## _cr05362 — Executive Summary and Selected Staff Report Extracts

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### Executive Summary — Key findings and program pillars
- Guatemala pursued important reforms and macroeconomic stabilization since the 1996 Peace Accords.
- Fiscal discipline anchored the policy framework; international reserves rose; banking reforms implemented.
- After three years of slow growth, activity improved in 2004; inflation rose partly due to higher oil prices.
- Economic and social goals of the Peace Accords remain partially unrealized.
- Efforts to increase tax revenues to fund higher social and investment spending stalled in recent years.
- Widespread poverty persists; 2002 World Bank survey highlighted perceptions of corruption and weak integrity in some public institutions.
- Incoming government platform includes the 1996 Peace Accords and a program based on three pillars:
  - macroeconomic stability;
  - financial sector restructuring;
  - structural reforms to boost growth and reduce poverty (Vamos Guatemala).
- Key program objectives:
  - keep the fiscal deficit low while mobilizing additional fiscal resources for public investment and social spending;
  - monetary policy geared to reducing inflation to the 4–6 percent range;
  - flexible exchange system with limited central bank interventions; rules-based mechanism for interventions introduced in January 2005.

### Background and structural issues
- 1996 Peace Accords ended nearly 40 years of civil conflict; produced a peace dividend in late 1990s: growth rose to 4 percent a year.
- Growth slowed during 2001–03 amid falling coffee prices and weaker external demand.
- Macroeconomic stability maintained: low public debt (18 percent of GDP) and strong international reserves position.
- Partial achievement of Peace Accords reforms, with fiscal, social, and governance goals lagging.
- Governance concerns: perceived deterioration in government effectiveness and regulatory quality since late 1990s.
- Tax effort: after progress toward a 12 percent of GDP target, tax/GDP slipped in 2003–04 as courts overturned some key taxes.

### Recent economic developments and macro framework (selected indicators)
- Real GDP growth:
  - 2001–03: just over 2 percent per year;
  - 2004: estimated 2¾ percent.
- Inflation and monetary conditions:
  - Headline inflation rose to over 9 percent in 2004 (central bank target 4–6 percent); inflation declined somewhat in 2005.
  - Central bank raised its benchmark interest rate several times since July 2003, but the rate remained negative in real terms.
- External sector and reserves:
  - International reserves covering 4½ months of imports.
  - Current account deficit narrowed to about 4 percent of GDP.
  - Worker remittances rose to more than 9 percent of GDP.
  - Central bank intervened for US$450 million last year, limiting appreciation of the quetzal to 3 percent against the dollar.
- Trade and competitiveness:
  - Trade deficit widened to about 15 percent of GDP; quetzal real appreciation by over 20 percent since 2000.
  - Traditional exports constrained; nontraditional exports showed robust growth supported by the CBI.

### Fiscal performance, revenue mobilization, and public debt
- Fiscal deficit and adjustments:
  - Fiscal deficit widened in 2003 mainly due to court-ordered tax reductions and compensation payments; fell to less than ½ percent of GDP in 2004.
  - Spending reduced sharply in 2004; investment program delayed.
- Tax revenue and projections:
  - Tax collections: 10.3 percent of GDP (2004); expected 10½ percent of GDP in 2005; expected 11 percent of GDP in 2006.
  - Tax collections maintained at 2003 level (10.3 percent of GDP) after June 2004 package and administration plan.
- Revenue measures:
  - June 2004 tax package (details summarized later) included temporary IETAAP, excises on alcoholic beverages, a 5 percent turnover tax option, and a minimum tax provision.
  - Authorities aim to raise collections toward the Peace Accords target of 12 percent of GDP; plan includes further measures in 2005 to take effect in 2006.
- Public debt and borrowing:
  - Nonfinancial public sector debt: 15.5 (2002), 17.1 (2003), 18.0 (2004), projected 17.8 (2005), projected 17.8 (2006) — percent of GDP.
  - External issuance: September 2004 a 30-year US$330 million Eurobond; planned increase in multilateral borrowing in 2005.
  - Shift from net domestic borrowing in 2003 (1.2 percent of GDP) to small net domestic lending position in 2004.
- Notable fiscal items and projections:
  - Army reduced by one-third (12,000 personnel) at a severance cost of 0.4 percent of GDP.
  - Previously accumulated domestic supplier debt: 0.4 percent of GDP at end-2003, reduced by half in 2004.
  - Overdue VAT refunds: 0.5 percent of GDP at end-2003; expected elimination by mid-2006.

### Monetary policy, exchange rate policy, and staff recommendations
- Staff recommended central bank focus on maintaining low inflation.
- Conditions to return inflation to 4–6 percent range:
  - greater exchange rate flexibility;
  - adherence to a path for currency emission consistent with the objective.
- Intervention rule introduced in January 2005 reduces discretion but should be made symmetrical and transparent.
- Staff encouraged continued work (with MFD support) toward adopting an inflation targeting framework; authorities agreed and aimed for the end-year inflation target of 4–6 percent.
- Policy mix adopted: moderate monetary tightening, tight fiscal policy, and central bank intervention to prevent excessive appreciation without an exchange rate target.
- Exchange rate and competitiveness:
  - Real appreciation driven by remittances and capital inflows contributed to widening trade deficit and slow export growth; staff view that nontraditional exports performed well and U.S. market share maintained.
  - Competitiveness requires productivity gains, reduced infrastructure bottlenecks, and appropriately tight fiscal policies rather than exchange rate targeting.

### Financial sector reforms, soundness indicators, and vulnerabilities
- Reform progress:
  - 2001 FSSA recommendations pursued: modernized legislation, tighter prudential framework, strengthened onsite inspections.
  - Offshore banks required to be part of licensed financial conglomerates.
  - July 2004: FATF removed Guatemala from list of noncooperating jurisdictions on money laundering.
- Selected prudential indicators (as presented in source):
  - Statutory capital to (unadjusted) risk-weighted assets: 13.9 (2000), 14.1 (2001), 14.9 (2002), 15.6 (2003), 14.5 (2004), 12.2 (year not specified).
  - Nonperforming loans to total loans: 9.6 (2000), 8.1 (2001), 7.9 (2002), 6.5 (2003), 5.8 (2004), 3.3 (year not specified).
  - Provisions to nonperforming loans: 24.3, 25.8, 36.2, 39.1, 43.6, 34.8 (years as presented).
  - Return on assets: 1.1, 1.1, 0.8, 1.1, 1.4, 1.6 (years as presented).
  - Return on equity: 12.0, 11.6, 8.5, 12.2, 15.3, 16.8 (years as presented).
- Dollarization and FX exposure:
  - Since 2001 residents permitted to hold foreign currency deposits; share has risen to 15 percent (36 percent including offshore banks).
  - Credit in foreign currency has grown more slowly than foreign currency deposits.
- Remaining vulnerabilities and reform actions:
  - Persistent losses at state mortgage bank (CHN) to be addressed via due-diligence and inclusion of fiscal costs in future budgets.
  - Four small private banks and CHN remain weak; high related-party lending; low provisions in offshore banks; illegal offshore banks action underway.
  - Measures: register financial conglomerates (including offshore banks) by mid-2006; complete bank resolution framework; Trust Fund for Bank Capitalization funded end-2004; implement lender-of-last-resort facility in 2005; central bank recapitalization via bond issuance beginning 2005.

### Near-term macro outlook (2005–2006) — official projections and staff baseline
- Real GDP growth: 2.2 (2002), 2.1 (2003), 2.7 (2004), projected 3.2 (2005), projected 3.2 (2006) — percent.
- Real GDP per capita growth: -0.4 (2002), -0.5 (2003), 0.1 (2004), 0.6 (2005), 0.6 (2006) — percent.
- Inflation (end of period): 6.3 (2002), 5.9 (2003), 9.2 (2004), projected 6.0 (2005), projected 5.0 (2006) — percent.
- External current account deficit: 5.3 (2002), 4.2 (2003), 4.4 (2004), projected 4.4 (2005), projected 4.2 (2006) — percent of GDP.
- Combined public sector deficit: 0.8 (2002), 2.0 (2003), 0.4 (2004), projected 1.7 (2005), projected 1.2 (2006) — percent of GDP.
- Tax revenue: 10.6 (2002), 10.3 (2003), 10.3 (2004), projected 10.5 (2005), projected 11.0 (2006) — percent of GDP.
- Net international reserves (NIR, US$ millions): US$2,278 (2002), US$2,799 (2003), US$3,380 (2004), projected US$3,655 (2005), projected US$3,722 (2006).
- Staff projection note: Real GDP projected to grow by 3.2 percent in 2005; external current account deficit broadly unchanged; reserves accumulation would slow if central bank intervenes only to dampen exchange-rate volatility.

### Medium-term outlook, scenarios, and vulnerability analysis
- Baseline medium-term projection:
  - Real GDP growth could rise to 3.5–4 percent under the government’s program.
  - Public debt would decline to 15 percent of GDP by 2010 from 18 percent in 2004.
  - Total external debt (public and private) would remain stable at around 28 percent of GDP.
- Weaker-policy illustrative scenario:
  - If tax revenue is not raised and inflation remains at current levels and financial reform stalls:
    - tax collections remain around 10 percent of GDP;
    - budgetary expenditure reduced by about 1 percent of GDP relative to baseline;
    - fiscal deficit would rise by ½ percent of GDP;
    - public debt would remain at 18 percent of GDP in 2010 instead of declining;
    - consequences: higher inflation, stagnant revenue and social spending, halted financial reforms, worse investment climate and market sentiment, higher borrowing costs, lower real GDP growth, increased financial sector risks.
- Stress-test examples (as presented):
  - B1 (nominal interest rate +200 bps in 2005): external debt rises to 30.2 (peak).
  - B5 (combination one-standard-deviation shocks): external debt reaches 36.5 (peak).
  - B6 (one-time 30 percent nominal depreciation in 2005): external debt rises to 39.8 (2005) and stabilizes lower subsequently.
  - Public debt shock (B3 primary balance shock): public debt rises to 21.6 (peak).

### Policy recommendations and near-term priorities (staff emphasis)
- Fiscal policy:
  - Maintain fiscal discipline and keep the fiscal deficit low while mobilizing additional fiscal resources for public investment and social spending.
  - Strengthen the revenue effort toward the Peace Accords target of 12 percent of GDP.
  - Staff recommended a VAT increase be central to additional revenue effort; removal of distortionary elements and introduction of efficient measures to improve buoyancy.
  - Government tax plan elements: June 2004 package; comprehensive tax administration plan (106 actions); second set of fiscal measures in 2005 to take effect in 2006.
  - Authorities intend to aim for at least 11 percent of GDP in collections in 2006.
- Expenditure and public investment:
  - Prioritize expenditures toward social and infrastructure needs, focusing on poorest municipalities.
  - With rising revenue and falling military outlays, social spending and public investment expected to rise significantly in 2005 and 2006.
- Monetary and exchange rate policy:
  - Keep conditions appropriately tight to ensure achievement of inflation target for 2005; maintain flexible exchange rate regime; limit interventions to avoid excessive short-term volatility.
  - Continue work toward adopting inflation targeting.
- Financial sector:
  - Continue financial sector reforms: bring offshore banks into regulatory perimeter; complete bank resolution framework; reduce related-party lending; build general provisions; conduct due-diligence for CHN and incorporate fiscal costs into budgets.
  - Implement payments system modernization (real-time gross settlements; clearing-house upgrade) in 2005.
- Governance, transparency, and social programs:
  - Improve transparency, governance, and anticorruption measures to bolster public support.
  - Public dialogue and education campaign (February 2005) and national consultation process to build consensus on priorities and funding.
  - Draft fiscal transparency law to be presented to congress in 2005; expand Integrated Financial Management System (SIAF); expand GuateCompras procurement system.
  - GuateSolidaria social component focused on education, health, housing, security, and justice in poorest municipalities.
- Statistics and data quality:
  - Prioritize updating national accounts (adopt 1993 SNA, update base year to 2001), strengthen balance of payments and external flow data, and upgrade non-budgetary fiscal sector reporting.
  - Guatemala joined the General Data Dissemination Standard at end-2004; ROSC mission found significant shortcomings.

