017, INE). - One in four employees are functionally illiterate (UNICEF, 2015). Only 3 percent of workers have a secondary school degree. *Source: IMF staff report chapter titled "15. Revenue mobilization should be supplemented with measures to raise spending" from the Guatemala country bundle.* ### 23. The authorities expressed reservations about the reclassification of the de facto ### cr18154-guatemalabundle - 23. The authorities expressed reservations about the reclassification of the de facto ### Exchange rate policy and FX intervention - Authorities expressed reservations about the reclassification of the de facto exchange rate assessment. - Authorities argued FX intervention is based on a transparent rule designed to smooth exchange rate adjustment without affecting its trend. - Rationale for intervention: insufficient hedging by market participants and possible herd behavior in the FX market. - Realized intervention was one-sided due to positive shocks to the balance of payments from stronger terms of trade and the upsurge in remittance inflows. - Central bank expectation: these flows would start weakening or even reversing by mid-year and FX intervention would be accordingly scaled back. - Authorities reiterated commitment to a more flexible exchange rate so it can play a greater role as an adjustment mechanism. ### Building financial sector resilience — assessment of current soundness and vulnerabilities - Financial system described as sound and well-regulated; vulnerabilities manageable. - Banks are well capitalized, appear to have sufficient liquidity, and nonperforming loans are low. - Staff stress test results indicate: - Sharp increases in interest rates or severe liquidity shocks in U.S. dollar funding markets could challenge banks’ resilience, but such shocks would be absorbed within available capital and liquidity buffers. - Exposure to exchange rate-related credit and funding risk: - 44 percent of FX loans are to unhedged borrowers. - 17 percent of total loans are FX loans to unhedged borrowers. - Recommendation: further tightening of prudential requirements on FX loans to unhedged borrowers could be warranted, including higher provision, risk-weighting, and collateral requirements, along with enhanced supervision of underwriting standards. ### Measures to modernize and strengthen the financial sector - Gradual move toward Basel III standards is recommended. - Strengthen the macroprudential framework by: - developing systemic risk indicators; - designating and clearly defining responsibility for macroprudential regulations. - Implement consolidated supervision: - harmonize consolidation procedures with international standards; - introduce consolidated regulatory requirements for financial groups. - Reinforce supervision of cooperatives and microcredit institutions. - New banking law under consideration by Congress merits support; it would strengthen the bank resolution framework and reinforce depositor protection by clarifying triggers for resolution and providing safeguards for the use of public funds. - Recently-adopted laws on microcredit, collateral, and securitization of accounts receivable are important for financial development and inclusion. - Support authorities’ plan to establish an inter-ministerial committee on financial inclusion, with attention to balancing social and financial stability goals. ### Stress test assumptions and results (as reported) - Credit risk: assumes 3.3 percent of performing loans becoming non-performing in the system-wide shock and 6½ percent on the sectoral shock to the manufactoring, trade, and non-bank financial sectors. - Interest rate risk: assumes a 2 percent increase in the nominal interest rates. - Exchange rate risk: assumes a 12 percent depreciation of the bilateral USD exchange rate. - Combined shock: assumes all of the above shocks occur. - Liquidity shock: assumes a 10 percent per day withdrawal of demand deposits and a 3 percent per day withdrawal of time deposits. - Reverse stress test indicators noted: System CAR < 10; 9 banks with CAR <10 in a simulated 1/2 market share scenario (as depicted in source charts). ### AML/CFT framework and recommendations - Strengthening AML/CFT framework is paramount to support efforts against corruption and organized crime. - Adoption of a revised AML/CFT bill (endorsed in 2014 by the bank supervisor, the private sector, and international organizations) would make it more difficult to conceal proceeds of corruption and would deter illicit flows. - When established, the bill and implementing regulations would: - expand the list of reporting entities to include notaries and other non-financial businesses and professionals; - enhance preventive measures for reporting entities; - establish an obligation for financial institutions to adopt a risk-based approach and a sound sanctioning regime for noncompliance; - secure greater protection for supervisors; and - enhance interaction between the supervisor and law enforcement authorities. - Additional recommendations: - Strengthen risk-based AML/CFT supervision for both offsite and onsite activities. - Ensure transparency on the ultimate beneficial ownership of corporate vehicles to help tackle illicit flows. ### Authorities’ views on vulnerabilities and reforms - Authorities concurred with staff assessments of vulnerabilities. - Authorities emphasized benefits of existing prudential measures to contain FX loans to unhedged borrowers and preferred to wait until these measures take full effect before considering additional tightening. - Banking Supervisor supported gradual adoption of Basel III and implementation of a macroprudential framework during the next three years. - Authorities indicated efforts to finalize the draft AML/CFT law, requiring harmonization with the Criminal Code and the Code of Commerce, and expected submission to Congress shortly. - Authorities highlighted recent progress in developing the necessary framework and tools for effective risk-based supervision. ### Staff appraisal — macroeconomic outlook and policy recommendations - Political context: economy endured a political crisis in mid-2017, weakening confidence and diminishing prospects for future structural reforms; political fragmentation has weakened prospects for reforms and eroded investor confidence. - Growth outlook: - Forecast growth to rise to 3.6 percent by 2019—broadly in line with Guatemala’s estimated growth potential—driven by better U.S. growth, accommodative monetary conditions, and normalization in government spending capacity. - Achieving better medium-term growth will require higher public and private investment. - External position: stronger than the level consistent with medium-term fundamentals and desirable policies. - Fiscal policy: - A supplementary budget aiming to raise spending by up to ½ percent of GDP in 2018 merits support, with a focus on raising capital spending and increasing spending execution. - Monetary policy: - Should be attuned to signs of weakening inflation. - With growth and inflation risks tilted to the downside, the central bank should be open to further lowering the policy rate if activity indicators have not strengthened by mid-year and inflation risks appear to remain to the downside. - Structural and medium-term policies: - Integral fiscal reform needed: tax administration efforts, tax policy changes, and increased spending efficiency targeted to high-impact projects in pursuit of the Sustainable Development Goals. - Expand social protection and combat informality to improve social outcomes. - Improve business climate and strengthen governance to raise investment and private sector job creation. - Exchange rate and financial sector reforms: - Greater exchange rate flexibility is recommended to underline the primacy of the inflation objective and to allow the exchange rate to play a greater role as an adjustment mechanism. - Continue efforts to discourage financial dollarization and foster development of domestic capital markets. - Develop macroprudential policies, implement consolidated supervision, and reinforce bank resolution to increase financial sector resiliency. - In adopting Basel III standards, give priority to mitigating vulnerabilities to interest rate and FX liquidity risks. - Strengthening the AML/CFT framework is important to maintain domestic banks’ access to the international financial system and to support efforts against corruption. *International Monetary Fund — Selected chapter content from the Guatemala staff report.* ### 36. It is recommended that the next Article IV consultation be held on the standard ### 36. It is recommended that the next Article IV consultation be held on the standard ### Recent Economic Developments - Growth has decelerated over the past two years. - The output gap has started to open. - Economic Activity Confidence Index: moving average (12 month) shown on scale 0-100 (index series in figures). - Remittances remain strong and have contributed to aggregate activity; Remittances (Millions of US$, rhs) are shown in figures. - Employment and wages growth has remained moderate. - Official unemployment remains low but the level of informality continues to be high. ### Key macroeconomic figures and projections (from Table 1) - Real GDP: 2007–2017 historical and 2018–2023 projections: 6.3 (2007), 3.3 (2008), 0.5 (2009), 2.9 (2010), 4.2 (2011), 3.0 (2012), 3.7 (2013), 4.2 (2014), 4.1 (2015), 3.1 (2016), 2.8 (2017), 3.2 (2018), 3.6 (2019), 3.8 (2020), 3.7 (2021), 3.6 (2022), 3.6 (2023). - Consumer prices (end of period): 8.7 (2007), 9.4 (2008), -0.3 (2009), 5.4 (2010), 6.2 (2011), 3.4 (2012), 4.4 (2013), 2.9 (2014), 3.1 (2015), 4.2 (2016), 5.7 (2017), 4.2 (2018), 3.5 (2019), 3.5 (2020), 3.7 (2021), 3.8 (2022), 4.0 (2023). - M2 (annual percent change): 10.2 (2007), 7.6 (2008), 10.0 (2009), 11.3 (2010), 10.7 (2011), 9.8 (2012), 9.0 (2013), 8.7 (2014), 9.4 (2015), 6.6 (2016), 8.4 (2017), 8.6 (2018), 7.4 (2019), 7.4 (2020), 7.4 (2021), 7.4 (2022), 7.4 (2023). - Credit to the private sector (annual percent change): 26.0 (2007 est.), 11.0 (2008), 1.1 (2009), 5.7 (2010), 14.1 (2011), 17.7 (2012), 12.0 (2013), 8.8 (2014), 12.8 (2015), 5.9 (2016), 3.8 (2017), 7.5 (2018), 8.5 (2019), 10.4 (2020), 10.5 (2021), 10.7 (2022), 9.0 (2023). ### Structural fiscal indicators and public finances - Sizable gaps in health, education, and infrastructure spending remain (figures report Education, Health, Infrastructure as percent of GDP). - There is scope to reduce spending rigidities and to shift the spending mix towards greater capital outlays and to better align pay with performance. - Central government revenue (percent of GDP): 12.8 (2007), 12.0 (2008), 11.1 (2009), 11.2 (2010), 11.6 (2011), 11.6 (2012), 11.6 (2013), 11.5 (2014), 10.8 (2015), 11.0 (2016), 10.8 (2017), 10.9 (2018), 10.9 (2019), 11.0 (2020), 10.9 (2021), 11.0 (2022), 11.0 (2023). - Central government expenditures (percent of GDP): 14.3 (2007), 13.6 (2008), 14.2 (2009), 14.5 (2010), 14.4 (2011), 14.0 (2012), 13.8 (2013), 13.4 (2014), 12.3 (2015), 12.1 (2016), 12.1 (2017), 12.3 (2018), 12.6 (2019), 13.0 (2020), 13.1 (2021), 13.2 (2022), 13.2 (2023). - Central government overall balance (percent of GDP): -1.4 (2007), -1.6 (2008), -3.1 (2009), -3.3 (2010), -2.8 (2011), -2.4 (2012), -2.1 (2013), -1.9 (2014), -1.4 (2015), -1.1 (2016), -1.3 (2017), -1.4 (2018), -1.7 (2019), -1.8 (2020), -2.0 (2021), -2.1 (2022), -2.2 (2023). - Central government debt (percent of GDP): 21.3 (2007), 20.1 (2008), 22.9 (2009), 24.1 (2010), 23.7 (2011), 24.3 (2012), 24.6 (2013), 24.3 (2014), 24.2 (2015), 24.5 (2016), 24.7 (2017), 24.8 (2018), 25.1 (2019), 25.5 (2020), 25.9 (2021), 26.3 (2022), 26.7 (2023). - Public wage bill and budget rigidities are highlighted in figures (budget rigidities by category shown for 2017). ### External developments and balance of payments - The recent improvement in the current account reflects a lower energy import bill and stronger remittances. - Remittances contributed to appreciation of the REER and accumulation of foreign reserves. - The current account is forecast to return to deficit in the medium term, largely financed by FDI inflows. - Net IIP position: negative 22½ percent of GDP (described as small by regional standards). - A large portion of external liabilities comprises non-debt creating FDI inflows. - Current account balance (in US$ millions): -1,351 (2013), -1,230 (2014), -96 (2015), 1,023 (2016), 1,134 (2017), 922 (2018), 577 (2019), 212 (2020), -264 (2021), -800 (2022), -1,416 (2023). - Trade balance (goods) (US$ millions): -6,176 (2013), -6,064 (2014), -5,557 (2015), -5,186 (2016), -5,992 (2017), -6,654 (2018), -7,208 (2019), -7,834 (2020), -8,527 (2021), -9,286 (2022), -10,123 (2023). - Exports, f.o.b. (US$ millions): 10,183 (2013), 10,992 (2014), 10,824 (2015), 10,581 (2016), 11,118 (2017), 12,008 (2018), 12,913 (2019), 13,812 (2020), 14,696 (2021), 15,583 (2022), 16,514 (2023). - Imports, f.o.b. (US$ millions): 16,359 (2013), 17,056 (2014), 16,381 (2015), 15,767 (2016), 17,110 (2017), 18,662 (2018), 20,121 (2019), 21,645 (2020), 23,222 (2021), 24,869 (2022), 26,637 (2023). - Remittances (part of net transfers): 5,246 (2013), 5,699 (2014), 6,461 (2015), 7,354 (2016), 8,338 (2017), 8,964 (2018), 9,367 (2019), 9,789 (2020), 10,180 (2021), 10,587 (2022), 11,011 (2023). - Net International Reserves (stock in millions of U.S. dollars): 6,433 (2013), 6,587 (2014), 7,077 (2015), 8,321 (2016), 10,578 (2017), 11,078 (2018–2023 as projected constant at 11,078 in table). - NIR in months of next-year NFGS imports: 3.8 (2013), 4.0 (2014), 4.5 (2015), 4.9 (2016), 5.7 (2017), 5.5 (2018), 5.2 (2019), 4.8 (2020), 4.5 (2021), 4.2 (2022), 4.2 (2023). ### Financial sector developments and soundness - Banks are well capitalized, with capital adequacy well above the regulatory minimum; Regulatory capital to RWA: 15.3 (2011), 14.7 (2012), 14.8 (2013), 14.6 (2014), 14.1 (2015), 13.8 (2016), 14.7 (2017) (figure series). - Profitability remains strong, although trending down with the deceleration of economic activity: Return on assets series around 1.5–1.8 (figures and FS indicators). - Liquidity is adequate and tilted towards reserves at the central bank; Reserves at Banguat and liquid assets depicted in figures. - Credit dollarization exposes banks to credit risk: Foreign currency-denominated loans to total loans in FS indicators: 33.2 (2007), 33.6 (2008), 31.0 (2009), 30.2 (2010), 34.0 (2011), 35.2 (2012), 36.7 (2013), 38.5 (2014), 39.9 (2015), 39.0 (2016), 38.6 (2017). - Foreign liabilities raise banks’ vulnerability