## 1. Narrowing the Tax Gap in Guatemala

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### Context and recent macroeconomic developments
- Growth picked up to 3.1 percent (from 2.8 percent in 2017).
- Potential growth: 3½ percent.
- Output gap: negative; bottomed out amid weak employment creation.
- Near-term projection: growth projected to accelerate to 3.4 percent in 2019.
- Medium-term projection: growth expected to peak at 3¾ in 2021, before converging to 3½ percent by 2024.
- Inflation:
  - 2018 inflation closed at 2.3 percent y/y (below the 4±1 percent target range).
  - Core inflation end-of-period 2.9 percent.
  - As of April 2019, inflation reached 4¾ percent y/y.
- Fiscal outcomes:
  - Revenue-to-GDP ratio declined to 10.6 percent of GDP in 2018 (10.8 percent of GDP in 2017).
  - Central government deficit widened to 1.8 percent of GDP in 2018 (from 1.3 percent in 2017).
  - Fiscal impulse: nearly ½ percent of GDP in 2018; estimated fiscal impulse about ½ percent of GDP for 2018 and 2019 (fiscal impulse defined as change in the cyclically-adjusted primary balance in percent of GDP).
- External:
  - CA balance declined to ¾ percent of GDP in 2018.
  - Staff estimates a CA norm at -2.2 percent of GDP implying a CA gap of 2.9 percent of GDP for 2018, with a CA gap range of 1.6 to 4.2 percent of GDP and an implied REER gap range of -26 to -10.
  - Guatemala’s gross external debt is estimated to have reached nearly 30 percent of GDP in 2018.
  - Public sector external debt stands at about 11 percent of GDP (about ½ of total government debt).
  - Related interest payments amounted to 4½ percent of tax revenues.
- Monetary and credit conditions:
  - Accommodative monetary conditions enabled a turnaround in credit since mid-2018.
  - Credit growth led by mortgages, then credit to large businesses and consumption loans.
  - FX-adjusted credit expansion broad-based (industrial, consumption, and trade sectors).
- Risks:
  - Downside: U.S. and regional slowdown; increased return of migrants; drifting anti-corruption efforts; lagged business environment reforms; ambiguity on ILO Convention 169 interpretation affecting mining.
  - Upside: creation of ProGuatemala and deepening trade agreements.

### Fiscal policy stance and recommendations
- Near-term stance:
  - Fiscal support to demand is appropriate given spare capacity and available fiscal space.
  - Fiscal deficit forecast to widen to 2.2 percent of GDP by year-end, and to 2.4 percent in 2020, enabling a cumulative fiscal impulse of 0.6 percent of GDP over 2019−20.
  - Authorities should sustain spending momentum and redouble tax administration efforts to stabilize the revenue-to-GDP ratio at around 10½ percent this year and gradually increase it thereafter.
- Medium-term fiscal strategy:
  - Aim for a broadly stable debt-to-GDP ratio to safeguard ability to deal with shocks.
  - Capacity to address infrastructure and social gaps depends on raising tax collections, improving spending efficiency, and maintaining sound public debt management.
  - A broad tax reform (Annex IV) could eventually be considered to finance well-planned spending.
- Fiscal efficiency and structural reforms to consider:
  - Reform civil service and salaries: tie remunerations with coverage and quality of health and education services; professionalize public service via merit-based recruitment, incentives, and training.
  - Reform procurement law: align with best international practices; leverage e-procurement system (Guatecompras) to bolster cost-effectiveness while ensuring transparency and traceability.
  - Increase budget flexibility: scale back revenue earmarking and mandatory spending floors; enforce performance-based budgeting within a medium-term framework.
  - Rationalize tax incentives and exemptions: centralize comprehensive information on exemptions and beneficiaries; prepare cost-benefit analyses to avoid abuses.

### Narrowing the tax gap — findings
- Aggregate and structural facts:
  - Guatemala has one of the lowest tax efforts worldwide; tax burden well below the aspirations of the 2000 Fiscal Pact and about half of the country’s tax capacity of around 20 percent.
  - The tax gap stems roughly equally from tax policy (low statutory rates and numerous exemptions) and tax evasion.
- Quantified evasion estimates:
  - Technical assistance estimated tax evasion at almost 5 percent of GDP in 2015, largely affecting VAT and CIT.
  - VAT evasion increased from 2.4 percent of GDP in 2015 to 2.8 percent of GDP in 2017, mostly reflecting SAT enforcement challenges; recovery seen by end-2018 is encouraging.
  - CIT and other taxes evasion reached similar levels.
- Design and enforcement issues:
  - CIT complex dual system (regime on profits and a simplified optional regime on income) alongside numerous exemptions has challenged enforcement and resulted in arbitrage and evasion.
  - Effectiveness of the minimum tax on income is weakened by exemptions rules and underreporting of assets.

### Targeted actions to narrow the tax gap (policy recommendations)
- Strengthen tax controls:
  - Strengthen the large taxpayer office management.
  - Improve use of tax information to correct noncompliance.
  - Redirect resources towards risk-based auditing.
  - Enhance tax administrative enforcement faculties, especially for unpaid tax debt.
  - Reconsider the lifting of bank secrecy for tax audit purposes.
  - Improve IT infrastructure and human capital to make the new electronic billing effective.
- Simplify and improve tax design:
  - Rationalize tax incentives and exemptions to enhance economic efficiency and SAT’s tax-raising capacities.
  - Reduce income tax arbitrage between regimes by granting regime shifting on a lower frequency (e.g. every 5 years instead of on a yearly basis).
  - Instate transfer pricing rules for operations between related parties when benefited with tax exemptions.
  - Phase-out exemption rules based on gross margin to increase the effectiveness of the income minimum tax.
- Improve fiscal transparency and public-sector management:
  - Use the newly collected public-sector personnel census effectively.
  - Incorporate decentralized institutions into the treasury single account.
  - Strengthen fiscal risk oversight and governance of public entities.
  - Increase payroll controls by including all central government entities in the payroll system (Guatenominas).

### Other fiscal data points and constraints
- Debt and debt-service pressures relative to revenues:
  - Debt-to-revenues 234 percent.
  - Debt service-to-revenues 14 percent.
- Historical fiscal averages:
  - Over the last decade, the fiscal deficit averaged 2.1 percent of GDP and never exceeded 3.3 percent.
- Staff projections:
  - Staff projections for the revenue-to-GDP ratio are more subdued than the authorities’ in view of tax enforcement challenges.

