## 1gtmea2023002

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### Context and structural indicators
- 2012-2021 average growth rate: 3.5 percent.
- 2012-2021 fiscal deficits on average: below two percent of GDP.
- Public debt-to-GDP ratio: kept below 30 percent of GDP (historical context).
- International reserves: covered seven months of imports in 2021-22.
- Remittance dependence: 20 percent of GDP in 2022.
- GDP per capita (PPP): US$9,800 in 2021.
- Estimated potential growth: 3.5 percent.
- Population: 17.4 million in 2022.
- Poverty rate: 55 percent in 2022 (55.3 percent in 1998).
- Access to basic services: 43.1 percent of the population (INE 2022).
- Chronic malnutrition (infants under five): 46.5 percent (UNICEF).
- Political calendar: General elections scheduled for June 25, 2023 (and August 20, 2023, if needed); All 160 Congress seats, President and Vice-President to be elected.
- Key government positions appointed in early October 2022 for four years (Central Bank President and Vice-President and Superintendent of Banks).

### Recent developments — growth, labor, prices, and monetary conditions
- Real GDP growth: 4.1 percent in 2022; projected to decelerate to 3.4 percent in 2023.
- Growth drivers in 2022: trade, manufacturing, real estate, accommodation and hospitality; private consumption was the main expenditure support.
- Labor market and wages:
  - 2022 overall participation rate: 60 percent.
  - Women’s share of participation: 22.7 percent (2022).
  - Unemployment rate: three percent in 2022 (higher than 2017-2021: 2.0-2.2 percent).
  - Formal average monthly wages grew by 29 percent (y-o-y) in 2022 and 17 percent relative to 2019 (NSIE 2022).
  - Minimum wage adjustment in 2023: Department of Guatemala +7 percent; rest of country +4 percent.
  - Informality: about 71 percent of the active population (national estimate); ILO’s informality rate for Guatemala closer to 80 percent.
- Inflation dynamics:
  - Headline CPI: 9.9 percent (y-o-y) in February 2023; 9.71 percent (y-o-y) in March 2023.
  - Core inflation: 5.3 percent (y-o-y) in February 2023; 5.08 percent (y-o-y) in March 2023.
  - One-year ahead inflation expectations breached the target band (4 ± 1 percent) in August 2022; two-year ahead expectations mostly anchored within bands.
  - Main drivers in March 2023: food prices and services.
- Monetary policy and liquidity:
  - Policy rate increased by 300 bps to 4.75 percent between May 2022 and March 2023; Monetary Board increased rate by 25 b.p. to 5 percent on April 26 (decision described as data-dependent).
  - Monetary policy transmission relies heavily on expectations and forward guidance; long lags limit lending-channel impact.
  - Large remittance inflows treated as permanent have added one-sided exchange rate pressures and liquidity injections.
  - Partial sterilization and foreign exchange interventions have come at a cost to Banguat’s balance sheet.
  - Banguat repurchase agreements facility in U.S. dollars with overall limit of US$500 million to end-December 2022; since January 1, 2023, doubled maximum daily FX intervention to US$100 million.
  - Banguat’s net FX purchases mounted to – US$53.8 million by April 10, 2023.
- Credit and lending rates:
  - Bank credit to the private sector increased: 20 percent in domestic currency in 2022.
  - Credit to consumption increased by 25 percent (y-o-y) in 2022.
  - Consumer lending credit rates adjusted by 100 basis points over March-December 2022 to 24.9 percent.
  - U.S. dollar lending rates adjusted faster to FED rate increases.

### Fiscal and external sector developments
- Fiscal outcomes and composition (2022):
  - Overall fiscal deficit: 1.7 percent of GDP (budgeted at 3.8 percent of GDP).
  - Estimated tax revenue: 12.0 percent of GDP (budget assumed 10.5 percent of GDP).
  - Fiscal support measures in 2022: 0.7 percent of GDP to households and firms.
  - Infrastructure spending: remained below 1 percent of GDP.
  - Public debt-to-GDP ratio: 29.2 percent in 2022.
  - Pending balances to IGSS and Banguat admitted by courts: about 4.1 percent of GDP (not included in stock of debt).
- External position (2022):
  - Current account surplus: 1.4 percent of GDP.
  - Trade balance deficit: about 17 percent of GDP.
  - Remittances: 19 percent of GDP in 2022.
  - Net international reserves: US$20 billion at end-2022, 4.4 percent (US$920 million) below end-2021.
  - Nominal exchange rate: remained stable around historical mean in 2022.
  - Real effective exchange rate: appreciated about three percent in 2022.
  - Factors affecting temporary U.S. dollar liquidity needs in 2022: large import bill, closing of four offshore banks by year-end, repayment of expensive US$-denominated debt held by some large banks.

### Outlook and key macro projections (staff)
- 2023 real GDP growth: projected to decelerate to 3.4 percent.
- Remittances: about US$19 billion in 2023 expected to remain strong.
- Output gap: should close by 2024.
- Inflation: expected to peak in Spring 2023 and gradually decline to the target band (center) by end-2024.
- 2023 budget (approved by Congress November 2022): envisages an overall deficit of three percent of GDP.
- Staff’s deficit projection: 1.7 percent of GDP (after adjusting for low spending execution rate and higher tax collection).
- MT fiscal deficit: expected not to exceed the two percent target.
- Current account balance: projected at 1.9 percent of GDP.
- In 2023 (to end-February), remittance inflows remained strong—12.6 percent higher than in 2022 (to end-March).

### Fiscal framework 2023 (Central government, Percent of GDP; Budget / Authorities' Proj / Staff's Proj.)
- Total revenues: 11.3 12.5 12.2
- Tax revenues: 10.7 11.9 11.6
- Direct taxes: 3.7 4.3 4.2
  - o/w PIT: 2.9 3.5 3.4
- Indirect taxes: 6.6 7.7 7.4
  - o/w VAT: 5.0 5.9 5.7
    - Domestic: 2.2 2.5 2.6
    - On imports: 2.8 3.3 3.1
- Nontax revenues: 0.6 0.6 0.6
- Total expenditures: 14.2 14.0 13.9
  - Current: 11.7 11.6 11.4
    - Operating expenditures: 10.1 10.0 9.9
    - Interest: 1.6 1.6 1.6
  - Capital: 2.6 2.4 2.5
  - Primary expenditures: 12.6 12.4 12.3
- Primary balance: -1.4 0.1 -0.1
- Fiscal balance: -3.0 -1.6 -1.7
- Note: The 2023 budget assumes inflation at 5% and real GDP growth of 2.5%. Staff projects nominal GDP growth at 10%.

### Financial sector structure, soundness, and stress tests
- Banking system: 17 banks held about 93 percent of financial sector assets in 2022; ten are part of a financial group; a new purely digital bank licensed in December 2022.
- Capital adequacy: capital ratios at 16.5 percent (well above regulatory minimum of 10 percent); CAR reported at 16.8 percent end-December 2022.
- Nonperforming loans: 1.3 percent.
- Provisions: exceeded 260 percent (262 percent in December 2022).
- Liquidity ratios: short-term 20 percent; MT liquidity 48 percent.
- Profitability: return on assets 2.3 percent; return on equity above 24 percent (ROE 24.3 percent end-December 2022).
- Stress test findings (end-December 2022):
  - Credit risk shock (system-wide NPLs to 3.3 percent): CAR fall by 1.4 percentage points to 14.8; one bank’s CAR would decline below 10 percent.
  - Sectoral shock: CAR fall by 2.9 percentage points to 13.4; four banks’ CAR would fall below 10 percent.
  - Interest rate risk shock (150 basis points): valuation losses reduce system-wide CAR by 2.9 percentage points; post-shock CAR remained at or above 10 percent for all banks.
  - FX risk shock (20 percent nominal depreciation): CAR for whole system declines by about 1 percentage point to 16.1 percent.
  - Combined solvency shock: CAR falls by 6 percentage points to 11.2 percent; six individual banks would fall short of minimum regulatory CAR; identified capital shortfalls after combined shock amount to 0.8 percent of GDP.
  - Liquidity stress test (withdrawals scenario): one out of 17 banks would end up illiquid after 5 days under assumed withdrawals.
  - Reverse stress test implied NPL increases (percent of performing loans):
    - System CAR < 10: 15.9
    - 9 banks with CAR < 10: 18.2
    - 1/2 market share with CAR < 10: 8.5

### External sector assessment — key points
- External position in 2022: stronger than level implied by fundamentals and desirable policies.
- NIIP: deficit declined from 22 percent of GDP in 2015 to six percent in 2022.
- Remittances: 18 percent growth to account for 19 percent of GDP in 2022.
- Imports of goods and services: 35.7 percent of GDP in 2022.
- Exports of goods and services: 19 percent of GDP in 2022.
- REER: appreciated by 3.4 percent in 2022; REER experienced a 49 percent appreciation since 2010 and a 20 percent appreciation since 2015.
- Reserves: declined from US$20.9 billion end-2021 to US$20.2 billion end-2022; end-2022 reserves are 161 percent of the IMF ARA metric; reserves cover more than 7 months of next year’s goods and services imports.

### Debt dynamics and public debt outlook (Annex III)
- Public debt-to-GDP (actual and projections):
  - 2022: 29.2
  - 2023: 28.2
  - 2024: 27.8
  - 2025: 27.7
  - 2026: 27.8
  - 2027: 28.0
  - 2028: 28.0
  - 2029: 28.1
  - 2030: 28.2
  - 2031: 28.4
  - 2032: 28.5
- Change in public debt (annual, Percent of GDP):
  - 2022: -1.5; 2023: -1.0; 2024: -0.4; 2025: 0.0; 2026: 0.0; 2027: 0.3; 2028: 0.0; 2029: 0.1; 2030: 0.1; 2031: 0.1; 2032: 0.1
- Gross financing needs (Percent of GDP):
  - 2022: 2.3; 2023: 2.6; 2024: 3.1; 2025: 3.0; 2026: 3.6; 2027: 3.8; 2028–2032: 4.0 (each year)
- Memo indicators:
  - Real GDP growth (percent): 2022: 4.1; 2023: 3.4; 2024–2032: 3.5 to 3.9 (as listed).
  - Inflation (GDP deflator; percent): 2022: 6.2; 2023: 6.3; 2024: 4.8; 2025–2032: 3.9 to 3.5.
  - Nominal GDP growth (percent): 2022: 10.6; 2023: 9.9; 2024: 8.5; 2025–2032: 7.6 to 7.4.

### Key risks to the outlook
- Near-term risks:
  - Abrupt global slowdown or recession in the U.S. could trigger a slowdown (or contraction) in remittance inflows.
  - Intensification of regional conflict(s) could heighten volatility and uncertainty and further impact commodity prices.
  - Monetary policy miscalibration and high commodity price volatility could add further uncertainty and fuel social demands.
- Medium-term risks:
  - Persistent structural weaknesses hindering growth potential (infrastructure, skilled labor supply, governance, legal certainty).
  - Exposure to money laundering and terrorism financing (ML/TF) risks; next AML/CFT evaluation by GAFILAT scheduled for 2027.
  - Approval of the draft AML/CFT Law is critical to strengthen the legal and regulatory framework to prevent negative impacts on correspondent banking relationships and credits with foreign financial institutions.
  - Exposure to extreme events caused by climate change.

### Policy discussions and recommendations — overarching themes
- Urgent priorities: curb inflationary pressures and scale up the structural agenda.
- Maintain a prudent fiscal policy stance while cementing a pro-growth agenda focused on inclusion and productivity.
- Preserve the implicit two percent fiscal deficit anchor and a low debt-to-GDP ratio.
- Consider a prudent increase in sovereign debt to cover infrastructure investments if accompanied by a clear communication strategy and well-defined and vetted infrastructure projects.
- Monetary policy: further tightening may be required to bring inflation back to the four percent target.
- Strengthen and deepen the financial sector and implement a roadmap to enhance governance perceptions.

### Monetary and exchange rate policy recommendations (selected)
- Recapitalization of Banguat (following Article 9 of the Banguat Law) to ensure use of all tools and fulfillment of mandate; publish Banguat’s financial statements using international accounting standards.
- Continue transition towards a fully-fledged IT framework by:
  - Adjusting the governance framework to support the inflation-only objective.
  - Strengthening Banguat’s role as an operationally independent monetary authority.
  - Modernizing the monetary policy implementation framework (policy rate operational framework, macroeconomic modeling capacity, and reserves requirements practices).
- Gradual transfer of market risk management to FX users to support the exchange rate’s role as a shock absorber:
  - Develop an FX risk management toolkit and synchronize with hedging market regulatory framework and communication strategy.
- Adopt structural pro-growth and productivity-enhancing reforms to increase the absorption capacity of large FX inflows.