to rollover risk: Foreign currency-denominated liabilities to total liabilities shown (25.0…29.1 series). - Holdings of sovereign bonds expose banks to interest rate-driven valuation losses: Bank claims on central government, 2017 (percent of GDP) shown in figure; comparative series across countries included. - Financial Soundness Indicators (selected): - Regulatory capital to risk-weighted assets (on-shore banks): series includes 13.8 (2007) through 14.7 (2017). - Nonperforming loans to total gross loans: 2.1 (2007), 2.2 (2008), 2.7 (2009), 2.1 (2010), 1.6 (2011), 1.3 (2012), 1.2 (2013), 1.3 (2014), 1.4 (2015), 2.1 (2016), 2.3 (2017). - Provisions to non-performing loans: 42.7 (2007), 73.2 (2008), 89.3 (2009), 115.3 (2010), 126.2 (2011), 143.4 (2012), 157.6 (2013), 151.9 (2014), 138.4 (2015), 120.4 (2016), 119.6 (2017). - Financial Sector Heatmap and overall ratings indicate predominantly M (moderate) and L (low) risk markings across categories; Overall Financial Sector Rating over 2016–2017 quarters is MMMMMMM in the heatmap. ### Monetary sector and central bank positions (Table 4 highlights) - Bank of Guatemala Net international reserves (in millions of U.S. dollars): series shows 50,515 (2013), 50,031 (2014), 54,155 (2015), 62,816 (2016), 77,679 (2017), 82,110 (2018), with projections to 87,113 (2023) in quetzales. - Currency in circulation (in millions of quetzales): 22,373 (2013), 24,134 (2014), 27,148 (2015), 29,398 (2016), 33,595 (2017), 36,548 (2018), projected 51,792 (2023). - Banking sector credit to the private sector (in millions of US$ or quetzales depending on table context): 140,159 (2013), 152,455 (2014), 172,036 (2015), 182,199 (2016), 189,043 (2017), projected 324,567 (2023) in the banking-sector table. - Net foreign position of banks (in millions of U.S. dollars): -22,472 (2013), -26,865 (2014), -32,991 (2015), -34,924 (2016), -37,419 (2017), -39,629 (2018), projected -52,848 (2023). - Memorandum monetary ratios include Currency in circulation and M2 shares and credit-to-GDP ratios presented in the monetary survey. ### Central government operations and financial balance (Table 2 highlights) - Central government revenue (in millions of quetzales): 49,250 (2013), 52,217 (2014), 52,858 (2015), 57,413 (2016), 59,984 (2017), 64,940 (2018), projected 94,328 (2023). - Expenditure (in millions of quetzales): 58,260 (2013), 60,811 (2014), 59,865 (2015), 63,076 (2016), 67,271 (2017), 73,496 (2018), projected 113,137 (2023). - Compensation of employees (in millions of quetzales): 16,968 (2013), 18,466 (2014), 20,304 (2015), 21,028 (2016), 22,328 (2017), 23,643 (2018), projected 34,659 (2023). - Interest (in millions of quetzales): 6,569 (2013), 6,583 (2014), 7,617 (2015), 7,724 (2016), 8,003 (2017), 8,669 (2018), projected 15,370 (2023). - Net lending (+)/borrowing (–) in millions of quetzales: -9,010 (2013), -8,594 (2014), -7,007 (2015), -5,663 (2016), -7,288 (2017), -8,556 (2018), projected -18,810 (2023). - Net financial worth (in millions of quetzales): -83,447 (2013), -87,469 (2014), -91,955 (2015), -91,033 (2016), -91,583 (2017), -102,766 (2018), projected -181,950 (2023). *Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### A. Background — Current Account - The CA balance flipped into surplus in 2016, rising to 1½ percent of GDP owing to improvements in the non-oil trade balance (0.9 percent of GDP), the energy balance (0.5 percent of GDP), and remittance inflows (0.6 percent of GDP). - The CA balance for 2017 is estimated at 1½ percent of GDP. - Remittances grew by over 13 percent in both 2016 and 2017, raising remittances as a share of GDP from 10.1 percent in 2015 to 11.0 percent in 2017. - Staff expectation: as the shock of foreign-held saving diminishes and perceptions of transfers abate, remittance inflows are expected to moderate. Together with domestic demand acceleration, the trade deficit should rise and push the CA balance back into deficit by the end of the forecast period: -1.3 percent of GDP by 2023. ### A. Background — Real Exchange Rate (REER) - The REER appreciated by 6 percent in 2016 and 5½ percent in 2017. - The NEER appreciated by around 3 percent in both 2016 and 2017. - IMF FSGM estimates: an increase in remittances inflows by 14 percent can cause the real exchange rate to appreciate by about 5 percent. ### A. Background — Capital and Financial Flows - FDI inflows were stable at around 2 percent of GDP up to 2015, then decreased to 1.4 percent of GDP in 2017. - Forecast: FDI is expected to stay below 1½ percent of GDP but would still suffice to fully cover the current account deficit in 2023. - Portfolio inflows due to sovereign Eurobond issuance were 1.0 percent of GDP in 2016 and 0.7 percent of GDP in 2017. - Net IIP position: negative 22¼ percent of GDP in 2016 (small by regional standards; Central America average of 65 percent). - Net IIP is forecast to decline to around 15 percent of GDP by 2023. - Non-debt creating FDI inflows comprised about 42 percent of total external liabilities in 2016 and are forecast to increase to about 50 percent in the medium term. - Public external borrowing was about 12 percent of GDP in 2016 and is forecast to decline further over the medium term. ### B. External Sector Assessment — Overall - Staff estimates based on the EBA current account (CA) methodology suggest the external position is stronger than the level consistent with medium-term fundamentals and desirable policies. - EBA cyclically-adjusted CA norm is estimated to be -3.1 percent of GDP, reflecting Guatemala’s relatively young population and low per capita income. - The political and institutional risk indicator in the EBA appears out of line; adjusting it to be more consistent with peers would improve the EBA norm by around 1 percent of GDP. - The EBA CA methodology estimates a cyclically adjusted balance of 1½ percent of GDP; accounting for temporary remittance flows (assuming half of the dollar increase in remittances since 2015 is temporary) would reduce the cyclically adjusted CA position to around ½ percent of GDP. - Combined adjustments imply: - CA gap of 2.4 percent of GDP. - Corresponding REER undervaluation of about 15½ percent. - Policy gaps (linked to low fiscal deficit and inadequate health spending) would account for around ¾ of the needed CA adjustment. - Removing structural impediments to investment is essential to facilitate external adjustment. - Under the EBA-lite ES approach, the CA norm that stabilizes Guatemala’s net IIP at the region’s weighted average is -3.6 percent of GDP; this implies a similar CA gap of 2.3 percent compared with the projected medium-term CA balance. ### B. External Sector Assessment — Competitiveness - Cost competitiveness: - Estimates imply that a 10 percent appreciation of Guatemala’s REER would lead to a reduction in total exports of approximately 1.2 percent (or US$100 million). - Guatemala’s export composition: manufacturing contributes 18 percent and commodities 57 percent of total exports, yielding smaller sensitivity to exchange rate movements than other Central American countries. - Structural competitiveness factors: - Competitiveness worsened in 2017−18 per the World Economic Forum Global Competitiveness Report. - Businesses report crime and theft, corruption, government bureaucracy, and poor infrastructure as the most problematic factors. - World Bank Doing Business Survey 2018: Guatemala scores weakly in enforcing contracts and protecting minority investors; all sub-categories deteriorated compared to the previous year, especially dealing with construction permits and starting a business. ### C. Reserve Adequacy Assessment - Net international reserves at end-2017 are at 173 percent of the composite ARA EM metric. - This is over the upper bound of the Fund’s recommended range (100−150 percent) for a floating FX regime. - Under a stabilized FX regime the comparable metric is 114 of ARA EM metric. - Coverage relative to traditional metrics: - Greater than 3 months of imports. - Greater than 20 percent of broad money. - Greater than 100 percent of short-term external debt. - Net international reserves increased from 4½ months of imports in 2015 to 5.7 months of imports at end-2017. - Reserves are expected to reach 4.2 months of imports over the medium term. *Source: IMF staff estimates in Annex I. External Sector Assessment.