### Millennium Development Goals and social indicators (selected)
- Population (million): 8.7, 10.0, 11.9, 12.0 (series shown).
- GNI per capita (U.S. dollars): 977; 1,448; 1,810; 1,965 (series shown).
- Percentage of population below the poverty line (2000): 56.2.
- Gini index (1998): 55.8.
- Adult illiteracy rate (2001): 30.1.
- Life expectancy at birth (2001): 65.7.
- Selected MDG-related indicators (as presented): child malnutrition prevalence 26.6 and 24.2 (years shown); net primary enrollment 72.5 and 85 (years shown); under-5 mortality 82, 64, 59, 49 (series shown).

*IMF staff report content unit _cr05362.*

### Executive Summary ......................................................................................................

### _cr05362 - Executive Summary ......................................................................................................

### Executive Summary — Key Findings and Policy Priorities
- Guatemala has pursued important reforms and macroeconomic stabilization since the 1996 Peace Accords.
- Fiscal discipline has anchored the policy framework; international reserves have risen; and important banking reforms have been implemented.
- Following three years of slow growth, activity improved somewhat in 2004, but inflation also rose, partly due to higher oil prices.
- The economic and social goals of the Peace Accords remain to be fully realized.
- Efforts to increase tax revenues to fund higher social and investment spending have stalled in recent years.
- Guatemala continues to suffer from widespread poverty; and, according to a 2002 World Bank survey, perceptions of corruption, and weak integrity of some public institutions pose additional challenges.
- The government that took office last year has included the 1996 Peace Accords in the platform for its policy agenda.
- The government’s economic program rests on three main pillars: macroeconomic stability; financial sector restructuring; and structural reforms to boost growth and reduce poverty.
- A key objective of the program is to keep the fiscal deficit low while mobilizing additional fiscal resources to finance a significant increase in public investment and social spending.
- Monetary policy is being geared to reducing inflation to the 4–6 percent range.
- The exchange system is flexible; the central bank has intervened in the foreign exchange over the past year to limit the nominal appreciation of the quetzal against the U.S. dollar.
- In January 2005 a rules-based mechanism for interventions was introduced.
- The Guatemalan banking system has been strengthened in recent years: prudential norms have been tightened and offshore banks have been brought into the regulatory framework.
- The reform process is continuing, and steps are being taken to address the persistent losses of the state mortgage bank (CHN).
- The government’s structural reform program, Vamos Guatemala, is focused on promoting competitiveness, economic growth, and social progress.
- A Commissioner for Competitiveness has been appointed; implementation of CAFTA-DR is expected to underpin the recovery.
- Social spending and the development effort are being stepped up, particularly in the poorest municipalities.
- Success of the program will hinge on the government’s ability to strengthen the revenue effort, focus spending on priority needs, and improve transparency and governance.
- The government has launched a national consultation process to engage broad groups of Guatemalan society in a dialogue to build consensus on national priorities and their funding.
- With a record of overall fiscal discipline, low public debt, and a strengthened banking system, Guatemala’s economic vulnerabilities are well contained.
- The policy framework is susceptible to erosion of public support, in part because of low domestic revenue and the resulting constraints on the government’s capacity to address poverty and infrastructure bottlenecks.
- The government’s program is designed to reduce this risk by mobilizing revenue, prioritizing expenditures, and improving governance.

### I. Background — Perspective and Structural Issues
- The 1996 Peace Accords ended nearly 40 years of civil conflict and embodied a broad national consensus on economic, social, and security priorities.
- Political stability produced a peace dividend in the second half of the 1990s: economic growth rose to 4 percent a year and nontraditional exports increased, helping to diversify the economy.
- Growth slowed during 2001–03 amid falling coffee prices and weaker external demand, but macro stability was maintained by policies anchored on a strong fiscal stance and a flexible exchange rate regime—resulting in low public debt (18 percent of GDP) and a strong international reserves position.
- Progress was made on some structural reforms (such as in the financial sector), but other reform goals of the Peace Accords—particularly in the fiscal, social, and governance areas—were only partially achieved.
- Guatemala continues to face serious problems of poverty and income distribution and falls below the Latin American average for available social indicators.
- Governance concerns: government effectiveness and regulatory quality are perceived to have slipped since the end of the 1990s.
- Successive governments have faced serious obstacles to raising additional revenue and funding higher social spending; powerful interest groups have opposed higher taxes and often successfully challenged existing taxes in court.
- After progress during 2000–02 raising the tax/GDP ratio toward the 12 percent target established under the Peace Accords, the ratio slipped again in 2003–04 as courts overturned some key taxes.
- Part of the increase in social spending achieved in the second half of the 1990s has been reversed since 2001.

### II. Recent Economic Developments — Macroeconomic Framework and Indicators
- Real GDP grew by just over 2 percent per year during 2001–03.
- Growth is estimated at 2¾ percent in 2004, supported by private investment and consumption; consumption has been fueled, in part, by rising worker remittances.
- Legal instability in the tax system: during 2001–03 the Constitutional Court received more than fifty appeals to eliminate, clarify, or reduce taxes; recent rulings eliminated the minimum corporate tax (IEMA) in December 2003 and an injunction was issued against the excise tax on fuel in December 2004.
- Headline inflation rose to over 9 percent in 2004, above the central bank’s target range of 4–6 percent, but inflation has declined somewhat in 2005.
- Higher oil prices and relatively easy monetary conditions contributed to the 2004 inflation increase.
- Although the central bank has raised its benchmark interest rate on several occasions since July 2003, the rate remains negative in real terms, and commercial bank rates have continued to decline.
- The balance of payments has strengthened in recent years, with international reserves now covering 4½ months of imports.
- The current account deficit narrowed to about 4 percent of GDP, helped by a sharp rise in worker remittances, now at more than 9 percent of GDP.
- The rise in remittances, capital inflows, and the global weakening of the U.S. dollar put upward pressure on the quetzal; the central bank intervened in the foreign exchange market for US$450 million last year, limiting the appreciation to 3 percent against the dollar.
- The trade deficit widened to about 15 percent of GDP, as import demand was fueled by remittances and a steady real appreciation of the quetzal (by over 20 percent since 2000).
- Export performance: traditional exports (coffee, sugar, bananas, and cardamom) faced limited growth due to adverse price developments, trade barriers in key markets, and supply-side constraints; nontraditional exports (textiles, light manufactures, and specialty agriculture) showed robust growth, supported by preferential access to the U.S. market under the Caribbean Basin Initiative (CBI).

### Boxes — Institutional and Social Context (summarized)
- Box 1 — Legal Challenges and Instability of the Tax System:
  - Constitutional Court appeals based on Article 243 (taxes should not exceed taxpayer payment capacity) created an unpredictable tax environment and eroded the tax base.
  - Court rulings threatened to reduce tax revenue by more than 1 percent of GDP in 2004.
- Box 2 — Social Expenditure:
  - Post-1996 social program objectives: expanded access to services (especially for the poor and indigenous), decentralization, and economic efficiency.
  - Social expenditure rose in the late 1990s but declined since 2001.
  - Social expenditure composition (1996–2004) shows total social expenditure moving from 3.2 percent of GDP in 1996 to 5.0 percent of GDP in 2004, with sectoral detail:
    - Health: 1996 0.9; 1997 1.1; 1998 1.1; 1999 1.4; 2000 1.4; 2001 1.4; 2002 1.3; 2003 1.3; 2004 1.2 (percent of GDP)
    - Education: 1996 1.6; 1997 1.8; 1998 2.1; 1999 2.4; 2000 2.5; 2001 2.7; 2002 2.5; 2003 2.5; 2004 2.5 (percent of GDP)
    - Housing, Internal Security, Judicial System, Attorney General: detailed annual figures provided in the source.
  - Memorandum item: Guatemalan Army spending listed for 1999–2004 (1999 0.8; 2000 0.7; 2001 0.7; 2002 0.7; 2003 0.5; 2004 0.4 percent of GDP).

### Policy Implications and Priorities Highlighted
- Maintain fiscal discipline and keep the fiscal deficit low while mobilizing additional fiscal resources for public investment and social spending.
- Strengthen the revenue effort to achieve financing for Peace Accords commitments and Vamos Guatemala priorities.
- Prioritize expenditures toward social and infrastructure needs, focusing on poorest municipalities.
- Improve transparency, governance, and anticorruption measures to bolster public support and reduce policy fragility.
- Continue financial sector reforms, address persistent losses at the state mortgage bank (CHN), and sustain tightened prudential norms.
- Conduct monetary policy aimed at reducing inflation to the 4–6 percent range and manage exchange rate pressures with transparent, rules-based interventions.

*Executive Summary — IMF staff report content unit _cr05362.*

### 9.      Fiscal discipline has been broadly maintained despite the weak revenue base.

### 9.      Fiscal discipline has been broadly maintained despite the weak revenue base.

### Fiscal performance and revenue mobilization
- The fiscal deficit widened in 2003 mainly because of court-ordered tax reductions and compensation payments to auxiliary soldiers for service in the civil conflict, but fell to less than ½ percent of GDP in 2004.
- Spending was reduced sharply in 2004 as the new government faced additional tax reductions and legal problems that delayed execution of the investment program.
- To offset the impact of the court rulings and raise tax collections toward the 12 percent of GDP target, the government launched a tax plan comprising policy measures and a blueprint for strengthening tax administration and tax enforcement.
- An initial tax package passed by congress in June 2004 fell short of the government’s proposal, but the tax administration plan generated more revenue than expected, keeping tax collections at the level of 2003 (10.3 percent of GDP).
- Tax collections projections: 10.3 percent of GDP (2004); expected 10½ percent of GDP in 2005; expected 11 percent of GDP in 2006.
- Notes on fiscal adjustments and one-off items:
  - Army reduced by one-third (12,000 personnel) at a severance cost of 0.4 percent of GDP.
  - Compensation payments were made to auxiliary soldiers; these were disbursed to a trust fund pending resolution of a constitutional challenge.
  - Previously accumulated domestic supplier debt: 0.4 percent of GDP at end-2003, reduced by half in 2004.
  - Overdue VAT refunds were 0.5 percent of GDP at end-2003 and are expected to be eliminated by the middle of 2006.