### Fiscal policy recommendations and structural priorities (selected)
- Maintain prudent fiscal stance; move to a multi-year, medium-term, more flexible budget to support sustainable, inclusive growth.
  - Address legal rigidities and cumbersome approval processes that limit capital spending.
  - Increase flexibility in the annual budget and align multi-year fiscal revenue and spending targets with an MT debt strategy.
  - Include MT fiscal framework in annual budget discussions at Congress and publish multi-year plans and targets.
- Tax policy:
  - Increase tax revenue objective to at least 15 percent of GDP; requires approval of a comprehensive tax reform.
  - Consider measures: broadening the tax base, a structural increase in domestic VAT and personal income tax rates, streamlining exemptions, and enhancing compliance (e.g., tax audit functions).
- Pro-growth spending to close gaps in investment, institutional capacity, and social needs:
  - Accelerate implementation and evaluation of critical transformative infrastructure projects and strengthen project appraisals, procurement, portfolio management, and risk management functions.
  - IMF-led Public Investment Management Assessment (PIMA/Climate-PIMA) scheduled for June 2023.
  - Complete first PPP project and adopt PPP legal framework reform simplifying processes; approve infrastructure legislation (roads, airports, ports).
  - Strengthen labor and institutional capacity (INDECAP training; Ministry of Education scholarship program).
  - Better target and increase social spending; use household survey (completion due by late 2023/early 2024) to improve targeting.
  - Use accumulated cash balances due to budgetary underspending (e.g., about 0.6 percent of GDP from 2022 and the first two months of 2023) to support the most vulnerable groups.

### Revenue mobilization findings and recommendations
- 2022 tax revenue: around 12 percent of GDP.
- Staff’s estimates of tax capacity for Guatemala: range between 21 and 24 percent of GDP.
- Estimated tax efficiency: 58 percent.
- Tax expenditures (2021):
  - Total: 2.8 percent of GDP.
  - VAT-related exemptions: 1.7 percent of GDP.
  - PIT-related measures: 0.8 percent of GDP.
  - Other (spending clauses in the Constitution): 0.24 percent of GDP.
  - Eliminating other exemptions by law could reduce tax expenditures by about 2.1 percent of GDP.
- Recommended measures:
  - Undertake an external evaluation and estimation of the VAT compliance gap.
  - Strengthen the tax register and large taxpayer management; improve auditing and debt collection.
  - Continue digitalization efforts (including e-filing of VAT in real-time).
  - Reduce tax expenditures by eliminating tax exemptions and exonerations; evaluate a comprehensive tax reform to increase marginal tax rates to international standards.

### Public investment and FDI impact (empirical and DSGE findings)
- Public investment stock has fallen by 20 percentage points since 2010.
- Spending on public capital has remained below 3 percent of GDP in the last decade.
- Public investment infrastructure (2015-2021 average): below 1 percent of GDP.
- Estimated effects of a temporary 1 percent of GDP increase in public investment:
  - Short-term GDP increase: about 0.3 percent of GDP.
  - Long-term GDP increase: about 1–1.2 percent of GDP.
  - Private investment: increases by about 0.4 percent of GDP in the short term and close to 2 percent in the medium and long term.
  - FDI cumulative inflows increase by about 0.5 percent of GDP.
- DSGE simulations calibrated to Guatemala:
  - A one percent increase in the stock of public investment estimated to increase GDP by 0.3 percent in the short term and 0.8 percent in the medium term.
  - FDI increases by 0.1 percent in the short-term and 7 percent in the medium term.
  - Improving capital spending efficiency by 5 percent can raise the public investment multiplier from 0.8 to 1.2 percent of GDP.
- Policy implication: Public investment targeted to export-related sectors is more effective at attracting export-oriented FDI.

### Governance, AML/CFT, and structural reforms
- Governance improvements: digital procurement platform, budget transparency, procurement law, updated procurement regulation, continued efforts on consolidated statistics for the NFPS.
- Setbacks: legal action announced on January 16, 2023, against former CICIG head led to adverse international reactions; 2022 Sustainable Development Report shows deterioration in corruption perception and press freedom index.
- Urgent priorities:
  - Diagnostic governance assessment to roadmap reforms.
  - Approval of pending draft AML/CFT Law and further implementation to align with FATF standards (draft pending in Congress for several years); GAFILAT postponed next assessment until 2027.
  - Strengthen institutional capacity for AML/CFT; Fund staff coordinating capacity building with World Bank, IADB, and OAS.

### Data, statistics, and capacity development priorities
- Data improvements and projects:
  - 2022 Survey on Employment and Income completed in February and published in April 2023.
  - National Household Survey on income and spending to be completed by end-2023.
  - Updated CPI data (with updated weights) published by January 2024.
  - Banguat, Ministry of Economy and National Statistics Institute started developing quarterly leading labor market indicators.
  - Ongoing: Measuring GDP by region; strengthening environmental accounting; advancing monetary and financial sector statistics on non-bank financial institutions; expanding debt data to cover general government debt (including public entities).
- Capacity development (IMF CD priorities):
  - Revenue administration, Public Financial Management, Central Bank Operations and Monetary and Macroprudential Policies, Financial Supervision and Regulation, Governance Finance and Real Sector Statistics.
  - Planned IMF missions in 2023 include PIMA/Climate-PIMA, Monetary and Macroprudential Policies and Inflation Targeting, Basel standards, AML/CFT supervision, Government Finance Statistics and Public Sector Debt Statistics enhancement.

### Staff recommendation on surveillance
- Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

*Source: IMF staff report (1gtmea2023002 - 2023).*

### 2023. The team comprised Maria A. Oliva (Head), Paula

### 1gtmea2023002 - 2023. The team comprised Maria A. Oliva (Head), Paula

### CONTEXT
- Guatemala built a strong track record of prudent macroeconomic, fiscal, and financial management:
  - 2012-2021 average growth rate: 3.5 percent.
  - Fiscal deficits on average remained below two percent of GDP in the past decade.
  - Public debt-to-GDP ratio kept below 30 percent of GDP (historical context).
  - International reserves covered seven months of imports in 2021-22.
  - Remittance dependence: 20 percent of GDP in 2022.
- Structural constraints and social indicators:
  - GDP per capita (PPP): US$9,800 in 2021.
  - Estimated potential growth: 3.5 percent.
  - Population: 17.4 million in 2022.
  - Poverty rate: 55 percent in 2022 (55.3 percent in 1998).
  - 43.1 percent of the population have access to basic services (INE 2022).
  - Chronic malnutrition for infants under five: 46.5 percent (UNICEF).
- Political calendar:
  - General elections scheduled for June 25, 2023 (and August 20, 2023, if needed).
  - All 160 Congress seats, President and Vice-President to be elected.
  - Key government positions appointed in early October 2022 for four years (Central Bank President and Vice-President and Superintendent of Banks).

### RECENT DEVELOPMENTS — Growth, Labor, and Prices
- Growth and demand composition:
  - Real GDP growth: 4.1 percent in 2022.
  - Growth drivers: trade, manufacturing, real estate, accommodation and hospitality; private consumption was the main expenditure support.
- Labor market and wages:
  - 2022 overall participation rate: 60 percent.
  - Women’s share of participation: 22.7 percent (2022).
  - Unemployment rate: three percent in 2022 (higher than 2017-2021 which was 2.0-2.2 percent).
  - Formal average monthly wages grew by 29 percent (y-o-y) in 2022 and 17 percent relative to 2019 (NSIE 2022).
  - Minimum wage adjustment in 2023: Department of Guatemala +7 percent; rest of country +4 percent.
  - Informality: about 71 percent of the active population (national estimate); ILO’s informality rate for Guatemala closer to 80 percent.
- Inflation dynamics:
  - Headline CPI reached 9.9 percent (y-o-y) in February 2023; core inflation reached 5.3 percent (y-o-y) in February 2023.
  - March 2023 readings: headline 9.71 percent and core 5.08 percent (y-o-y).
  - One-year ahead inflation expectations breached the target band (4 ± 1 percent) in August 2022; two-year ahead expectations mostly anchored within bands.
  - Main drivers in March 2023: food prices and services.
- Monetary policy and liquidity:
  - Policy rate increased by 300 bps to 4.75 percent between May 2022 and March 2023.
  - Monetary policy transmission relies heavily on expectations and forward guidance; long lags limit lending-channel impact.
  - Large remittance inflows treated as permanent have added one-sided exchange rate pressures and liquidity injections.
  - Partial sterilization and foreign exchange interventions have come at a cost to Banguat’s balance sheet.
- Credit and lending rates:
  - Bank credit to the private sector increased: 20 percent in domestic currency in 2022.
  - Credit to consumption increased by 25 percent (y-o-y) in 2022.
  - Consumer lending credit rates adjusted by 100 basis points over March-December 2022 to 24.9 percent.
  - U.S. dollar lending rates adjusted faster to FED rate increases, especially for consumption and large business credit.

### FISCAL AND EXTERNAL SECTOR DEVELOPMENTS
- Fiscal outcomes and composition:
  - 2022 overall fiscal deficit: 1.7 percent of GDP (budgeted at 3.8 percent of GDP).
  - Estimated tax revenue: 12.0 percent of GDP (budget assumed 10.5 percent of GDP).
  - Fiscal support measures in 2022: 0.7 percent of GDP to households and firms (partially offset energy bill rise and reconstruction needs from natural disasters).
  - Infrastructure spending: remained below 1 percent of GDP.
  - Public debt-to-GDP ratio: 29.2 percent in 2022.
  - Pending balances to IGSS and Banguat admitted by courts: about 4.1 percent of GDP (not included in stock of debt).
- External position:
  - 2022 current account surplus: 1.4 percent of GDP.
  - Trade balance deficit: about 17 percent of GDP in 2022 (expanded).
  - Remittances: 19 percent of GDP in 2022.
  - Net international reserves: US$20 billion at end-2022, 4.4 percent (US$920 million) below end-2021.
  - Nominal exchange rate: remained stable around historical mean in 2022.
  - Real effective exchange rate: appreciated about three percent in 2022.
  - Factors affecting temporary U.S. dollar liquidity needs in 2022: large import bill, closing of four offshore banks by year-end, repayment of expensive US$-denominated debt held by some large banks.
  - Banguat actions: repurchase agreements facility in U.S. dollars with overall limit of US$500 million to end-December 2022; since January 1, 2023, doubled maximum daily FX intervention to US$100 million.

### FINANCIAL SECTOR AND STABILITY
- Structure and resilience:
  - Banking system: 17 banks held about 93 percent of financial sector assets in 2022; ten are part of a financial group; a new purely digital bank licensed in December 2022.
  - Capital adequacy: capital ratios at 16.5 percent (well above regulatory minimum of 10 percent).
  - Nonperforming loans: 1.3 percent.
  - Liquidity ratios: short-term 20 percent; MT liquidity 48 percent.
  - Provisions: exceeded 260 percent.
  - Profitability: return on assets 2.3 percent; return on equity above 24 percent.
  - Top-down stress tests (Annex IV) suggest banks are well prepared to withstand a range of shocks, though pockets of vulnerability exist related to rapid credit expansion in 2022, especially toward consumption.

### POLICY AND REFORM ENVIRONMENT
- Fiscal policy stance: authorities maintained a prudent fiscal stance in 2022 with revenue outperformance and limited infrastructure spending.
- Legislative developments and business climate:
  - Approved laws: leasing and insolvency laws, law to encourage foreign investment, Free Zones Act.
  - Pending draft legislation in Congress: Securities and Merchandise Market, Intellectual Property Rights, Public-Private Partnerships (PPPs), Infrastructure.
  - Competition draft law expected to be approved soon.
- Identified structural bottlenecks needing policy attention:
  - Infrastructure, education, social, and governance gaps hampering growth; tax collection insufficient to address social and infrastructure deficits.
  - Perceptions of weak legal protection, high legal uncertainty, weak governance, and crime—efforts underway on data transparency and digitalization but more is needed.

*Source: IMF staff report (1gtmea2023002 - 2023).*

### 13.      Significant efforts are ongoing to strengthen data availability and its quality

### 13.      Significant efforts are ongoing to strengthen data availability and its quality

### Data availability and statistical projects
- The 2022 Survey on Employment and Income was completed in February and published in April 2023.
- The National Household Survey on income and spending will be completed by the end of 2023.
- Updated Consumer Price Index (CPI) data (with updated weights) published by January 2024.
- Banguat, jointly with the Ministry of Economy and the National Statistics Institute, has started a project to develop quarterly leading labor market indicators to help identify inflationary pressures in the future.
- Other ongoing projects:
  - Measuring GDP by region.
  - Strengthening the environmental accounting system.
  - Advancing monetary and financial sector statistics on non-bank financial institutions.
  - Expanding the debt data to cover general government debt (including public entities).

### Outlook and key macro projections
- 2023 real GDP growth rate is projected to decelerate to 3.4 percent.
- Large remittance inflows—about US$19 billion in 2023—are expected to remain strong and continue supporting domestic consumption and imports.
- The output gap should close by 2024.
- Inflation is expected to peak in Spring 2023 and gradually decline to the target band (center) by end-2024.
- The 2023 budget, approved by Congress in November 2022, envisages an overall deficit of three percent of GDP.
- Staff’s deficit projection is 1.7 percent of GDP, after adjusting for a low spending execution rate and higher tax collection.
- The MT fiscal deficit is expected not to exceed the two percent target.
- The current account balance is projected at 1.9 percent of GDP and only close over the medium term.
- In 2023 (to end-February), remittance inflows remained strong—12.6 percent higher than in 2022 (to end-March).
- Banguat’s net FX purchases mounted to – US$53.8 million by April 10, 2023.