* ### 4. Tax administration efforts should be reinforced. Effective implementation of reforms ### 4. Tax administration efforts should be reinforced. Effective implementation of reforms ### Tax administration and revenue prospects - The SAT committed reforms are expected to yield at most an additional 1 percentage point of GDP in revenues over five years. - In 2016, there was a reasonable improvement in tax collection and the revenue-to-GDP ratio increased slightly due to efforts to combat fraud in customs. - In 2017, a combination of exchange rate and growth shocks led to a shortfall in revenues compared to SAT targets. - Over the medium term, continued efforts in tax administration reforms at the SAT and stronger tax enforcement are needed to achieve revenue targets. ### Assessing debt dynamics and fiscal sustainability — scenario framework - Scenario 1 (baseline): assumes an overall fiscal deficit of 1.4 and 1.7 percent of GDP in 2018 and 2019, respectively, and 2.1 percent of GDP between 2020-23. - Scenario 2 (temporary relaxation): assumes a temporary relaxation (for 5 years) of the overall deficit to 2½ percent of GDP. - Scenario 3 (permanent relaxation): assumes a primary balance consistent with a permanent relaxation of the overall fiscal deficit to 2½ percent of GDP until 2075. - Scenario 4 (historical averages): assumes that real GDP growth rate, real interest rate and the primary balance remain at their historical averages over the past ten years. ### Main scenario findings - Fiscal position is sustainable in the long-run under all three scenarios, while the debt ratio is higher under the permanent relaxation. - Baseline scenario outcomes: - Debt-to-GDP ratio stabilizes at the current level of 24.7 percent of GDP in the medium and long term. - Debt-to-revenue ratio remains at around 215 percent. - Temporary relaxation outcomes: - Debt-to-GDP ratio rises slightly in the short term and stabilizes at 30 percent of GDP in the long term. - Debt-to-revenue ratio increases to 262 percent. - Permanent relaxation outcomes: - Debt ratio continues rising over a long horizon but stabilizes at 33 percent of GDP. - Debt-to-revenue ratio reaches 286 percent. - Under all three scenarios the debt-to-GDP does not exceed an indicative benchmark for countries with market access at 60 percent. ### Sensitivity analysis and stochastic simulation - Five sensitivity tests considered: shock to the primary balance; shock to the real GDP growth; shock to the real interest rate; shock to the real exchange rate; and a combined shock of all the above. - Shock sizes were based on the historical standard deviations of the corresponding variables (with 2009 and 2010 excluded from the historical sample; the historical sample was extended by two earlier years to compensate so that the historical average is still based on a 10-year sample). - Definitions of specific shocks (as provided): - Real GDP Growth Shock: GDP growth rate is reduced by 1 standard deviation for 2 consecutive years; level of noninterest expenditures is the same as in the baseline; deterioration in primary balance leads to higher interest rate; decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth). - Primary Surplus Shock: Minimum shock equivalent to 50 percent of planned adjustment (50 percent implemented), or baseline minus half of the 10-year historical standard deviation, whichever is larger. There is an increase in interest rates of 25bp for every percentage point of GDP worsening in the primary balance. - Interest Rate Shock: Interest rate increases by the difference between average real interest rate level over projection and maximum real historical level, or by 200bp, whichever is larger. - Real Exchange Rate Shock: Estimate of overvaluation or maximum historical movement of the exchange rate, whichever is higher; pass-through to inflation with default elasticity of 0.25 for EMs and 0.03 for AEs. - Stochastic simulation results: - Simulations yield a very slight upward trend in public debt-to-GDP ratio, with the median debt forecast reaching about 25 percent of GDP, almost identical to the baseline projection. - The 95 percent upper confidence interval reaches 29 percent of GDP. - A restricted simulation in which upside shocks are disregarded yields an only slightly-higher 95 percent upper confidence interval of 30 percent of GDP. - The narrowness of these ranges reflects the historical stability of Guatemala’s macro variables. ### Key baseline projection figures (selected) - Nominal gross public debt: 23.0 (2015), 24.2 (2016), 24.0 (2017), 23.2 (2018), 23.1 (2019), 23.3 (2020), 23.7 (2021), 24.1 (2022), 24.7 (projection year shown). - Public gross financing needs (in percent of GDP): 3.6 (2015), 2.8 (2016), 2.6 (2017), 2.3 (2018), 2.1 (2019), 2.3 (2020), 2.6 (2021), 2.7 (2022), 2.9 (projection year shown). - Real GDP growth (in percent): 3.7 (2015), 4.1 (2016), 3.1 (2017), 2.8 (2018), 3.2 (2019), 3.6 (2020), 3.8 (2021), 3.7 (2022), 3.6 (projection year shown). - Inflation (GDP deflator, in percent): 5.2 (2015), 3.2 (2016), 3.9 (2017), 4.9 (2018), 4.5 (2019), 3.7 (2020), 3.5 (2021), 3.6 (2022), 3.7 (projection year shown). - Effective interest rate (in percent): 7.1 (2015), 6.9 (2016), 6.5 (2017), 6.3 (2018), 6.6 (2019), 6.9 (2020), 7.1 (2021), 7.3 (2022), 7.5 (projection year shown). - Primary (noninterest) revenue and grants (in percent of GDP): 11.8 (2015), 10.8 (2016), 11.0 (2017), 10.6 (2018), 10.7 (2019), 10.8 (2020), 10.8 (2021), 10.8 (2022), cumulative 64.7. - Primary (noninterest) expenditure (in percent of GDP): 12.6 (2015), 10.7 (2016), 10.6 (2017), 10.5 (2018), 10.7 (2019), 11.0 (2020), 11.1 (2021), 11.2 (2022), cumulative 65.9. - Change in gross public sector debt (in percent of GDP): 0.4 (2015), -0.1 (2016), -0.2 (2017), -0.8 (2018), -0.1 (2019), 0.2 (2020), 0.4 (2021), 0.5 (2022), cumulative 0.8. - Automatic debt dynamics (contribution, cumulative): -0.8. - Of which: real interest rate contribution cumulative 3.7; real GDP growth contribution cumulative -4.5. - Residual, including asset changes (cumulative): -0.1. ### Composition, alternative scenarios, and stress tests (high-level) - Baseline, historical, and alternative scenarios present variations in Real GDP growth, Inflation, Primary