### Access to markets and public borrowing
- In 2003 a planned Eurobond issue was reduced to US$300 million because domestic investors were reluctant to participate.
- In September 2004 a 30-year US$330 million issue was significantly oversubscribed.
- Public sector shifted from sizeable net domestic borrowing in 2003 (1.2 percent of GDP) to a small net domestic lending position in 2004.
- The maturity structure of external and domestic debt was extended in 2004; authorities intend to increase borrowing from multilateral institutions in 2005.
- Nonfinancial public sector debt: 15.5 (2002), 17.1 (2003), 18.0 (2004), projected 17.8 (2005), projected 17.8 (2006) — all figures in percent of GDP.

### Financial sector reforms and indicators
- Reforms recommended in the 2001 FSSA have been pursued vigorously: financial sector legislation modernized; tighter prudential framework and strengthened onsite inspections.
- Offshore banks are required to be part of licensed financial conglomerates to operate in Guatemala.
- Reported risk-weighted capital adequacy ratios of both onshore and offshore banks are well above the statutory minimum of 10 percent.
- In July 2004 the FATF removed Guatemala from its list of noncooperating jurisdictions on money laundering.
- Selected prudential indicators (In percent at end of period; Onshore 2004 where given):
  - Statutory capital to (unadjusted) risk-weighted assets: 13.9 (2000), 14.1 (2001), 14.9 (2002), 15.6 (2003), 14.5 (2004), 12.2 (year not specified in table snippet).
  - Nonperforming loans to total loans: 9.6 (2000), 8.1 (2001), 7.9 (2002), 6.5 (2003), 5.8 (2004), 3.3 (year not specified).
  - Provisions to nonperforming loans: 24.3, 25.8, 36.2, 39.1, 43.6, 34.8 (years as presented).
  - Return on assets: 1.1, 1.1, 0.8, 1.1, 1.4, 1.6 (years as presented).
  - Return on equity: 12.0, 11.6, 8.5, 12.2, 15.3, 16.8 (years as presented).
  - Net open position in foreign exchange to regulatory capital: 11.5, 37.8, 36.3, 44.6, 33.1 (years as presented).
- Dollarization: since 2001 residents permitted to hold foreign currency deposits in domestic banks; share of such deposits has risen to 15 percent (36 percent including deposits in the offshore banks).
- Credit in foreign currency has grown more slowly than foreign currency deposits.

### Implementation of Fund policy advice and program performance
- Overall stance of macroeconomic policy and financial sector reforms broadly in line with Fund advice in recent years; less progress on tax reform.
- Pursuit of prudent macroeconomic policies reflects broad consensus on importance of sound fiscal and monetary policies and financial stability.
- Lack of progress after 2002 toward the tax objectives of the Peace Accords attributed to strong opposition from powerful interest groups and the perception that higher revenues would mainly lead to wasteful spending.
- Many objectives of the 2003 Stand-By Arrangement (SBA) were achieved, but the midterm review was not completed; the precautionary arrangement expired in March 2004 without completion of the midterm review.
- Slippages in 2003: ceilings on the fiscal deficit and short-term external debt were exceeded; structural performance criteria on exempting the purchase of bank assets from VAT and conducting due diligence on the state mortgage bank (CHN) were not observed.
- Technical assistance from the Fund: considerable; record of implementation good on banking reforms, mixed on revenue mobilization, constrained by institutional bottlenecks in statistics.

### Near-term macroeconomic outlook (2005–2006)
- Real GDP growth: 2.2 (2002), 2.1 (2003), 2.7 (2004), projected 3.2 (2005), projected 3.2 (2006) — all figures in percent.
- Real GDP per capita growth: -0.4 (2002), -0.5 (2003), 0.1 (2004), 0.6 (2005), 0.6 (2006) — percent.
- Inflation (end of period): 6.3 (2002), 5.9 (2003), 9.2 (2004), projected 6.0 (2005), projected 5.0 (2006) — percent.
- External current account deficit: 5.3 (2002), 4.2 (2003), 4.4 (2004), projected 4.4 (2005), projected 4.2 (2006) — percent of GDP.
- Combined public sector deficit: 0.8 (2002), 2.0 (2003), 0.4 (2004), projected 1.7 (2005), projected 1.2 (2006) — percent of GDP.
- Tax revenue: 10.6 (2002), 10.3 (2003), 10.3 (2004), projected 10.5 (2005), projected 11.0 (2006) — percent of GDP.
- Net international reserves (NIR): US$2,278 (2002), US$2,799 (2003), US$3,380 (2004), projected US$3,655 (2005), projected US$3,722 (2006).
- Projection for 2005: Real GDP projected to grow by 3.2 percent in 2005; external current account deficit remaining broadly unchanged; international reserves accumulation would slow if central bank intervenes only to dampen exchange rate volatility.
- Factors supporting the recovery: favorable external environment, improvements in the business climate, early ratification of CAFTA-DR.
- Downside risks: continued high oil prices, further real appreciation of the quetzal, insufficient political support for revenue mobilization and key structural reforms.

### Medium-term outlook, scenarios, and vulnerabilities
- Baseline scenario: real GDP growth could rise to 3.5–4 percent under the government’s program; public debt would decline to 15 percent of GDP by 2010 from 18 percent in 2004; total external debt (public and private) would remain stable at around 28 percent of GDP.
- Robustness: using 10-year historical averages for key assumptions does not significantly alter medium-term projection; temporary negative shocks push debt ratios up but they return to a declining path once conditions normalize.
- Key vulnerabilities under baseline:
  - Political obstacles or legal actions delaying or thwarting fiscal and structural reforms and Peace Accord objectives.
  - One-third of exports remain commodity-based; United States absorbs 30 percent of non-maquila exports.
  - Productivity concerns and real appreciation of the quetzal due to rising worker remittances and capital inflows.
  - Banking system risks: main risks to nonperforming loan ratio (currently below 6 percent) come from sharp reductions in economic activity and major increases in interest rates.
- Weaker policy scenario (illustrative):
  - If tax revenue is not raised and inflation remains at current levels and financial reform momentum stalls: tax collections remain around 10 percent of GDP; budgetary expenditure would be reduced by about 1 percent of GDP relative to the baseline; fiscal deficit would rise by ½ percent of GDP.
  - Under that scenario public debt would remain at 18 percent of GDP in 2010 instead of declining.
  - Consequences: higher inflation, stagnant revenue and social spending, halted financial reforms could harm investment climate and market sentiment, raise cost of borrowing, lower real GDP growth, and increase risk of financial sector problems.

### Fiscal policy strategy and staff recommendations
- Government fiscal strategy: raise revenue toward Peace Accords target of 12 percent of GDP, maintain low budget deficit, and improve quality of public spending.
- Staff support: broad support for strategy; stressed key challenge of raising tax revenue to 12 percent of GDP.
- Staff recommended that a VAT increase be a central part of additional revenue effort and that the tax administration plan be underpinned with legislative support as needed.
- Government’s tax plan (three elements):
  - Tax package approved in June 2004 that: (i) reintroduced excises on alcoholic beverages (revoked in 2003); (ii) introduced a turnover tax as an option under the corporate income tax regime; (iii) established a presumptive minimum corporate income tax (IETAAP) with a lower rate and different structure than the one revoked in 2003; and (iv) provided for a small minimum corporate tax to take effect after the IETAAP is phased out by 2007.
  - A comprehensive plan launched to strengthen tax administration, following FAD recommendations.
  - A second set of fiscal measures to be put in place in 2005 and to take effect in 2006, with measures still to be specified.
- Authorities intend to introduce a package of efficient measures calibrated to take account of progress under the tax administration plan, aiming to raise collections to at least 11 percent of GDP in 2006.
- Staff urged removal of distortionary elements (such as an optional corporate turnover tax) and introduction of efficient measures to make the tax system more buoyant.
- Government strategy to build support: public dialogue and education campaign announced in February 2005, with round-table discussions on health, education, and security; expectation that improved anti-corruption track record and higher quality public spending will build private sector support.

### Public investment, spending priorities, and debt management
- With rising revenue, falling military outlays, and a moderately higher budget deficit, social spending and public investment expected to rise significantly in 2005 and 2006.
- Key priorities: raising public investment and social spending to progress toward Peace Accords objectives and Millennium Development Goals.
- Public debt management: keep public debt low and improve its structure; increase multilateral borrowing in 2005; reduce arrears and overdue VAT refunds by mid-2006.

### Monetary and exchange rate policy stance
- Monetary framework strained in 2004 by weakening of the U.S. dollar, strong inflows of private capital and remittances, and cost-push from higher oil prices.
- Authorities increased central bank interest rates during the year to contain second-round effects from the oil price shock; aggressive rate hikes were avoided to prevent encouraging additional capital inflows and further appreciation of the quetzal.
- Policy mix adopted: moderate monetary tightening, tight fiscal policy, and central bank intervention in the foreign exchange market to prevent excessive appreciation of the quetzal, without pursuing an exchange rate target.
- Intervention rule introduced earlier in the year referred mainly to purchases of foreign exchange to avoid short-term volatility; central bank intends broadly symmetrical intervention policy to also dampen excessive depreciation as needed.
- Authorities emphasized that central bank credibility has improved due to success in reducing inflation; lengthening of the yield curve for public debt in 2004 was cited as evidence of improved confidence.

*Source: IMF staff report excerpt titled "9.      Fiscal discipline has been broadly maintained despite the weak revenue base."*

### 28.      The staff recommended that the central bank focus on the goal of maintaining

### The staff recommended that the central bank focus on the goal of maintaining low inflation

### Monetary policy and inflation
- Staff recommended that the central bank focus on the goal of maintaining low inflation.
- The staff welcomed the increases in interest rates implemented last year but noted that monetary conditions had nevertheless remained relatively lax, with currency emission (the intermediate target) exceeding the limit set by the bank.
- Bringing inflation back to within the target range will require:
  - greater exchange rate flexibility; and
  - adherence to a path for currency emission consistent with that objective.
- The new foreign market intervention rule reduced discretion but needed to be made symmetrical (responding to both appreciation and depreciation pressures) and implemented consistently and in a transparent manner.
- The staff encouraged continued work, with the support of MFD, toward adopting an inflation targeting framework.
- The authorities agreed with moving toward such a framework and noted that inflationary pressures had abated in recent months, supporting achievement of the end-year target for inflation of 4–6 percent.
- Staff recommendation reiterated (para. 42): keep conditions appropriately tight to ensure achievement of the target for 2005; maintain a flexible exchange rate regime; allow the exchange rate of the quetzal to be determined by the market and limit interventions to what is needed to avoid excessive short-term volatility; support ongoing work toward adopting inflation targeting.

### Exchange rate developments and competitiveness
- Real appreciation of the quetzal, driven recently by a surge in worker remittances and strong private capital inflows, has contributed to a widening trade deficit and slow export growth since the end of the 1990s.
- Staff view: real appreciation has not been a major obstacle to export growth given:
  - good performance of nontraditional exports; and
  - maintenance of market share in the United States.
- Nevertheless, maintaining competitiveness is a key challenge, accentuated by the elimination of trading quotas for textiles and clothing.
- Staff and authorities agreed that competitiveness cannot be met on a sustained basis by targeting the exchange rate—hence the need for a strong and comprehensive effort to strengthen underlying determinants of competitiveness: raise productivity, lessen infrastructure bottlenecks, and implement appropriately tight fiscal policies.