*Source: 1gtmea2019001 - 1. Narrowing the Tax Gap in Guatemala*

### 1. Narrowing the Tax Gap in Guatemala _________________________________________________________ 10

### 1. Narrowing the Tax Gap in Guatemala

### Context and recent macroeconomic developments
- Fundamentals remain strong; higher and more inclusive growth is a central priority.
- Growth revived since mid-2018 after three years of weaker performance.
- Key macro outcomes and dynamics:
  - Growth: picked up to 3.1 percent (from 2.8 percent in 2017).
  - Potential growth: 3½ percent (growth still fell below potential).
  - Output gap: negative; bottomed out amid weak employment creation.
  - Near-term projection: growth projected to accelerate to 3.4 percent in 2019.
  - Medium-term projection: growth expected to peak at 3¾ in 2021, before converging to 3½ percent by 2024.
  - Inflation: 2018 inflation closed at 2.3 percent y/y (below the 4±1 percent target range); core inflation end-of-period 2.9 percent. As of April 2019, inflation reached 4¾ percent y/y.
  - Fiscal outcomes: revenue-to-GDP ratio declined to 10.6 percent of GDP in 2018 (10.8 percent of GDP in 2017). Central government deficit widened to 1.8 percent of GDP in 2018 (from 1.3 percent in 2017).
  - Fiscal impulse: nearly ½ percent of GDP in 2018; estimated fiscal impulse about ½ percent of GDP for 2018 and 2019 (note: fiscal impulse is calculated as the change in the cyclically-adjusted primary balance in percent of GDP).
  - External: CA balance declined to ¾ percent of GDP in 2018; staff estimates a CA norm at -2.2 percent of GDP implying a CA gap of 2.9 percent of GDP for 2018, with a CA gap range of 1.6 to 4.2 percent of GDP and an implied REER gap range of -26 to -10.
  - External debt: Guatemala’s gross external debt is estimated to have reached nearly 30 percent of GDP in 2018. Public sector external debt stands at about 11 percent of GDP (about ½ of total government debt), and related interest payments amounted to 4½ percent of tax revenues.

- Monetary and credit conditions:
  - Accommodative monetary conditions enabled a turnaround in credit since mid-2018.
  - Credit growth led by mortgages, then credit to large businesses and consumption loans.
  - FX-adjusted credit expansion was broad-based (industrial, consumption, and trade sectors).
- Risks:
  - Downside risks from a growth slowdown in the U.S. and regional partners; possible increased return of migrants from the U.S.; drifting anti-corruption efforts; lagged implementation of business environment reforms; ambiguity on ILO Convention 169 interpretation affecting mining.
  - Upside from creation of a government-sponsored trade promotion agency (ProGuatemala) and deepening trade agreements.

### Fiscal policy stance and recommendations
- Near-term stance:
  - Fiscal support to demand is appropriate given spare capacity and available fiscal space.
  - Fiscal deficit forecast to widen to 2.2 percent of GDP by year-end, and to 2.4 percent in 2020, enabling a cumulative fiscal impulse of 0.6 percent of GDP over 2019−20.
  - Authorities should sustain spending momentum and redouble tax administration efforts to stabilize the revenue-to-GDP ratio at around 10½ percent this year and gradually increase it thereafter.
- Medium-term fiscal strategy:
  - Aim for a broadly stable debt-to-GDP ratio to safeguard ability to deal with shocks.
  - Capacity to address infrastructure and social gaps depends on raising tax collections, improving spending efficiency, and maintaining sound public debt management.
  - A broad tax reform (Annex IV) could eventually be considered to finance well-planned spending.
- Fiscal efficiency and structural reforms to consider:
  - Reform of laws on civil service and salaries: tie remunerations with coverage and quality of health and education services; professionalize public service via recruitment based on merit, incentives, and training.
  - Reform of procurement law: align with best international practices; leverage e-procurement system (Guatecompras) to bolster cost-effectiveness while ensuring transparency and traceability.
  - Increase budget flexibility: scale back revenue earmarking and mandatory spending floors; enforce performance-based budgeting within a medium-term framework.
  - Rationalize tax incentives and exemptions: centralize comprehensive information on exemptions and beneficiaries; prepare cost-benefit analyses to avoid abuses.

### Narrowing the tax gap — findings and targeted actions (Box 1)
- Key findings
  - Guatemala has one of the lowest tax efforts worldwide; tax burden well below the aspirations of the 2000 Fiscal Pact and about half of the country’s tax capacity of around 20 percent.
  - The tax gap stems roughly equally from tax policy (low statutory rates and numerous exemptions) and tax evasion.
  - Technical assistance estimated tax evasion at almost 5 percent of GDP in 2015, largely affecting VAT and CIT.
  - VAT evasion: increased from 2.4 percent of GDP in 2015 to 2.8 percent of GDP in 2017, mostly reflecting SAT enforcement challenges; recovery seen by end-2018 is encouraging.
  - CIT and other taxes evasion reached similar levels; the CIT complex dual system (regime on profits and a simplified optional regime on income) alongside numerous exemptions has challenged enforcement and resulted in arbitrage and evasion.
  - The effectiveness of the minimum tax on income is weakened by exemptions rules and underreporting of assets.

- Policy recommendations to narrow the tax gap
  - Strengthen tax controls:
    - Strengthen the large taxpayer office management.
    - Improve use of tax information to correct noncompliance.
    - Redirect resources towards risk-based auditing.
    - Enhance tax administrative enforcement faculties, especially for unpaid tax debt.
    - Reconsider the lifting of bank secrecy for tax audit purposes.
    - Improve IT infrastructure and human capital to make the new electronic billing effective.
  - Simplify and improve tax design:
    - Rationalize tax incentives and exemptions to enhance economic efficiency and SAT’s tax-raising capacities.
    - Reduce income tax arbitrage between regimes by granting regime shifting on a lower frequency (e.g. every 5 years instead of on a yearly basis).
    - Instate transfer pricing rules for operations between related parties when benefited with tax exemptions.
    - Phase-out exemption rules based on gross margin to increase the effectiveness of the income minimum tax.
  - Improve fiscal transparency:
    - Use the newly collected public-sector personnel census effectively.
    - Incorporate decentralized institutions into the treasury single account.
    - Strengthen fiscal risk oversight and governance of public entities.
    - Increase payroll controls by including all central government entities in the payroll system (Guatenominas).

- Other fiscal data points and constraints
  - Guatemala’s debt tolerance is limited: debt and debt service ratios relative to revenues are high (debt-to-revenues 234 percent and debt service-to-revenues 14 percent).
  - Over the last decade, the fiscal deficit averaged 2.1 percent of GDP and never exceeded 3.3 percent.
  - Staff projections for the revenue-to-GDP ratio are more subdued than the authorities’ in view of tax enforcement challenges.

*Source: 1gtmea2019001 - 1. Narrowing the Tax Gap in Guatemala*

### 13.      Well-targeted and productive infrastructure and social spending would promote

### 13.      Well-targeted and productive infrastructure and social spending would promote private sector growth and key SDGs

### Infrastructure and social spending: priorities and fiscal framework
- Prioritize investments generating the strongest externalities: water and sanitation services, preventive and primary healthcare, pre-primary education programs, and teachers’ training.
- Prioritize investments with highest potential for cost recovery and private sector participation: transportation infrastructure.
- Congress approval of multi-year loans (for education, health, food security, justice, infrastructure, and water and sanitation) would enable incorporation of these priorities into a medium-term budget framework.
- As spending is scaled-up, place more focus on performance-based budgeting through strengthened monitoring and evaluation, as steered by the Secretary of Planning.
- Staff analysis: In the case of Guatemala, an additional spending of about 8½ percent of GDP by 2030 in areas such as education, health, road, electricity, and water and sanitation infrastructure would be key to promote sustainable and inclusive growth (WP/19/60).

### Selected development indicators (comparative context)
- Sources cited: WHO, UNICEF, World Bank Group, and IMF staff calculations.
- Note: Good Performing Peers refer to the median of countries with per capita GDP ranging $3,000−$6,000 that rank the highest in each category of development; LAC = Latin America and Caribbean; Central America = Costa Rica, ElSalvador, Guatemala, Honduras, Nicaragua, and Panama.