Balance, and Effective interest rate across 2017–2022 (values provided in detailed tables and charts). - Stress tests include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Shock, with scenario-specific parameterizations and projected impacts on Gross Nominal Public Debt, Gross Nominal Public Debt (in percent of Revenue), and Public Gross Financing Needs. ### External debt sustainability (selected baseline indicators) - Baseline external debt-to-GDP: 33.1 (2013), 34.1 (2014), 32.8 (2015), 31.5 (2016), 31.1 (2017), 30.0 (2018), 29.2 (2019), 28.4 (2020), 27.7 (2021), 26.4 (2022), 25.9 (2023). - Change in external debt: 2.7 (2013), 1.0 (2014), -1.4 (2015), -1.2 (2016), -0.5 (2017), -1.1 (2018), -0.7 (2019), -0.8 (2020), -0.7 (2021), -1.3 (2022), -0.5 (2023). - Identified external debt-creating flows (4+8+9) (in percent of GDP): -1.8 (2013), -2.8 (2014), -4.3 (2015), -5.4 (2016), -3.6 (2017), -3.3 (2018), -3.0 (2019), -2.6 (2020), -2.0 (2021), -1.5 (2022), -0.9 (2023). - Current account deficit, excluding interest payments (in percent of GDP): 1.5 (2013), 1.0 (2014), -0.8 (2015), -2.6 (2016), -2.6 (2017), -2.2 (2018), -1.7 (2019), -1.2 (2020), -0.7 (2021), -0.2 (2022), 0.4 (2023). - Exports (in percent of GDP): 23.6 (2013), 23.5 (2014), 21.4 (2015), 19.5 (2016), 18.7 (2017), 18.6 (2018), 18.8 (2019), 18.9 (2020), 18.9 (2021), 18.9 (2022), 18.9 (2023). - Imports (in percent of GDP): 35.5 (2013), 34.2 (2014), 30.6 (2015), 27.4 (2016), 27.3 (2017), 27.4 (2018), 27.8 (2019), 28.1 (2020), 28.3 (2021), 28.6 (2022), 28.9 (2023). - External debt-to-exports ratio (in percent): 140.2 (2013), 144.9 (2014), 153.0 (2015), 162.0 (2016), 166.1 (2017), 161.3 (2018), 155.6 (2019), 150.7 (2020), 146.7 (2021), 139.7 (2022), 137.0 (2023). - Gross external financing need (in billions of US dollars): 4.8 (2013), 4.8 (2014), 4.3 (2015), 3.4 (2016), 3.5 (2017), 4.0 (2018), 4.8 (2019), 5.5 (2020), 6.3 (2021), 8.0 (2022), 8.3 (2023). *Source: IMF staff.* ### Annex V. Past Fund Staff Recommendations ### Annex V. Past Fund Staff Recommendations ### Fiscal Policy — 2016 Recommendations and Implementation - Recommendations: - Strengthen the SAT by improving control and minimizing tax evasion. - Review of the tax system to help raise revenue by at least 3½ percent of GDP in the longer term. Main options include an increase in the number of brackets and top marginal rate of the PIT; a smaller increase in the VAT rate; a simplification of the corporate income tax; and higher energy taxes. - Reduce the high level of revenue earmarking to strengthen the efficiency of the budget. - Improve fiscal transparency and efficiency by implementing the IMF’s recent technical assistance advice on fiscal transparency. - Implementation and developments: - The taxpayer Register has become a priority for the SAT. - The VAT control strategy is offering: - (i) a plan to drive a more effective control on VAT refunds, and ensure risk-based compliance; - (ii) taxpayer integrated consultancy service to access taxpayers’ complete information; - (iii) reinforced invoicing authorization, and e-form to VAT refund application filing. - Updated web portal and a new model-office created for taxpayer services. - The index of audit efficiency increased from 58 percent (2016) to 64 percent (August 2017). - In August 2016 the government proposed a tax reform in line with staff recommendations, but the proposal had to be withdrawn due to lack of political support. - Limited progress has been made on reducing the high level of revenue earmarking. - Authorities are implementing some recommendations, including: - (i) defining an action plan to improve fiscal transparency; - (ii) designing an action plan to implement GFSM 2014 (guided by CAPTAC-DR), with actions until 2020; - (iii) creating the open government data portal with data on budget formulation and execution, and grants to municipalities; - (iv) publishing fiscal risks as an appendix of Budgets 2017 and 2018; - (v) making progress towards the publication of consolidated nonfinancial public sector data (on a GFSM 1986 format). ### Monetary Policy and Financial Sector — 2016 Recommendations and Implementation - Recommendations: - Continue strengthening the institutional framework for inflation targeting. - Prepare further macro-prudential measures in case the degree of dollarization persists and credit quality deteriorates. - Further strengthen capital buffers through a stricter definition of related parties and adopt capital ratios consistent with Basel III (including a capital surcharge for large systemic institutions). - Continue implementing risk-based AML/CFT supervision, and bring the framework in line with the 2012 FATF standards. - Improve consolidated supervision of financial conglomerates, adjust the legal framework in line with international standards, appoint national lead supervisors, and create a regional council for financial stability. Step up ring-fencing of on-shore banks with respect to the operations of off-shore banks. - Implementation and developments: - The authorities widened the fluctuation margin for interventions in the foreign exchange market from 0.75 to 0.8 percent of the five-day moving average of the exchange rate. - Congress approved a government transfer to cover the central bank’s annual losses from quasi-fiscal operations, but limited progress was made to recapitalize the central bank. - No additional measures were taken to further discourage dollarization or develop private debt and security markets. The securities market law was not submitted to Congress. - Authorities are developing a comprehensive macro-prudential program with Fund TA and plan to gradually adopt Basel III standards in 2018–21. - They received TA on market risk regulations. - The superintendence of banks is strengthening the AML/CFT capacity of its financial intelligence unit, including through Fund TA, and is reviewing the AML/CFT law to be submitted to Congress. - Progress remains slow on improving consolidated supervision of financial conglomerates, tightening definitions of related parties, and stepping up ring-fencing of on-shore banks relative to off-shore banks. ### Exchange Rate Policy - Recommendation: - Step up efforts to de-dollarize credit, mainly by allowing the exchange rate to fluctuate to force agents to internalize FX risks and promote hedging. - Implementation: - The fluctuation margin for interventions in the foreign exchange market was widened from 0.75 to 0.8 percent of the five-day moving average of the exchange rate. - Interventions have been conducted according to the rule. ### Structural Policies - Recommendations: - Raise government spending on security, the judicial system, infrastructure, education, health, and social assistance; improve the efficiency and targeting of social assistance programs; facilitate regional and international integration; strengthen competition policies, including through the adoption of the pending competition law; promote rural development. - Foster financial deepening and inclusion. - Implementation and developments: - Little progress has been made to increase social spending and investment in infrastructure. - The competition law remains pending. - Authorities adopted microcredit, collateral, and securitization of accounts receivable