## _cr16281 ## Source details **Canonical URL:** [_cr16281](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16281.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16281.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16281.pdf.json) --- ### Political context and anti‑corruption strategy - 2015 political crisis elevated an anti‑corruption agenda following CICIG investigations that uncovered tax graft, money laundering, and illegal funding, resulting in arrests and indictments of top officials, including former President Perez Molina and Vice President Baldetti. - President Morales took office in January 2016 on a platform of no‑tolerance against corruption. - Immediate outcomes: - Multiple legal proceedings have resulted in the recovery of past‑due taxes and other assets. ### Tax administration (SAT) reforms and priorities - Central priority: reform SAT after 2015 tax graft cases eroded SAT credibility, weakened tax compliance, and led to collection losses. - Measures and developments: - Emergency actions to regain control over customs. - New SAT law recently approved by Congress to strengthen governance and remove bank secrecy constraints to tax enforcement starting in 2017. - Strategic plan for tax and customs administration being developed with IMF assistance. ### Public procurement transparency and competition - Legislative and institutional measures approved in late 2015: - Creation of an e‑outlet (“Guatecompras”) for transparent procurement information. - Introduction of reverse auctions to enhance supplier competition. - Procurement bill forbids government contracts with state officials and sponsors of political parties. - Improvements to technical capacity of government awarding committees. - Penalties for collusion or noncompetitive practices. - Authorities developing a fiscal transparency strategy with IMF assistance. ### Congressional, judicial, and political party reforms - 2016 organic laws aim to improve accountability of Congress and independence of the Judiciary: - Discourage deputies from switching political parties; constrain excessive hiring of staff. - Reduce discretion in removal of the general attorney; broaden powers to designate prosecutors and strengthen criminal investigation. - Recent congressional bills aim to: - Increase transparency of political party funding. - Set guidelines to develop the judicial service. - Enhance merit‑based recruitment and promotion of congressional civil servants. - Government actions: - Civil service initiative for the Executive underway. - Planned constitutional reform to further strengthen the Judiciary; Congress to consider reforms to broaden access to justice, strengthen protection of judges, and reduce abuses of immunity. ### Macroeconomic and structural context relevant to anti‑corruption agenda - Growth and labor market: - Growth remained at 4.1 percent in 2015. - Unemployment is 3 percent of the labor force; large informal sector, especially among indigenous and rural population. - Female labor force participation low, partly due to low education among indigenous women. - Inflation and monetary policy: - Inflation target: 4±1 percent. Inflation was below target for most of 2015 and returned to target range in 2015; exceeded center in early 2016. - Central bank cut policy rate three times in 2015 by a cumulative 100 basis points (to 3 percent). - Nominal exchange rate broadly stable vis‑à‑vis the U.S. dollar; exchange rate fluctuation margin widened from 0.7 to 0.75 percent of the five‑day moving average in 2016. - External sector and reserves: - Net international reserves (NIR) at end‑2015: US$7 billion or 4.2 months of imports. - Current account deficit shrank by 1¾ percent of GDP in 2015. - Staff’s preferred EBA‑lite current account methodology suggests a current account gap of about 2 percent of GDP, implying a moderate (7 percent) REER undervaluation. - Fiscal stance and public debt: - Revenues underperformed budget goals by 1¼ percent of GDP in 2015; revenue ratio was 10¾ percent of GDP. - Fiscal deficit ½ percent of GDP lower than the budget target due to larger cuts in spending. - Public debt was 24 percent of GDP. - Financial sector vulnerabilities: - Banks meet Basel I requirements, sufficient liquidity, low NPL ratios; capital levels low by regional standards (insufficient under Basel II). - Credit expanded rapidly in 2015, mostly in foreign currency; credit dollarization: 36 percent of total loans at end‑May2016 (up from 27 percent at end‑2010). - Bank foreign liabilities at a decade high: 15 percent of total bank assets. - Government bond holdings: 11 percent of bank assets, about half in available‑for‑sale portfolio. ### Food price inflation drivers and policy recommendations (excerpt) - Drivers: - Guatemala‑specific factors explain persistently high food price inflation since 2013; global wheat and corn prices contributed in 2010–11 but not since 2013. - Strong remittances important driver of recent food inflation; vegetables and meat primary contributors. - Weather shocks raised some vegetable prices in late 2015. - Structural factors: higher transportation and intermediation costs, competition issues, non‑tariff barriers. - Policy recommendations: - Supply‑side policies including: - Increased investments in transport infrastructure. - Stronger competition policies, adoption of new Competition Law and establishment of a competition agency. - Further regional trade integration. - Support agricultural production: improved access to irrigation, financing, and technical assistance. --- ### Progress towards MDGs and social outcomes - Only one fourth of the MDGs targets for 2015 were met. - None of the MDGs targets for 2015 were met for the rural and indigenous population. - Reversals occurred in reducing extreme poverty and raising school enrollment. - Low fiscal revenues and the need for a comprehensive social strategy remain key hurdles to achieving the SDGs. - Social indicator gaps versus 2030 targets: maternal mortality rate, mortality rate under 5, neonatal mortality rate, and school enrollment at preprimary, primary, and secondary levels. ### Financial sector developments and risks (selected series) - Credit dynamics (selected figures): - Change in credit / GDP ratio (pp, annual): 6.3; 1.7; 0.9; 0.9; 1.0; 0.2; 0.3; 0.7; 1.0; 1.6; 1.6 - Growth of credit / GDP (%, annual): 25.2; 5.7; 2.9; 2.9; 3.3; 0.6; 1.1; 2.3; 3.0; 4.9; 4.9 - Credit‑to‑GDP gap (st. dev): 1.0; 0.6; 0.0; -0.8; -1.2; -1.6; -1.5; -1.6; -1.4; -1.2; -1.2 - Balance sheet composition (selected series): - Deposit‑to‑loan ratio: 134.2; 129.1; 129.9; 131.9; 131.2; 129.8; 128.9; 129.4; 129.6; 125.6; 124.1 - FX liabilities % (of total liabilities): 28.2; 29.0; 30.3; 30.4; 30.4; 30.9; 31.1; 30.8; 30.8; 31.1; 30.8 - FX loans % (of total loans): 35.2; 36.6; 36.3; 36.1; 37.1; 37.2; 38.1; 39.0; 39.4; 39.9; 39.5 - Capital and profitability: - Capital‑to‑assets ratio (%): 7.0; 6.8; 6.9; 7.0; 6.9; 7.1; 6.9; 7.0; 7.0; 7.0; 6.9 - ROA: 1.9; 2.0; 2.0; 1.9; 1.9; 1.8; 1.9; 1.9; 1.8; 1.7; 1.7 - ROE: 20.5; 21.5; 21.4; 21.0; 20.4; 19.3; 20.6; 20.7; 19.9; 19.2; 18.6 - Asset quality: - NPL ratio: 1.4; 1.3; 1.2; 1.3; 1.56; 1.41; 1.29; 1.35; 1.45; 1.43; 1.3 - NPL ratio change (%, annual): -8.0; -13.7; -11.3; -3.0; 13.3; 6.1; 7.9; 3.6; -6.9; 1.8; 4.6 - Key points: - Credit growth, particularly in FX, has been robust though it decelerated sharply recently. - Moderate credit dollarization increases banks’ credit risk exposure. - Fast‑growing bank foreign liabilities raise rollover risk. - System meets regulatory capital requirements and NPLs are low. ### Macroeconomic outlook and medium‑term projections (selected) - Real GDP: 2014: 4.2; 2015: 4.1; 2016: 3.8; 2017: 3.8; 2018: 3.8; 2019: 3.8; 2020: 3.9; 2021: 4.0 - Consumer prices (end of period): 2014: 2.9; 2015: 3.1; 2016: 4.0; 2017: 4.0; 2018: 4.0; 2019: 4.0; 2020: 4.0; 2021: 4.0 - Central government balance (percent of GDP): 2014: -1.9; 2015: -1.4; 2016: -1.6; 2017: -1.6; 2018: -1.6; 2019: -1.6; 2020: -1.6; 2021: -1.6 - Public sector debt: 2014: 24.3; 2015: 24.2; 2016: 24.1; 2017: 24.3; 2018: 24.3; 2019: 24.3; 2020: 24.2; 2021: 24.2 - External debt: 2014: 30.0; 2015: 29.7; 2016: 27.9; 2017: 25.8; 2018: 23.7; 2019: 21.7; 2020: 20.0; 2021: 18.3 - Reserve adequacy 1/: 2014: 122.6; 2015: 126.0; 2016: 127.7; 2017: 122.8; 2018: 118.6; 2019: 114.1; 2020: 110.1; 2021: 117.9 - Outlook summary: - Growth set to return to trend rate of 3¾ percent in 2016. - Potential growth expected to rise gradually to 4 percent in the medium term. - Inflation projected to remain within target range. - External current account deficit set to widen to 1¾ percent of GDP by 2021, while remaining more than fully financed by FDI. ### Near‑term risks - External risks: - Deeper slowdown in advanced and emerging markets, increased protectionism, financial volatility, substantial depreciation increasing credit risks, continued REER appreciation, reductions in provision of financial services by global banks. - Domestic risks: - Failure to credibly address SAT crisis endangering revenue mobilization. - AML efforts implicating bank staff/owners could lead to transitory financial pressures. - Deterioration in security situation jeopardizing growth. ### Near‑term policy mix and recommendations - Fiscal stance: - Fiscal deficit expected to remain at 1½ percent of GDP in 2016 and hover around this level in medium term. - 2016 budget envisions deficit of 1½ percent of GDP (below historical average of 2 percent). - Staff view: temporary relaxation to historical average of 2 percent of GDP could be justified; extreme poverty and infrastructure/security needs could warrant maintaining a deficit at 2 percent of GDP, or modestly higher, over medium term. - Tax and customs administration reform priorities: - Strengthen management and pro‑integrity measures; strengthen customs controls and valuation; better control large and medium taxpayers; improve VAT administration and enforcement; increase effectiveness of audits; broaden e‑services. - Need a short‑ and medium‑term reform strategy with clear priorities and timetables. - Monetary policy: - Stance broadly appropriate; central bank should be ready to tighten if inflationary pressures intensify. - Core inflation below target range since 2013; inflation expectations within target. - Financial sector policy: - Develop comprehensive macro‑prudential program; strengthen resolution framework via “open bank” intervention; implement risk‑based AML/CFT supervision and align with 2012 FATF standards. ### Financial integrity and correspondent banking (selected) - Loss of CBRs limited to four correspondent banks canceling accounts with four small Guatemalan banks. - Amount drawn on foreign credit lines stands at $4.9 bn (22 percent of credit to the private sector). - Banking system external credit lines (selected figures): - Contracted Amount (Dec series, Millions of US$): 266; 133; 243; 967; 492; 155; 746; 300 - Amount Used (Dec series): 140; 122; 522; 954; 361; 142; 564; 852 - Guarantees, Letters of Credit: 100; 125; 192; 248 - Margin Available: 1260; 1072; 913; 1185; 1127; 1201 - Number of Correspondent Banks: 33; 38*; 35; 39 - Interest Rate Paid on Credit Lines, Weighted Average (%): 3.44; 3.3; 3 - Note: *The 2013 analysis did not include the determination of the number of correspondent banks. --- ### Fiscal policy reorientation towards supply‑side and social objectives - Revenue targets and social costing: - Raising fiscal revenues to at least 15 percent of GDP essential for higher social and infrastructure spending and to reduce crime and corruption. - Eradicating extreme poverty would cost around 1 percent of GDP per year; lifting all poor out of poverty would cost upwards of 7 percent of GDP per year (AN). - Achieving SDG objective of halving poverty would require at least 5 percent of GDP in fiscal spending. - Guatemala’s tax capacity estimated at 20 percent of GDP. - Authorities concurred revenues would need to rise to at least 15 to 17 percent of GDP to fulfill basic public functions. ### Box 4 — Poverty, Inequality, and Fiscal Redistribution: key findings - Mobilizing revenue via PIT less distortive and more equitable than via VAT. - Model simulations (AN): - Raising 1 percent of GDP via VAT would depress GDP by almost 2 percentage points over 5 years; same revenue via PIT would depress GDP by less than 1 percentage point. - VAT is regressive; poverty and inequality rise more under VAT increases. - Reasons VAT may be non‑neutral: large informal economy escapes VAT; low PIT rates of 5 and 7 percent are among the lowest in the world. - Use of 1 percent of GDP raised via PIT: - Proportionally expanding cash transfers could reduce extreme poverty by 20 percent and inequality by 2½ percentage points, but GDP would fall by about 1¾ percentage points. - Investing