*Italicized source attribution line at the document level is provided separately by the pipeline.*

### Monetary policy: continued accommodation and eventual normalization
- Near-term stance:
  - Policy rate at 2¾ percent.
  - Policy rate is about 120 basis points lower than what a neutral stance would imply.
  - The real interest rate is negative.
  - Limited scope for additional interest rate cuts in the near term, given inflation expectations of slightly above 4 percent.
  - Staff inflation prospects: 3.8/4.1 percent for 2019/2020.
- Medium-term path:
  - As growth exceeds its potential rate by 2021, monetary normalization could resume gradually.
  - Given uncertainties surrounding neutral-rate estimates, the path for normalization should be data-dependent and attuned to signs of activity and inflation expectations.

### Enhancing monetary framework and transmission (Box 2: key findings and recommendations)
- Credible monetary management is a cornerstone of macroeconomic stability.
- Findings on transmission:
  - Transmission to money market rates:
    - Valle and Morales (2017) estimate short-term correlation between policy and money market rates at 0.73 percent (EM average 0.74 percent).
    - Long-term correlation at 0.81 (EM average 0.59 percent).
    - Solorzano and others (2019) find a 0.8 percent contemporaneous response of the repo rate to a 100-basis points MPR shock.
  - Transmission to lending channel:
    - Valle and Morales (2017) estimate short-term correlation between money market rate and lending rate at 0.08 percent (EM average 0.37 percent).
    - Micro-level evidence: lending channel operates with lags and is relatively small, or even non-existent, in large banks (Blanco and Valle, 2018).
  - Staff estimates based on Brandao and others (2019) point to stronger transmission to activity overall and suggest overall monetary transmission to output and prices in Guatemala is commensurate with other LatAm IT regimes.
- Policy recommendations to enhance the inflation-targeting framework:
  - Greater FX flexibility and reduced FX intervention to strengthen control over longer-maturity money market interest rates and allow better targeting of the money supply.
    - Quetzal depreciated by 5.3 percent in 2018 (largest annual variation in seven years).
    - Reserves accumulation came to 3.2 percent of total FX market operations, down from 6½ percent in 2017.
    - Guatemala has reserves at 118 percent of the ARA metric.
    - Enhanced FX flexibility would support market finance development and de-dollarization efforts.
  - Absorb excess liquidity:
    - Bank liquidity remained high in 2018 with most excess liquidity lodged in Banguat amid limited credit penetration and an underdeveloped secondary interbank market.
    - Expanded use of treasury and/or central bank bills, and recapitalization of the central bank would help reduce excess liquidity.
  - Enhance secondary market development:
    - Finalize the securities market law and fully dematerialize securities to support monetary policy operations.
  - Refine communication strategy:
    - Quarterly monetary policy reports could place stronger emphasis on the most likely trajectory for monetary policy at two years under baseline and sensitivity scenarios.

### Neutral-rate estimates and policy gap (method summary and figures)
- Staff estimates (table of methods summarized in text):
  - Expected-Inflation Augmented Taylor Rule: Neutral Real Interest Rate 0.1; Expected Inflation December 2019 3.9; Neutral Nominal Interest Rate 4.0; Nominal Monetary Policy GAP (bps) 119.
  - General Equilibrium Model: Neutral Real Interest Rate 0.2; Expected Inflation 4.0; Neutral Nominal 127; GAP 127.
  - Uncovered Interest Parity: Neutral Real Interest Rate 0.1; Expected Inflation 3.9; Neutral Nominal 3.9; GAP 113.
  - Forward Looking Monetary Model: Neutral Real Interest Rate 0.1; Expected Inflation 3.9; Neutral Nominal 3.9; GAP 116.
  - (Fourth row) 0.0; Expected Inflation 3.8; Neutral Nominal Interest Rate 105; Nominal Monetary Policy GAP (bps) 105.
- Actual monetary policy rate and comparisons shown in staff calculations and charts.

### Lifting potential growth through business climate reforms
- Central priority: mobilize investment, bolster productivity and exports to raise growth and living standards.
- Key policy areas and measures:
  - Business facilitation:
    - Ease and digitalize bureaucratic procedures in citizens’ transactions with public entities to reduce red tape and exposure to dishonest behavior and susceptibility to corruption.
    - Implementation of the digital procurement registry is a step in the right direction.
  - Rule of law and regulatory environment:
    - Expedite authorities’ agenda to foster the business environment (see Box 3).
  - Anti-corruption agenda:
    - Reaffirm commitment after withdrawal from CICIG by sustaining prior legal and institutional progress (Organized Crime Act, anti-corruption reforms to the Criminal Code, creation of Higher-Risk Courts) and proceeding with outstanding cases.
    - Strengthen the Attorney General’s Office and judicial capacities to preserve capabilities, fortify investigative and prosecutorial competences, and reduce judicial backlog.
    - Authorities’ plans to extend coverage of the Public Prosecutor’s Office and consolidate its financial independence are welcome.
    - Further reforms needed to strengthen asset declaration regime, including public availability of the information.
    - Enhance domestic and international cooperation on corruption and related asset recovery cases.
  - Preventive measures:
    - Strengthen procurement and AML/CFT framework, increase transparency of tax exemptions, broaden use of the single treasury account, reduce red tape, and improve contract enforcement.

### Broad-based agenda for a thriving business environment (Box 3: concrete reforms)
- Rule of law reforms:
  - Adopt a law on insolvency aligned with best practices: use cash-flow test, allow vote by creditor classes on reorganization plans, prioritize post-petition financing in liquidation waterfall, provide comprehensive safeguards for secured creditors.
  - Adopt legal stability law to reduce policy uncertainty and strengthen investor protection for large projects; scope and exclusions should be consistent with best regional practices.
  - Swiftly align national legislation with ILO Convention 169 balancing investment attraction and rights for indigenous people; resolve pending consultations affecting large foreign investments expeditiously.
- Regulatory framework reforms:
  - Modernize road infrastructure management:
    - Pass the road infrastructure bill to complement existing PPP vehicle (a portfolio of high-priority investments worth 2 percent of GDP cumulatively over 2018−23) and catalyze private investments.
    - To limit contingent fiscal risks, assign Ministry of Finance a clear mandate in approval and fiscal risks oversight of projects.
    - Provide legal certainty on right-of-way acquisition and legal nature of contracts; consolidate road-specific and national procurement framework to avoid overlap.
  - Streamline adoption of construction licenses:
    - Digitize the process, strengthen legal framework, speed up environmental assessments and connection to water.
  - Continue trade facilitation efforts:
    - SAT’s Integral Load Control Plan reduced rates of physical inspection and increased appeal filings and resolutions.
    - Further enhancements: post-clearance auditing capacities and controls to prevent abuse of customs unions with Honduras.
    - Implement customs automation and modernization as per the Programa de Modernizacion Integral Aduanera roadmap.
  - Government-sponsored export promotion:
    - Create an export and investment promotion agency (ProGuatemala law) with attention to private sector involvement, public-sector funding, and a performance evaluation system.