### Fiscal framework 2023 (Percent of GDP)
- Budget 1/ (Authorities' Proj / Staff's Proj.)
- Central government  
  - Total revenues  11.312.512.2
  - Tax revenues  10.711.911.6
  - Direct taxes3.74.34.2
    - o/w 
        PIT2.93.53.4
    - Indirect taxes6.67.77.4
        - o/w 
           VAT5.05.95.7
               - Domestic2.22.52.6
               - On imports2.83.33.1
  - Nontax revenues  0.60.60.6
  - Total expenditures  14.214.013.9
    - Current 11.711.611.4
       - Operating expenditures10.110.09.9
       - Interest   1.61.61.6
    - Capital  2.62.42.5
    - Primary expenditures  12.612.412.3
  - Primary balance  -1.40.1-0.1
  - Fiscal balance  -3.0-1.6-1.7
- Note: The 2023 budget (2023, left column in the table) assumes inflation at 5% and real GDP growth of 2.5%. Staff projects nominal GDP growth at 10%

### Risks to the outlook
- Near-term risks:
  - Abrupt global slowdown or recession in the U.S. could trigger a slowdown (or contraction) in remittance inflows.
  - Intensification of regional conflict(s) could heighten volatility and uncertainty and further impact commodity prices.
  - Monetary policy miscalibration and high commodity price volatility could add further uncertainty and fuel social demands.
- Medium-term risks:
  - Persistent structural weaknesses hindering growth potential (infrastructure, skilled labor supply, governance, legal certainty).
  - Exposure to money laundering and terrorism financing (ML/TF) risks; the next AML/CFT evaluation by GAFILAT is scheduled for 2027.
  - Approval of the draft AML/CFT Law is critical to strengthen the legal and regulatory framework and to prevent negative impacts on correspondent banking relationships and credits with foreign financial institutions.
  - Exposure to extreme events caused by climate change.

### Policy discussions and recommendations — overarching themes
- Urgent priorities: curb inflationary pressures and scale up the structural agenda.
- Maintain a prudent fiscal policy stance while cementing a pro-growth agenda focused on inclusion and productivity.
- Preserve the implicit two percent fiscal deficit anchor and a low debt-to-GDP ratio.
- Consider a prudent increase in sovereign debt to cover infrastructure investments if accompanied by a clear communication strategy and well-defined and vetted infrastructure projects.
- Monetary policy: further tightening may be required to bring inflation back to the four percent target.
- Strengthen and deepen the financial sector and implement a roadmap to enhance governance perceptions.

### A. Monetary and exchange rate policy recommendations
- Recent policy rate increases (+300 basis points between May 2022 and March 2023) have helped keep inflation expectations anchored; however, the monetary stance remains accommodative.
- Further reforms to strengthen Banguat’s position, the Inflation-Targeting (IT) framework, and the toolkit:
  - Recapitalization of Banguat (following Article 9 of the Banguat Law) to ensure use of all tools and fulfillment of mandate; publish Banguat’s financial statements using international accounting standards to enhance transparency.
  - Continue transition towards a fully-fledged IT framework by:
    - Adjusting the governance framework to support the inflation-only objective.
    - Strengthening Banguat’s role as an operationally independent monetary authority.
    - Modernizing the monetary policy implementation framework (policy rate operational framework, macroeconomic modeling capacity for monetary policy forecasting, and reserves requirements practices).
  - Gradual transfer of market risk management to FX users to support the exchange rate’s role as a shock absorber, including:
    - Developing an FX risk management toolkit (FX risk management and macroprudential FX tools).
    - Synchronizing the gradual transfer of FX risk management with operationalization of the hedging market regulatory framework and adopting a well-designed communication strategy.
    - Letting the exchange rate assume a more important role would facilitate FX market deepening, lessen frictions and potential balance sheet vulnerabilities, and allow Banguat to intervene only to address disruptive shocks.
  - Adopt structural pro-growth and productivity-enhancing reforms to increase the absorption capacity of large FX inflows.

### Authorities’ views on monetary policy
- Authorities expect inflation to return to the target band by the end of 2023 and be at the mid-point of the band by 2024.
- They acknowledged considerable uncertainty affecting food prices, wage adjustments, and inflation persistence effects.
- They expect the current account surplus to close in two years, owing to higher imports and further moderation in remittance inflows growth rate.
- Authorities have accumulated large buffers in the form of international reserves and consider part of them precautionary; they believe higher reserve buffers are justified given protracted high uncertainty.

### B. Fiscal policy: recommendations and structural priorities
- Authorities’ commitment to a prudent fiscal stance continues to be appropriate; 2022 budget had a 96 percent execution rate and the fiscal deficit stayed well below the projected deficit.
- The 2023 approved budget maintains low fiscal deficits (below 2 percent) and a low debt-to-GDP ratio (below 30 percent of GDP).
- Need for a multi-year, medium-term, more flexible budget to support sustainable, inclusive growth:
  - Address legal rigidities and cumbersome approval processes that limit capital spending.
  - Increase flexibility in the annual budget and align multi-year fiscal revenue and spending targets with a MT debt strategy.
  - Include MT fiscal framework in annual budget discussions at Congress and publish multi-year plans and targets.
- Tax policy and revenue:
  - 2022 revenues estimated at 12 percent of GDP.
  - Increase tax revenue objective to at least 15 percent of GDP; this would require approval of a comprehensive tax reform.
  - Consider measures: broadening the tax base, a structural increase in domestic VAT and personal income tax rates, streamlining exemptions, and enhancing compliance (e.g., tax audit functions).
- Pro-growth spending to close gaps in investment, institutional capacity, and social needs:
  - Infrastructure:
    - Accelerate implementation and evaluation of critical transformative infrastructure projects.
    - Ensure consistency between the "Guatemala no se detiene" strategy, a bottom-up national investment plan, and MT development goals.
    - Strengthen project appraisals and procurement, portfolio management and implementation, and risk management functions, including risk assessments and insurance instruments to mitigate climate-related hazards.
    - An IMF-led Public Investment Management Assessment (PIMA/Climate-PIMA), scheduled for June 2023, will propose reforms to streamline processes.
    - Complete first PPP project and adopt PPP legal framework reform simplifying processes; approving infrastructure legislation (roads, airports, ports) would be key.
  - Labor and institutional capacity:
    - Access to qualified labor force remains constrained; initiatives include INDECAP training and a Ministry of Education scholarship program to study English.
    - Education budget largely assigned to wages; indications of brain drain migration due to wage differentials with the U.S.
    - Strengthen public sector services quality via meritocracy, institutional efficiency, and competitive and effective procurement services as part of civil service law reform efforts.
  - Social spending:
    - Better target and increase social spending.
    - Completion of the national household survey (due by late 2023/early 2024) should improve targeting of vulnerable populations.
    - Scale up temporary targeted support to education and health.
    - Use accumulated cash balances due to budgetary underspending (e.g., about 0.6 percent of GDP from 2022 and the first two months of 2023) to support the most vulnerable groups.

### Debt management and capital markets
- Develop a MT debt management framework supporting development needs; issue debt instruments across the yield curve according to a pre-announced annual plan and market conditions.
- A slightly higher debt-to-GDP ratio could be appropriate for critical large investments if clearly articulated with a communication strategy and project timeline.
- Improve MT debt management strategy and annual budgeting and borrowing to bring efficiency gains and reduce spending lags.
- Develop the secondary market for sovereign debt and the domestic capital market; broaden the investor base (e.g., insurance markets) to reduce funding costs and improve access over time.

### Authorities’ views on fiscal reform and transparency
- Authorities broadly agreed with staff recommendations and emphasized progress on tax administration (digitalization, transparency, streamlining procedures).
- Commitment to fiscal transparency yielded improvements in the recent Fiscal Transparency Evaluation (FTE).
- Progress cited: digital procurement platform, budget transparency, procurement law, updated procurement regulation, and continued efforts on consolidated statistics for the NFPS.

*Source: 1gtmea2023002 - 13.      Significant efforts are ongoing to strengthen data availability and its quality*

### 2023. The authorities recognize the need to increase tax revenue further if the longstanding social

### 1gtmea2023002 - 2023. The authorities recognize the need to increase tax revenue further if the longstanding social

### Fiscal stance, revenue, and fiscal framework
- Authorities recognize the need to increase tax revenue to address longstanding social and infrastructure gaps.
- Their longstanding commitment to prudent fiscal policies resulted in low debt levels and a deficit below the anchor for two consecutive years.
- Current MT Framework guides conservative policies; authorities are interested in exploring mechanisms to improve it further and recognize benefits of adopting a MT fiscal and debt framework, noting officialization would require Congress approval.
- A comprehensive fiscal reform would be needed to achieve a 15 percent of GDP target; authorities prefer this be taken by the next administration.
- The 2022 boosting of tax collection due to tax administration reform (customs, tax administration enforcement, and digitalization), and high import prices, is welcomed.
- Continued efforts are recommended to identify and correct factors limiting VAT collection and to streamline tax exemptions.
- Reappointment of Superintendence of Tax Administration posts based on effort result-based assessments to achieve MT strategic objectives and plan the multi-annual budget should be considered.

### Social protection, subsidies, and targeting
- Targeted cash transfers funded by multilateral debt is not possible in Guatemala; Congress has been limiting approval of multilateral projects on education and health.
- Temporary energy subsidies (implemented in 2022 and extended for three months in 2023) are identified as the second-best option when targeted cash transfers are not feasible.
- Authorities indicated renewal of social support by extending targeted and temporary subsidies and raising social spending in 2023 to alleviate poverty and inflationary pressures.
- Authorities will reduce information gaps to target social spending by using the household survey in the field, expected by 2024.

### Public investment, PIMA/Climate-PIMA, and infrastructure
- Authorities appreciated the FTE and welcomed the PIMA/Climate-PIMA evaluation as a first step to identify main steps to streamline processes.
- They agreed they could enhance their public investment framework and its resilience to climate events.
- The IMF PIMA/C-PIMA (starting late May 2023 with World Bank collaboration) aims to identify gaps in the investment governance framework to increase high-quality investments.
- Recommendations: adopt a MT, multi-year planning and implementation approach; ensure infrastructure plans incorporate resilience to natural shocks; make the budget flexible for multi-year ambitious infrastructure investment; link national, subnational, and sectoral planning; rationalize project appraisals and PPP procedures; adopt portfolio management with clear timelines and delivery targets.

### Public sector liabilities and contested obligations
- The Ministry of Finance does not recognize the debt claimed by IGGS; some judicial processes are in Courts for resolution.
- The Law to cover the employer’s contribution to social security must respond to a new tax which was never promulgated by Congress.
- Notes to Banguat Financial Statements reflect it requires authorization from Congress; the Ministry has made proposals in annual budget projects and long-term plans.

### Financial sector policies and supervision
- Accounting and regulatory framework underpinning Guatemala’s banking sector needs to advance; fast-tracking pending accounting reform to ensure disclosure using international accounting standards is important.
- Congress’ approval of the 2002 Banking Law and Financial Groups update is urgently needed to align regulatory and supervisory practices to international standards and equip supervisors with up-to-date tools to monitor credit, market, and operational risks.
- The Law would equip supervisors with a mandate to evaluate and act upon risks and vulnerabilities affecting the financial system.
- Publication of the Financial Stability Report is recommended to provide a stocktaking of financial stability risks based on bottom-up and top-down stress testing and to foster communication with market participants.
- Staff recommended strengthening carbon footprint data collection from the banking sector and better understanding climate risks’ impact in the financial sector, partnering with regional bodies.
- The financial sector remains small and bank-centric; the insurance sector needs to grow, deepen in life and non-life segments, and support climate-risk management.
- Digitalization of financial services could propel inclusion of the large informal sector.
- Other urgent measures to improve monetary policy effectiveness include recapitalization of Banguat and development of hedging tools for the private sector to manage foreign exchange volatility.

### Governance, anti-corruption, and AML/CFT
- Implementation of governance and anti-corruption reforms has seen progress: fiscal reporting and fiscal risks advanced relative to the 2016 Evaluation; further work needed in budgetary and fiscal projections.
- Authorities have developed technological tools and portals for expenditure and budget execution, implemented the General Registry of State Acquisitions since January 2020, and established a technical sub-commission in August 2021 to follow up on conventions.
- Closing the remaining four offshore banks was noted as progress.
- Setbacks: announcement on January 16, 2023, of legal action against the former head of CICIG and former CICIG staff led to adverse international reactions; 2022 Sustainable Development Report shows deterioration in corruption perception and press freedom index.
- A diagnostic governance assessment is recommended to provide a roadmap of reforms with a timeline to improve business climate and attract FDI.
- Approval of the pending draft AML/CFT Law and further implementation of reforms to align with FATF standards is very urgent; the draft has been in Congress for approval for several years.
- GAFILAT postponed the next assessment until 2027 (initially planned for 2024).
- Fund staff, in collaboration with the World Bank, IADB, and OAS, is coordinating AML/CFT institutional capacity building and training; further support expected to raise awareness once the AML/CFT Law is approved and implementing regulations updated.
- Authorities view strengthening institutional capacity for AML/CFT as a core prerequisite to approve and implement AML/CFT Law; they expressed strong interest in undertaking the IMF governance diagnostic, pending new government approval and timeline agreement.