### Elimination of textile and clothing quotas (Box 3)
- Quotas eliminated on January 1, 2005 under the Agreement on Textiles and Clothing.
- Net exports of textiles and clothing account for 6.1 percent of Guatemala’s current account receipts.
- The sector accounts for 2.6 percent of employment.
- Staff Spring 2005 WEO simulations indicate elimination of quotas could reduce Central American and Caribbean exports of these products by nearly half; for Guatemala the projected decline would be equivalent to:
  - a reduction in current account receipts of 2.9 percent; and
  - a reduction in employment of 1.2 percent.
- Preliminary data for the first quarter of 2005 show U.S. imports of textiles and apparel increased by:
  - China: 65 percent; and
  - India: 29 percent.
- Growth rates of Chinese exports of selected products to the United States in Q1 2005:
  - knit shirts and blouses: 1250 percent;
  - cotton trousers: 1550 percent;
  - underwear: 300 percent.
- Preliminary U.S. import data for Q1 2005 indicate that Guatemala did not lose market share.
- Moderating factors noted that could reduce worst-case impact: CAFTA-DR preferential access and relaxed rules of origin; lower transportation costs and delivery times compared with Asian suppliers; exporters moving up the value chain; U.S. safeguards proceedings under China’s WTO accession protocol affecting certain product categories.

### Government strategy to boost exports and reduce trade deficit (para. 30)
- Three-pronged strategy:
  - Robust macroeconomic framework with prudent fiscal and monetary policies to support productivity-enhancing reforms.
  - Trade liberalization through CAFTA-DR and efforts to complete a customs union in Central America; work toward trade agreements with the European Union and other Latin American trade blocs; commitment to multilateral liberalization in the Doha Round.
  - Simplification of export and investment procedures; appointment of a Commissioner for Competitiveness; addressing barriers such as delays in rebating VAT to exporters and cumbersome customs procedures; promotion of export diversification and growth through “third-generation” incentives as export-linked incentives are due to be eliminated by 2009 under the WTO framework.

- Note: Guatemala ratified the CAFTA-DR agreement in March 2005.

### Business climate, public institutions, and social programs
- Policies to foster a better business climate and strengthen public institutions include:
  - Promoting fiscal transparency: drafted a fiscal transparency law (with Fund assistance) to be introduced in congress in 2005; revisions to the organic budget law prepared.
  - Improving expenditure control: expanding the Integrated Financial Management System (SIAF) to cover nearly 100 additional municipalities and decentralized agencies by the end of 2005; expanding the on-line procurement system GuateCompras.
  - Strengthening the legal system: Supreme Court initiatives submitted in September 2004 to modernize the legal system; reforms introduced to reduce delays in the judicial process.
  - Strengthening state institutions: external management audits of all ministries; new civil service legislation; strict enforcement of regulations for government procurement and contracting.
  - Combating corruption: high-profile campaign underway; prosecutions of former high-level officials; stricter penalties; promulgated a code of ethics for the civil service.
  - Reviewing pension obligations: in 2005 the authorities will initiate a comprehensive financial evaluation of the Social Security Institute (IGSS) and the government’s other pension obligations; review prompted by a recent court ruling that suspended an earlier decision to raise the retirement age gradually from 60 to 65 years.
- Social programs: restructuring the budget to improve targeting of expenditure under Vamos Guatemala; social component GuateSolidaria focused on education, health, housing, security, and justice, with emphasis on projects to build productive capacity in the poorest municipalities; partnerships with the private sector and support from multilateral development agencies.

### Financial sector reforms and vulnerabilities
- Remaining challenges: low provisions in offshore banks; four small private banks and the state mortgage bank (CHN) remain weak; high level of related-party lending; illegal offshore banks operating (action underway).
- Authorities committed to addressing these challenges and support regional cooperation to improve banking regulation convergence.
- Main reform areas:
  - Bringing offshore banks into the regulatory framework: registration of financial conglomerates (including offshore banks) began in July 2004 and will be completed by mid-2006.
  - Bank resolution framework: new framework to be completed and made operational; Trust Fund for Bank Capitalization funded at end-2004; implementing central bank lender-of-last-resort facility in 2005.
  - Bank consolidation: legislation in 2005 to exempt the sale of bank assets from the VAT.
  - Public mortgage bank (CHN): plan drawn up to address persistent losses; fiscal costs to be estimated as part of due-diligence and incorporated into future budgets.
  - Related lending and general provisions: Bank Superintendency to supervise institutions with high levels of “Préstamos vinculados”; authorities to review tightening statutory limits and consider requiring general provisions.
  - Central bank recapitalization: government to assume, year-by-year beginning in 2005, the losses incurred after 2002; seek approval for issuance of a long-term zero-coupon bond to cover the stock of past losses.
  - Payments system modernization: Matrix for Modernization of the Payments System to be implemented in 2005, calling for introduction of real-time gross settlements and upgrading the clearing house for bank settlements.

### Statistics and data quality
- Authorities intensifying efforts to upgrade economic statistics (see Appendix V).
- October 2004 ROSC mission from STA found significant shortcomings in macroeconomic statistics.
- Planned improvements:
  - Central bank designing a new reporting system to improve balance of payments statistics.
  - Adoption of the 1993 system of national accounts and updating the base-year from 1958 to 2001.
  - Guatemala joined the General Data Dissemination Standard at the end of 2004.
- Staff recommends prioritizing updating national accounts, strengthening information on external flows, and upgrading reporting of data by the non-budgetary fiscal sector; these will require additional resources and close inter-agency collaboration.

### Staff appraisal and medium-term outlook
- Recent performance mixed: macroeconomic stability maintained; economic vulnerabilities contained; growth sluggish; poverty widespread.
- Positives: low public debt; strengthened overall external position; more robust financial system.
- Challenges: weak domestic consensus and legal ambiguities undermining tax increases and Peace Accords aspirations; decline in social expenditure and low social indicators.
- Government program rests on three pillars: structural reforms to spur growth and reduce poverty; macroeconomic stability anchored on prudent fiscal and monetary policies; and financial sector restructuring.
- Critical priorities and observations:
  - A sustained improvement in the tax effort is critical; staff regrets the decline in the tax/GDP ratio after 2002.
  - Last year’s tax package was reduced by congress, reducing its yield over time; government relying on tax administration plan and mobilizing support for additional revenue measures.
  - Authorities committed to introducing additional measures in 2005 to help achieve the revenue goal of the Peace Accords; government has initiated a public dialogue and education campaign to build consensus.
  - Staff commends progress on financial sector reform but stresses need to reduce lending to related parties, build general provisions, and deal with CHN losses.
  - Staff encourages continued work to strengthen macroeconomic statistics and gives priority to national accounts update, external flow information, and non-budgetary fiscal reporting.
- Medium-term economic outlook: favorable under strong policies but risks remain; prospects for exports and growth depend on productivity-enhancing structural reforms, continued prudent fiscal policy, and trade promotion.
- Guatemala has considerable room for maneuver to deal with shocks given low public debt, strengthened banking system, flexible exchange rate regime, and adequate international reserves, but achieving the ambitious program requires sufficient domestic political consensus.

*Source: _cr05362 (IMF staff report excerpt).*

### 46.      Staff proposes that Guatemala remain on a 12-month consultation cycle.

### _cr05362 - 46.      Staff proposes that Guatemala remain on a 12-month consultation cycle.

### Social and demographic indicators
- Population 2001 (millions): 11.9
- Gini index (1998): 55.8
- Percentage of indigenous population (2001): 55.0
- Life expectancy at birth (2001): 65.7
- Percentage of population below the poverty line (2000): 56.2
- Adult illiteracy rate (2001): 30.1
- Rank in UNDP development index (2004): 121 of 177
- GDP per capita (US$, 2003): 2,079

### Real economy and prices (selected annual changes)
- Real GDP growth:
  - 2000: 3.6
  - 2001: 2.3
  - 2002: 2.2
  - 2003 (Prog.): 2.4
  - 2004 (Actual): 2.1
  - 2005 (Prog.): 2.7
  - 2006 (Proj.): 3.2
- Consumer prices (end of period):
  - 2000: 5.1
  - 2001: 8.9
  - 2002: 6.3
  - 2003 (Prog.): 4 -
  - 2004 (Actual): 6.3
  - 2005 (Prog.): 9.2
  - 2006 (Proj.): 6.0
  - 2007 (Proj.): 5.0

### Monetary sector (selected indicators)
- Credit to private sector (12-month % change):
  - 2000: 9.6
  - 2001: 12.5
  - 2002: 6.1
  - 2003 (Prog.): 9.3
  - 2004 (Actual): 7.3
  - 2005 (Prog.): 16.2
  - 2006 (Proj.): 11.2
  - 2007 (Proj.): 10.5
- Liabilities to private sector (12-month % change):
  - 2000: 22.3
  - 2001: 8.1
  - 2002: 13.2
  - 2003 (Prog.): 12.4
  - 2004 (Actual): 11.0
  - 2005 (Prog.): 11.4
  - 2006 (Proj.): 14.1
  - 2007 (Proj.): 10.7
- Interest rate (annual, domestic-currency time deposits): 15.3 (2000); 11.3 (2001); 9.6 (2002); ...; 6.7 (2004); 6.9 (2005)

### External sector (selected flows and balances; percent of GDP unless noted)
- Exports (annual % change):
  - 2000: 10.9
  - 2001: -7.3
  - 2002: -1.4
  - 2003 (Prog.): 5.7
  - 2004 (Actual): 8.6
  - 2005 (Prog.): 12.1
  - 2006 (Proj.): 10.9
  - 2007 (Proj.): 2.7
- Imports (annual % change):
  - 2000: 13.4
  - 2001: 8.4
  - 2002: 12.4
  - 2003 (Prog.): 7.2
  - 2004 (Actual): 6.6
  - 2005 (Prog.): 16.2
  - 2006 (Proj.): 9.2
  - 2007 (Proj.): 2.7
- Terms of trade (12-month % change):
  - 2000: 1.7
  - 2001: -1.0
  - 2002: -2.5
  - 2004 (Actual): -4.4
  - 2005 (Prog.): 1.0
  - 2006 (Proj.): -0.5
  - 2007 (Proj.): -0.3
- Current account (percent of GDP):
  - 2000: -5.4
  - 2001: -6.0
  - 2002: -5.3
  - 2003 (Prog.): -5.5
  - 2004 (Actual): -4.2
  - 2005 (Prog.): -4.4
  - 2006 (Proj.): -4.4
  - 2007 (Proj.): -4.2
- Trade balance (percent of GDP):
  - 2000: -10.8
  - 2001: -13.1
  - 2002: -15.0
  - 2003 (Prog.): -15.0
  - 2004 (Actual): -14.8
  - 2005 (Prog.): -16.3
  - 2006 (Proj.): -16.2
  - 2007 (Proj.): -15.7
- Net international reserves (in millions of U.S. dollars; stock):
  - 2000: 1,802 (Table 13)
  - 2001: 2,301
  - 2002: 2,278
  - 2003: 2,799
  - 2004 p/: 3,380
  - 2005 (Proj.): 3,655 / 3,722 (different tables)
  - 2006 (Proj.): 3,722
- Net international reserves (months of next year imports of goods and services):
  - 2003: 3.6
  - 2004: 4.0
  - 2005 (Proj.): 4.4
  - 2006 (Proj.): 4.6
  - 2007 (Proj.): 4.5