in infrastructure would boost GDP by about ½ percent; smaller impact on extreme poverty and inequality. - Empirical study (Acosta‑Ormaechea and Yoo, 2012): in low income countries PIT does not significantly affect growth; relevant where PIT collection is only 0.4 percent of GDP. ### Revenue mobilization and tax policy recommendations - Multifaceted approach to reach revenue targets: - Strengthen SAT: legal framework, staff performance evaluation, pro‑integrity measures, improve digital services. - Tax policy options to raise at least 3½ percent of GDP in the longer term aimed at 15 percent revenue target: - Increase number of PIT brackets and top marginal rate; smaller increase in VAT rate; simplify corporate income tax; higher energy taxes. - Evaluate macroeconomic and distributional consequences (see Box 4). - Reduce revenue earmarking (currently 40 percent) to strengthen budget efficiency. ### Fiscal transparency and spending efficiency - Implement IMF TA advice on fiscal transparency: - Improve fiscal accounting, consolidation, reporting, and fiscal risk assessment. - Protect tax administration from political interference. - Strengthen control and audit of fiscal spending; strengthen planning and internal audit units. - Regulate and make government’s direct purchases more transparent. - Supplement transparency with measures to raise spending efficiency—particularly in education—via program budgeting. - Authorities implementing some recommendations, including procurement transparency measures. ### Strengthening monetary and financial frameworks - Recommendations include: - Continue institutionalizing inflation targeting and increase exchange rate flexibility. - Discourage credit dollarization. - Develop private debt and securities markets. - Refine monetary operations and manage short‑term and structural liquidity. - Cover accumulated operational losses of the central bank and develop a permanent solution to legacy quasi‑fiscal operations, including recapitalization of the Central Bank. ### Financial sector resilience and macroprudential recommendations - Vulnerabilities: credit dollarization, exposure to public debt, fast growth in foreign liabilities, potential FX maturity mismatches. - Stress test results (AN): - System could withstand a historical 20 percent depreciation shock, though non‑linear effects on credit quality possible. - Balance sheets robust to a 2 percent interest rate increase or a severe growth shock of 4 percentage points. - Combined severe adverse shocks could push aggregate capital ratio below regulatory minimum, requiring recapitalization. - Macroprudential measures: - Differentiate risk weights by currency; eliminate exemptions for mortgage and electricity sector loans. - Prepare further macroprudential tools if dollarization persists. - Introduce higher capital requirements for market risk; strengthen capital buffers and related‑party definitions; adopt capital ratios consistent with Basel III. - Authorities are considering a liquidity coverage ratio differentiated by currency. ### Long‑term inclusive growth policies - Agreed policy actions: - Raise spending on security, judicial system, infrastructure, education, health, social assistance, supported by higher revenues. - Increase education access, invest in infrastructure and IT to raise LFP, including for women. - Improve childcare, expand conditional cash transfers targeting indigenous girls. - Improve efficiency and targeting of social assistance; reforms to food support program and beneficiary controls underway. - Facilitate regional and international integration: regional highways, ports, airports; harmonize IT and customs transit; customs union plans with Honduras and El Salvador noted. - Strengthen competition policy and promote rural development (irrigation, financing, technical assistance). - Financial deepening actions: adopt securities market law; dematerialize securities; standardize government securities; adopt public debt law. - Strengthen property and ownership rights, improve legal system efficiency, reduce corruption, improve corporate governance. --- ### Financial inclusion: status, gaps, and policy implications - Access infrastructure: - 37 branches and 36 ATMs per 100,000 adults (versus LAC averages of 24 branches and 25 ATMs). - Use of financial services: - 41 percent of adults have a bank account (47 percent in LAC). - 60 percent of SMEs have a bank account (90 percent in LAC). - Regulatory and infrastructure gaps: no formal comprehensive financial inclusion strategy; under‑developed credit reporting; weak electronic payments regulation. - Fundamental constraints: income level, education (especially among women), size of shadow economy, rule of law. ### Box 5 — Financial inclusion, growth, and inequality: model findings - Three types of constraints: entry (participation) costs, borrowing constraints, intermediation costs. - Simulation outcomes: - Reducing entry, borrowing, or intermediation costs raises growth. - Easing borrowing and intermediation constraints could increase inequality (benefits accrue mainly to wealthy entrepreneurs). - Reducing entry costs raises growth and reduces inequality. - Policy implication: prioritize reducing entry costs first given high inequality. ### Recent initiatives and near‑term measures - Initiatives: - Adoption of the microfinance law. - Regulation of mobile financial services. - Efforts to develop a national financial inclusion strategy and promote financial education. - Measures under consideration: - Simplified bank accounts for low‑income customers; measures to reduce entry costs. - Longer‑term measures after entry barriers reduced: - Examine lending practices and credit concentration, develop credit bureaus, promote bank competition, lower information costs and collateral requirements. --- ### External sector assessment (Annex I) — summary and diagnostics - Staff’s preferred EBA‑lite CA methodology: - CA gap: about 2 percent of GDP. - Implied REER undervaluation: 7 percent. - Staff conclusion: Guatemala’s external position moderately stronger than fundamentals/desirable policy settings; policy gap driven mostly by lower‑than‑desirable fiscal deficit. - REER and current account dynamics (2000–2015): - CPI‑based REER appreciated by 66 percent since 2000. - NEER relatively stable; REER appreciation largely driven by inflation differential. - IMF FSGM model: about ½ of