### Supply-side reforms, labor market, and informality
- Guatemala should adopt an enhanced results-based framework linking initiatives to outcomes within an overall MT strategy.
- Approval of insolvency framework and foreign direct investment law are positive steps; signing new bilateral trade agreements and FDI promotion are important.
- Policies to improve structural competitiveness: increase access to technology and innovation, lower electricity costs, and increase skilled labor supply.
- Reducing informality requires an integral labor market formalization strategy including strengthening education and governance, reducing labor market rigidities, and coping with agricultural seasonality.
- Labor market flexibilization measures: rationalize severance payments, link minimum wage to productivity, adjust regulations for rural labor seasonality, enhance oversight, and design formalization benefits (streamlined taxation, access to credit, SME hiring policies, part-time arrangements).
- Authorities approved two minimum wage increases this year: 7 percent in the Department of Guatemala City and 4 percent in other regions; recently approved ILO-backed regulation to facilitate partial-time hiring.
- Authorities expect to ease formalization through electronic invoicing, digitalizing public procedures, and implementing the Tax Simplification, Update, and Incorporation Law.

### Macroeconomic outlook and monetary policy (Staff Appraisal)
- Guatemala’s economy: 2022 growth slowed to 4.1 percent and is expected to continue to 3.4 percent in 2023 but remain close to potential.
- Large remittance inflows are expected to continue supporting a robust external position and domestic private demand.
- Inflationary pressures and uncertainty remain challenges; domestic factors risk outpacing external factors in explaining inflation.
- Bank of Guatemala’s unanimous policy rate hikes sent a strong message consistent with its Inflation Targeting framework; decline in U.S. inflation and base effects from April 2023 will help tame pressures, but continued monetary policy efforts are required.
- Banguat should stay ready to fight inflation persistence by further tightening its stance and reversing its still widely accommodative stance as needed.
- Further strengthening the IT framework and practices in monetary operations, adopting technical measures to enhance policy rate effectiveness and transmission, and gradual transfer of market risk management to the private sector are recommended.
- Debt outlook: Guatemala’s debt-to-GDP ratio is low and risk premium stable and low; development of secondary debt markets and completion of the yield curve should help secure low-risk, lower-rates financing and facilitate private sector access to external financing at lower rates.
- Financial sector resilience: banking sector proven resilient but close monitoring is justified; adoption of international accounting standards and publication of the Financial Stability Report should not be further delayed.
- Structural agenda: approval of draft laws on civil service reform and infrastructure is urgently needed; financial sector should deepen and insurance sector should play a role in managing climate-related risks.
- Complementary priorities for development:
  - Expand the formal labor market, strengthen productivity, and attract investment by widening access to technology and innovation, investing in human capital, and reducing regulatory uncertainty.
  - Scale up efforts to improve governance and legal certainty, reduce corruption vulnerabilities, and guarantee responsible and independent anti-corruption institutions to enhance the business climate and attract more investment.
  - Authorities’ strong interest in completing a governance diagnostic to provide a roadmap of reforms is an important step forward.

*Source: 1gtmea2023002 - 2023. The authorities recognize the need to increase tax revenue further if the longstanding social*

### 45.      Staff recommends that the next Article IV consultation take place on the standard

### 45. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Recent Economic Developments and Outlook
- Growth outlook: "The Guatemala’s MT growth outlook remains broadly unchanged."
- Confidence: "The confidence index shows a recovery."
- Real GDP Growth (selected markers shown in figure): 0, 1, 2, 3, 4, 5, 6, 7 (LAC, CAPDR, SLV, HND, GTM, CRI, NIC, DOM, PAN; series 2009-2019 and 2023-2028 displayed).
- Real interest rates (Real rate, March 2023): levels illustrated for HND, GTM, NIC, DOM, CRI.

### Inflation and Monetary Conditions
- Inflation: "Inflation remains high and shows signs of stickiness... with food inflation playing a major role."
- Policy rate: "And while the policy rate has increased .... it remains in negative real terms territory."
- Monetary aggregates (Table 4 memorandum items):
  - M2 (percent change series): 9.4, 9.6, 18.9, 11.6, 14.5, 11.2, 8.5, 7.6, 7.3, 7.4, 7.4 (years 2018–2028 as listed).
  - Credit to the private sector (percent change series): 7.0, 4.9, 6.4, 12.7, 16.0, 14.0, 7.0, 7.5, 7.5, 8.0, 8.0.

### External Sector and External Developments
- Current account and external saving:
  - Current account balance (percent of GDP series): 0.9, 2.4, 5.0, 2.2, 1.4, 1.5, 1.3, 1.2, 1.1, 0.8, 0.5 (2018–2028).
  - External saving series in Table 1: -0.9, -2.4, -5.0, -2.2, -1.4, -1.5, -1.3, -1.2, -1.1, -0.8, -0.5.
- Trade balance (goods) (percent of GDP series): -10.9, -10.3, -8.1, -12.7, -14.9, -13.9, -13.5, -13.0, -12.7, -12.4, -12.2.
  - Exports (percent of GDP series): 13.2, 12.9, 13.0, 14.4, 15.0, 14.0, 13.1, 12.5, 12.1, 11.6, 11.3.
  - Imports (percent of GDP series): 24.0, 23.2, 21.2, 27.1, 30.0, 27.9, 26.6, 25.6, 24.7, 24.0, 23.4.
  - Of which: oil & lubricants (percent of GDP): 4.0, 3.8, 3.1, 5.2, 6.6, 5.5, 5.1, 4.8, 4.5, 4.3, 4.1.
- Remittances and transfers:
  - Net transfers (percent of GDP series): 13.6, 14.5, 15.3, 18.7, 20.0, 19.2, 18.2, 17.6, 16.7, 16.5, 16.0.
  - Of which: remittances (percent of GDP): 12.6, 13.6, 14.6, 17.8, 19.0, 18.2, 17.2, 16.6, 16.1, 15.5, 15.0.
- International reserves and liquidity:
  - Stock of NIR (in millions of U.S. dollars): 11,617; 13,769; 18,468; 20,940; 20,020; 20,520; 21,520; 22,520; 23,520; 24,520; 25,520 (series in Table 3 memorandum items).
  - NIR in months of next-year NFGS imports: 6.5, 8.6, 8.1, 7.4, 7.0, 6.9, 7.0, 7.0, 6.7, 7.0, N.A.
  - NIR in ARA metric under stabilized regime (percent): 119.6, 136.8, 173.2, 176.4, 163.3, 160.4, 161.9, 162.9, 163.5, 162.4, 162.8.
- Foreign direct investment: "FDI has dropped from 2021 but is above previous years." (Table 3 FDI series, in percent of GDP: -1.1, -1.0, -1.0, -3.5, -1.0, -1.1, -1.1, -1.1, -1.1, -1.1, -1.1.)

### Fiscal Sector Developments
- Overall fiscal results (Table 1 and Table 2a/2b highlights):
  - Central government total revenues (percent of GDP series from Table 1/Table 2b): 11.2, 10.7, 12.3, 12.7, 12.2, 12.1, 12.0, 11.9, 11.8, 11.8, 11.8 (2018–2028).
  - Total expenditures (percent of GDP): 13.4, 15.6, 13.5, 14.4, 13.9, 13.9, 13.9, 13.9, 13.8, 13.8, 13.8.
  - Primary balance (percent of GDP): -0.6, -3.2, 0.6, 0.0, -0.1, -0.1, -0.3, -0.3, -0.3, -0.3.
  - Overall balance (percent of GDP): -2.2, -4.9, -1.2, -1.7, -1.7, -1.8, -1.9, -2.0, -2.0, -2.0.
- Tax collection: "despite tax collection remained amongst the lowest." and "Tax collection targets continue to be overperformed."
- Central government debt (percent of GDP series from Table 2b): 26.4, 31.5, 30.8, 29.2, 28.2, 27.8, 27.8, 27.7, 27.8, 28.0, 28.0.
- Fiscal figures in millions of quetzales (Table 2a highlights, 2019–2028 projections):
  - Total revenues (2019–2028): 66,555; 64,066; 82,186; 93,155; 98,700; 106,565; 113,370; 120,236; 128,094; 137,519.
  - Total expenditures (2019–2028): 79,836; 93,529; 90,066; 105,726; 112,418; 121,986; 131,512; 140,531; 150,399; 160,981.
  - Overall balance (2019–2028): -13,281; -29,463; -7,880; -12,571; -13,718; -15,421; -18,142; -20,295; -22,305; -23,462.
  - Central Government debt (2019–2028, millions of quetzales): 156,999; 188,908; 204,666; 215,106; 227,940; 243,545; 261,687; 281,923; 304,247; 327,708.

### Monetary Policy, Banking, and Financial Sector
- Monetary policy pass-through and liquidity:
  - "Banguat increased the policy rate, but it is not yet fully adjusting to the lending rates, especially in quetzal."
  - Liquidity: "liquidity growth in the system is adjusting ... continuing supporting credit in quetzal... especially for consumption..."
  - FX liquidity: "FX liquidity has been declining, but not in quetzal... showing some pressure in the last quarter of 2022."
- Banking sector structure and exposures (Figure 5 / Bank-Sovereign Nexus, September 2022):
  - Banks are the sovereign bond holders; holdings by bank size (as % of banks' assets per group) in domestic currency:
    - Traded: 0%, 0%, 0%, 0%.
    - For sale: 12%, 13%, 10%, 11%.
    - Held to maturity: 10%, 12%, 2%, 9%.
  - In foreign currency:
    - Traded: 0%, 0%, 0%, 0%.
    - For sale: 1%, 1%, 2%, 0%.
    - Held to maturity: 1%, 2%, 0%, 0%.
  - FX exposures: "And maintain positive albeit low FX exposures."
- Financial soundness and performance descriptors: "The financial system is even more bank-centric... with a traditional business model... that is profitable ... conservative and with apparent low credit risk exposures."

### Social Indicators and Governance
- Social indicators: Figure 6 presents social indicators with "1 Latest available year reported" note; data sources: World Development Indicators, ILOSTAT, UNESCO, and IMF Staff Calculations.
- Governance: Figure 7 shows Worldwide Governance Indicators covering perceptions of participation, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. Source: The Worldwide Governance Indicators, World Bank Group.

### Key Projections and Memoranda (selected numeric series preserved)
- Real GDP (annual percent change, Table 1): 3.4, 4.0, -1.8, 8.0, 4.1, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9 (2018–2028).
- Consumer prices (average, Table 1): 3.8, 3.7, 3.2, 4.3, 6.9, 7.5, 5.5, 4.3, 4.0, 4.0, 4.0.
- Net International Reserves (stock in millions of U.S. dollars, Table 3 memorandum): 11,617; 13,769; 18,468; 20,940; 20,020; 20,520; 21,520; 22,520; 23,520; 24,520; 25,520.
- Nominal GDP (in billions of U.S. dollars): 73.3; 77.2; 77.8; 86.0; 95.0; 103.8; 112.6; 121.2; 130.1; 139.7; 150.1.

*Source: 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

### Overall Assessment
- The external position of Guatemala in 2022 was stronger than the level implied by fundamentals and desirable policies.
- The Current Account (CA) surplus further declined in 2022 below its 2019 (pre-pandemic) level.
- Remittances continued double-digit growth of recent years: 18 percent growth to account for 19 percent of GDP in 2022.
- The growth in remittances was not enough to offset a deterioration of the trade balance largely due to higher commodity prices.
- The Net International Investment Position (NIIP) remained low despite significant investment needs.
- The Real Effective Exchange Rate [appreciated] in 2022.
- Reserves reversed their accumulating trend of recent years (to US$20 by end-2022).

### Potential Policy Responses
- Guatemala’s long-standing lagging structural agenda significantly explains the CA gap.
- Capital and social spending remain low to address the gaps.
- Policy recommendations:
  - Increase infrastructure spending.
  - Strengthen human capital.
  - Implement well-targeted social spending within a sustainable fiscal framework.
  - Improve the business environment.
  - Strengthen governance.
  - Improve the security situation to increase growth potential and attract foreign investment.