### Enhancing financial modernization and inclusion
- Financial system health and vulnerabilities:
  - Banks continue to be well-capitalized, have sufficient liquidity, and nonperforming loans remain at low levels and well-provisioned.
  - Assets and liabilities dollarization of over 30 percent.
  - Currency mismatches from FX loans granted to unhedged borrowers: 17 percent of total loans.
  - Recommendation: As greater FX flexibility is pursued, monitor these vulnerabilities closely and act pre-emptively by further tightening prudential requirements on FX-loans to unhedged borrowers.
- Scope for further financial inclusion:
  - Despite increase in financial sector to GDP share, financial inclusion remains shallow.
  - Only 44 percent of adults had an account at a financial institution in 2017, well below the world and LatAm averages.

*International Monetary Fund staff summary of chapter content.*

### 19.      The authorities should persevere in their efforts to foster financial inclusion. The

### 19. The authorities should persevere in their efforts to foster financial inclusion.

### Financial inclusion: reforms, actions, and priorities
- Recent reforms of the code of commerce and movable guarantees, and approval of the factoring law should facilitate SME’s access to credit.
- Complementary actions recommended:
  - Operationalize the 2016 microfinance law.
  - Encourage the introduction of simplified bank accounts.
  - Encourage the development of credit bureaus.
- Institutional coordination:
  - Creation of an interinstitutional commission to coordinate the National Strategy for Financial Inclusion (ENIF).
  - ENIF to include FinTech solutions based on a “sandbox” approach that balances innovation with financial stability and integrity.
- Capacity and consumer protections:
  - Enhance technological and financial literacy for all parts of the population.
  - Strengthen consumer protection.
  - Ensure compliance with Customer Due Diligence (CDD) provisions.

### Financial system modernization and FSAP-related reforms
- Alignment with Basel III (ongoing efforts with Fund technical assistance):
  - Adopt the LCR regulation.
  - Update capital requirements for market risks.
  - Update the off-site reporting system.
  - Draft regulations under consideration on credit risk management and loan-loss provisioning.
  - Actions to develop monitoring tools for credit and interest rate risk in line with Basel provisions and to enhance monitoring of systemic risks to inform macroprudential policies.
- Supervision and governance:
  - Review framework for financial groups supervision, including updating key definitions and extending supervision powers to holding companies and banks’ foreign branches.
  - Finalizing implementation of the risk-based corporate governance framework adopted in 2016.
- Legislative priorities:
  - Bill on banks and financial groups (in Congress since 2016) should be given priority; it would align legislation with Basel III by increasing capital requirements and establishing a robust framework for bank resolution, clarify triggers for effective resolution, and introduce safeguards for the use of public funds in the open-bank intervention scheme.
  - Other initiatives meriting support include the securities market law and the electronic money law.
- Additional modernization measures:
  - Promote adoption of the securities market law and dematerialization of securities.
  - Expand use of treasury and/or central bank bills to strengthen monetary transmission.

### FinTech’s potential to promote financial inclusion (Box 4)
- Context:
  - Guatemala’s young population and deep penetration of mobile phones (60 percent in 2017) create strong potential for FinTech.
- Domains where FinTech can promote inclusion:
  - Households’ access to basic financial services: mobile platforms can enable money transfers, bills payments, and loans for remote and low-income populations (examples cited: Kenyan M-Pesa; India; Peru).
  - SMEs lending: FinTech (e.g., crowdfunding) can increase SME access to financing (example cited: Mexico’s rapid expansion led to the 2018 Fintech law).
  - Remittance transfers:
    - Cost of sending $200 remittance into Guatemala is 4.8 percent.
    - Global average is 7 percent.
    - SDG goal is 3 percent.
    - Digitalization of personal identities could reduce the cost of AML/CFT-mandated CDD provisions, depending on product design and service features.
  - Lessening information asymmetries: robo-advice, big data analytics, digital financial profiles, and facilitation of credit bureaus and registries.
- Regulatory approach:
  - Staff welcomes exploration of a sandbox approach to balance technological innovation with financial stability and integrity.

### AML/CFT framework and related recommendations
- A new draft AML/CFT law has been finalized; passage in Congress should be expedited.
- Draft law features:
  - Largely aligns with FATF standards.
  - Expand the list of reporting entities to notaries and other non-financial businesses and professionals.
  - Establish an obligation for financial institutions to adopt a risk-based approach and a sound sanctioning regime for noncompliance.
  - Secure greater protection for supervisors.
- Further suggested enhancements:
  - Strengthen provisions on Politically Exposed Persons.
  - Enhance interaction between the supervisor and law enforcement authorities.
  - Ensure transparency on ultimate beneficial ownership of corporate vehicles (e.g., keep corporate registry up-to-date and facilitate access) to tackle money laundering and reduce scope for corruption.
- Authorities’ stance:
  - Emphasized commitment and progress with implementation of GAFILAT recommendations.
  - Strengthening regulatory framework to secure alignment with FATF standards.

### Authorities’ views on macroeconomic and policy context (selected points)
- Macroeconomic outlook:
  - Authorities broadly agreed with staff macroeconomic outlook and noted increased economic momentum since mid-2018 amid strong fundamentals.
  - They view risks as broadly balanced: downside risks include growth slowdown in the U.S. and other regional trading partners, political uncertainty, and constrained government spending (if further revenues shortfall); upside risks stem from stronger construction and exports momentum.
- Fiscal policy:
  - Ministry of Finance intends to sustain fiscal support to demand in the near term and couch the SDG agenda within multi-year budgetary plans.
  - Priority: sustain spending execution in the current year; portfolio of strategic investments could allow further fiscal impulse in 2020.
  - Over the medium term, plan to scale up spending gradually as reduced tax evasion and improved spending efficiency allow additional resources while keeping debt-to-GDP broadly stable.
  - Authorities concurred on the need to reform public procurement, civil service, and public sector salaries.
- Tax administration:
  - Ongoing measures to increase taxpayers’ risk perception include the electronic invoice and a strengthened VAT declaration form.
  - Further measures noted as key: strengthening tax controls, lifting bank secrecy provisions, and improving tax policy design to reduce tax evasion.
- Monetary and exchange rate policy:
  - Authorities agree with staff on the monetary stance; expect output gap to close by end-2019 and to keep the policy rate on hold until rebound firms up, pursuing gradual, data-dependent normalization thereafter.
  - Noted reclassification of de facto exchange rate from crawl-like to stabilized; FX intervention policy based on a transparent rule to smooth volatility without affecting trend.
  - Restated commitment to a more flexible exchange rate.
- Rule of law and business climate:
  - Authorities concurred on need to meaningfully improve rule of law and regulatory framework.
  - Ministry of Economy proposed initiatives to improve the business ecosystem, intended to be passed during the presidential transition in 4Q2019.
  - Cabinet for Economic Development to steer agenda through Congress.
  - Authorities reiterated commitment to anti-corruption agenda.