long‑run REER appreciation since 2000 attributable to remittance inflows. - 2014–2015 shock: - CA deficit shrank by 1.8 percent of GDP. - REER appreciated by 10 percentage points; remittances’ contribution estimated at ¼ of the total appreciation. - Non‑oil trade balance deteriorated by 0.5 percent of GDP. - Staff views the abrupt CA movement as at least partly temporary. ### Reserves and liabilities - Net IIP in 2015: negative 22 percent of GDP. - FDI comprises about 45 percent of total external liabilities. - Net international reserves end‑2015: - 4.2 months of imports. - 148 percent of composite ARA EM metric (recommended range 100‑150 percent). - Staff projects little further reserve accumulation; move to greater exchange rate flexibility welcomed but vigilance on reserve adequacy advised. ### EBA/EBA‑lite results (selected) - EBA‑lite CA gap: 2 percent of GDP; implied REER undervaluation: 7 percent. - EBA REER Index methodology suggests an overvaluation of 17 percent (no 2015 shock adjustment). - EBA CA methodology suggests moderate undervaluation of 6 percent. ### Structural competitiveness and policy priorities - Competitiveness indicators: - Global Competitiveness Report 2015–16 rank: 78th out of 140 (improved from 86th in 2013–14). - Ease of Doing Business Index 2016 rank: 81st out of 189 (unchanged from 2014; down from 79th in 2013). - Structural weaknesses: crime and corruption; excessive bureaucracy; inadequate infrastructure and human capital; shallow financial system; weak legal environment. - Policy priorities: reduce crime and corruption; invest in education and infrastructure; strengthen legal protection and contract enforcement; deepen financial system; address fiscal weakness. --- ### External debt sustainability (Annex IV) — baseline projections and indicators - Baseline external debt (percent of GDP): - 2011: 27.5; 2012: 28.1; 2013: 29.1; 2014: 30.0; 2015: 29.7; 2016: 27.9; 2017: 25.8; 2018: 23.7; 2019: 21.7; 2020: 20.0; 2021: 18.3 - Change in external debt (percent of GDP): - 2011: 0.1; 2012: 0.7; 2013: 1.0; 2014: 0.9; 2015: -0.3; 2016: -1.9; 2017: -2.0; 2018: -2.1; 2019: -2.0; 2020: -1.7; 2021: -1.7 - External debt‑to‑exports ratio (percent): - 2011: 102.4; 2012: 112.6; 2013: 123.0; 2014: 127.5; 2015: 139.3; 2016: 132.7; 2017: 122.3; 2018: 113.1; 2019: 103.9; 2020: 97.5; 2021: 90.2 - Identified external debt‑creating flows (percent of GDP): 2011: -2.4; 2012: -1.3; 2013: -1.6; 2014: -2.5; 2015: -3.8; 2016: -2.4; 2017: -2.1; 2018: -1.9; 2019: -1.7; 2020: -1.4; 2021: -1.5 - Gross external financing need (USD billions): 2011: 4.4; 2012: 4.4; 2013: 4.8; 2014: 4.7; 2015: 4.3; 2016: 4.6; 2017: 4.6; 2018: 4.5; 2019: 4.4; 2020: 4.3; 2021: 4.3 - Scenario with key variables at historical averages — external debt (percent of GDP): - 2016: 27.9; 2017: 26.6; 2018: 25.2; 2019: 23.9; 2020: 22.5; 2021: 21.2 - Debt‑stabilizing non‑interest current account (long‑run): -2.7 percent of GDP - Key macro assumptions (selected series as presented): - Real GDP growth and other series presented in baseline and scenarios (tables in source). ### Stress tests and policy implications - Bound tests include interest‑rate shock, current account shock, combined shock, real depreciation shock (one‑time real depreciation of 30 percent in 2010), and growth shock. - Policy recommendations (IMF–World Bank coordination): - Fiscal policy: arrest revenue decline, increase transparency and spending efficiency, raise revenue and prioritize expenditure composition. - Revenue mobilization: implement SAT reform strategy and revamp tax policy framework. - Government spending: raise level, improve efficiency, and transparency. - Pension reform: parametric pension reform required in longer run. - Monetary policy framework: strengthen monetary transmission, move towards gradual XR flexibility, develop securities markets. - Financial sector: implement risk‑based AML/CFT supervision, strengthen resolution framework, fortify capital buffers, enhance consolidated supervision, approve securities market law, dematerialize government bonds market, adopt national financial inclusion strategy. --- ### IMF work, technical assistance, and donor coordination - Program and TA: - CAPTAC‑DR program involvement; staff visit November 2016; 2017 Article IV consultation April 2017 June 2017. - TA areas include public expenditure management, tax and customs administration, regional customs harmonization, PPP legal review, treasury management, fiscal risks management, liquidity risk models and stress testing, and central bank macroeconomic modeling. - Relations with World Bank and IADB: - World Bank provides implementation support; IADB pipeline and portfolio figures presented (approved sovereign‑guaranteed loans: US$654.2 million; undisbursed balance: US$408.8 million). - IADB pipeline for 2016 (public sector): US$440 million across three projects (Fiscal management: US$30 million; Modernization and administration of Justice: US$60 million; Regional integration: US$100 million; Policy‑Based‑Loan related to tax collection and financial sector transparency: US$250 million). - Statistical issues (as of July 1, 2016): - Data broadly adequate for surveillance with shortcomings. - National accounts rebasing process under way to 2013 base year; dissemination planned December 2018. - Consumer price index rebased to December 2010; unemployment estimated biannually. - GFS: gaps in consolidated nonfinancial public sector reporting; central government financing and debt coverage adequate. - Monetary and financial statistics: SRFs reported regularly; some exclusions noted. - External sector statistics: migrated to BPM6; Reserves Data Template and CDIS disseminated; legislation obligating private sector data provision pending. - Participation in e‑GDDS; data ROSC completed October 28, 2004. - Past Fund staff recommendations (2014 Article IV) and implementation notes summarized in source. *Source: IMF staff report excerpts and annexes compiled in content unit _cr16281.