### Foreign Assets and Liabilities: Position and Trajectory
- Background:
  - The deficit in the NIIP maintained its declining trend in 2022: from 22 percent of GDP in 2015 to six percent in 2022.
  - Assets projected to increase by US$1.6 billion in 2022 and liabilities by US$0.5 billion.
  - Assets increased from 19 percent of GDP in 2015 to 40.7 percent in 2022.
  - Liabilities declined to 49 percent of GDP in 2022.
- FDI and external liabilities (2022):
  - Net FDI declined after an exceptional surge in 2021 (linked to the US$2.2 billion sale of Tigo Guatemala), to 1.0 percent of GDP, similar to 2018-2020.
  - FDI remained the largest component of external liabilities in 2022, accounting for 50 percent of the total.
  - Portfolio investment accounted for 16 percent.
  - Other investments accounted for 33 percent.
  - External debt comprised around 54 percent of external liabilities in 2022 or around 26 percent of GDP.
- Assessment:
  - The current NIIP projected path does not imply risks to external sustainability or a need for a CA adjustment.
  - Absent sustained trend changes in FDI or public sector external borrowing, the NIIP is projected to increase towards balance, unusual for a country with significant investment needs.
- 2022 (% GDP) snapshot:
  - NIIP: -5.7
  - Gross Assets: - 41
  - Gross Liab.: -46.4
  - Debt Liab.: -25
  - Debt Assets: n.a.

### Current Account
- Background:
  - The CA balance declined from 2.2 percent in 2021 to 1.4 percent in 2022.
  - Remittances reached 19 percent of GDP in 2022, a historically high level.
  - The increase in remittances in recent years is likely permanent, reflecting continuously robust migration to the United States.
  - Imports of goods and services surged to historically high levels: 35.7 percent of GDP in 2022, largely due to higher international commodity prices because of the war in Ukraine, while the volume of imports remained stagnant.
  - Exports of goods and services increased to 19 percent of GDP in 2022 because of higher international prices and a substantial recovery of the tourism sector.
- Projections and drivers:
  - The remittances growth rate is expected to moderate as the U.S. economy and labor market are projected to decelerate but should remain considerably above pre-Covid levels in the medium term because of a higher migrant population.
  - The implementation of the U.S. infrastructure bill will boost construction and thus remittances.
  - Total imports and exports’ growth should decline in the medium term in line with the projected downward correction in commodity prices.
- Assessment:
  - The External Balance Assessment (EBA) methodology suggests that the external position in 2022 was stronger than the level consistent with fundamentals and desirable medium-term policies.
  - Changes relative to 2021 EBA:
    1. Estimates of migrants outside Guatemala revolve around 2.7 million, most in the U.S.; no official statistics; a new UN report to be published by May 2023.
    2. Application of several Covid-related adjustors for tourism and transportation; remittance-related adjustor applied (based on the EBA-Lite methodology) and lower than for 2021 due to an upward revision in the medium-term projection of remittances, implying a smaller temporary component.
    3. In 2022 there is a slightly higher REER to CA elasticity. The same upward adjustment to the CA norm was made to reflect the negative impact of Guatemala’s structural bottlenecks on investment.

### Real Exchange Rate
- Background:
  - The Real Effective Exchange Rate (REER) appreciated by 3.4 percent in 2022.
  - REER experienced a 49 percent appreciation since 2010 and a 20 percent appreciation since 2015.
  - In contrast, the value of the quetzal fell by 2 percent relative to the U.S. dollar from end-2021 to end-2022.
- Assessment:
  - The EBA CA methodology suggests that the REER is below the level implied by fundamentals and lower than in 2021.
  - Under the assumption that the estimated CA gap will be closed by an adjustment in the trade balance, the EBA model implies a REER undervaluation of 13.5 percent.
  - The EBA REER Level and Index model indicates that REER was severely overvalued (about 38 and 20 percent, respectively) in 2022; however, both models had an unusually poor fit for Guatemala because Guatemala is not included in the EBA REER index model and the estimate relies on imputed values for missing data.

### Capital and Financial Accounts: Flows and Policy Measures
- Background:
  - FDI liabilities in 2022 were US$1.4 billion, lower than the exceptionally high US$3.3 billion in 2021 (which reflected a US$2.2 billion acquisition by Millicom International Cellular of 45 percent of Tigo Guatemala’s equity).
  - As a share of GDP, FDI liabilities were 1.4 percent in 2022 (above years 2018-20 but below 2010-17 average of 2 percent of GDP).
  - Portfolio investment net inflows of 0.5 percent of GDP in 2022 were much lower than in 2021, reflecting debt repayments amid global monetary tightening.
- Assessment:
  - There are no significant macroeconomic risks from capital flows, given their relatively low level.
  - The solid fiscal stance and low public debt imply that large government bond-related portfolio investment flows do not carry important risk.

### FX Intervention and Reserves Level
- Background:
  - Net International Reserves (NIR) declined from US$20.9 billion end-2021 to US$20.2 billion end-2022.
  - The 2022 decline partly reflected a late-2022 retrenching of U.S. financial institutions and higher costs in U.S. borrowing that prompted an accelerated repayment of outstanding balances.
  - The de facto exchange rate arrangement of Guatemala is classified as a stabilized arrangement.
- Assessment and reserve metrics:
  - End-2022 reserves are 161 percent of the IMF’s metric for Assessing Reserve Adequacy (ARA metric) for countries with stabilized exchange rates like Guatemala.
  - Reserves cover more than 7 months of next year’s goods and services imports.
  - Reserves are 36.5 percent of broad money.
  - Reserves are 397 percent of short-term external debt.
  - In 2022, FX intervention has been asymmetric, tilted towards the accumulation of foreign exchange, consistent with recent years.

*Source: Annex I. External Sector Assessment (content provided).*

### Annex III. Table 2. Guatemala: Debt Coverage and Disclosures (concluded)

### 1gtmea2023002 - Annex III. Table 2. Guatemala: Debt Coverage and Disclosures (concluded)

### Debt coverage and disclosure scope
- Coverage focuses on the central government due to data availability concerns for the broader public sector (historical availability and composition).
- Outstanding debt SS recognized by law, not included in official MoF data, is included in the contingent liability shock and represents 8.7 percent of GDP.
- Central Government debt with the Central Bank is estimated at 4.1 percent and is included in the contingent liability scenario.
- Authorities are improving data timeliness, quality, and coverage with IMF TA.
- Preliminary authorities’ data on Non-Financial Public Sector debt suggests an adjustment of about -2 percent of GDP without including debt with the Social Security and the Central Bank.

### Public debt: baseline projections and dynamics (Annex III. Figure 2)
- Staff commentary: Debt is expected to decrease in 2023, along with a primary surplus and despite a reduction in GDP growth. Over the medium term, continued fiscal consolidation is expected to keep debt on a downward trajectory. Debt service is expected to remain broadly constant.
- Public debt path (Percent of GDP, actual and projections):
  - Actual 2022: 29.2
  - 2023: 28.2
  - 2024: 27.8
  - 2025: 27.7
  - 2026: 27.8
  - 2027: 28.0
  - 2028: 28.0
  - 2029: 28.1
  - 2030: 28.2
  - 2031: 28.4
  - 2032: 28.5
- Change in public debt (annual, Percent of GDP):
  - 2022: -1.5
  - 2023: -1.0
  - 2024: -0.4
  - 2025: 0.0
  - 2026: 0.0
  - 2027: 0.3
  - 2028: 0.0
  - 2029: 0.1
  - 2030: 0.1
  - 2031: 0.1
  - 2032: 0.1
- Contribution of identified flows (Percent of GDP):
  - 2022: -1.3
  - 2023: -0.5
  - 2024: -0.1
  - 2025: 0.1
  - 2026: 0.2
  - 2027: 0.4
  - 2028: 0.1
  - 2029: 0.3
  - 2030: 0.3
  - 2031: 0.3
  - 2032: 0.3
- Primary deficit (Percent of GDP):
  - 2022: 0.0
  - 2023: 0.1
  - 2024: 0.1
  - 2025–2032: 0.3 (each year)
- Noninterest revenues (Percent of GDP) 2022–2032:
  - 2022: 12.7; 2023: 12.2; 2024: 12.1; 2025: 12.0; 2026: 11.9; 2027: 11.8; 2028–2032: 11.8 (each year)
- Noninterest expenditures (Percent of GDP) 2022–2032:
  - 2022: 12.7; 2023: 12.3; 2024: 12.3; 2025: 12.3; 2026: 12.2; 2027–2032: 12.1 (each year)
- Automatic debt dynamics and components (Percent of GDP):
  - Automatic debt dynamics: 2022: -1.3; 2023: -0.6; 2024: -0.2; 2025: -0.1; 2026: -0.1; 2027–2032: 0.0
  - Real interest rate and relative i: 2022: -0.2; 2023: 0.3; 2024: 0.8; 2025: 0.8; 2026: 0.9; 2027: 1.0; 2028–2032: 1.1 (each year)
  - Real interest rate: 2022: -0.6; 2023: -0.1; 2024: 0.5; 2025: 0.7; 2026: 0.8; 2027: 0.8; 2028–2032: 0.9 (each year)
  - Relative inflation: 2022: 0.4; 2023: 0.4; 2024: 0.3; 2025: 0.2; 2026: 0.1; 2027: 0.2; 2028–2032: 0.2 (each year)
  - Real growth rate: 2022: -1.2; 2023: -0.9; 2024: -1.0; 2025–2032: -1.0 to -1.1 (listed as -1.0 for 2024–2027 and -1.1 for 2028–2032)
- Gross financing needs (Percent of GDP) and debt service breakdown:
  - Gross financing needs: 2022: 2.3; 2023: 2.6; 2024: 3.1; 2025: 3.0; 2026: 3.6; 2027: 3.8; 2028–2032: 4.0 (each year)
  - Of which: debt service: 2022: 2.3; 2023: 2.5; 2024: 3.0; 2025: 2.7; 2026: 3.3; 2027: 3.5; 2028–2032: 3.8 (each year)
  - Debt service local currency: 2022: 1.2; 2023: 1.4; 2024: 1.9; 2025: 1.8; 2026: 2.1; 2027: 2.5; 2028–2032: 2.9 (each year)
  - Debt service foreign currency: 2022: 1.1; 2023: 1.1; 2024: 1.1; 2025: 1.0; 2026: 1.2; 2027: 1.0; 2028–2032: 0.9 (each year)
- Memo indicators:
  - Real GDP growth (percent): 2022: 4.1; 2023: 3.4; 2024–2032: 3.5 to 3.9 (listed per year, ending at 3.9)
  - Inflation (GDP deflator; percent): 2022: 6.2; 2023: 6.3; 2024: 4.8; 2025–2032: 3.9 to 3.5 (as listed)
  - Nominal GDP growth (percent): 2022: 10.6; 2023: 9.9; 2024: 8.5; 2025–2032: 7.6 to 7.4 (as listed)
  - Effective interest rate (percent): 2022: 4.0; 2023: 6.0; 2024: 6.7; 2025–2032: 4.6 to 6.9 (as listed)

### Realism of baseline assumptions
- Staff assessment: Realism analysis does not point to major concerns; past forecast errors do not reveal systematic biases. Forecast track record generally within bounds for optimism, excepting the SFA projections.
- Debt-creating flows composition is similar between the last and next 5 years, noting that pandemic onset biases primary deficit contribution upwards historically while high inflation and normalization of monetary policy affect later projections.
- Risk premium is expected to remain relatively constant.

### External debt sustainability (Annex IV)
- Summary: Guatemala’s external debt (sovereign and private) to GDP is low and resilient to standard DSA-shocks.
- Baseline projection: external debt declines from 26.3 percent of GDP by end-2022 to 18.8 percent of GDP by 2028.
- Historical context:
  - External debt to GDP at 37.4 percent in 2013; pandemic led to a temporary increase in 2020 by 0.3 percent of GDP.
  - Private bank external debt ratio to GDP: 2013: 8.2 percent; 2021: 6.6 percent; projected 2022: 5.4 percent.
  - Nonbank private sector external debt: 2013: 19.3 percent; 2021: 12.9 percent; projected 2022: 10.7 percent.
  - Official external debt ratio remained stable between 12 to 15 percent of GDP during this period.
- Major downside risks:
  - A large depreciation shock could hike the external debt ratio to exceed 40 percent of GDP in 2024 and fall afterward.
  - A current account (excluding interest payments) shock could drive external debt to GDP up by 30 percent of GDP by 2024, then start falling slowly.