### Staff appraisal: outlook, policies, and priorities
- Growth and external position:
  - Near-term growth poised for a rebound; growth projected to accelerate and peak in 2021, propelled by a further fiscal impulse, exports recovery and stronger investment momentum, before converging to its potential rate of 3½ percent by 2024.
  - Inflation set to reach the mid-point of the target band as spare capacity narrows.
  - External position stronger than level implied by medium-term fundamentals and desirable policies, but gap expected to narrow by 2024.
- Policy recommendations — near term:
  - Continue fiscal and monetary support to demand given prevailing spare capacity.
  - Fiscal policy needs to reverse the decline in revenues and keep up spending execution.
  - Accommodative monetary conditions should continue as the output gap closes amid well-anchored inflation expectations.
- Policy recommendations — medium term:
  - Fiscal policy should preserve macroeconomic stability while undertaking more productive spending.
  - Raise tax collections and enhance spending efficiency to expand fiscal space; SAT should redouble efforts to fight tax evasion.
  - Spending efficiency reforms: increase coverage and quality of public services, bolster cost-effectiveness of procurement, increase budget flexibility, and rationalize tax incentives and exemptions.
  - Prioritize investments with the strongest positive externalities and highest potential for cost recovery and private sector participation; consider comprehensive tax reform subsequently.
  - Enhance inflation targeting: (i) enhance FX flexibility; (ii) expand use of treasury and/or central bank bills and foster securities market law adoption and dematerialization of securities; (iii) refine forward-looking communication strategy.
- Structural and governance priorities:
  - Expedite business-environment reforms to restore legal certainty for large-scale investment projects, spearhead PPP framework, pass the road infrastructure bill, and ease issuance of construction licenses.
  - Create an export promotion agency and expedite customs procedures with El Salvador and Mexico to enhance export potential.
  - Reaffirm commitment to anti-corruption agenda: strengthen the Attorney General’s Office and judicial capacities, preserve legal and institutional progress, fortify investigative and prosecutorial competences, reduce judicial backlog, extend coverage of the public prosecutor’s office and consolidate its financial independence.
  - Preventive anticorruption strategy should strengthen procurement and the AML/CFT frameworks, reduce red tape, improve contract enforcement, and increase transparency of tax exemptions.
- Financial inclusion focus:
  - Build on a sound financial system to promote financial inclusion.
  - Operationalize the 2016 microfinance law, and set in motion simplified bank accounts and credit bureaus.
  - Leverage the interinstitutional Commission and ENIF to promote FinTech solutions via a sandbox approach balancing technological innovation with financial stability.

*IMF staff report (excerpt).*

### 37.      It is recommended that the next Article IV consultation with Guatemala be held on

### 37.      It is recommended that the next Article IV consultation with Guatemala be held on 

### Recommendation
- It is recommended that the next Article IV consultation with Guatemala be held on the standard 12-month cycle.

### Recent Economic Developments
- Economic activity was supported by trade and construction; confidence improved.
- Private investment was high and driven by machinery and equipment (private) and private construction.
- Expanded credit and a fiscal impulse lifted growth.
- Employment and wages growth were moderate; labor force continued to shift to services sectors.
- Index of Economic Activity (Trend, percent, YoY) series shown for Dec-13 through Dec-18 with sectoral decomposition (Wholesale and Retail; Mining; Manufacturing; Agric. For. And Fish.; Rest; Total).
- Confidence Index (Scale 0-100) and Moving Average (12 month) series shown May-13 through Mar-19.

### Fiscal Developments
- Primary balance has declined on the back of spending recovery, producing a positive fiscal impulse in 2017 and 2018.
- Revenues declined for the second consecutive year; improved budget execution enabled capital spending.
- Spending efficiency highlighted as key to maximize outcomes; public debt remains low, lending fiscal space.
- Primary Balance (Percent of GDP) and Overall Balance and Fiscal Impulse (Percent of GDP) series shown for 2007-10, 2011-14, and annually 2015–2024.
- Tax Revenues (Percent of GDP) composition: Other taxes, Import tariffs, VAT, Direct taxes (2007-10 through 2024 projection).
- Public Expenditure (Percent of total) — Current vs Capital (2007-10 through 2024 projection).
- Current Expenditure (Percent of GDP) breakdown: Salaries, Goods & services, Interest, Other current (2007-10 through 2024).
- Public Debt (Percent of GDP) composition: External and Domestic (2007-10 through 2024).

### External Developments
- Trade balance deteriorated, but continued strong remittances helped maintain a current account (CA) surplus in 2018.
- Effective exchange rate (REER) depreciated in 2018 on weaker trade balance.
- International reserves remain healthy and are well above the benchmark of 3 months of imports.
- CA balance projected to deteriorate over the medium term but would be largely funded by FDI inflow.
- Net international investment position (IIP) is negative but small compared to other countries in the region; almost half of total external liabilities are non-debt generating FDI liabilities.
- Current Account and Trade Balances (Percent of GDP) series and Remittances (Millions of US$, rhs) series shown for 2008–2018.
- Net International Reserves (NIR) and NIR in months of imports series shown Apr-13 through Mar-19.
- Net IIP (Percent of GDP, 2018) comparisons across countries and IIP composition by instrument (2010–2024).

### Financial Developments and Soundness
- Banks’ capital adequacy is well above the minimum required: Regulatory capital to RWA series for 2011–2018 (values include 15.3, 14.7, 14.8, 14.6, 14.1, 13.8, 14.7, 14.8).
- Profitability and loan portfolio quality remain strong: Return on assets (ROA), Provisions (in percent of total loans), Non-performing loan as % of total loans (NPL) series Mar-15 through Dec-18.
- Banks liquidity continues to be adequate; credit dollarization exposes banks to FX-related credit risk: Credit Composition by Currency (Percent of GDP) series 2002–2018 showing substantial foreign currency share.
- Lower foreign liabilities narrowed exposure to rollover risk; holdings of sovereign bonds expose banks to interest-driven valuation losses.
- Banking sector indicators: Liabilities to Non Residents (Percent of Total Liabilities) declined 2003–2018; Bank Claims on Central Government, 2018 (Percent of GDP) compare GTM with peers.
- Financial Soundness Indicators (selected): Reserves as a percentage of Deposits (NC and FC), Short-term liquidity, Regulatory capital to risk-weighted assets, NPL ratios, Provisions to NPLs, Return on assets, Return on equity, FX loans % and FX liabilities % (annual values 2008–2018).
- Financial Soundness Heatmap (quarterly indicators 2016Q2–2018Q4 and Latest): Overall Financial Sector Rating M; Credit cycle L; Balance Sheet Soundness M; Asset quality moved from H to L by 2018; NPL ratio series and changes reported (e.g., NPL ratio values 2016Q2–2018Q4 and Latest mostly around 2.2 percent).