### Public sector fiscal indicators (percent of GDP)
- Total revenue:
  - 2000: 10.4
  - 2001: 11.1
  - 2002: 11.6
  - 2003: 11.5
  - 2004: 11.3
  - 2005 (Proj.): 11.0
  - 2006 (Proj.): 11.2
  - 2007 (Proj.): 11.6
- Tax revenue:
  - 2000: 9.4
  - 2001: 9.7
  - 2002: 10.6
  - 2003: 10.6
  - 2004: 10.3
  - 2005 (Proj.): 10.3
  - 2006 (Proj.): 10.5
  - 2007 (Proj.): 11.0
- Total expenditures:
  - 2000: 12.4
  - 2001: 13.3
  - 2002: 12.2
  - 2003: 13.1
  - 2004: 13.4
  - 2005 (Proj.): 11.4
  - 2006 (Proj.): 13.0
  - 2007 (Proj.): 13.1
- Combined public sector balance (including central bank losses):
  - 2000: -2.2
  - 2001: -2.3
  - 2002: -0.8
  - 2003 (Prog.): -1.7
  - 2004 (Actual): -2.0
  - 2005 (Prog.): -0.4
  - 2006 (Proj.): -1.7
  - 2007 (Proj.): -1.2
- Overall balance of the nonfinancial public sector (deficit -):
  - 2000: -1.8
  - 2001: -1.5
  - 2002: -0.3
  - 2003 (Prog.): -1.1
  - 2004 (Actual): -1.5
  - 2005 (Prog.): 0.1
  - 2006 (Proj.): -1.2
  - 2007 (Proj.): -0.8
- Nonfinancial public debt (percent of GDP):
  - 2000: 16.7
  - 2001: 17.1
  - 2002: 15.5
  - 2004: 17.1
  - 2005 (Proj.): 18.0
  - 2006 (Proj.): 17.8
  - 2007 (Proj.): 17.8
- Tax revenue in percent of GDP (memorandum): 9.4 (2000); 9.7 (2001); 10.6 (2002); 10.7 (2003); 10.3 (2004); 10.3 (2005); 10.5 (2006); 11.0 (2007)
- Central government social spending (percent of GDP, memorandum): 5.0 (2000); 5.5 (2001); 5.1 (2002); 5.3 (2003); 5.3 (2004); 5.0 (2005); 5.8 (2006); 6.0 (2007)

### Balance of payments (selected flows in millions of U.S. dollars)
- Current account (levels, Prel./Prog.):
  - 2001: -1,253
  - 2002: -1,234
  - 2003 (Prel.): -1,050
  - 2004 (Prog.): -1,188
  - 2005 (Actual/Proj.): -1,294 / -1,297
- Trade balance (levels):
  - 2001: -2,747
  - 2002: -3,485
  - 2003 (Prel.): -3,661
  - 2004 (Prog.): -4,382
  - 2005 (Proj.): -4,727
  - 2006 (Proj.): -4,851
- Exports, f.o.b. (levels):
  - 2001: 2,860
  - 2002: 2,819
  - 2003: 3,060
  - 2004 (Prog.): 3,430
  - 2005 (Actual/Proj.): 3,805 / 3,908
- Imports, c.i.f. (levels):
  - 2001: -5,606
  - 2002: -6,304
  - 2003: -6,722
  - 2004 (Prog.): -7,812
  - 2005 (Proj.): -8,532
  - 2006 (Proj.): -8,759
- Current transfers (net) (levels and percent of GDP):
  - 2001: 997 (4.7 percent of GDP)
  - 2002: 1,976 (8.5 percent of GDP)
  - 2003: 2,462 (10.0 percent of GDP)
  - 2004 (Prog.): 3,006 (11.2 percent of GDP)
  - 2005 (Proj.): 3,236 (11.1 percent of GDP)
  - 2006 (Proj.): 3,377 (10.9 percent of GDP)
  - Of which: remittances (percent of GDP):
    - 2001: 2.8
    - 2002: 6.5
    - 2003: 8.2
    - 2004: 9.4
    - 2005 (Proj.): 9.4
    - 2006 (Proj.): 9.3

### Monetary and financial sector accounts (Bank of Guatemala and commercial banks; selected stocks)
- Exchange rate (quetzales/U.S. dollars): 7.9 (2000); 7.6 (2001); 8.0 (2002); 8.0 (2003); 7.7 (2004)
- Net domestic assets (Bank of Guatemala, levels in millions of quetzales):
  - 2000: -8,810
  - 2001: -7,395
  - 2002: -9,346
  - 2003 (Prog.): -10,535
  - 2004 (Actual): -13,522
  - 2005 (Proj.): -15,760
  - 2006 (Proj.): -16,023
- Bank of Guatemala losses (levels in millions of quetzales):
  - 2000: 11,013
  - 2001: 12,028
  - 2002: 13,135
  - 2003 (Prog.): 13,000
  - 2004 (Actual): 14,187
  - 2005 (Proj.): 15,275
  - 2006 (Proj.): 16,308
- Commercial banks: Credit to private sector (stocks in millions of quetzales):
  - 2000: 32,871
  - 2001: 34,867
  - 2002: 38,433
  - 2003 (Prog.): 37,397
  - 2004 (Actual): 43,455
  - 2005 (Proj.): 48,331
  - 2006 (Proj.): 53,408
- Money and quasi-money (stocks, millions of quetzales):
  - Money (M1): 20,532 (2000); 23,284 (2001); 26,394 (2002); 28,189 (2003); 30,960 (2004); 34,988 (2005); 38,724 (2006)
  - Quasi-money: 28,139 (2000); 31,828 (2001); 35,560 (2002); 32,959 (2003); 37,177 (2004); 42,787 (2005); 51,094 (2006)

### Financial soundness and banking-sector indicators (selected)
- Statutory capital to risk-weighted assets: 13.9 (1998); 14.1 (1999); 14.9 (2000); 15.6 (2001); 14.5 (2003)
- Nonperforming loans to total gross loans: 9.6 (1998); 8.1 (1999); 7.9 (2000); 6.5 (2001); 5.8 (2003)
- Return on assets: 1.1 (2000); 1.1 (2001); 0.8 (2002); 1.1 (2003); 1.4 (2004)
- Return on equity: 12.0 (2000); 11.6 (2001); 8.5 (2002); 12.2 (2003); 15.3 (2004)
- Liquid assets to total assets (liquid asset ratio): 25.7 (2000); 29.9 (2001); 31.3 (2002); 28.0 (2003); 29.1 (2004)
- Foreign currency-denominated loans to total loans (percent): 18.4 (2000); 21.1 (2001); 24.1 (2002); 27.7 (2003); 28.3 (2004)

### Structure and performance of the financial sector (summary)
- Number of banks 2/ (1998-2004): 34 (1998); 34 (1999); 32 (2000); 31 (2001); 31 (2002); 29 (2003); 28 (2004)
- Majority state-owned (in percent of total assets): 6.5 (1998); 8.8 (1999); 8.5 (2000); 3.4 (2001); 2.5 (2002); 3.3 (2003); 3.3 (2004)
- Total assets of banks (in percent of nominal GDP): 29.1 (1998); 29.0 (1999); 33.9 (2000); 35.2 (2001); 38.5 (2002); 34.6 (2003); 35.6 (2004)
- Credit to private sector (percent of nominal GDP): 21.3 (1998); 22.3 (1999); 22.2 (2000); 22.5 (2001); 20.2 (2002); 17.4 (2003); 18.7 (2004)
- Foreign currency sovereign debt rating: Moody's Ba2 (series of years); S&P BBB...BBB-BB- (table shows progression)

### Quantitative performance and program monitoring (2003 Stand-By Arrangement)
- Deficit of the combined public sector: Program ceilings and actuals for Jun./Sep./Dec. shown with margins:
  - Program ceiling (Dec.): 3,347 (millions of U.S. dollars)
  - Actual (Dec.): 3,970
  - Adjusted ceiling (Dec.): 2,147
  - Margin (+), shortfall (-) (Dec.): -1,823
- Central government expenditure (Dec. program ceiling vs actual):
  - Program ceiling (Dec.): 25,679 (millions of quetzales)
  - Actual (Dec.): 26,334
  - Adjusted ceiling (Dec.): 24,479
  - Margin (+), shortfall (-) (Dec.): -1,855
- Net international reserves of the central bank (program floor vs actual):
  - Program floor (Dec.): 2,528 (millions of U.S. dollars)
  - Actual (Dec.): 2,799
  - Adjusted floor (Dec.): 2,293
  - Margin (+), shortfall (-) (Dec.): 271

### Structural performance criteria, benchmarks, and policy actions (status highlights)
- Continuous/observed:
  - No use of CHN to assist or absorb private banks: Observed
  - Non-accumulation of external payments arrears: Observed
- By midterm review:
  - Submission to congress of draft law on combating the financing of terrorism: Done
  - Submission to congress of draft law on fiscal transparency: Not done
  - Complete onsite inspection of offshore banks: Completed
  - Conduct viability analysis of CHN: Not done
- Ongoing or pending structural measures (Table 11):
  - Strengthening of tax administration (SAT): Ongoing
  - Revenue package in 2005: Pending
  - Strengthen expenditure control: Ongoing
  - Implement a strategic plan for CHN: Pending (plan developed and initiated in 2005)
  - Complete bank resolution framework; register financial conglomerates; bring offshore banks into regulatory framework: Ongoing / Mostly done
  - Cover the 2003 central bank losses in the 2005 budget: Ongoing / Approved with the 2005 budget; government expected to issue bond in second or third quarter of 2005
  - Initiate comprehensive review and evaluation of pension funds: Pending (financial assessment expected mid-2005)
  - Increase social spending: Pending (a sustained increase would require additional resources)
  - Revise the Organic Budget law and enact a fiscal transparency law: Pending (transparency law ready for presentation to congress)
  - Reduce excessive related-party lending by banks and require general provisions of banks: Pending (to be considered by the Monetary Board)
  - Implement program to control corruption: Ongoing (new ethics code and tightened sanctions)
  - Improve quality and coverage of BOP, national accounts, and fiscal statistics: Initiated
  - Expand integrated budgetary control system (SIAF) to include Social Security Institute and 100 municipalities: Pending