- External Debt Sustainability Framework (Table 1, selected figures; Percent of GDP unless indicated):
  - Baseline: External debt
    - 2018: 33.4
    - 2019: 32.3
    - 2020: 32.6
    - 2021: 29.9
    - 2022: 25.5
    - 2023: 23.4
    - 2024: 21.7
    - 2025: 20.4
    - 2026: 19.4
    - 2027: 18.7
    - 2028: 18.2
  - Change in external debt:
    - 2018: -1.5; 2019: -1.0; 2020: 0.3; 2021: -2.7; 2022: -4.4; 2023: -2.1; 2024: -1.6; 2025: -1.3; 2026: -1.1; 2027: -0.7; 2028: -0.5
  - Identified external debt-creating flows (4+8+9):
    - 2018: -2.8; 2019: -5.0; 2020: -6.3; 2021: -8.8; 2022: -5.2; 2023: -3.4; 2024: -3.1; 2025: -3.0; 2026: -2.9; 2027: -2.6; 2028: -2.3
  - Current account deficit, excluding interest payments:
    - 2018: -2.2; 2019: -3.6; 2020: -6.1; 2021: -3.1; 2022: -2.3; 2023: -2.3; 2024: -2.1; 2025: -2.0; 2026: -1.8; 2027: -1.5; 2028: -1.2
  - Deficit in balance of goods and services (Percent of GDP):
    - 2018: 10.7; 2019: 10.3; 2020: 8.4; 2021: 14.1; 2022: 16.6; 2023: 15.4; 2024: 14.7; 2025: 14.2; 2026: 13.8; 2027: 13.5; 2028: 13.3
  - Exports (Percent of GDP):
    - 2018: 18.2; 2019: 17.6; 2020: 16.4; 2021: 17.7; 2022: 19.0; 2023: 17.8; 2024: 17.0; 2025: 16.2; 2026: 15.6; 2027: 15.1; 2028: 14.6
  - Imports (Percent of GDP):
    - 2018: 28.9; 2019: 27.9; 2020: 24.8; 2021: 31.8; 2022: 35.7; 2023: 33.3; 2024: 31.8; 2025: 30.5; 2026: 29.5; 2027: 28.6; 2028: 27.9
  - Net non-debt creating capital inflows (negative):
    - 2018: -1.1; 2019: -1.0; 2020: -1.0; 2021: -3.5; 2022: -1.0; 2023: -1.1; 2024–2028: -1.1 (each year)
  - Automatic debt dynamics (contribution, Percent of GDP):
    - 2018: 0.5; 2019: -0.4; 2020: 0.9; 2021: -2.2; 2022: -1.9; 2023–2028: 0.0 (each year)
  - Contribution from nominal interest rate:
    - 2018: 1.3; 2019: 1.3; 2020: 1.1; 2021: 0.9; 2022: 0.9; 2023: 0.8; 2024: 0.8; 2025: 0.8; 2026: 0.7; 2027: 0.7; 2028: 0.7
  - Contribution from real GDP growth:
    - 2018: -1.2; 2019: -1.3; 2020: 0.6; 2021: -2.4; 2022: -1.1; 2023: -0.8; 2024: -0.8; 2025: -0.7; 2026: -0.7; 2027: -0.7; 2028: -0.7
  - Residual, incl. change in gross foreign assets (2-3):
    - 2018: 1.2; 2019: 4.0; 2020: 6.6; 2021: 6.1; 2022: 0.8; 2023: 1.2; 2024: 1.5; 2025: 1.7; 2026: 1.8; 2027: 1.9; 2028: 1.8
  - External debt-to-exports ratio (in percent):
    - 2018: 183.2; 2019: 183.5; 2020: 199.5; 2021: 168.7; 2022: 133.8; 2023: 131.0; 2024: 127.7; 2025: 125.9; 2026: 124.0; 2027: 123.6; 2028: 124.7
  - Gross external financing need (in billions of US dollars):
    - 2018: 5.2; 2019: 4.2; 2020: 1.8; 2021: 3.4; 2022: 5.2; 2023: 3.4; 2024: 3.1; 2025: 2.8; 2026: 3.0; 2027: 3.0; 2028: 3.4
  - Gross external financing need (in percent of GDP):
    - 2018: 7.1; 2019: 5.5; 2020: 2.3; 2021: 3.9; 2022: 5.4; 2023: 3.3; 2024: 2.8; 2025: 2.3; 2026: 2.3; 2027: 2.2; 2028: 2.3
- Key macroeconomic assumptions (selected):
  - Real GDP growth (in percent): Historical average 3.4; 2018: 4.0; 2019: -1.8; 2020: 8.0; Baseline projection years: 2022: 4.1; 2023: 3.6; 2024: 2.4; 2025: 3.4; 2026: 3.5; 2027: 3.6; 2028: 3.7; 2029: 3.8; 2030: 3.9
  - GDP deflator in US dollars (change in percent): Historical average -1.0; Baseline 2022: 6.1; 2023: 3.0; 2024: 2.0; 2025: 5.7; 2026: 4.8; 2027: 3.9; 2028: 3.5; 2029: 3.4; 2030: 3.4
  - Nominal external interest rate (in percent): Historical average 3.8; Baseline 2022: 3.2; 2023: 3.4; 2024: 0.3; 2025: 3.6; 2026–2030: 3.7–3.9 (as listed)
  - Growth of exports (US dollar terms, in percent): Historical average 0.8; Baseline 2022: 18.6; 2023: 5.0; 2024: 8.5; 2025: 2.4; 2026: 3.5; 2027: 2.7; 2028: 3.4; 2029: 3.7; 2030: 3.9
  - Growth of imports (US dollar terms, in percent): Historical average 7.2; Baseline 2022: 23.9; 2023: 7.5; 2024: 15.1; 2025: 1.9; 2026: 3.6; 2027: 3.3; 2028: 3.8; 2029: 4.3; 2030: 4.8

### External debt bound tests and scenarios (Annex IV. Figure 1)
- Individual shocks are permanent one-half standard deviation shocks; combined shock scenarios and a one-time real depreciation of 30 percent in 2024 are analyzed.
- Notable scenario outcomes summarized in commentary:
  - Interest rate shock, CA shock, combined shock, and 30 percent real depreciation all materially affect external debt trajectories, with 30 percent depreciation capable of pushing external debt above 40 percent of GDP in 2024 under certain scenarios.

### Banking system vulnerabilities and stress tests (Annex V; End-December 2022)
- Overview:
  - Stress tests assess solvency and liquidity; banks appear well prepared with buffers. Regulatory forbearance from COVID has been phased out.
  - In a run scenario, one out of the 17 banks could run out of liquidity.
- Soundness indicators (Percent, End-December 2022):
  - Capital Adequacy Ratio (CAR, Capital / Risk Weighted Assets): 16.8
  - Non-Performing Loans / Total Loans: 1.3
  - Provisions / NPLs: 94.7
  - FX Loans / Total Loans: 33.1
  - Deposits / Total Liabilities: 89.4
  - Deposits / Total Loans: 162.9
  - ROA: 2.3
  - ROE: 24.3
  - Liquid Assets / Total Assets: 33.1
  - Liquid Assets / ST Liabilities: 70.0
  - Net FX Exposure / Capital: 11.5
- Key qualitative points:
  - Banks are well capitalized and show sound asset quality; CAR 16.8 percent as of December 2022 versus 17.3 percent in December 2021, above the regulatory minimum 10 percent.
  - Impaired loans were low at 1.3 percent of total loans at end-December 2023 (Appendix Table 1 referenced).
  - Provisions increased to 262 percent in December 2022 from 208 percent in December 2021 and 197 percent in 2020.
  - Deposits are nearly 90 percent of total liabilities at end-December; deposit-to-loans ratio was 162.9 percent.
  - Loans represent over half of banks’ asset portfolios; long-term government bonds comprise just less than one fifth of assets; cash and T-bills over one eighth.
  - Banking system concentrated: largest five banks account for nearly 80 percent of total assets (out of 17); top 2 banks account for over 50 percent of market share.
  - FX-induced risk: one third of bank loans denominated in foreign currency; a large share to un-hedged borrowers exposes system to FX credit risk.
  - Authorities require un-hedged borrowers to comply with a capital increase of 40 percentage points to offset additional FX risk.
- Solvency stress test results:
  - Credit risk shock (system-wide NPLs to 3.3 percent; sectoral shocks of 10 percent in manufacturing, trade, consumption):
    - CAR fall by 1.4 percentage points (to 14.8) in system-wide shock; one bank’s CAR would decline below 10 percent.
    - CAR fall by 2.9 percentage points (to 13.4) under sectoral stress; four banks’ CAR would fall below 10 percent.
    - Guatemalan banks better positioned to withstand credit risk shock in December 2022 compared to December 2021.
  - Interest rate risk shock (150 basis points increase):
    - Valuation losses on sovereign bond holdings reduce system-wide CAR by 2.9 percentage points.
    - After repricing, CAR remained at or above 10 percent for all banks.
  - FX risk shock (20 percent nominal depreciation):
    - CAR for whole system declines by about 1 percentage point to 16.1 percent.
    - Losses arise directly from FX exposure and indirectly via credit quality deterioration for un-hedged borrowers.
  - Combined solvency shock (credit risk + interest rate risk + FX risk):
    - CAR falls by 6 percentage points to 11.2 percent; system still above 10 percent minimum.
    - Six individual banks would fall short of the minimum regulatory CAR, requiring recapitalization.
    - Identified capital shortfalls after combined shock amount to 0.8 percent of GDP.
  - Contagion analysis:
    - Contagion risks from domestic interbank exposures are limited; no second-round effect following the combined macro-shock due to relatively light interbank lending.

*Source: IMF staff.*

### 8.      The reverse test suggests that NPLs would need to increase substantially for the

### 1gtmea2023002 - 8.      The reverse test suggests that NPLs would need to increase substantially for the

### Bank stress tests — Credit risk and reverse stress test
- The reverse stress test assesses NPL increase necessary for: (i) the system-wide CAR to fall below the regulatory minimum of 10 percent; (ii) the CAR of at least nine banks (half of total) to fall below 10 percent; and (iii) the CAR for 50 percent of the total market share to fall below 10 percent.
- Required implied increases in NPLs (percent of performing loans) from the reverse stress test:
  - System CAR < 10: 15.9
  - 9 banks with CAR < 10: 18.2
  - 1/2 market share with CAR < 10: 8.5
- Interpretation: NPLs would need to increase substantially (to the levels above) for the system or large segments of the market to breach the 10 percent regulatory CAR threshold.

### Liquidity stress test
- Assumptions for liquidity stress scenario:
  - Widespread liquidity drain of 7.5 and 2.5 percent per day of demand and time deposits respectively (affecting all banks proportionally), without liquidity contagion or any intervention.
  - Banks can roll off maturing assets and convert them into new cash inflows.
- Results and key metrics:
  - Post-shock liquid assets/total assets (percent): 18.1 (2022) and 13.4 (2021)
  - Post-shock liquid assets/short-term liabilities (percent): 54.6 (2022) and 39.0 (2021)
  - Number of liquid banks after 5 days: 16.0 (2022) and 17.0 (2021)
  - Outcome: one out of 17 banks would end up illiquid after 5 days of continuous withdrawals under the assumed withdrawals.

### Annex V — Stress test headline metrics and combined shocks
- Banking System Capital Adequacy Ratio (CAR) pre-shock:
  - 2022: 16.8
  - 2021: 15.6
- Credit Risk — system-wide proportional increase in NPLs (post-shock CAR and CAR change):
  - Post-shock CAR (percent): 14.8 (2022), 14.2 (2021)
  - CAR change (pct points): -1.4 (2022), -1.4 (2021)
- Credit Risk — sectoral shock (post-shock CAR and CAR change):
  - Post-shock CAR (percent): 13.4 (2022), 14.0 (2021)
  - CAR change (pct points): -2.9 (2022), -1.6 (2021)
- Interest rate risk:
  - Assumes a 150 basis points increase in the nominal interest rates.
  - Net Interest Income (NII) impact — Post-shock CAR (percent): 16.9 (2022), 15.7 (2021); CAR change (pct points): 0.0 (2022), 0.1 (2021)
  - Repricing impact — Post-shock CAR (percent): 14.0 (2022), 14.8 (2021); CAR change (pct points): -2.9 (2022), -0.8 (2021)
  - Overall change in CAR (NII and repricing): -2.9 (2022), -0.8 (2021)
- FX risk:
  - Assumes a 20 percent depreciation of the bilateral USD exchange rate.
  - Direct FX impact — Post-shock CAR (percent): 16.6 (2022), 15.5 (2021); CAR change (pct points): -0.2 (2022), -0.1 (2021)
  - Indirect FX impact (through credit risk) — Post-shock CAR (percent): 16.1 (2022), 14.8 (2021); CAR change (pct points): -0.5 (2022), -0.6 (2021)
  - Overall change in CAR (direct and indirect): -0.8 (2022), -0.7 (2021)
- Combined shock (system-wide credit, interest rate, and FX):
  - Post-shock CAR (percent): 11.2 (2022), 12.7 (2021)
  - CAR change (pct points): -5.6 (2022), -2.9 (2021)
- Interbank contagion:
  - CAR after macroshocks: 11.2 (2022), 12.7 (2021)
  - CAR after contagion: 11.2 (2022), 12.7 (2021)

### Domestic revenue mobilization — core findings
- Guatemala’s 2022 tax revenue: around 12 percent of GDP.
- Staff’s estimates of tax capacity for Guatemala: range between 21 and 24 percent of GDP.
- Estimated tax efficiency for Guatemala under a time-decay model: 58 percent (comparable to the CAPDR average but slightly below the 62 percent average for Latin America and the Caribbean).
- Tax expenditure in Guatemala (2021):
  - Total: 2.8 percent of GDP
  - VAT-related exemptions: 1.7 percent of GDP
  - PIT-related measures: 0.8 percent of GDP
  - Other (spending clauses in the Constitution): 0.24 percent of GDP
  - Eliminating other exemptions by law could reduce tax expenditures by about 2.1 percent of GDP.
- Historical tax administration effort estimate: resulted in 0.3 percent of GDP additional tax revenue in 2022.