### Key Economic and Social Indicators (Table 1 highlights)
- Population 2018 (millions) 17
- Gini index (2014) 49
- Percentage of indigenous population (2016) 41
- Life expectancy at birth (2017) 74
- Population below the poverty line (Percent, 2014) 59
- Adult illiteracy rate (2017) 19
- Rank in UNDP development index (2017; of 189) 127
- GDP per capita (US$, 2017) 4,470

### Selected Macroeconomic Figures and Projections (exact series and projections reported)
- Real GDP (annual percent change): 2014–2024 series: 4.2, 4.1, 3.1, 2.8, 3.1, 3.4, 3.5, 3.7, 3.6, 3.5, 3.5
- Consumer prices (end of period): 2014–2024 series: 2.9, 3.1, 4.2, 5.7, 2.3, 3.8, 4.1, 4.0, 4.1, 4.2, 4.3
- Credit to the private sector (percent of GDP, projections): series includes 8.8, 12.8, 5.9, 3.8, 7.0, 7.0, 8.4, 8.3, 8.3, 8.2, 8.2
- Gross domestic investment (Percent of GDP): 2014–2024 series: 13.6, 14.0, 13.3, 11.8, 12.0, 12.0, 12.0, 11.9, 11.7, 11.5, 11.4
- Current account balance (Percent of GDP): 2014–2024 series: -2.1, -0.2, 1.5, 1.6, 0.8, 0.6, 0.3, -0.1, -0.6, -1.1, -1.5
- Remittances (Percent of GDP and levels): 2014–2024 percent series: 9.7, 10.1, 10.7, 11.0, 12.0, 12.8, 13.2, 13.3, 13.2, 13.1, 12.8
- Net International Reserves (Stock in months of next-year NFGS imports): 4.0, 4.5, 4.9, 5.8, 6.1, 5.7, 5.4, 5.1, 4.9, 4.6, 4.6
- Central Government Revenues (Percent of GDP): 11.5, 10.8, 11.0, 10.8, 10.6, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9
- Central Government Expenditures (Percent of GDP): 13.4, 12.3, 12.1, 12.1, 12.3, 12.6, 12.9, 12.9, 13.0, 13.0, 13.0
- Primary balance (Percent of GDP): -0.4, 0.1, 0.4, 0.1, -0.3, -0.7, -0.9, -0.7, -0.5, -0.4, -0.3
- Overall balance (Percent of GDP): -1.9, -1.4, -1.1, -1.3, -1.8, -2.2, -2.4, -2.3, -2.2, -2.2, -2.2
- Central Government Debt (Percent of GDP): 24.3, 24.2, 24.0, 23.8, 24.7, 25.4, 26.0, 26.3, 26.5, 26.9, 27.0

### Balance of Payments and Monetary Sector (selected figures)
- Current account balance (in millions of US$): 2015–2024 series: -961, -23, 1,189, 638, 484, 272, -53, -551, -1,158, -1,695
- Trade balance (goods, in millions of US$): 2015–2024 series: -5,557, -5,186, -6,010, -7,287, -8,051, -8,763, -9,490, -10,282, -11,103, -11,986
- Exports, f.o.b. (in millions of US$): 10,824; 10,581; 11,100; 11,079; 11,201; 11,646; 12,088; 12,508; 12,945; 13,393 (2015–2024 series)
- Imports, f.o.b. (in millions of US$): 16,381; 15,767; 17,110; 18,366; 19,252; 20,409; 21,578; 22,790; 24,048; 25,379 (2015–2024 series)
- Net transfers (in millions of US$): 7,198; 7,959; 8,975; 9,911; 10,930; 11,863; 12,738; 13,555; 14,332; 15,153 (2015–2024 series)
- Bank of Guatemala Net International Reserves (in millions of US$): 54,155; 62,816; 77,679; 89,817; 91,273; 92,591; 93,914; 95,372; 96,930; 96,930 (2015–2024 series)
- Monetary survey highlights: Net foreign assets (in millions of US$) 21,164; 27,892; 40,260; 53,545; 50,863; 49,222; 47,642; 46,818; 45,961; 44,092 (2015–2024 series)
- Currency in circulation (in millions of quetzales): series shows 27,148; 29,398; 33,595; 38,023; 40,806; 43,929; 47,331; 50,953; 54,951; 59,240 (2015–2024 series)

### Policy and Structural Priorities (implied by analysis)
- Maintain standard 12-month Article IV consultation cycle.
- Prioritize spending efficiency to maximize outcomes from increased capital spending.
- Monitor and manage fiscal balance as primary balance has declined and overall balance remains in deficit (overall balance around -2.2 percent of GDP in projections).
- Preserve healthy reserve buffers (NIR comfortably above 3 months of imports).
- Manage FX exposure in the banking sector given credit dollarization and foreign-currency liabilities.
- Leverage low public debt to preserve fiscal space while addressing revenue weakness and improving tax collection.

*Sources: National authorities and IMF staff calculations; Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Recent Developments
- Current account (CA) balance:
  - CA surplus moderated from 1½ percent of GDP in 2017 to ¾ percent of GDP in 2018.
  - Medium-term projection: CA balance expected to fall to negative 1½ percent of GDP due to dampening U.S. and exports growth, and an increase in the FDI payout.
- Trade balance and terms of trade:
  - Trade balance deteriorated by 1¾ percent of GDP in 2018.
  - Worsening terms of trade driven by higher oil prices and lower prices on some exports (coffee, sugar, and rubber).
  - Suspension of operations at San Rafael Mine contributed to the trade deterioration.
- Remittances:
  - Remittances increased by about 1 percentage point to 12 percent of GDP in 2018, partly offsetting the trade deterioration.
- Exchange rates and competitiveness:
  - Real effective exchange rate (REER) depreciated by 2¼ percent in 2018 after cumulative appreciation of almost 30 percent over 2014−17.
  - Nominal bilateral exchange rate with the U.S. dollar depreciated by 5.3 percent (y/y) in 2018.
  - Nominal effective exchange rate (NEER) depreciated by 2½ percent in 2018.
- Foreign direct investment (FDI) and capital flows:
  - Gross FDI inflows decreased by more than 1 percent of GDP since 2013.
  - FDI is forecast to stay below 1½ percent of GDP over the medium term, remaining the main funding source of the CA deficit in 2024.
  - Portfolio and other capital inflows have played a limited role due to weak financial integration.
- External liabilities and public external borrowing:
  - Net international investment position (IIP) around minus 17 percent of GDP in 2018 (much stronger than regional average for Central America: minus 70 percent of GDP).
  - Around 56 percent of total external liabilities in 2018 are portfolio and other liabilities; the rest are FDI liabilities.
  - Public external borrowing about 11 percent of GDP in 2018 and forecast to decline over the medium term.
- Structural constraints:
  - Low expenditure-switching effects imply limited role for the REER as a shock absorber.
  - Continued remittance strength could re-appreciate the REER and erode export competitiveness.
  - Major structural weaknesses: high crime and violence rates, weak institutions, and poor road infrastructure (World Economic Forum Global Competitiveness Report 2018).

### External Sector Assessment (EBA-based findings and implications)
- EBA CA methodology results and staff adjustments:
  - EBA CA model suggests a CA norm of -4.2 percent of GDP in 2018.
  - Staff considers the EBA CA norm estimate too negative because the model’s ICRG-based indicators fail to capture Guatemala’s poor security conditions.
  - Staff regression estimates (investment-to-GDP on security and controls) imply security conditions significantly lower investment:
    - Pooled OLS estimated impact on Guatemala’s investment level: -2.7*** percent of GDP.
    - Fixed effects estimated impact: -1.3* percent of GDP.
  - Staff’s overall adjustment: security conditions lower Guatemala’s investment by 2 percent of GDP relative to the EBA sample.
  - Adjusted CA norm (staff correction for security conditions): -2.2 ± 1.3 percent of GDP.
  - CA gap (cyclically adjusted CA less adjusted CA norm): 1.6 to 4.2 percent of GDP (presented as 2.9 ± 1.3 percent of GDP in table context).
  - Implied REER gap range: -26 to -10 percent.
  - Standard error of the CA norm estimate: 1.3 percent of GDP.
- Drivers of the stronger-than-norm CA:
  - Structurally low investment: investment rate at 14.8 percent of GDP in 2017.
  - Policy gaps account for almost 30 percent of the CA gap:
    - Of which 0.7 percent of GDP owes to lower fiscal deficit and 0.3 percent of GDP owes to lower health spending than desirable policies.
- Policy implications and recommended reforms:
  - Increase public infrastructure spending and expand social protection to help close the CA gap.
  - Remove structural impediments to investment: improve rule of law, regulatory framework, and security conditions.
  - Improving business climate and competitiveness would mitigate REER appreciation pressures associated with remittances and help raise investment.
- Methodological notes:
  - EBA REER index model estimates a 12-percent overvaluation for 2018, but staff bases assessment on the EBA CA model because Guatemala is not included in the EBA REER index model and the REER index model contains country fixed effects that may miss time-invariant distortions.