* ### 1. Key Elements of the Anti-Corruption Strategy __________________________________________________ 5 ### 1. Key Elements of the Anti-Corruption Strategy ### Political context and immediate outcomes - The 2015 political crisis elevated an anti-corruption agenda to the fore, following investigations by the International Commission against Impunity in Guatemala (CICIG) that uncovered tax graft, money laundering, and illegal funding, resulting in arrests and indictments of top officials, including former President Perez Molina and Vice President Baldetti. - President Morales took office in January 2016 on a platform of no-tolerance against corruption. - The anti-corruption effort has led to multiple legal proceedings that have resulted in the recovery of past-due taxes and other assets. ### Tax administration (SAT) reforms and priorities - A central priority is reforming the tax administration (SAT) after unveiled cases of tax graft in 2015 that sharply eroded SAT credibility, weakened tax compliance, and led to collection losses. - Emergency actions taken by the new government aim to regain control over customs. - A new SAT law was recently approved by Congress to strengthen governance and remove bank secrecy constraints to tax enforcement starting in 2017. - A strategic plan for tax and customs administration is being developed with IMF assistance. ### Public procurement transparency and competition - In late 2015, Congress approved changes to strengthen governance and transparency of government procurement: - Creation of an e-outlet (“Guatecompras”) to provide transparent information on procurement transactions. - Introduction of reverse auctions to enhance competition among suppliers. - The new procurement bill forbids government contracts with state officials and sponsors of political parties. - Improvements to the technical capacity of government awarding committees. - Penalties for collusion or noncompetitive practices in supplying the government. - Authorities are developing a strategy to increase fiscal transparency with IMF assistance. ### Congressional, judicial, and political party reforms - New organic laws passed in 2016 aim to improve accountability of Congress and enhance independence of the Judiciary: - Reduce conflict of interest by discouraging deputies from switching political parties and constrain excessive hiring of staff. - Reduce discretion in the removal of the general attorney; broaden powers to designate prosecutors and strengthen criminal investigation. - More recent congressional bills aim to: - Increase transparency of political party funding. - Set guidelines to develop the judicial service. - Enhance recruitment and promotion of civil servants in Congress based on merit. - A civil service initiative for the Executive is underway. - The government plans constitutional reform to further strengthen the Judiciary; Congress will consider reforms to broaden access to justice, strengthen protection of judges, and reduce abuses of immunity granted to government officials. ### Macroeconomic and structural context relevant to anti-corruption strategy - Growth and labor market: - Growth remained at 4.1 percent in 2015 despite slowdown in public consumption and investment during the political crisis. - Unemployment is 3 percent of the labor force, though a large share of the population, particularly indigenous and rural, is employed in the informal sector. - Female labor force participation (LFP) is low, partly due to low education levels among indigenous women. - Inflation and monetary policy: - The inflation target is 4±1 percent. Inflation was below the target range for most of 2015 and returned to the target range in 2015; it exceeded the center of the range in early 2016 driven by higher food prices and dissipation of prior declines in transportation and utility tariffs. - The central bank cut the policy rate three times in 2015 by a cumulative 100 basis points (to 3 percent). - The nominal exchange rate has remained broadly stable vis-à-vis the U.S. dollar; in 2016 the exchange rate fluctuation margin under the central bank’s intervention rule was widened from 0.7 to 0.75 percent of the five-day moving average. - External sector and reserves: - Net international reserves (NIR) stood at US$7 billion or 4.2 months of imports at end-2015. - The current account deficit shrank by 1¾ percent of GDP in 2015. - Staff’s preferred EBA-lite current account methodology suggests a current account gap of about 2 percent of GDP, implying a moderate (7 percent) REER undervaluation. - Fiscal stance and public debt: - Revenues underperformed budget goals by 1¼ percent of GDP in 2015; the revenue ratio was 10¾ percent of GDP. - The revenue shortfall was offset by larger cuts in spending (in part due to delays in multilateral loan disbursements), resulting in a fiscal deficit that was ½ percent of GDP lower than the budget target. - Public debt was 24 percent of GDP. - Financial sector vulnerabilities: - Banks meet Basel I capital requirements, have sufficient liquidity, and NPL ratios are low, but capital levels are low by regional standards and insufficient to cover market and operational risks under Basel II. - Credit expanded rapidly in 2015, mostly in foreign currency; credit dollarization stood at 36 percent of total loans at end-May2016 (up from 27 percent at end-2010). - Bank foreign liabilities rose to a decade high of 15 percent of total bank assets. - Government bond holdings are 11 percent of bank assets, about half in the available-for-sale portfolio used to manage liquidity. - Private sector balance sheets appear healthy with limited accumulation of debt over the last decade; foreign currency loans are concentrated in the corporate sector. ### Food price inflation drivers and policy recommendations (Box 2) - Drivers identified: - Guatemala-specific factors explain persistently high food price inflation since 2013; rising global wheat and corn prices contributed in 2010–11 but not since 2013. - Strong remittances have been an important driver of the recent increase in food inflation; vegetables and meat have been primary contributors as these are added to diets as incomes rise. - Weather-related shocks raised prices of some vegetable products in late 2015. - Structural factors such as higher transportation and intermediation costs (possibly due to poor transport infrastructure), competition issues, and non-tariff barriers (sanitary and phyto-sanitary measures) may impede price adjustment and regional trade. - Policy recommendations: - Supply-side policies to reduce food price pressures through: - Increased investments in transport infrastructure. - Stronger competition policies, including adoption of the new Competition Law and establishment of the competition agency. - Further advances in regional trade integration. - Policies to support agricultural production, including programs to improve access to irrigation, financing, and technical assistance. *IMF staff report: "1. Key Elements of the Anti-Corruption Strategy" (excerpt).