## Public Investment Efficiency, Growth and Debt Sustainability in Guatemala

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**Canonical URL:** [Public Investment Efficiency, Growth and Debt Sustainability in Guatemala](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025129.pdf)

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### Abstract and Key Findings
- Guatemala has limited levels of public investment efficiency (PIE) which constrain infrastructure and social investment.
- Improving PIE to levels comparable with Costa Rica (approximately 20 percent) could produce:
  - a 2.3 percent increase in consumption and GDP,
  - a 0.7 percent increase in debt-to-GDP with no increases in sovereign spreads.
- Higher PIE allows Guatemala to sustain higher long-run levels of public debt-to-GDP without negative effects on sovereign spreads and the current account balance.
- Welfare benefits amplify through higher private consumption.

### Recent Economic Developments (2012–2024)
- GDP growth:
  - Average growth of 3.5 percent from 2012 to 2023.
  - COVID-19 caused a 1.8 percent drop in GDP, with recovery in 2021–2023.
- Public debt and sovereign spreads:
  - Public debt-to-GDP around 27 percent of GDP.
  - Sovereign spreads in a neighborhood of 2.4 percent, peak of 2.8 percent in 2020, end-2024 spreads below 2 percent.
- Fiscal balances:
  - COVID-19 primary balance of -3.2 percent of GDP.
  - End-2024 primary surplus close to 0.6 percent of GDP.
  - Average fiscal balance-to-GDP ratio close to -2 percent over 2012–2024, peak of -4.9 percent in 2020.

### Model Structure and Calibration
- Model type: Small open economy sovereign default model adapted from Arellano (2008).
- Key agents: households, sovereign, international investors.
- Production: single final good produced using labor L, private capital s, and public capital g; PIE denoted by e.
- Production function form:
  - y = z (e g)^{γ} s^{α(1−γ)} l^{1−α}  (variables and exponents presented as in source)
- Fiscal and financial features:
  - Sovereign issues Eurobonds and can default; international investors price one-period defaultable claims.
  - PIE converts public investment into units of public capital.
- Calibration targets:
  - Model replicates observed debt-to-GDP and sovereign spreads for 2012–2024 and long-run public-to-private capital ratio.
- Solution method:
  - Value function iteration with linear interpolation over a grid of bonds and TFP realizations; expectations via Gauss-Hermite polynomials.
  - Long-run statistics computed by simulating 5,000,000 periods and eliminating first 50,000 periods; model statistics reported in Table 1.

### Simulated PIE Shocks and Impulse Responses
- Baseline shock: permanent and unexpected 20 percent increase in PIE (comparable to Costa Rica).
- Main dynamic responses (model predictions):
  - GDP increases by 2.3 percent in the long-run.
  - Government debt increases by 0.6 percent in the long-run.
  - Sovereign spreads show no significant changes in equilibrium.
  - Current Account (CA) Balance temporarily deteriorates by 1 percent of GDP to finance additional consumption.
  - Private consumption temporarily increases by 4 percent, converging to 2.3 percent above pre-shock values.
- Mechanism:
  - Increased PIE makes public investment more productive, prompting optimal additional public investment.
  - Complementarity between public and private capital induces higher private investment.
  - Higher GDP raises the cost of default, allowing more borrowing without higher sovereign risk premia.

### Sensitivity: Larger PIE Improvements
- Simulated PIE increments range: 0 to 100 percent of baseline.
- Long-run outcomes by PIE increment (selected points reported in source):
  - 20 percent PIE increase: 0.6 percent higher debt-to-GDP; 2.3 percent GDP gain.
  - 100 percent PIE increase: could produce a 2.5 percent permanently higher level of debt-to-GDP and larger GDP gains.
- Across simulations:
  - GDP gains rise with higher PIE.
  - Sovereign spreads and long-run CA balance remain largely unaffected.
  - Public debt is optimally allowed to increase with higher PIE.

### Quantitative Model Fit (Selected Moments)
- Targeted moments (Data vs Model):
  - Average Debt/GDP (%): 26.7 vs 26.6
  - Average Spreads (p.p.): 2.4 vs 2.5
- Untargeted moments (Data vs Model):
  - Average Fiscal Balance/GDP (%): -1.9 vs -1.0
  - Average CA Balance/GDP (%): 0.6 vs 0.2
- Standard deviations and correlations reported in Table 1 (as in source).

### Policy Implications and Conclusions
- Improving PIE is a lever to increase public and private capital spending with significant GDP and welfare gains.
- A 20 percent improvement in PIE could yield a 2.3 percent higher GDP in the long run and a permanent welfare gain via higher consumption.
- Higher PIE permits temporary external borrowing to frontload gains and results in permanently, yet sustainably, higher public debt without market punishment.
- Sovereign spreads do not significantly change because default costs rise with higher GDP; thus, increased PIE can support higher debt-to-GDP ratios while maintaining market confidence.

*Prepared by Andrea Paloschi (IMF Selected Issues Paper SIP/2025/129).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025129.pdf_