### Domestic revenue mobilization — recommended measures and policy priorities
- Tax administration measures to improve compliance with VAT and PIT gaps:
  - Undertake an external evaluation and estimation of the VAT compliance gap.
  - Strengthen the tax register and fiscal control of Large Taxpayers (timely and accurate information, improved auditing and debt collection, definition of risk profiles, credible tax fines, streamlining follow-up).
  - Centralize and improve the taxpayer register.
  - Continue digitalization efforts (including e-filing of VAT in real-time).
  - Continue customs administration efforts.
- Tax reform measures:
  - Reduce tax expenditures by eliminating tax exemptions and exonerations.
  - Update sector-specific taxes (e.g., primary sector; non-alcoholic beverages).
  - Evaluate and formulate a tax reform that increases the marginal tax rate to international standards (a 2016 IMF study found the potential return of these measures is estimated at about 3.5 percentage points of GDP).
  - Revise PIT segmentation.
- Broader principles:
  - Approve a comprehensive reform package addressing exemptions and increasing direct and indirect tax rates.
  - Use taxpayer segmentation and automation to improve compliance.
  - Emphasize transparency and pro-growth measures; cross-country evidence shows long-run estimated gains following a comprehensive tax reform: medium country gain of three percent of GDP, the least attaining two percent of GDP, and the most 11 percent of GDP.

### Stochastic frontier application — tax potential methodology and empirical setting
- Model specification follows Fenochietto and Pessino (2013): log tax revenue to GDP ratio modeled with controls and non-negative inefficiency term; tax capacity defined as the predicted tax revenue to GDP ratio without inefficiency.
- Tax effort defined as actual tax revenue divided by tax capacity (range 0–1).
- Empirical setting: panel dataset for 76 emerging and middle-income countries covering 1990-2022 (sample selection based on data availability).
- Independent variables shaping tax frontier include: governance (gifts in meetings with tax officials), formal firms, education spending, GDP per capita, public capital spending, trade openness, and Human Capital Index.

### Public investment — findings on macroeconomic impact
- Guatemala’s public investment and public capital:
  - Public investment stock has fallen by 20 percentage points since 2010.
  - Spending on public capital has remained below 3 percent of GDP in the last decade.
  - Public investment infrastructure (2015-2021 average) is below 1 percent of GDP and ranks below 18 out of 21 in Latin America across energy, water, communication, and transport.
- Estimated effects of a temporary 1 percent of GDP increase in public investment:
  - Short-term GDP increase: about 0.3 percent of GDP.
  - Long-term GDP increase: about 1–1.2 percent of GDP.
  - Private investment: increases by about 0.4 percent of GDP in the short term and close to 2 percent in the medium and long term.
  - FDI cumulative inflows increase by about 0.5 percent of GDP.
- Modeling approaches:
  - Local projections and DSGE-based simulations used; multiplier analysis and impulse response functions estimated using samples of emerging and middle-income economies (114 countries for public investment empirical analysis).

*Source: SIB; and IMF staff estimates.*

### 4.      Public investment has a larger impact on FDI when related to export-related FDI.

### 4.      Public investment has a larger impact on FDI when related to export-related FDI.

### Sectoral empirical findings
- Sectoral estimates on cumulative FDI inflows are stronger in sectors with higher tradable components.
- The analysis suggests that public investment is more effective in attracting FDI that wants to exploit lower costs to export rather than those dedicated to domestic absorption.
- The estimates for Guatemala are consistent with tradable-enhancing flows, although the point estimates are smaller.
- Sample and data:
  - The sample covers 6 emerging economies including: Chile, Colombia, Guatemala, Hungary, Mexico, and Poland.
  - The data source for Chile, Colombia, Hungary, Mexico, and Poland is the OECD FDI statistics and Banguat for Guatemala.
- Empirical model (sector-heterogeneous extension):
  - Cumulative bilateral-sector FDI after ℎ periods following a shock in period 푡 is specified as:
    - 푭푫푰풊,풐,풔,풕ା풉풄풖풎 = 휶풊,풐 + 휸풔 + 휷풉풔 푪풂풑푺풉풐풄풌풊,풕 + 훉′퐂퐨퐧퐭퐫퐨퐥퐬풊,풔,풕 + 풖풊,풐,풔,풕
  - 휶풊,풐 is a bilateral fixed effect; 휸풔 is a sector fixed effect; Controls include initial GDP growth, initial FDI to GDP ratio in sector 푠, initial FDI to GDP ratio.
  - 풖풊,풕 is an unobserved confounder variable.
  - Focus is on differences across export-related vs. domestic-consumption-based sectors.
- Robustness:
  - Results are robust to alternative specifications including other control variables such as initial debt to GDP, lagged currency depreciation.
  - The sample period is chosen based on availability of WEO vintages, required to construct the forecast error series for public capital spending used in the empirical estimation.

### DSGE model structure and FDI mechanism
- Model type: medium-sized DSGE model with public investment complementarities; builds on Hale (2003) and Melitz (2006).
- Key agents and sectors:
  - Households: two types — Ricardian (optimize intertemporally, access to capital and financial markets) and hand-to-mouth (financially constrained).
  - Production sectors: three types — domestic firms producing non-tradable goods; domestically owned firms producing tradable goods; foreign-owned firms producing exporting goods.
  - Government: finances capital spending using lump-sum taxes; public capital spending has positive productivity spillovers to all sectors; public investment subject to investment inefficiency modeled via efficiency parameter 휃.
- Public capital law of motion (as presented):
  - 퐾... = 휃... 퐼... + (1 − 훿...) 퐾... + adjustmentcosts...
- FDI-specific building blocks:
  - Prospective foreign affiliates indexed by 푖 face a potential cost of entry 푐௜ known at entry decision.
  - Foreign affiliates use a Cobb-Douglas production function with capital and labor and benefit from public capital spillovers.
  - Foreign firms maximize profits, compete monopolistically in exports, and face random utility shocks of staying in the market (Fréchet distribution).
  - Firm value: 푉௜,௧ = max{...} Π௜,௧ + 훽 E... with exit condition E(푉௜,௧+1) = c̅.

### DSGE simulations and counterfactuals for Guatemala
- Simulated experiments:
  - Shock to public capital spending: temporary increase in 퐼...
  - Shock to public capital spending and efficiency: temporary increase in 퐼... following a permanent increase in the investment efficiency parameter 휃...
- Quantitative effects (model-calibrated to Guatemala):
  - A one percent increase in the stock of public investment is estimated to increase GDP by 0.3 percent in the short term and 0.8 percent in the medium term.
  - A comparable increase in private investment has a positive impact on GDP (qualitative statement preserved).
  - FDI increases by 0.1 percent in the short-term and 7 percent in the medium term.
  - Public infrastructure investment reduces the current account surplus in the short term and reduces consumption prices.
- Efficiency counterfactual:
  - Increasing capital spending efficiency by 5 percent can increase the public investment multiplier from 0.8 to 1.2 percent of the GDP.
- Simulation shock size and timing:
  - The size of the shock is 1 percent of the initial GDP. The shock is temporary and occurs in period 1.

### Policy-relevant implications (from analyses and simulations)
- Public investment targeted toward export-related (tradable) sectors is more effective at attracting FDI oriented to exports than FDI oriented to domestic absorption.
- Improving public investment efficiency materially raises the public investment multiplier (example: a 5 percent increase in efficiency raises the multiplier from 0.8 to 1.2 percent of GDP).
- Public infrastructure shocks can boost private investment and have large medium-term effects on FDI (7 percent increase in the medium term in the calibrated Guatemalan simulation).
- Because public infrastructure investment can reduce the current account surplus in the short term and lower consumer prices, macroeconomic and external dynamics should be considered when scaling up public capital spending.

*Source: Staff calculations.*

### Annex IX. Capacity Development

### Annex IX. Capacity Development

### Overview
- Presents the Capacity Development (CD) priorities of Guatemala under the technical assistance program provided by the IMF.
- Key priorities: mobilizing revenues, enhancing the inflation targeting framework, improving fiscal transparency, modernizing financial sector regulations, and strengthening data collection and compilation.

### Main CD objectives and workstreams
- Focus: consolidating past achievements and making further progress on macro-critical reform areas.
- Key CD workstreams:
  - Revenue administration.
  - Public Financial Management.
  - Central Bank Operations and Monetary and Macroprudential Policies.
  - Financial Supervision and Regulation.
  - Governance Finance and Real Sector Statistics.

### Revenue administration (workstream focus and recent achievements)
- Focus:
  - Strengthening the large taxpayers’ management.
  - Implementing a compliance risk management strategy.
  - Digitalizing core processes and taxpayers’ services.
  - Enhancing SAT’s administrative enforcement faculties.
- Past recent achievements:
  - Strengthening the legal framework.
  - Approval of the Strategic Plan to improve compliance and to reinforce support functions.
  - Start-up of the internal affairs and compliance risk management offices.
  - Greater focus on the management of large taxpayers and on customs processes.
- Support is directed to:
  - (i) strengthening the large taxpayers’ management;
  - (ii) implementing a compliance risk management strategy;
  - (iii) digitalizing core processes and taxpayers’ services;
  - (iv) enhancing SAT’s administrative enforcement faculties.

### Public Financial Management (workstream focus and recent achievements)
- Focus:
  - Strengthening the medium-term fiscal framework with a focus on increasing efficiency, transparency, accountability.
  - Prioritizing public spending while maintaining fiscal sustainability.
- Past recent achievements:
  - Strengthening of financial programming and budget planning.
  - Completion of the Fiscal Transparency Evaluation (FTE) update.

### Central Bank Operations and Monetary and Macroprudential Policies
- Focus:
  - Enhancing the Inflation Targeting framework through:
    - (i) building further forecasting capacity to define monetary policy under risk scenarios;
    - (ii) enhancing the monetary operations framework;
    - (iii) improving communication strategy for improved anchoring of inflation expectations.
- Past recent achievements:
  - Improvements to the modelling framework and inflation expectation measurement.

### Financial Supervision and Regulation
- Focus:
  - Tailored implementation of the Basel standards.
  - Enhancing credit risk management.
  - Bolstering non-banking sector supervision.
  - Strengthening the cybersecurity risk framework.
  - Providing support for the preparation of the legal framework for e-money.
- Past recent achievements:
  - Important inputs for a draft Banking and Financial Groups Law—aligning legislation to Basel III standards—pending approval by Congress.
  - Draft AML/CFT law—aligning with FATF standard—pending approval by Congress.
  - Improvements to the Stress Testing framework.

### Governance Finance and Real Sector Statistics
- Focus:
  - Updating the CPI basket.
  - Updating the household survey data.
  - Consolidating the government financial statistics analytical framework and increasing public debt coverage data.
- Past recent achievements:
  - Strengthening of the production of government statistics (general government).
  - Production of a producer price index.

### Annex IX. Table 1. Guatemala: IMF Capacity Development Missions (January 2021 – February 2023)
- Revenue Administration and Customs
  - Strengthen Tax Compliance Obligations — CAPTAC-DR — February 2023
  - Sea cargo process modeling and digitalization of customs processes — CAPTAC-DR — November 2022
  - Enhance Tax Compliance Obligations — CAPTAC-DR — July 2022
  - Air Cargo process improvement — CAPTAC-DR/FAD — December 2021
  - Document systems entry point & participants guide — FAD — November 2021
  - Trade operators' registry for special procedures — CAPTAC-DR/FAD — October 2021
  - Customs Anti-fraud strategy — CAPTAC-DR/FAD — October 2021
  - Strengthen Tax Refund Procedures — FAD — September 2021
  - Customs Anti-fraud strategy — CAPTAC-DR/FAD — August 2021
  - Definition of a Customs Digitalization action plan (Various missions) — CAPTAC-DR/FAD — March-May 2021
  - Implementing a new model for controlling special procedures operations — CAPTAC-DR — March 2021
  - Post clearance audit program — CAPTAC-DR — February 2021

- Public Financial Management
  - Fiscal Transparency Evaluation (FTE) Update — FAD — September 2022
  - Hackathon event (various topic) — FAD — July 2022
  - Fiscal Sustainability Model — FAD — January 2022
  - Budget - Economic Forecasts — CAPTAC-DR — March 2021
  - Treasury — CAPTAC-DR — March 2021
  - Budget - Medium Term Fiscal Framework — CAPTAC-DR — February 2021

- Monetary Policy and Central Bank Operations
  - Monetary Policy Implementation Framework Evaluation — CAPTAC-DR — August 2022
  - Monetary Policy Modeling, Forecasting & Communication — MCM — September 2021
  - Profitability and Capital Adequacy Assessment — MCM/CAPTAC-DR — August 2021

- Financial Supervision and Regulation
  - Cybersecurity — CAPTAC-DR — December 2022
  - Retail Credit Risk Diagnosis and Regulation — CAPTAC-DR — November 2022
  - Bankʼs recovery plan — MCM — July 2022
  - Training on e-money — MCM — December 2021

- Real and Government Statistics
  - Government Finance Statistics and Public Sector Debt Statistics — STA — September 2022
  - Price Statistics — STA — June 2022
  - Government Finance Statistics and Public Sector Debt Statistics — STA — May 2022
  - Public Sector Debt Statistics — STA — October 2021
  - Government Finance Statistics and Public Sector Debt Statistics — STA — June 2021
  - National Accounts — CAPTAC-DR — March 2021
  - Government Finance Statistics and Public Sector Debt Statistics — CAPTAC-DR — February 2021
  - Data Governance — CAPTAC-DR — February 2021

*Source: Annex IX. Capacity Development (Guatemala) as presented in the provided IMF content.*

### Annex IX. Table 2. Guatemala: IMF Capacity Development Planned Missions in 2023

### Annex IX. Table 2. Guatemala: IMF Capacity Development Planned Missions in 2023

### Overview
- (As of February 2023)

### Revenue Administration, Customs and Tax Policy
- Customs and Revenue Administrations — Strengthen revenue administration management and governance arrangements for customs and tax authority.
- Compliance Risk Management — Strengthen revenue administration management and governance arrangements for customs and tax authority.