### Reserve Adequacy Assessment
- Net international reserves (NIR) and ARA metrics:
  - NIR at end-2018: US$11.6 billion.
  - NIR equivalent to 123 percent of ARA EM metric under a stabilized FX regime (Fund’s recommended range: 100−150 percent).
  - Under a floating FX regime, end-2018 NIR would be 186 percent of the ARA EM metric.
- Conventional coverage metrics:
  - Reserve coverage above traditional metrics: greater than 3 months of imports, greater than 20 percent of broad money, and greater than 100 percent of short-term external debt.
  - NIR in months of imports increased to over 6 months of next year’s imports in 2018 and is expected to fall back to 5 months of imports over the medium term.

*Source: IMF staff estimates and analysis in "Annex I. External Sector Assessment."*

### 2.3 percent of GDP from 2019 to 2075.

### 2.3 percent of GDP from 2019 to 2075.

### Fiscal position and scenario projections
- Baseline scenario:
  - Debt-to-GDP ratio stabilizes at 27.0 percent of GDP in the medium and long term.
  - Debt-to-revenue ratio remains at around 249 percent.
- Temporary relaxation scenario:
  - Debt-to-GDP ratio rises slightly in the short term and stabilizes at 29.5 percent of GDP in the long term.
  - Debt-to-revenue ratio increases to 255 percent.
- Permanent relaxation scenario:
  - Debt ratio rises until 2035 and stabilizes at 32.0 percent of GDP.
  - Debt-to-revenue ratio reaches 269 percent.
- Under all three scenarios:
  - Debt-to-GDP does not exceed an indicative benchmark for countries with market access at 60 percent.
- Long-run fiscal path notes (from Figure III.3):
  - Permanent relaxation begins in 2019 and has an average primary deficit of 0.1 percent of GDP, compatible with an overall deficit of 2.3 percent of GDP for the entire period.
  - Temporary relaxation scenario runs a 2.7 percent of GDP overall deficit between 2019 and 2024; the deficit declines thereafter.

### Public debt dynamics (baseline projections and indicators)
- Nominal gross public debt: projected values (percent of GDP) include 23.6 (2017), 23.8 (2018), 24.7 (2019), 25.4 (2020), 26.0 (2021), 26.3 (2022), 26.5 (2023), 26.9 (2024), 27.0 (stabilized).
- Public gross financing needs (percent of GDP): 3.5 (2017), 2.3 (2018), 2.7 (2019), 3.3 (2020), 3.7 (2021), 3.5 (2022), 3.4 (2023), 3.0 (2024), 3.2 (projection).
- Effective interest rate (percent): 6.9 (2017), 6.4 (2018), 6.4 (2019), 6.5 (2020), 6.7 (2021), 6.8 (2022), 7.0 (2023), 7.2 (2024), 7.5 (projection).
- Real GDP growth (percent): 3.2 (2017), 2.8 (2018), 3.1 (2019), 3.4 (2020), 3.5 (2021), 3.7 (2022), 3.6 (2023), 3.5 (2024), 3.5 (projection).
- Inflation (GDP deflator, percent): 4.6 (2017), 3.6 (2018), 2.8 (2019), 3.4 (2020), 4.0 (2021), 4.3 (2022), 4.4 (2023), 4.7 (2024), 4.7 (projection).
- Identified debt-creating flows cumulative (2017–2024): 1.6 percent of GDP.
  - Primary deficit cumulative (2017–2024): 3.5 percent of GDP.
  - Primary (noninterest) revenue and grants cumulative (2017–2024): 63.8 percent of GDP.
  - Primary (noninterest) expenditure cumulative (2017–2024): 67.2 percent of GDP.
- Automatic debt dynamics contribution (cumulative 2017–2024): -1.4 percent of GDP.
  - Real interest rate contribution (cumulative): 3.7 percent of GDP.
  - Real GDP growth contribution (cumulative): -5.1 percent of GDP.
- Residual, including asset changes (cumulative 2017–2024): 0.7 percent of GDP.

### Sensitivity analysis and stress tests
- Five sensitivity tests considered:
  - Shock to the primary balance.
  - Shock to real GDP growth.
  - Shock to real interest rate.
  - Shock to real exchange rate.
  - Combined shock (all above).
- Shock sizing based on historical standard deviations of corresponding variables.
- Real GDP Growth Shock:
  - GDP growth reduced by 1 standard deviation for 2 consecutive years, dropping growth to 2.5 and 2.7 percent in 2020 and 2021, respectively.
  - Decline in growth leads to lower inflation: 0.25 percentage points per 1 percentage point decrease in GDP growth.
- Primary Surplus Shock:
  - Shock equivalent to 0.3 percent of GDP (half of the 10-year historical standard deviation).
  - Shock triggers an increase in interest rates of 25 basis points for every percentage point of GDP worsening in the primary balance.
- Interest Rate Shock:
  - Interest rate increases by 200 basis points with respect to the baseline.
- Real Exchange Rate Shock:
  - Shock translates to a nominal exchange rate depreciation of 10 percent; pass-through to inflation with an elasticity of 0.25.
- Stress test outcomes (summary from figures):
  - Gross nominal public debt under stress tests remains below higher thresholds shown; baseline debt path remains between about 23–31 percent of GDP across 2019–2024 depending on scenario.
  - Gross nominal public debt in percent of revenue rises under shocks, reaching up to the high 260–280 percent of revenue range in some stress scenarios (visual scale in figures).