* ### 9. Progress towards achieving the Millennium Development Goals (MDGs) has been slow. ### _cr16281 - 9. Progress towards achieving the Millennium Development Goals (MDGs) has been slow. ### Progress on MDGs and social outcomes - Only one fourth of the MDGs targets for 2015 were met. - None of the MDGs targets for 2015 were met for the rural and indigenous population. - There have been reversals in reducing extreme poverty and raising school enrollment. - Low fiscal revenues and the need for a comprehensive social strategy remain key hurdles to achieving the new sustainable development goals (SDGs). - Social indicators (Figure 4) highlight: - Poverty, malnutrition, and inequality are high compared to regional peers. - Poverty and extreme poverty have risen, posing challenges to meeting SDGs, particularly on poverty and malnutrition. - Selected SDG indicators show gaps versus the 2030 target across maternal mortality rate, mortality rate under 5, neonatal mortality rate, and school enrollment at preprimary, primary, and secondary levels. ### Financial sector developments and risks - Overall Financial Sector Rating: series of indicators by quarter (2013Q2 to Latest) show persistent Medium (M) and Low (L) assessments across components (e.g., Balance Sheet Soundness M, Balance Sheet Structural Risk M, Balance Sheet Buffers L, Profitability L, Asset quality L in many periods). - Credit dynamics: - Change in credit / GDP ratio (pp, annual): 6.3; 1.7; 0.9; 0.9; 1.0; 0.2; 0.3; 0.7; 1.0; 1.6; 1.6 - Growth of credit / GDP (%, annual): 25.2; 5.7; 2.9; 2.9; 3.3; 0.6; 1.1; 2.3; 3.0; 4.9; 4.9 - Credit-to-GDP gap (st. dev): 1.0; 0.6; 0.0; -0.8; -1.2; -1.6; -1.5; -1.6; -1.4; -1.2; -1.2 - Balance sheet composition (selected series): - Deposit-to-loan ratio: 134.2; 129.1; 129.9; 131.9; 131.2; 129.8; 128.9; 129.4; 129.6; 125.6; 124.1 - FX liabilities % (of total liabilities): 28.2; 29.0; 30.3; 30.4; 30.4; 30.9; 31.1; 30.8; 30.8; 31.1; 30.8 - FX loans % (of total loans): 35.2; 36.6; 36.3; 36.1; 37.1; 37.2; 38.1; 39.0; 39.4; 39.9; 39.5 - Capital and profitability: - Capital-to-assets ratio (%): 7.0; 6.8; 6.9; 7.0; 6.9; 7.1; 6.9; 7.0; 7.0; 7.0; 6.9 - ROA: 1.9; 2.0; 2.0; 1.9; 1.9; 1.8; 1.9; 1.9; 1.8; 1.7; 1.7 - ROE: 20.5; 21.5; 21.4; 21.0; 20.4; 19.3; 20.6; 20.7; 19.9; 19.2; 18.6 - Asset quality: - NPL ratio: 1.4; 1.3; 1.2; 1.3; 1.56; 1.41; 1.29; 1.35; 1.45; 1.43; 1.3 - NPL ratio change (%, annual): -8.0; -13.7; -11.3; -3.0; 13.3; 6.1; 7.9; 3.6; -6.9; 1.8; 4.6 - Key qualitative points: - Credit growth, particularly in foreign currency (FX), has been robust though it decelerated sharply more recently. - A moderately high degree of credit dollarization makes banks vulnerable to credit risk. - Fast-growing bank foreign liabilities raise banks’ vulnerability to rollover risks. - The system as a whole meets regulatory capital requirements and NPLs are low. ### Macroeconomic outlook and medium-term projections (Table 4) - Growth and inflation: - Real GDP: 2014: 4.2; 2015: 4.1; 2016: 3.8; 2017: 3.8; 2018: 3.8; 2019: 3.8; 2020: 3.9; 2021: 4.0 - Consumer prices (end of period): 2014: 2.9; 2015: 3.1; 2016: 4.0; 2017: 4.0; 2018: 4.0; 2019: 4.0; 2020: 4.0; 2021: 4.0 - Fiscal and debt indicators: - Central government balance (percent of GDP): 2014: -1.9; 2015: -1.4; 2016: -1.6; 2017: -1.6; 2018: -1.6; 2019: -1.6; 2020: -1.6; 2021: -1.6 - Central government primary balance: 2014: -0.4; 2015: 0.1; 2016: -0.1; 2017: -0.1; 2018: -0.1; 2019: -0.1; 2020: -0.1; 2021: -0.1 - Public sector debt: 2014: 24.3; 2015: 24.2; 2016: 24.1; 2017: 24.3; 2018: 24.3; 2019: 24.3; 2020: 24.2; 2021: 24.2 - External sector: - Current account balance (percent of GDP): 2014: -2.1; 2015: -0.3; 2016: -0.5; 2017: -0.7; 2018: -1.0; 2019: -1.2; 2020: -1.4; 2021: -1.7 - Capital and financial account: 2014: 3.1; 2015: 1.7; 2016: 1.1; 2017: 0.7; 2018: 1.0; 2019: 1.2; 2020: 1.4; 2021: 1.7 - External debt: 2014: 30.0; 2015: 29.7; 2016: 27.9; 2017: 25.8; 2018: 23.7; 2019: 21.7; 2020: 20.0; 2021: 18.3 - Reserve adequacy 1/: 2014: 122.6; 2015: 126.0; 2016: 127.7; 2017: 122.8; 2018: 118.6; 2019: 114.1; 2020: 110.1; 2021: 117.9 - Outlook summary: - Growth is set to return to its trend rate of 3¾ percent in 2016. - Potential growth is expected to rise gradually to 4 percent in the medium term. - Inflation is projected to remain within the target range. - External current account deficit is set to widen to 1¾ percent of GDP by 2021, while remaining more than fully financed by FDI. - Reserves expected to remain stable with some decline in reserves-to-import cover over time. ### Near-term risks - External risks: - Deeper-than-expected slowdown in advanced and emerging markets, including due to increased protectionism, could reduce growth. - Extreme bouts of financial volatility could inflict damage; a substantial depreciation vis-à-vis the U.S. dollar could increase credit risks from un-hedged borrowers. - Continued REER appreciation could negatively affect competitiveness. - Downside risks from potential reductions in provision of financial services by global banks, including withdrawal of correspondent banking services. - Domestic risks: - Failure to credibly address the crisis at the SAT could endanger revenue mobilization and jeopardize social and investment spending. - Anti-money laundering efforts implicating staff or owners of domestic banks could lead to transitory financial pressures. - Further deterioration in the security situation would jeopardize growth. ### Near-Term Policy Mix and recommendations - Fiscal stance: - The fiscal deficit is expected to remain at 1½ percent of GDP in 2016 and hover around this level in the medium term. - The 2016 budget envisions a deficit of 1½ percent of GDP—lower than the historical average of 2 percent of GDP. - Staff view: a temporary relaxation of the overall deficit to its historical average of 2 percent of GDP could be justified to prevent cuts in social and capital spending in the event of revenue shortfalls. - The acute problem of extreme poverty and malnutrition and infrastructure and security needs could warrant maintaining a deficit at 2 percent of GDP, or even modestly higher, over the medium term to allow time