### Public Financial Management and Budget Planning
- Fiscal Risks Management (risks of the financial sector and risks of natural disasters) — Strengthen identification, monitoring, and management of fiscal risks.
- Macroeconomic forecasts and financial programming models — Strengthen the integration of improved macroeconomic forecasts to budget preparation and execution.
- Public Investment Management Assessment (PIMA) with Climate module (C-PIMA) — Assess and strengthen public infrastructure governance to increase effectiveness in public investment.

### Monetary and Macroprudential Policies and Central Bank Operations
- Liquidity Forecasting — Improve liquidity forecast framework.
- Monetary and Macroprudential Policies and Inflation Targeting — Strengthen the monetary framework.

### Financial Supervision and Regulation
- Supervisory and regulatory framework on Use of Cloud Services — Develop/strengthen the cybersecurity risk supervisory guideline in reference to the use of cloud services and train supervisors and technical teams.
- Basel Standards and Capital Buffers Regulation — Develop/strengthen supervisory and regulatory framework.
- AML/CFT – Structures and Tools (Supervision) — Strengthen the development, adoption, and implementation of a sound and effective approach to risk-based supervision of financial institutions (FIs) and designated nonfinancial businesses and professions (DNFBPs) under the supervision of the “Intendencia de Verificacion Especial-IVE”.

### Real and Government Statistics
- Government Finance Statistics and Public Sector Debt Statistics — Strengthen compilation and dissemination of macroeconomic and financial statistics for decision making according to internationally accepted statistical standards, including developing statistical infrastructure, source data, service ability and/or metadata.

*Annex IX. Table 2. Guatemala: IMF Capacity Development Planned Missions in 2023 (As of February 2023).*

### 2013. The compilation of the quarterly national accounts (QNA) is performed by the production and

### 1gtmea2023002 - 2013. The compilation of the quarterly national accounts (QNA) is performed by the production and

### National accounts, prices, and labor statistics
- Quarterly national accounts (QNA) are compiled using the production and spending approaches.
- A monthly index of economic activity consistent with the quarterly and annual accounts is disseminated regularly.
- Consumer Price Index (CPI):
  - Prepared and disseminated monthly by the National Statistics Institute (INE).
  - Uses weights from 2009–10 based on the National Household Income and Expenditure Survey (ENIGFAM), conducted between July 2009 and July 2010.
  - Compiled at national level and for eight regions.
- Producer Price Index (PPI):
  - Currently not disseminated.
  - Technical assistance is being provided to improve the compilation method.
- Unemployment:
  - Estimated only on a biannual basis.

### Government finance statistics (GFS)
- Ministry of Finance (MINFIN) provides monthly fiscal data for surveillance purposes using national methodology with institutional coverage of Budgetary Central Government.
- Missing monthly reporting:
  - Revenue, expenditure, and financing statistics for social security agencies, local governments, and nonfinancial public enterprises are not reported monthly, which hinders calculation of a consolidated operations statement and balance sheet for the nonfinancial public sector.
- Annual publication:
  - On a yearly basis (2013-2021) MINFIN publishes detailed statistics for the non-financial public sector.
- Coverage and periodicity:
  - Coverage and periodicity of data on Budgetary central government financing and debt is adequate.
- Improvements with STAGO/CAPTAC-DR support:
  - MINFIN now publishes monthly budgetary central government fiscal data according to the Government Finance Statistics Manual 2014.
  - Publication corresponds to information on incomes, expenses, assets and liabilities, classification of expenditure by functions of government according to divisions and groups, and the statement of operation of the Central Government (which includes the Budgetary and Extrabudgetary entities).
  - MINFIN is advancing towards compilation of local governments and social security statistics to broaden GFS to General Government during 2023.

### Monetary and financial statistics
- Regular monthly reporting to STA using standardized report forms (SRFs) for:
  - Central bank, other depository corporations, and other financial corporations (OFCs).
- OFCs comprise insurance companies, warehouses, and exchange houses.
- Monetary data exclusions:
  - Exclude credit card companies, securities dealers, other financial intermediaries, and other financial auxiliaries.
- Financial access and indicators:
  - Guatemala reports data on some key series and indicators of the Financial Access Survey (FAS), including mobile money and the two indicators adopted by the UN to monitor Target 8.10.1 of the Sustainable Development Goals (SDGs).
- 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
- Methodological progress:
  - Significant progress on prerequisites for data quality and methodological soundness of concepts and definitions, scope, classification, and basis for recording.
- Legal/institutional constraint:
  - Legislation on the obligation of the private sector to provide information to Banguat for statistical purposes is still pending, affecting response rates to balance of payments surveys and limiting availability of required information.
- Dissemination achievements:
  - Migrated to BPM6 (sixth edition of the Balance of Payments and International Investment Position Manual).
  - 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.
- Recommendation:
  - Compilers at the Central Bank should be encouraged to participate in the Coordinated Portfolio Investment Survey (CPIS).

### Data standards and dissemination
- Guatemala implemented recommendations of the IMF’s Enhanced General Data Dissemination System (e-GDDS) by publishing essential data through the National Summary Data Page (NSDP).
- Guatemala completed implementation of the e-GDDS while addressing covid-19 impacts on data dissemination.

### Table of Common Indicators Required for Surveillance (As of April 20, 2023) — selected entries and reporting frequencies
- Exchange Rates — Date of latest observation: 03/12/2023; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: February 2023; Date received: March 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M.
- Reserve/Base Money — Date of latest observation: February 2023; Date received: March 2023; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W.
- Broad Money — Date of latest observation: February 2023; Date received: March 2023; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W.
- Central Bank Balance Sheet — Date of latest observation: 3/31/2022; Date received: 4/4/2022; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D.
- Consolidated Balance Sheet of the Banking System — Date of latest observation: February 2023; Date received: March 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M.
- Interest Rates — Date of latest observation: February 2023; Date received: March 2023; Frequency of Data: W; Frequency of Reporting: W; Frequency of Publication: W.
- Consumer Price Index — Date of latest observation: February 2023; Date received: March 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government — Date of latest observation: Dec. 2022; Date received: Jan. 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government — N/A; Frequency: N/A.
- Stocks of Central Government and Central Government-Guaranteed Debt — Date of latest observation: Dec 2022; Date received: Jan. 2023; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M.
- External Current Account Balance — Date of latest observation: Q4/2022; Date received: April 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q.
- Exports and Imports of Goods and Services — Date of latest observation: Q4/2022; Date received: April 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q.
- GDP/GNP — Date of latest observation: Q4/2022; Date received: April 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q.
- Gross External Debt — Date of latest observation: Q4/2022; Date received: April 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q.
- International Investment Position — Date of latest observation: Q4/2022; Date received: April 2023; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q.

### Authorities’ statement and macroeconomic assessment (Statement by Mr. Guerra and Ms. Lankester Campos on Guatemala; May 15, 2023)
- Political cycle and policy continuity:
  - Authorities emphasize considering political cycles when analyzing the economy and expect resilience during presidential elections on June 25th.
  - Public and private sectors are working on an initiative to ensure continuity of policies to address structural vulnerabilities, social inclusion, poverty, informality, and infrastructure gaps, building on the program “Guatemala no se detiene (Guatemala moving forward).”
- Economic performance and outlook:
  - Growth history: 8 percent in 2021; 4.1 percent in 2022.
  - Banguat expects a 3.5 percent growth rate for this year, its potential level of growth.
  - For 2024, authorities envisage a stable macroeconomic framework aligned with short-term indicators: Monthly Index of Economic Activity, Confidence Index of Economic Activity, and high growth of family remittances.
  - Sovereign ratings: S&P and Fitch improved Guatemala’s sovereign debt rating from BB- to BB stable.
- Structural reforms and labor market:
  - Measures to lower informality: two increases to minimum wages were approved; regulations to facilitate partial-time hiring.
  - Efforts on electronic invoicing, digitalizing public procedures, and implementing the Tax Simplification, Update, and Incorporation Law.
  - New laws to improve business climate: leasing and insolvency laws, law to encourage foreign investment, and the Free Zones Act.
- Infrastructure:
  - First PPP Autopista Escuintla-Puerto Quetzal (Escuintla-Quetzal port Highway) expected to start in 2023.
  - Investment spending increased in infrastructure for the health sector.

### Monetary and exchange rate policy — recent actions and expectations
- Monetary policy decision:
  - On April 26th, the Monetary Board increased the monetary policy interest rate by 25 b.p., from 4.75 percent to 5 percent, as part of a gradual strategy to bring inflation down without significantly harming economic activity.
  - Decision described as data-dependent and forward-looking.
- Inflation developments:
  - Inflation decreased from 9.92 percent in February to 8.32 percent in April.
  - Authorities expect inflation to return to the upper limit of the target band (4.0 percent ± 1 p.p.) by the end of 2023 and be at the midpoint of the band by 2024.
- Exchange rate flexibility and reserves:
  - Authorities view greater FX flexibility as helpful to absorb external shocks and commit to improving the communication framework; they favor gradual approach.
  - No significant misalignment with fundamentals is considered given current account results and outlook.
  - Expectation: current account surplus to close in about two years due to higher imports and moderation in remittances’ growth.
  - Banguat has accumulated large buffers in international reserves since the mid-2010s, assessed as adequate in the current environment.
  - Banguat is evaluating possible strategies to recapitalize the central bank, subject to further discussion with the new administration.

### Fiscal policy — stance, performance, and plans
- Fiscal stability and debt:
  - Authorities committed to fiscal stability and debt sustainability and maintaining good debt servicing track record.
  - Guatemala has one of the lowest debt-to-GDP shares in the Latin American region.
- Fiscal outcomes:
  - Deficit has been below the anchor for two consecutive years.
  - Tax revenue reached an all-time high of 12.0 percent of GDP in 2022.
  - Staff estimate: public debt expected to remain sustainable at 29.4 percent of GDP with high probability and moderate sovereign risk.
  - The 2022 ratio of 29.4 estimated by staff includes pending debt balances against the social security institute, IGSS, of about 0.2 percent of GDP. The Ministry of Finance does not recognize the debt claimed by IGSS; some judicial processes are in court.
- 2023 budget:
  - Approved by Congress in November 2022.
  - Envisages an overall deficit of three percent of GDP and a decline in total expenditure of 0.5 percent of GDP.
  - Social spending will be higher in 2023 to support the most vulnerable.
  - Authorities acknowledge the MT Framework could be improved to better anchor closing infrastructure and social gaps.
- Revenue strategy:
  - Authorities emphasize more progress required on the revenue side: strengthen tax administration capacity and gradually broaden the tax base to foster growth and reduce poverty over the medium term.
  - Consider broadening the tax base the appropriate strategy to increase the tax burden at least in the medium term.
- PIMA/Climate-PIMA:
  - Authorities committed to working on the PIMA/Climate-PIMA evaluation during the first half of June with the IMF team to identify steps to streamline processes and enhance public investment framework resilience to climate events.

### Financial sector — soundness and reforms
- Banking sector performance:
  - Bank credit to the private sector grew by 20 percent in domestic currency in 2022, financed by growth in customer deposits representing nearly 90 percent of total banks’ liabilities at end-December 2022.
  - Solvency and capital:
    - Capital ratios: 16.5 percent.
    - Regulatory minimum capital adequacy ratio: 10 percent.
  - Asset quality and profitability:
    - Nonperforming loans: 1.3 percent.
    - Returns on assets: 2.3 percent.
    - Returns on equity: above 24 percent.
  - Liquidity:
    - Short-term liquidity ratio: 20 percent.
    - MT liquidity ratio: 48 percent.
- Reform priorities:
  - Importance of approving the Banking and Financial Groups Law Reform.
  - Approval and implementation of an AML/CFT Law to address gaps and align Guatemala’s regime with FATF standards; critical for a positive outcome on the next AML/CFT evaluation by FATF in 2027.
- Structural commitments:
  - Authorities committed to strengthening fiscal transparency and governance, and improving data availability and quality.
  - Continued efforts to improve business climate, address labor market informality, and strengthen resilience to climate change during the presidential period and to work on continuity amid governmental change.

*International Monetary Fund — Guatemala staff report content unit*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1gtmea2023002.pdf_