laws, which will foster financial inclusion. The leasing law is pending approval. ### Fund Relations and Institutional Data (as of March 28, 2018) - Membership Status: - Joined: December 28, 1945, Article VIII - General Resources Account (SDR Million): - Quota 428.60 100.00 - Fund holdings of currency 374.01 87.26 - Reserve Tranche Position 54.60 12.74 - SDR Department (SDR Million): - Net cumulative allocation 200.91 100.00 - Holdings 120.73 60.09 - Outstanding Purchases and Loans: None - Latest Financial Arrangements (Stand-By): - 04/22/09–10/21/10 Amount Approved (SDR Million) 630.60 Amount Drawn (SDR Million) 0.00 - 06/18/03–03/15/04 Amount Approved (SDR Million) 84.00 Amount Drawn (SDR Million) 0.00 - 04/01/02–03/31/03 Amount Approved (SDR Million) 84.00 Amount Drawn (SDR Million) 0.00 - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Charges/Interest: 2018 0.50; 2019 0.66; 2020 0.66; 2021 0.66; 2022 0.66 - Total: 2018 0.50; 2019 0.66; 2020 0.66; 2021 0.66; 2022 0.66 - Safeguards Assessment: - The Bank of Guatemala was subject to an assessment completed in September 2009 (IMF Country Report No: 09/143). The assessment found strengthened safeguards in transparency of financial reporting and the management of foreign exchange reserves, and recommended further strengthening of the bank’s governance and independence. - Exchange Rate Arrangement details: - Since March 1994 Guatemala has had an arrangement based on an interbank foreign exchange market. - Effective January 1, 2018, the fluctuation margin that determines whether the BOG may intervene was increased to 0.80 percent (previously 0.75 percent). - In March 2018 the de facto exchange rate arrangement was reclassified as “stabilized” from “floating” reflecting limited exchange rate volatility. - As of March 28, 2018, the reference exchange rate was Q7.40 per U.S. dollar. - FSAP Participation: - An FSAP Update was carried out during March 18-April 1, 2014; the Financial System Stability Assessment was discussed by the Executive Board on September 12, 2014. - Article IV Consultation: - The last Article IV consultation was concluded by the Executive Board on August 22, 2016. - Resident Representative: - Mr. Gerardo Peraza is the Regional Resident Representative for Costa Rica, Guatemala, and El Salvador, and is based in Guatemala. ### Technical Assistance (selected 2011–18 entries) - FAD, CAPTAC (selected): - 2018 Fees and License Rights - 2018, 2017 Trade Operators Based on Risk; Integral Load Control Plan; Customs Administration Process; VAT Credit Control; Cash Planning in Treasury - 2017 System Requirements in Treasury; Fiscal Risks; Treasury Single Account - 2016 Improving Collection with Equity and Efficiency (tax policy mission) - 2016 Revenue administration mission (to define short- and medium-term strategy to reform tax and customs administration) - 2016 Fiscal Transparency Evaluation - 2015, 2014 Support tax control strategy with emphasis on mass control - 2014 Establish tax payers’ profiles and data to measure effectiveness of actions - 2011 Debt management strategy; Revenue forecasting; Government cash flow and financial planning - MCM, CAPTAC (selected): - 2018 Supervisory Reporting; Equilibrium Real Exchange Rate Model - 2017 Operational Risk Data Base; Market Risk Regulation; Supervisory Reporting; Insurance Catastrophic Risk; Operational Risk Supervision - 2017 International Financial Reporting Standards (IFRS); Central Bank’s Capacities for Financial Stability Analysis - 2016 Central Securities Depository for Government Securities - 2014 Enhancing monetary operations; Stress testing model for banking supervision and monetary stability purposes - STA, CAPTAC (selected): - 2018 Sectorization of the public sector and disclosure of fiscal data - 2017–2011 National accounts statistics (multiple missions) - 2016–2010 Balance of Payments Statistics and IIP; Producer price index; Export and import price indices; Monthly Index of Economic Activity ### Relations with the World Bank and JMAP — Macro-critical Reform Areas and Division of Labor - Shared assessment: - Main macroeconomic challenges: safeguard macroeconomic stability while addressing social and structural deficiencies. - Near-term outlook subdued, with risks from domestic policy constraints and global uncertainty. - Identified macro-critical structural reform areas: - Fiscal Policy: arrest revenue decline as a share of GDP and increase transparency and efficiency of fiscal spending. - Revenue mobilization: Guatemala’s revenue-to-GDP ratio continues to be among the lowest in the world; 2012 tax reform yielded less additional revenue than anticipated due to implementation problems and legal challenges; revenues declined amid the 2015 political crisis. - Government spending: improve efficiency, composition, and transparency; WB completed a Public Expenditure Review in 2013 and prepared interventions including a Development Policy Loan (November 2016) and Investment Project Financing to strengthen the Tax Superintendence (January 2017). - Pension reform: a parametric pension reform will be required in the longer run to limit increases in unfunded pension liabilities. - Monetary policy framework: allow greater exchange rate flexibility, discourage dollarization, and foster development of domestic capital markets. - Financial sector issues: apply key Basel III components; implement risk-based AML/CFT supervision; strengthen bank resolution framework; enhance consolidated supervision of financial conglomerates; adopt national strategy for financial inclusion and reduce entry costs. - Labor market: address informality (informality stands at 70 percent of total employment) through policies including aligning minimum wage with regional averages, raising education and productivity of informal workers, fostering apprenticeship schemes and part-time employment, and making the self-employed eligible for health and pension systems. - ILO 169 Convention: address legal uncertainty affecting investment in extractive industries; aim for swift incorporation of the Convention into domestic law balancing investment attraction and indigenous rights. - Division of labor between IMF and WB: - IMF to lead on overall fiscal policy strategy, debt sustainability analysis, and MTDS support; continue tax policy and administration TA and support via CAPTAC-DR. - WB to lead on improving composition and efficiency of public spending, prepare large lending operation to support tax administration institution building, deliver TA for a Fiscal Observatory, manage EU grant for First Civil Servants Census (expected completion 2019), and design new procurement framework and draft Procurement Law (final version expected by second quarter of 2018). - IMF to provide policy recommendations and TA on monetary framework, macro-prudential policy, and monetary transmission mechanism. - IMF and WB to cooperate on following up 2014 FSAP recommendations and on AML/CFT and risk-based supervision implementation. - WB to continue policy dialogue on labor market reforms. - On ILO 169 Convention, WB to support Ministry of Labor with TA to strengthen the draft law prior to Congressional discussions; Constitutional Court instructed Congress to approve a law to guide consultations of ILO 169 in May 2017; the law was