for revenue mobilization. - Authorities agreed and the Minister of Finance saw room for a temporary deficit higher than 2 percent of GDP. - Tax and customs administration reform (key priorities and measures): - Strengthen management and broaden pro-integrity measures internally. - Strengthen customs: more effective control of goods, more accurate valuation of imports, stricter control of special trade regimes. - More effective control of large and medium-size taxpayers’ compliance. - Improve VAT administration, including enforcement of issuance of VAT invoices. - Increase effectivity of audits. - Improve taxpayer services, including broadening e-services. - Need for a short- and medium-term reform strategy with clear priorities and timetables. - Authorities agreed on main steps and have started implementing some measures, noting they will take time to bear fruit. - Monetary policy: - Monetary policy stance broadly appropriate; central bank should be ready to tighten if inflationary pressures intensify. - Financial Conditions Index (FCI) indicates a small loosening of financial conditions in 2015 despite REER appreciation. - Core inflation has been below the target range since 2013; inflation expectations are within the target range. - Upside risks to inflation include possible food price pressures and delayed effects of past monetary easing. - Central bank reiterated commitment to inflation goals and credibility of monetary policy. - Financial sector policy: - Continue developing a comprehensive macro-prudential program and strengthen the resolution framework through introduction of an “open bank” intervention. - Continue implementing risk-based AML/CFT supervision and bring the framework in line with the 2012 FATF standards. ### Financial integrity and correspondent banking (Box 3) - Loss of correspondent banking relationships (CBRs) has been limited to four correspondent banks canceling accounts with four small Guatemalan banks. - The overall value of foreign credit lines continued rising in 2015; amount drawn stands at $4.9 bn (22 percent of credit to the private sector). - Three affected local banks have foreign credit lines with other correspondent banks; the number of correspondent banks has increased. - Several bank managers and small individual customers are under money laundering investigations; banks involved remain well-capitalized and liquid. - Supervisor actions: - Stepped up vigilance and contingency planning. - Tougher AML/CFT laws under consideration (remittances transfers, leasing, factoring). - Improving enforcement of final beneficiary identification and harsher penalties for non-compliance with suspicious transaction reporting. - Financial Intelligence Unit (IVE) undertook a national risk assessment and increased on-site inspections. - Proposal developed for an “open bank” intervention to strengthen ailing systemic institutions by temporary public sector management. - Banking system external credit lines (selected figures): - Contracted Amount (Dec series): 266; 133; 243; 967; 492; 155; 746; 300 (Millions of US$, unless otherwise indicated) - Amount Used (Dec series): 140; 122; 522; 954; 361; 142; 564; 852 - Guarantees, Letters of Credit: 100; 125; 192; 248 - Margin Available: 1260; 1072; 913; 1185; 1127; 1201 - Contracted Amount (annual percent change): 25; 19; 24; 13; 13 - Amount Used (annual percent change): 6; 13; 12; 21; 8; 14 - Number of Correspondent Banks: 33; 38*; 35; 39 - Interest Rate Paid on Credit Lines, Weighted Average (%): 3.44; 3.3; 3 - Amount drawn $4.9 bn (22 percent of credit to the private sector). - Note: *The analysis done for 2013 did not include the determination of the number of correspondent banks. ### Medium- and long-term policy challenges - Objective: achieve higher long-term inclusive growth while preserving macroeconomic stability. - Recommended areas: - Strengthen fiscal and monetary policy frameworks. - Fortify the financial system. - Broaden social opportunities to facilitate higher and more inclusive growth. - Fiscal sustainability assessment: - Central government debt remains sustainable under a range of scenarios. - Under the baseline scenario, central government debt would remain around 24 percent of GDP over the medium term. - A permanent fiscal relaxation of ½ percentage points of GDP would increase the debt to 29 percent of GDP. - The debt path is resilient to macro shocks. *Source: _cr16281 - 9. Progress towards achieving the Millennium Development Goals (MDGs) has been slow., International Monetary Fund.* ### 19. Fiscal policy should be reoriented towards supply side and social objectives. Raising ### 19. Fiscal policy should be reoriented towards supply side and social objectives. Raising ### Fiscal objectives and required revenue levels - Raising fiscal revenues to at least 15 percent of GDP would be essential in the longer run to accommodate higher social and infrastructure spending and to support efforts to durably reduce crime and corruption. - Eradicating extreme poverty would cost the budget around 1 percent of GDP per year while lifting all of the poor out of poverty would cost upwards of 7 percent of GDP per year (AN). - Achieving the SDG objective of halving poverty would require at least 5 percent of GDP in fiscal spending. - Guatemala’s tax capacity is estimated at 20 percent of GDP. - The authorities concurred that revenues would have to rise to at least 15 to 17 percent of GDP for the government to be able to fulfill its basic public functions. ### Box 4 — Poverty, Inequality, and Fiscal Redistribution: key findings - Mobilizing revenue through PIT could prove less distortive and more equitable than through VAT. - Model simulations indicate (AN) that raising one percent of GDP in additional revenue through VAT would depress GDP by almost 2 percentage points over 5 years, compared to less than 1 percentage point decline with similar revenue effort through PIT. - VAT is regressive; poverty and inequality increase more under VAT increases. - Two reasons the VAT may be non-neutral for investment in Guatemala: - Large informal economy, which escapes VAT taxation. VAT penalizes consumption of goods produced in the formal sector, reduces demand for these goods and lowers their prices, thereby reducing marginal returns to formal sector firms and shifting relative prices in favor of the less productive informal sector. - Low PIT versus medium VAT