### Medium-term projections and vulnerability analysis (baseline and stress tests)
- Medium-term Real GDP growth projections:
  - 2005: 2.7
  - 2006: 3.2
  - 2007–2010: 3.2–3.5 (annual projections shown)
- Current account (percent of GDP) baseline path:
  - 2004: -4.2
  - 2005 (Proj.): -4.4
  - 2006 (Proj.): -4.4
  - 2007–2010 (Proj.): -4.2 to -3.7
- Public sector debt (percent of GDP; Table 15 baseline):
  - 1999: 17.2
  - 2000: 16.7
  - 2001: 17.1
  - 2002: 15.5
  - 2003: 17.1
  - 2004: 18.0
  - 2005 (Proj.): 17.8
  - 2006 (Proj.): 17.8
  - 2010 (Proj.): 14.8
- External debt (percent of GDP; Table 13 baseline):
  - 1998: 22.9
  - 1999: 27.2
  - 2000: 28.5
  - 2001: 28.4
  - 2002: 27.5
  - 2003: 28.6
  - 2004 p/: 29.2
  - 2005 (Proj.): 28.9
  - 2010 (Proj.): 28.3
- Debt-stabilizing non-interest current account (Table 14 baseline and scenarios):
  - Baseline debt-stabilizing non-interest current account (percent): -2.2 (Table 14, end column)
  - Alternative/scenario results (selected):
    - A1 (variables at historical averages in 2005-09): Debt-stabilizing non-interest current account moves to -2.9 by 2010
    - B1 (nominal interest rate +200 bps in 2005): external debt rises to 30.2 (peak) with debt-stabilizing indicator -2.2
    - B5 (combination one-standard-deviation shocks): external debt reaches 36.5 (peak) with debt-stabilizing indicator -2.5
    - B6 (one-time 30 percent nominal depreciation in 2005): external debt rises to 39.8 (2005) and stabilizes lower in subsequent years; debt-stabilizing indicator -3.2
- Public debt stress tests (Table 15 bound tests):
  - Baseline public sector debt-to-GDP around 17.8 (2005)
  - B3 (primary balance shock): public debt rises to 21.6 (peak) with debt-stabilizing primary balance 0.7
  - B5 (one-time 30 percent real depreciation in 2004): public debt jumps to 29.0 (2004) with debt-stabilizing primary balance 1.1
- Gross external financing need (in percent of GDP):
  - 1998: 16.4
  - 1999: 18.8
  - 2000: 20.3
  - 2001: 22.1
  - 2004 p/: 17.6
  - 2005 (Proj.): 16.4

### Key cross-cutting policy implications and near-term priorities (drawn from structural benchmarks and program monitoring)
- Maintain and strengthen tax administration reforms (SAT) to support revenue mobilization; a revenue package in 2005 is pending and faces potential legal challenges.
- Strengthen expenditure control and expand public financial management reforms (SIAF) to improve transparency and coverage (including Social Security Institute and municipalities).
- Implement a strategic plan for CHN and complete the viability analysis; cover 2003 central bank losses through the 2005 budget and planned bond issuance.
- Complete bank resolution framework; integrate offshore banks into regulatory perimeter; adopt corrective actions from on-site inspections and strengthen framework for resolution of problem banks.
- Increase social spending sustainably would require additional resources; the government prioritizes improved transparency and has a draft fiscal transparency law ready for presentation to congress.
- Address data and statistics weaknesses: improve BOP, national accounts, and fiscal statistics quality and coverage.

*Sources: Bank of Guatemala; Ministry of Finance; Central Bank of Guatemala; Superintendency of Banks; and Fund staff estimates, projections, and program documents.*

### 1.   Eradicate extreme poverty and hunger

### _cr05362 - 1.   Eradicate extreme poverty and hunger

### Millennium Development Goals — Key indicators (Guatemala)
- Goal 1: Eradicate extreme poverty and hunger
  - Population below $1 a day (%): ..  ..  16..
  - Halve 1990 $1 a day poverty rate (target)
  - Poverty gap at $1 a day (%): ..  ..  4.6..
  - Percentage share of income or consumption held by poorest 20%: ..  ..  2.6..
  - Prevalence of child malnutrition (% of children under 5): ..  26.6 24.2.. 
  - Halve 1990 malnutrition rate (target)
  - Population below minimum level of dietary energy consumption (%): 16 21 25..

- Goal 2: Achieve universal primary education
  - Net primary enrollment ratio (% of relevant age group): ..  72.5 85..
  - Net enrollment to 100 (target)
  - Percentage of cohort reaching grade 5 (%): ..  49.6 55.8..
  - Youth literacy rate (% ages 15-24): 73.4 76.5 79.6 80.1

- Goal 3: Promote gender equality
  - Ratio of girls to boys in primary and secondary education (%): ..  88.4 92.5.. 
  - Education ratio to 100 (target)
  - Ratio of young literate females to males (% ages 15-24): 82.3 83.9 85.3 85.6
  - Share of women employed in the nonagricultural sector (%): 36.8..  37.5 39.2
  - Proportion of seats held by women in national parliament (%): ..  ..  8..  ..

- Goal 4: Reduce child mortality
  - Under 5 mortality rate (per 1,000): 82 64 59 49
  - Reduce 1990 under 5 mortality by two-thirds (target)
  - Infant mortality rate (per 1,000 live births): 60 49 44 36
  - Immunization, measles (% of children under 12 months): 68 83 91 92

- Goal 5: Improve maternal health
  - Maternal mortality ratio (modeled estimate, per 100,000 live births): ..  ..  240..
  - Reduce 1990 maternal mortality by three-fourths (target)
  - Births attended by skilled health staff (% of total): ..  34.3 40.6..

- Goal 6: Combat HIV/AIDS, malaria and other diseases
  - Prevalence of HIV, female (% ages 15-24): ..  ..  0.8..
  - Halt, and begin to reverse, AIDS, etc. (target)
  - Contraceptive prevalence rate (% of women ages 15-49): ..  31.9 38.2..
  - Number of children orphaned by HIV/AIDS: ..  ..  32,000..
  - Incidence of tuberculosis (per 100,000 people): ..  ..  82 77.2
  - Tuberculosis cases detected under DOTS (%): ..  44 39 45

- Goal 7: Ensure environmental sustainability
  - Forest area (% of total land area): 31.2..  26.3.. 
  - Nationally protected areas (% of total land area): ..  16.8 16.8 20
  - GDP per unit of energy use (PPP $ per kg oil equivalent): 5.5 6.3 6.4..
  - CO2 emissions (metric tons per capita): 0.6 0.7 0.9..
  - Access to an improved water source (% of population): 76..  92..
  - Access to improved sanitation (% of population): 70..  81..
  - Access to secure tenure (% of population): ..  ..  ..  ..

- Goal 8: Develop a Global Partnership for Development
  - Youth unemployment rate (% of total labor force ages 15-24): ..  ..  ..  ..
  - Fixed line and mobile telephones (per 1,000 people): 21.3 31.7 162.8 202
  - Personal computers (per 1,000 people): ..  ..  3 12.8 14.4

- General indicators
  - Population (million): 8.7 10.0 11.9 12.0
  - Gross national income (U.S. dollar billion): 8.5 14.5 21.5 23.6
  - GNI per capita (U.S. dollars): 977 1,448 1,810 1,965
  - Adult literacy rate (percent of people ages 15 and over): 61 64.9 69.2 69.9
  - Total fertility rate (births per woman): 5.3 5.1 4.6 4.3
  - Life expectancy at birth (years): 61.4 63.6 65.0 65.5
  - Aid (percent of GNI): 2.7 1.4 1.1 1.1
  - Gross investment (% of GDP): 13.6 15.1 17.1 19.8
  - Trade (% of GDP): 33.5 37.2 40.2 39.1

- MDG targets and notes (excerpted)
  - Goal 1 targets: Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day. Halve, between 1990 and 2015, the proportion of people who suffer from hunger.
  - Goal 6 targets: Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Have halted by 2015, and begun to reverse, the incidence of malaria and other major ... proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of at least 100 million slum dwellers.
  - Goal 8 targets: Develop further an open, rule-based, predictable, non-discriminatory trading and financial system; address Special Needs of the Least Developed Countries; address Special Needs of landlocked countries and small island developing states; deal comprehensively with the debt problems of developing countries to make debt sustainable; in cooperation with developing countries, develop and implement strategies for decent and productive work for youth; in cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries; in cooperation with the private sector, make available the benefits of new technologies, especially information and communications.
  - Goal 2 target: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.
  - Goal 3 target: Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education no later than 2015.
  - Goal 4 target: Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate.
  - Goal 5 target: Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio.
- Note: In some cases the data are for earlier or later years than those stated.

### Key IMF staff recommendations — Tax administration reform (FAD)
- Overarching objective: Strengthen tax administration and tax enforcement in Guatemala through segmentation, electronic filing, stronger controls, customs linkage, and legal changes.

- Taxpayer segmentation (early 2005)
  - Create a “Large Taxpayers Coordination” (CGC) unit responsible for monitoring the country’s 300 largest taxpayers; existing Special Taxpayer Coordination (CCE) unit to administer the subsequent 2,700 largest taxpayers.
  - Appoint “account officers” within CGC and CCE to manage taxpayer files, advise taxpayers, and take action against late filers or delinquents.

- Incentives to file electronically (early 2005)
  - Penalize banks not complying with SAT Resolutions 610-2002 and 263-2002 to encourage electronic filing.
  - Require all taxpayers managed by CGCs and CCEs to file and pay electronically.
  - Suspend banks that accept paper returns for taxes owed in excess of Q 10,000; such banks would no longer be authorized to receive tax returns and payments.

- Electronic recording of large taxpayers’ purchases and sales (AsisteLibros) (early 2005)
  - Require large taxpayers to use SAT’s AsisteLibros software to identify suppliers and verify compliance.

- Control of late filing and delinquent taxpayers (early 2005)
  - Require delinquent taxpayers to make a partial payment based on previous returns, in accordance with Articles 106, 107, and 109 of the Tax Code.
  - Allow taxpayers to file returns without paying in full the amount reported as due while immediately taking collection action to recover the resulting debt.

- Customs control (mid-2005)
  - Electronically link waybills of air and sea carriers to customs declarations to assure consistency of declared data; begin using the electronic air and sea waybill (done in April 2005).
  - Establish a new electronic customs declaration (declaración única de aduanas, DUA) for operations carried out on or after June 1, 2005.

- Legal changes to improve the tax administration (late 2005)
  - VAT withholding: Legislation should establish withholding systems with a rate of 3 percent for (a) imports, (b) large taxpayers’ purchases, (c) large exporters’ purchases, and (d) credit card operations.
  - Simplified system for small taxpayers: New VAT system should include monthly payments, eliminate requirement of filing returns, and prohibit issuance of invoices that generate tax credits.
  - Means of payment for large transactions: Require that invoices amounting to Q 10,000 or more be paid using bank means of payment; invoices over Q 10,000 not paid using bank means would not generate tax credits for VAT and would not be accepted as deductible expense on income tax returns.
  - Third-party information: Reinstatement of powers envisaged in Article 30 of the Tax Code (currently suspended) to enable SAT to obtain information from third parties.
  - Seizure of vehicles: Legislation should authorize SAT to seize vehicles found to be transporting contraband.
  - Suspended taxpayers: Authorize a “suspended taxpayers” category for taxpayers with no tax activity during a one-year period or who have failed to answer summonses; suspended taxpayers would not be eligible for automatic renewal of tax registration nor allowed to print invoices that grant tax credits for VAT or document expenditure on income tax returns; certain applications from suspended taxpayers should be denied.
  - Invoicing control: Legislation should establish specific controls to detect use of false invoices; SAT should have power to determine data requirements and procedures to control printing of tax invoices and other fiscal documents.