expected to be approved by the second quarter of 2017. *Source: cr18154-guatemalabundle - Annex V. Past Fund Staff Recommendations* ### 6. The teams have the following requests for information from their counterparts: ### 6. The teams have the following requests for information from their counterparts ### Information requests and coordination - IMF team requests to be kept informed of progress in the above macro-critical structural reform areas when milestones are reached (and at least semi-annually). - WB team requests to be kept informed of the IMF’s assessments of macroeconomic policies and prospects, including updates of the IMF’s macroeconomic framework, and progress in the above macro-critical structural reform areas. ### World Bank and IMF planned activities (March 2018–July 2019) - Joint table title: World Bank and IMF Planned Activities in Macro-Critical Structural Reform Areas March 2018–July 2019. - World Bank Work Program: - DPF Enhancing Governance and Policies to Address Malnutrition — Provisional Timing of Missions: May 2018 — Expected Delivery Date: May 2018 - IPF Transparency and Efficiency in Tax Administration — Provisional Timing of Missions: May 2018 — Expected Delivery Date: May 2018 - IMF Work Program including CAPTAC-DR: - 2018 Article IV consultation — Provisional Timing of Missions: March 2018 — Expected Delivery Date: March 2018 - Technical Assistance areas (Provisional Timing of Missions: May 2018 – April 2019): - Revenue Administration and Governance - Revenue Quantity - Tax Policy - Institutional Structures - Tax Administration Core Functions - Structures and Tools (Supervision) - Customs core administration - Tax Administration Core Functions - Asset Management - Budget Preparation - Fiscal Risks - Fiscal Reporting - Regulatory and Prudential Framework - Insurance Regulation and Supervision - Monetary Policy Implementation & Operations - Establishment of an effective macroprudential policy framework. - Monetary Policy Implementation & Operations - Government Finance - Real Sector - National Accounts - Macroprudential Policy ### World Bank — Guatemala financial relations (millions of U.S. dollars) - Table header: Guatemala and the World Bank Financial Relations - Projects (Total loan | Undisbursed through FY17 | Projected disbursements in FY18): - First Improved governance of Public Resources and Nutrition — 250 | 250 | 250 - Transparency and Efficiency in Tax Administration — 55 | 55 | (blank projected disbursements) - Guatemala Nutrition and Health Project — 100 | 100 | (blank projected disbursements) - Urban Infrastructure and Violence Prevention — 45 | 45 | (blank projected disbursements) - Note: All of these operations are pending Congressional approval. ### Relations with the Inter-American Development Bank (IADB) — key figures (As of March 2018) - IADB country strategy for Guatemala approved December 2017 for 2017–20, focusing on: (i) improving public management and transparency; (ii) reducing poverty and inequality; (iii) enhancing private sector development; with priorities on rural and indigenous populations, climate change adaptation, and coordination with the Alliance for the Prosperity of the Northern Triangle. - As of March 2018, IADB portfolio of approved sovereign-guaranteed loans under execution: Approved total US$784.0 million, with an undisbursed balance of US$559.7 million. - Pipeline for 2018 includes two public sector projects for US$200 million: health (US$100 million) and infrastructure (US$100 million). ### Loan transaction summary (In millions of U.S. dollars; (p) as of March 2018) - Disbursement: 2014 — 80.5; 2015 — 296.8; 2016 — 48.9; 2017 — 57.8; 2018(p) — 2.2 - Repayments: 2014 — 130.2; 2015 — 147.2; 2016 — 145.2; 2017 — 203.2; 2018(p) — 22.2 - Net Lending: 2014 — -49.7; 2015 — 149.6; 2016 — -96.3; 2017 — -145.4; 2018(p) — -19.9 - Subscriptions and Contributions: 2014 — 2.0; 2015 — 2.0; 2016 — 1.9; 2017 — 0.0; 2018(p) — 0.0 - Interest and Charges: 2014 — 78.5; 2015 — 76.3; 2016 — 85.5; 2017 — 84.9; 2018(p) — 10.8 - Net Cash Flow: 2014 — -130.2; 2015 — 71.4; 2016 — -183.8; 2017 — -230.3; 2018(p) — -30.7 - Source: Inter-American Development Bank. Note: (p) as of March 2018. ### IADB sovereign guaranteed loan portfolio as of March 2018 (In millions of U.S. dollars) - Sector | Approved | Undisbursed - Fiscal Transparency — 250.0 | 250 - Competitiveness — 29.0 | 14.1 - Security and Justice — 90.0 | 61.0 - Infrastructure — 30.0 | 8.5 - Water and Sanitation — 50.0 | 36.4 - Health — 35.0 | 12.3 - Education — 300.0 | 177.4 - Total — 784.0 | 559.7 - Source: Inter-American Development Bank. ### Statistical issues (As of April 2, 2018) - Assessment of Data Adequacy for Surveillance: Data provision has some shortcomings, but is broadly adequate for surveillance. - National accounts: - Bank of Guatemala (Banguat) publishes annual and quarterly national accounts consistent with the System of National Accounts 1993 (1993 SNA), with 2001 as the base year. - Monthly index of economic activity (IMAE) consistent with quarterly and annual accounts is disseminated regularly. - Banguat has started national accounts rebasing planned to be completed in 2018 and disseminated in the first quarter of 2019, with 2013 as the new base year and adopting main recommendations of the 2008 SNA. - Consumer prices and unemployment: - Consumer price index (CPI) is disseminated monthly, using weights from 2009–10 based on the National Household Income and Expenditure Survey (ENIGFAM), conducted between July 2009 and July 2010. - CPI is compiled at national level and for eight regions. - Unemployment is estimated only on a biannual basis. - Government finance statistics: - Revenue, expenditure, and financing statistics for social security agencies, local governments, and nonfinancial public enterprises are not reported, hindering consolidated operations statement and balance sheet for the nonfinancial public sector. - Coverage and periodicity of data on central government financing and debt is adequate. - Guatemala provides annual fiscal data for the GFSY with institutional coverage of Budgetary Central Government. - Country participates in a regional capacity development program for harmonization of GFS for Central America, Panama, and the Dominican Republic led by CAPTAC-DR; workshop launched September 2017; TA provided October 2017 and February 2018; further TA scheduled for April and December 2018. - Monetary and financial statistics: - Monetary and financial statistics are reported monthly to STA using standardized report forms (SRFs) for the central bank, other depository corporations, and other financial corporations (OFCs). - OFCs comprise insurance companies, warehouses and exchange houses. - Monetary data exclude credit card companies, securities dealers, other financial intermediaries, and other financial auxiliaries. - Financial sector surveillance: - Authorities report monthly all twelve core financial soundness indicators (FSIs) and ten (out of thirteen) of the encouraged set for the deposit taking sector. - Authorities are working on expanding FSI coverage of the OFCs sector. - External sector statistics: - Significant progress on prerequisites for data quality and methodological soundness. - Legislation obliging private sector to provide information