### External debt sustainability
- Baseline external debt (percent of GDP): 34.1 (2014), 32.8 (2015), 31.5 (2016), 30.7 (2017), 28.8 (2018), 28.9 (2019), 28.4 (2020), 27.6 (2021), 26.2 (2022), 25.6 (2023), 24.8 (2024).
- Change in external debt (percent of GDP): ranges from 1.0 (2014) to -0.7 (2024); specific years include -1.4 (2015), -1.2 (2016), -0.9 (2017), -1.8 (2018), 0.1 (2019), -0.5 (2020), -0.8 (2021), -1.4 (2022), -0.7 (2023), -0.7 (2024).
- Identified external debt-creating flows (sum, percent of GDP): -2.8 (2014), -4.3 (2015), -5.4 (2016), -5.8 (2017), -2.9 (2018), -2.6 (2019), -2.3 (2020), -2.0 (2021), -1.4 (2022), -0.8 (2023), -0.4 (2024).
  - Current account deficit excluding interest payments: 1.0 (2014), -0.8 (2015), -2.6 (2016), -2.7 (2017), -2.2 (2018), -2.0 (2019), -1.7 (2020), -1.2 (2021), -0.7 (2022), -0.1 (2023), 0.3 (2024).
  - Net non-debt creating capital inflows (negative = inflows): -2.2 (2014), -1.7 (2015), -1.6 (2016), -1.3 (2017), -1.0 (2018), -1.0 (2019–2024 assumed).
  - Automatic debt dynamics contribution: -1.7 (2014), -1.7 (2015), -1.2 (2016), -1.8 (2017), 0.3 (2018), 0.4 (2019), 0.4 (2020), 0.3 (2021), 0.3 (2022), 0.4 (2023), 0.3 (2024).
- External debt-to-exports ratio (percent): 144.9 (2014), 153.0 (2015), 162.0 (2016), 166.1 (2017), 162.6 (2018), 166.1 (2019), 166.4 (2020–2021), 162.8 (2022), 163.5 (2023), 166.2 (2024).
- Gross external financing need (in billions of US dollars): 4.8 (2014), 4.3 (2015), 3.4 (2016), 3.4 (2017), 4.3 (2018), 4.3 (2019), 4.6 (2020), 5.2 (2021), 6.7 (2022), 7.0 (2023), 7.9 (2024).
  - In percent of GDP: 8.3 (2014), 6.7 (2015), 5.0 (2016), 4.6 (2017), 5.5 (2018).
- Key macroeconomic baseline assumptions (selected):
  - Real GDP growth (percent): historical 4.2; baseline projections include 3.4 (2019), 3.5 (2020), 3.7 (2021), 3.6 (2022), 3.5 (2023), 3.5 (2024).
  - GDP deflator in US dollars (change in percent): 4.7 (historical 2008–2016), baseline includes 2.4 (2020), 2.8 (2021), 2.9 (2022), 3.0 (2023), 4.7 (long-run).
  - Nominal external interest rate (percent): baseline near 4.9–5.0 in projections.
  - Growth of exports (US$ terms, percent): projection 4.0 (2020), 3.8 (2021), 3.5 (2022–2024).
  - Growth of imports (US$ terms, percent): projection 6.0 (2020), 5.7 (2021), 5.6 (2022), 5.5 (2023–2024).
  - Current account balance excluding interest payments (percent of GDP): baseline 1.9 (2019 historical-average scenario), projections generally near 1.2 to 0.1 by 2024 for baseline.

### External adjustment to terms-of-trade (TOT) shocks
- Main finding:
  - Evidence fails to confirm a significant expenditure-switching effect through REER adjustments; expenditure-switching effect is weak.
- VAR-based quantitative results (2001–2018):
  - One year following a 10-percent negative TOT shock:
    - REER would cumulatively appreciate by 1.5 percent (REER response not statistically significant at 10-percent confidence level).
    - Imports decrease by 5 percent (cumulative).
    - Exports decrease by 6½ percent (cumulative).
  - Interpretation:
    - Predicted fall in imports appears largely due to the negative income effect (though not statistically significant).
    - Fall in exports could reflect exporters delaying sales when international prices are unfavorable.
- Role of remittances:
  - Replacing TOT shock with a remittance shock shows remittances’ impacts increased post-GFC.
  - One year following a 10-percent positive shock in remittances:
    - REER appreciates by 1½ percent.
    - Imports increase by 3.6 percent.
    - Exports response is insignificant.
  - Implication:
    - Strong remittance inflows in recent years may have contributed to REER appreciation, weakening REER’s buffering role in the event of a TOT bust.

### Financing strategy: tax reform options (summary)
- A 2016 technical assistance mission identified significant additional potential revenue from tax policy reform (Fenochietto and others, 2016).
- Note on VAT/ISRPI/ISC/IUSI terminology preserved:
  - VAT = Value Added Taxes (Impuesto al Valor Agregado).
  - ISRPI = personal income tax (Impuesto sobre la Renta de Personas Individuales).
  - ISC = consumption taxes (Impuestos Selectivos al Consumo).
  - IUSI = property tax (Impuesto Único Sobre Inmuebles).
- To reach 4½ percent of GDP of additional revenues from tax reform, further measures equivalent to 1 percent of GDP should be identified.

*Source: IMF staff (as presented in the supplied content).*

### 6.      The VAR estimates also suggest that the net effect of remittances on the CA is not

### 1gtmea2019001 - 6.      The VAR estimates also suggest that the net effect of remittances on the CA is not

### Remittances and Current Account (CA): research question and theoretical channel
- Research question: Do remittance inflows lead to a deterioration in the trade balance that fully offsets the positive impact of remittances on the CA (i.e., are remittances merely causing compositional changes in the CA while leaving the overall CA level broadly unchanged)?
- Theoretical channel described: If remittance income is channeled mainly to liquidity-constrained and poor households (with a high marginal propensity to consume) and to finance imports, then the trade balance would deteriorate, offsetting the direct positive impact of remittances on the CA through secondary income.

### Empirical evidence for Guatemala (2011−18 and VAR estimates)
- Over the period 2011−18:
  - The increase in the remittances-to-GDP ratio came along with a decline in the imports-to-GDP ratio, leading to an overall improvement in the CA.
- VAR empirical result:
  - A 10-percent increase in remittances would lead to a 3½ percent increase in imports, yielding a net positive effect on the overall CA.

### Supporting data points and related macro context (selected figures from the chapter)
- Period referenced: 2011−18.
- VAR elasticity reported: 10-percent increase in remittances → 3½ percent increase in imports.
- Fiscal context (selected figures from Annex VII relevant to macro stance and possible interaction with external balance):
  - 2019 budget execution expected expenditure level: 12.6 percent of GDP (12.3 percent in 2018), consistent with a fiscal impulse of 0.4 percent of GDP.
- Exchange rate context (relevant for external competitiveness and imports):
  - Effective January 1, 2018, fluctuation margin that determines whether Banguat may intervene was increased to 0.80 percent (previously 0.75 percent).
  - The Quetzal depreciated by 5.3 percent in 2018.
  - As of March 31, 2019, the reference exchange rate was Q7.68 per U.S. dollar.
- Reserves accumulation and FX intervention:
  - Reserves accumulation came down to 3.2 percent of total FX market operations, from 6½ percent in 2017.

### Policy implications and considerations
- Remittance inflows can improve the overall current account even if they spur import growth, provided the induced import response is smaller than the direct remittance income effect on secondary income (as suggested by the VAR estimate reported).
- Monitoring and policy priorities that follow from the evidence:
  - Continue monitoring remittance-to-GDP and imports-to-GDP ratios to assess evolving net effects on the CA.
  - Consider exchange rate and reserve management policies in light of remittance-driven external demand and import responses (given recorded exchange rate movements and changes in reserves accumulation).
  - Fiscal stance and public spending composition (e.g., the 2019 budget execution and fiscal impulse) should be coordinated with external sector monitoring to avoid unintended pressures on the CA.

*Italic: Source — IMF staff analysis and country data as presented in the chapter.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1gtmea2019001.pdf_