### Selected World Bank relations and portfolio indicators (as of early 2005)
- IBRD portfolio (as of January 31, 2005)
  - Number of active projects: 12 projects for a total commitment of US$526 million, of which US$251 million remains undisbursed.
  - The last project approved was the Second Main and Rural Roads Project (US$47 million); declared effective and began full implementation in November 2004.
- IBRD Operations by Sector (US$ millions, as of January 31, 2005)
  - Transportation: Disbursed 49.4; Undisbursed 64.0
  - Private Sector Development: Disbursed 2.2; Undisbursed 18.1
  - Law and Public Administration: Disbursed 66.0; Undisbursed 55.9
  - Land Management: Disbursed 23.0; Undisbursed 0.0
  - Financial Sector: Disbursed 100.8; Undisbursed 54.2
  - Environment and Rural Development: Disbursed 15.6; Undisbursed 14.4
  - Education: Disbursed 17.6; Undisbursed 44.5
  - TOTAL: Disbursed 274.7; Undisbursed 251.2
  - Plus: Disbursements from closed projects 687.6
  - Less: Repaid principal 476.5
  - Current Debt outstanding 477.5
- IBRD Flows (US$ millions)
  - Gross disbursements: 2000: 51.4; 2001: 46.3; 2002: 82.9; 2003: 45.0; 2004: 79.2; 2005: 2.4
  - Principal Repayments (-): 2000: 13.2; 2001: 11.6; 2002: 13.4; 2003: 17.9; 2004: 29.2; 2005: 1.9
  - Total Net Disbursements: 2000: 38.2; 2001: 34.7; 2002: 69.5; 2003: 27.1; 2004: 50.0; 2005: 0.5
  - Interests and Fees (-): 2000: 20.8; 2001: 22.3; 2002: 22.1; 2003: 18.6; 2004: 16.9; 2005: 0.8
  - Total Net Cash Flows: 2000: 17.4; 2001: 12.4; 2002: 47.4; 2003: 8.5; 2004: 33.1; 2005: -0.3
  - Debt Outstanding (end of year): 2000: 295.7; 2001: 329.5; 2002: 399.8; 2003: 427.6; 2004: 477.7; 2005: 477.5
- Future assistance: World Bank will develop a new CAS expected to be completed during the first half of 2005; central component is a programmatic series of quick-disbursing operations to support the Berger Administration’s program, Vamos Guatemala!, accompanied by selective investment lending in Education, Public Sector Management, Health and Nutrition, Judicial Systems and Land Property Rights.

*Source: World Development Indicators database, April 2004, and IMF staff estimates*

### 1. The Bank’s country strategy with Guatemala parallels the new 2004–2007 political

### _cr05362 - 1. The Bank’s country strategy with Guatemala parallels the new 2004–2007 political

### IDB strategic objectives and alignment with government policy
- Central objective: poverty reduction.
- Two interrelated strategic objectives for 2004–2007:
  - (i) to improve the conditions for efficient production and incorporate excluded sectors into the productive process;
  - (ii) to strengthen human capital with equity.
- Cross-cutting issue: improvements in the country’s institutions in support of better governance, necessary for progress in both strategic objectives.
- The Bank seeks to support the government’s strategy focused on promoting opportunities for higher economic growth and job creation with broad participation by all sectors, aimed at reducing poverty levels in a setting of macroeconomic stability.
- Pipeline and nonfinancial support:
  - Projects in the pipeline in citizen security, rural electricity, environment, and indigenous population.
  - Support for authorities to define a strategy to reduce poverty.
  - Nonfinancial activities: coordination of the Consultative Group meetings in Guatemala and several sectoral studies (growth, governance, etc.).

### Recent and recent-past IDB lending (selected approvals)
- 2003 approvals:
  - National census: US$25 million
  - Investments in rural water and sanitation: US$50 million
  - Project for electricity interconnection with Mexico: US$37.5 million
- 2004 approvals:
  - Loan to support social public expenditure reform: US$100 million

### IDB Loan Disbursements 1999–2004 (In millions of U.S. dollars)
- Disbursements by year:
  - 1999: 169.6
  - 2000: 65.7
  - 2001: 96.5
  - 2002: 195.1
  - 2003: 53.4
  - 2004: 118.3
- Amortization by year:
  - 1999: 46.4
  - 2000: 42.3
  - 2001: 35.1
  - 2002: 39.5
  - 2003: 51.9
  - 2004: 72.5
- Interest and charges by year:
  - 1999: 42.1
  - 2000: 49.0
  - 2001: 41.8
  - 2002: 57.1
  - 2003: 54.0
  - 2004: 46.5
- Net flows by year:
  - 1999: 81.1
  - 2000: -25.6
  - 2001: 19.6
  - 2002: 98.5
  - 2003: -52.5
  - 2004: 0.3

### IDB Schedule of Loan Disbursements 2005–2007 (In millions of U.S. dollars)
- Disbursements:
  - 2005: 82.3
  - 2006: 160.0
  - 2007: 180.0
- Amortization:
  - 2005: 64.0
  - 2006: 68.6
  - 2007: 71.6
- Interest and charges:
  - 2005: 53.9
  - 2006: 67.7
  - 2007: 66.9
- Net flows:
  - 2005: -35.6
  - 2006: 23.7
  - 2007: 41.5
- Note: Includes loans that are anticipated but not yet approved.

### IDB Portfolio in Guatemala as of February 2005 (In millions of U.S. dollars)
- Sector — Approved — Undisbursed
  - Quality of public expenditure: 100 — 100
  - Social sectors: 325 — 120
    - Community development: 205 — 61
    - Environment: 64 — 11
    - Health: 55 — 48
  - Physical infrastructure: 269 — 179
  - Agriculture: 33 — 21
  - Reform loans: 38 — 6
    - Infrastructure and investment: 8 — 0
    - Justice: 25 — 4
    - Trade: 5 — 2
  - Technology development: 11 — 10
  - Total: 776 — 436

### Guatemala statistical issues and ROSC findings
- General:
  - Authorities cooperative with the Fund; efforts to improve macroeconomic statistics.
  - Important deficiencies remain in government finance, balance of payments, money and banking, national accounts, and price statistics.
  - Guatemala became a participant in the General Data Dissemination System (GDDS) in 2004.
- Data ROSC mission (October 14-28 2004) main shortcomings and recommendations:
  - Announce publication by early 2005 of the national accounts for 2001 to serve as a benchmark for a new series consistent with 1993 SNA.
  - Expand fiscal statistics coverage to include social security agencies, local governments, and nonfinancial public enterprises.
  - Widen monetary statistics coverage to include offshore banks and credit and savings cooperatives.
  - Prepare sectoral breakdowns of depository corporations in accordance with the MFSM methodology.
  - Implement conversion of balance of payments statistics according to BPM5 recommendations.
  - Expand balance of payments data sources by implementing new ITRS forms and conducting surveys.

### National accounts statistics (findings)
- Compilation:
  - Compiled by the Bank of Guatemala (BG) based on the 1953 U.N. System of National Accounts (1953 SNA) with 1958 as the base year.
  - Conceptual framework, methodology and base year are seriously outdated.
  - BG is working to implement the 1993 SNA and produce a higher-quality series with 2001 as base year, with results expected shortly.
- Data limitations:
  - Paucity of source data; compilation relies on administrative source data with virtually no survey data; coverage is limited.
  - GDP compiled by the production approach at constant (1958) prices only and by the expenditure approach at current and constant prices.
  - Data published annually with preliminary estimates available with a lag of about three months.
  - Processes for assessment and validation of source, intermediate, and output data are weak.
- Technical assistance:
  - STA missions: August 1997, January 1998, March 1999, and June 2000 (for the CPI).

### Consumer Price Index and National Institute of Statistics (findings)
- CPI:
  - NIS introduced a new CPI based on weights from a household expenditure survey conducted in 1998/1999; publication of the new CPI began in February 2001.
  - Weaknesses in CPI compilation: treatment of missing prices, changes in product quality, and inclusion of new products.
- Institutional issues:
  - Independence concerns: NIS may lack financial autonomy; governing body includes representatives from ministries and industry associations.
  - The head of the NIS is a member of the NIS Board but lacks the right to vote.
  - Fines for nonreporting and misreporting are low, with no mechanism to preserve their real value.
  - Resources at the NIS are insufficient, including for compiling the CPI.
  - Contribution of the NIS to national accounts compilation is minimal.
  - A producer price index, basic input for compiling national accounts estimates in real terms, is not compiled.

### Monetary statistics (findings and recommendations)
- Current compilation:
  - Data on the BG, commercial banks, and other financial institutions compiled on a monthly basis and regularly sent to the Fund for publication in the IFS.
  - Data on offshore banks not yet included.
- Technical recommendations (from 1998 mission and September 2001 mission):
  - Compile monetary statistics for savings and credit cooperatives.
  - Revise the money and credit aggregates.
  - Classify domestic institutional units into central and local governments, nonfinancial public enterprises, and the financial corporations subsector (central bank, depository corporations, and other financial corporations) to improve coherence with balance of payments, fiscal sector, and national accounts data.
  - Break down monetary accounts between residents and nonresidents.
- Progress and constraints:
  - As of end-2004, commercial banks still unable to provide adequately sectorized data (financial assets and liabilities not broken-down by counterpart sector).
  - August 2004 mission assisted BG in developing an integrated monetary database for internal BG use and for WHD and STA.

### Government finance statistics (findings)
- Reconciliation issues between above-the-line public sector balance and financing flows (below-the-line).
- Progress in adopting new accounting framework for the budget, but insufficient work to improve statistics of social security and public enterprises.
- Overall public sector data are not compiled on a regular basis by the ministry of finance.

### Balance of payments (findings and data sources)
- Conceptual framework broadly conforms with BPM4 guidelines; plans underway for full transition to BPM5.
- BG compiles annual balance of payments; quarterly balance of payments based on BPM5 are prepared for IMF publication (IFS and BOPSY).
- Data source limitations:
  - Surveys are not conducted; data sources are insufficient and not fully dependable.
  - Data collection is largely based on the International Transactions Reporting System (ITRS) managed by banks.

*International Monetary Fund staff summary (content unit: _cr05362).*

### 8.      The data ROSC mission found shortcomings similar to those identified by the TA

### 8.      The data ROSC mission found shortcomings similar to those identified by the TA mission of March 2004

### ROSC and TA mission findings
- The data ROSC mission found shortcomings similar to those identified by the TA mission of March 2004.
- Following these missions, BG is in the process of hiring an external expert to support the implementation of recommendations.

### Main recommendations (as stated)
- (i) implement and publish the planned conversion of balance of payments statistics according to BPM5 recommendations;
- (ii) expand data sources by implementing new foreign exchange transactions forms (ITRS) and conducting surveys commencing with direct investment enterprises;
- (iii) and modify as planned the new ITRS forms following BPM5 classification and sectorization to ensure identification of transactions involving financial assets and liabilities and the residency status of transactors.