to Bank of Guatemala for statistical purposes is still pending, affecting response rate to balance of payments surveys. - On dissemination, Guatemala has: - Migrated to BPM6; - Disseminated the Reserves Data Template; - Disseminated comprehensive inward/outward data on the Coordinated Direct Investment Survey (CDIS); - Provided total external debt statistics by sector on the World Bank’s website. - Compilers at the Central Bank should be encouraged to participate in the Coordinated Portfolio Investment Survey (CPIS). - Data Standards and Quality: - Guatemala participates in the enhanced General Data Dissemination System (e-GDDS) and meets nearly all recommended periodicity and timeliness recommendations of the e-GDDS. - A data ROSC was completed on October 28, 2004. ### Table of Common Indicators Required for Surveillance — selected entries - Exchange Rates — Date of latest observation: Feb/2018 — Date received: 3/5/2018 — Frequency of Data/Reporting/Publication: D / D / D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: Feb/2018 — Date received: 3/5/2018 — Frequency: M / M / M - Reserve/ Base Money — Date of latest observation: Dec/2017 — Date received: 12/19/2017 — Frequency: W / W / W - Broad Money — Date of latest observation: Nov/2017 — Date received: 12/19/2017 — Frequency: W / W / W - Central Bank Balance Sheet — Date of latest observation: Dec/2017 — Date received: 1/10/2018 — Frequency: D / D / D - Consolidated Balance Sheet of the Banking System — Date of latest observation: Nov/2017 — Date received: 12/20/2017 — Frequency: M / M / M - Interest Rates — Date of latest observation: Nov/2017 — Date received: 12/19/2017 — Frequency: W / W / W - Consumer Price Index — Date of latest observation: Feb/2018 — Date received: 4/2/2018 — Frequency: M / M / M - Revenue, Expenditure, Balance and Composition of Financing - Central Government — Date of latest observation: Dec/2017 — Date received: 12/20/2017 — Frequency: M / M / M - Stocks of Central Government and Central Government-Guaranteed Debt — Date of latest observation: Dec/2017 — Date received: 12/20/2017 — Frequency: M / M / M - External Current Account Balance — Date of latest observation: Q4/2017 — Date received: 4/3/2018 — Frequency: Q / Q / Q - Exports and Imports of Goods and Services — Date of latest observation: Q4/2017 — Date received: 4/3/2018 — Frequency: Q / Q / Q - GDP/GNP — Date of latest observation: Q4/2016 — Date received: 12/08/2017 — Frequency: Q / Q / Q - Gross External Debt — Date of latest observation: Q4/2017 — Date received: 12/20/2017 — Frequency: Q / Q / Q - International Investment Position — Date of latest observation: Q4/2017 — Date received: 4/3/2018 — Frequency: Q / Q / Q - Frequency codes: Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA). ### Statement by Mr. Carlos Hurtado, Executive Director for Guatemala (May 25, 2018) — key points - Economic resilience and growth: - Guatemalan public debt is "at 24 percent of GDP". - Economic growth averaged 3.5 percent since 2007. - Economy decelerated to 2.8 percent in 2017. - Official projections point to a recovery of 3.4 percent in 2018, driven by expected higher U.S. growth, increased exports, and recovery in internal demand, in particular public investment. - Monetary and exchange rate policies: - Inflation has been within the target range during the last eight years. - Policy rate history: cut by 100 basis points in 2015 (from 4 percent to 3 percent); remained unchanged until November 2017 when an additional cut of 25 basis points was approved. - Current policy rate: 2.75 percent. - The current policy rate is described as "well below the authorities’ estimation of neutral interest rate, negative in real terms, and one of the lowest among the Latin American countries under the inflation targeting regime." - Authorities see limited space for additional monetary policy accommodation due to ample liquidity, closing output gap, expected acceleration in core inflation, improved fiscal budget execution, and potential external pressures (oil prices, U.S. monetary policy normalization). - Authorities dispute reclassification of de-facto exchange rate arrangement from floating to stabilized; state that exchange rate is flexible and central bank intervenes only to smooth volatility without changing ER trend; commitment to a more flexible exchange rate by gradually increasing the intervention margin. - Financial system: - "Guatemala’s financial system is one of the more solids and excels in the fight against money laundering." - Banking system soundness ranks 11 among 137 countries assessed (World Economic Forum 2017-2018). - According to the 2016 Mutual Evaluation Report by GAFILAT and a Basel Institute on Governance publication (August 2017), Guatemala ranks among the first ten in world comparison in technical compliance and effectiveness in AML/CFT. - Revision of law to strengthen the AML/CFT framework is underway and expected to be completed during the second semester of the year. - Financial inclusion efforts: Guatemala ranks 20 in the getting credit category of the Doing Business 2018 report. - Law of Factoring and Discounts Contracts approved January (year unspecified in text); April Congress approved reforms to the Law of Movable Guarantees; leasing law initiative pending Congress approval. - Fiscal policy and governance: - Law for strengthening fiscal transparency and governance of the Superintendency of Tax Administration (SAT) passed August 2016. - Actions under the law aligned around: (i) transparency and tackling corruption; (ii) increase institutional efficiency, cooperation, fiscal audit and tackling evasion; (iii) better service to taxpayers; (iv) use of technology and personal development. - New Vice-Ministry of Finance in charge of Transparency established. - Anti-smuggling law pending approval by Congress. - Authorities acknowledge need for deeper reforms to increase revenue mobilization, improve spending quality and efficiency, reform civil service, broaden tax base; additional revenues should finance visible high-impact spending programs. - Programs with highest potential to reduce poverty and inequity linked to Sustainable Development Objectives are being identified with WB and IMF support. - General Road Infrastructure Law initiative presented to Congress on April 2018 and under assessment. - Authorities share staff’s view on need to push reforms (e.g., Comptroller General’s Office) to accelerate budget execution. - In June 2017, Congress ratified the Convention on Mutual Administrative Assistance in Tax Matters. - Governance and anti-corruption: - Significant efforts to fight corruption since 2015; MP and CICIG unveiled high-impact cases during 2015-2018. - Reforms: organic law of the public ministry (approved March 2016); law of the judicial career (approved July 2016 and reformed October 2017). - Financial Intelligence Unit (IVE) has strengthened capacity; suspicious transactions reports and national reporting requirements overseen by IVE have increased dramatically over the past 5 years (see Table 1 page 42 of the SIP). *Source: cr18154-guatemalabundle - 6. The teams have the following requests for information from their counterparts (IMF staff content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18154-guatemalabundle.pdf_