### Data dissemination and reporting (selected items from Table of Common Indicators required for surveillance; dates and frequencies preserved)
- Exchange Rates: Date of latest observation 4/15/05; Date received 4/18/05; 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 4/15/05; Date received 4/18/05; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- Reserve/Base Money: Date of latest observation 3/31/05; Date received 4/1/05; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- Broad Money: Date of latest observation 2/25/05; Date received 3/15/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Central Bank Balance Sheet: Date of latest observation 4/15/05; Date received 4/18/05; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 2/25/05; Date received 3/15/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Interest Rates: Date of latest observation 4/7/05; Date received 4/15/05; Frequency of Data D; Frequency of Reporting D; Frequency of publication D.
- Consumer Price Index: Date of latest observation 3/05; Date received 4/15/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 3/05 (Financing); Date received 4/15/05; 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 4/05; Date received 4/15/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 12/31/04; Date received 1/15/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- External Current Account Balance: Date of latest observation 12/04; Date received 3/28/05; Frequency of Data Q; Frequency of Reporting I; Frequency of publication Q.
- Exports and Imports of Goods and Services: Date of latest observation 12/04; Date received 3/28/05; Frequency of Data Q; Frequency of Reporting I; Frequency of publication Q.
- GDP/GNP: Date of latest observation 2003; Date received 3/31/04; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.
- Gross External Debt: Date of latest observation 12/31/04; Date received 2/15/05; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.

### Executive Board and authorities’ program highlights (selected)
- Government program pillars: macroeconomic stability; financial sector restructuring; and structural reforms to boost growth and reduce poverty.
- Key fiscal objective: keep the fiscal deficit below 2 percent of GDP.
- Monetary policy objective: reduce inflation to the 4–6 percent range.
- Exchange system: flexible; central bank intervened to contain appreciation of the quetzal; in January 2005 a rules-based mechanism for interventions was introduced.
- Banking system: prudential norms tightened and offshore banks brought into the regulatory framework.
- Structural reform program: Vamos Guatemala focused on promoting competitiveness, economic growth, and social progress; Commissioner for Competitiveness appointed; implementation of CAFTA-DR expected to help underpin recovery.
- Social spending: to be increased, with emphasis on municipalities with the highest incidence of poverty.

### Executive Directors’ assessment and recommendations (selected)
- Commended efforts to maintain macroeconomic stability and pursue structural reforms.
- Noted concerns: sluggish economic growth, widespread poverty, decline in tax revenue-to-GDP ratio since 2002.
- Recommended fiscal reform measures supported by prudent monetary policy to control inflation, and structural reforms to increase competitiveness and enhance the investment climate.
- Urged specification and expeditious implementation of measures to strengthen revenues and improve tax system quality, including broadening the tax base and eliminating exemptions.
- Supported adoption of inflation targeting as the framework for monetary policy and recommended limiting foreign exchange intervention to smoothing excessive short-term volatility.
- Encouraged measures to raise productivity, reduce infrastructure bottlenecks, and maintain prudent fiscal policy to strengthen external competitiveness.
- Urged addressing financial sector vulnerabilities: reduce bank lending to related parties, build general provisions, deal with persistent losses of the state mortgage bank (CHN), implement anti-money laundering legislation, and update combating-the-financing of terrorism legislation.
- Welcomed accession to the General Data Dissemination System and called for further work on national accounts, balance of payments, and data on non-budgetary fiscal transactions.

### Selected economic and financial indicators (as reported)
- Real GDP: 2001 2.3; 2002 2.2; 2003 2.1; 2004 2.7; 2005 3.2.
- Consumer prices (end of period): 2001 8.9; 2002 6.3; 2003 5.9; 2004 9.2; 2005 6.0.
- Consolidated public sector deficit (percent of GDP): 2001 -2.3; 2002 -0.8; 2003 -2.0; 2004 -0.4; 2005 -1.7.
- Nonfinancial public sector debt (end of period): 2001 17.1; 2002 15.5; 2003 17.1; 2004 18.0; 2005 17.8.
- Credit to the private sector (end-year, percentage change): 2001 12.5; 2002 6.1; 2003 7.3; 2004 16.2; 2005 11.2.
- Liabilities to the private sector (end-year, percentage change): 2001 8.1; 2002 13.2; 2003 11.0; 2004 11.4; 2005 14.1.
- Interest rates (domestic currency time deposits): 2001 11.3; 2002 9.6; 2003 6.7; 2004 6.9; 2005 ...
- External current account balance (percent of GDP): 2001 -6.0; 2002 -5.3; 2003 -4.2; 2004 -4.4; 2005 -4.4.
- Change in net international reserves (millions of U.S. dollars, increase -): 2001 -499; 2002 23; 2003 -521; 2004 -581; 2005 -275.
- Gross international reserves (in months of next year imports of goods and services): 2001 4.0; 2002 3.7; 2003 4.0; 2004 4.4; 2005 4.6.
- Terms of trade (percentage change): 2001 -1.0; 2002 -2.5; 2003 -4.4; 2004 1.0; 2005 -0.5.
- Real effective exchange rate (end of period) 1/: 2001 3.2; 2002 8.3; 2003 -1.9; 2004 7.5; 2005 ...

### Additional contextual figures (excerpted from narrative)
- Real GDP growth in 2004: 2.7 percent.
- Inflation closed at 9.2 percent in 2004 (5.8 percent in 2003); reached 8.9 percent by end-April 2005.
- Net international reserves in 2004: US$3.5 billion (US$2.9 billion in 2003), about 5.1 months of imports or 5.2 times the external service on short-term public debt.
- The budget deficit was reduced sharply in 2004 to 0.3 percent of GDP, from 2.3 percent in 2003.

*IMF staff report content unit: _cr05362 - 8.      The data ROSC mission found shortcomings similar to those identified by the TA*

### 2003. This reduction reflected those actions to revert the impact of court-ordered tax

### _cr05362 - 2003. This reduction reflected those actions to revert the impact of court-ordered tax

### Fiscal policy and tax measures
- June 2004 tax package included:
  - a temporary tax to support the peace agreement (IETAAP) and excises on alcoholic beverages.
  - a 5 percent turnover tax as an alternative to the corporate income tax.
  - a minimum tax provision in the corporate income tax that will remain in effect after the IETAAP is phased out by 2007.
- Fiscal target for 2005: 1.8 percent of GDP, reflecting:
  - a sharp rebound in public investment.
  - an increase in social spending by about ½ percent of GDP.
- Revenue mobilization objective:
  - authorities will seek approval by Congress of revenue measures that will raise tax collections to 12 percent.
  - the corresponding revenue measures will be calibrated to take account of resources generated under the tax administration plan.
- Tax administration:
  - Superintendency of Tax Administration (SAT) has drawn up a detailed strategic plan incorporating 106 points of action identified with technical advice from FAD.
- Implementation approach:
  - authorities emphasize building public support, including a public education and consultation campaign linking the Millennium Development Goals and the Peace Accords objectives to mobilization of additional fiscal resources.

### Public debt and financing
- Public debt level: 18 percent of GDP in 2004.
- Debt management measures taken:
  - lengthened maturity structure of domestic and external debt.
  - begun to reduce the foreign currency component of domestic debt.
- Notable issuance:
  - September 2004: US$330 million 30-year Eurobond placed at a spread of 300 bps.
  - By late-April 2005: government almost completed its financing requirement for the year mostly through local placements of bonds in domestic currency in maturities of 5 and 10 years at 9 percent for the longest maturity.
- Placement context: reflected favorable global liquidity conditions and renewed confidence in government market-oriented policies.

### Monetary and exchange rate policy
- External pressures:
  - sizeable inflows of private capital and remittances and higher oil prices complicate monetary and exchange rate management.
- Policy mix:
  - authorities plan to maintain current policy mix with central bank intervention in the foreign exchange market to prevent excessive appreciation of the quetzal.
  - central bank increased placement of open market paper and raised its benchmark interest rate on several occasions—more recently in February 2005—to minimize second round effects from high oil prices.
  - central bank will continue intervening in the foreign exchange market only to prevent excessive exchange volatility through the nondiscretionary rule introduced early this year.
- Inflation outlook:
  - current decline in inflation supports view that policy mix is adequate and that, in the absence of new shocks, inflation will converge to the upper limit of the central bank’s target range of 4-6 percent.
- Policy framework:
  - Bank of Guatemala will continue efforts to adopt inflation targeting and values technical assistance from the Fund’s MFD department.
- Public sector role:
  - public sector has maintained larger than anticipated deposits at the central bank, providing support.

### Financial sector and central bank recapitalization
- Financial sector program:
  - authorities committed to implementation of the plan launched in 2001 (in line with FSSA recommendations) to strengthen the financial system.
  - new legal and regulatory framework approved in 2002 has strengthened supervision and improved bank performance and solvency.
- Banking sector indicators:
  - Guatemalan banks remain well capitalized with NPL at record low and stronger net open position.
- Remaining vulnerabilities to address:
  - (i) addressing the persistent losses of the CHN;
  - (ii) assessing the need to tighten related party lending and the introduction of general provisions;
  - (iii) recapitalizing the central bank;
  - (iv) the payment system.
- Regional cooperation:
  - Guatemala will seek convergence of banking regulations and prudential norms in Central America and welcomes Fund work on this area.
- Central bank recapitalization measures:
  - approved budget for 2005 included a bond at market interest to cover central bank losses for 2003 (about 0.5 percent of GDP).
  - during the second half of 2005, the government will re-submit to Congress a request to approve issuance of a long-term zero-coupon bond equivalent to the stock of central bank losses accumulated up to end-2001.
  - March 2005: new regulations introduced to complement and clarify the lender-of-last-resort framework in the 2002 Organic Law of the central bank.

### Structural reforms and competitiveness
- Structural reform program to strengthen competitiveness and shock resilience:
  - 2004 appointment of a Commissioner for Competitiveness to promote exports and investment, focusing on infrastructure, administrative and regulatory impediments, and institutional factors to enhance the investment climate.
  - pursuit of deeper economic integration with Central America and harmonization of fiscal incentives among Central American countries to attract FDI in the context of CAFTA-DR.
  - expected benefits from the extension of the EU’s Generalized System of Preferences (GSP).

### Social programs and governance initiatives
- Anti-corruption and governance:
  - authorities seeking to adopt a judicial framework fully consistent with the Inter-American Convention Against Corruption.
  - initiatives under way: revision of the civil service law, stricter norms for contracts with states, reforms to the penal code with more severe sanctions for bribery and illicit enrichment.
- Vamos Guatemala program (growth, competitiveness, social progress):
  - budget restructured to ensure public spending targeted to program priorities.
  - social component (Guate Solidaria) to promote economic development by focusing on municipalities with the highest incidence of poverty.
  - program initiated in 41 municipalities with vulnerable population and unsatisfactory nutritional standards.
  - key components based on partnerships with the private sector and support from multilateral development agencies, including sector loans from the IDB and the World Bank.

*Content derived from IMF staff report text in _cr05362.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05362.pdf_