rates: PIT rates of 5 and 7 percent are among the lowest in the world and raising them from this level would reduce GDP only slightly, compared to raising the VAT rate, which is 12 percent. - Impact of raising 1 percent of GDP in revenue through PIT and using it on alternative spending options: - Proportionally expanding existing cash transfer programs with one percent of GDP revenue generated through PIT could reduce extreme poverty by 20 percent and inequality by 2½ percentage points, but GDP would fall by about 1¾ percentage points since resources are shifted away from investment toward consumption by the poor. - Investing additional resources in infrastructure would raise the stock of public capital and improve private sector productivity, boosting GDP by about ½ percent. The impact on extreme poverty and inequality is smaller than with cash transfers. - An empirical study (Acosta-Ormaechea and Yoo, 2012) finds that in low income countries PIT does not significantly affect growth; relevant for Guatemala where PIT collection is only 0.4 percent of GDP. ### Revenue mobilization and tax policy recommendations - A multifaceted approach is needed to achieve ambitious revenue targets: - Strengthen the SAT focused on improving control and minimizing tax evasion, including: - Strengthening the SAT’s legal framework. - Encouraging staff responsibility by strengthening the performance evaluation system and actively and consistently addressing integrity issues. - Broadening and improving the quality of the SAT’s digital services. - Tax policy measures: staff recommended a review of the tax system to help raise revenue by at least 3½ percent of GDP in the longer term with the 15 percent revenue target in mind. - Main options: increase in the number of brackets and top marginal rate of the PIT; a smaller increase in the VAT rate; simplification of the corporate income tax; higher energy taxes. - Caution is warranted in evaluating macroeconomic and distributional consequences (see Box 4). - Set tax reform against a more comprehensive government reform strategy to articulate broader macroeconomic and social objectives and build public support. - Reduce the high level of revenue earmarking (currently 40 percent) to strengthen budget efficiency; some earmarking is constitutionally prescribed and difficult to change. ### Fiscal transparency and spending efficiency - Implement IMF technical assistance advice on fiscal transparency, focusing on: - Improving fiscal accounting, consolidation, and reporting with adequate elaboration of fiscal risk assessments. - Protecting tax administration from political interference. - Improving control and audit of fiscal spending, including strengthening units in charge of planning government purchases and internal auditing. - Regulating and making government’s direct purchases more transparent. - Supplement transparency efforts with measures to raise spending efficiency—in particular, in education—by continued strengthening of program budgeting. - Authorities indicated they are implementing some recommendations, including measures aimed at improving transparency in procurement of goods and services. ### Strengthening monetary and financial frameworks - Continue strengthening the institutional framework for inflation targeting with focus on: - Continuing raising exchange rate flexibility to credibly convey the primacy of the inflation objective to the public (AN). - Reinforcing measures, if needed, to discourage credit dollarization. - Developing private debt and securities markets. - Refining the framework for monetary operations, including management of short-term and structural liquidity. - Covering accumulated operational losses of the central bank that are eroding its capital base and developing a permanent solution to the legacy of past quasi-fiscal operations, including recapitalization of the Central Bank. - The Central Bank keeps debt on its balance sheet from quasi-fiscal operations in the 80’s and 90’s; weekly sterilization of maturing securities hinders liquidity management. The organic law dictates government covers annual losses; Congress failed to approve the government transfer for this purpose for the past few years. ### Financial sector resilience and vulnerabilities - The financial system appears relatively resilient though vigilance is warranted. Sources of vulnerabilities include: - Moderately high degree of credit dollarization. - Relatively large exposure to public debt. - Fast growing bank foreign liabilities and possible FX maturity mismatches. - Top-down staff stress test suggests the system could withstand sizable shocks (AN): - Banking sector could withstand a historically sizeable 20 percent depreciation shock, but there could be unknown non-linear effects on credit quality. - Banks’ balance sheets are robust to a 2 percent increase in interest rates or a severe growth shock of 4 percentage points. - A combined severe adverse macroeconomic scenario would push the aggregate capital ratio below the regulatory minimum, requiring recapitalization of the banks. - Rollover risks associated with foreign funding remain manageable but fast growth in bank foreign liabilities warrants close monitoring. - Maturity mismatches between FX assets and liabilities could represent risks though data constraints prevent accurate assessment. - Domestic and international interbank contagion effects from credit and funding shocks appear limited with relatively small bilateral bank exposures (AN). ### Macroprudential and regulatory recommendations - Use current stability period to fortify the financial system: - Differentiate risk weights based on currency denomination and gradually eliminate exemptions for mortgage loans and loans to the electricity sector to help reduce credit dollarization. - Prepare further macro-prudential measures if dollarization persists and credit quality deteriorates. - Introduce higher capital requirements for market risk to mitigate government debt exposure risk. - Authorities expressed reservations about differential reserve requirements for FX deposits due to concerns about deposit migration; they are considering a liquidity coverage ratio differentiated by currency, which staff supported. - Strengthen capital buffers through a stricter definition of related parties and adopt capital ratios consistent with Basel III (including a capital surcharge for large systemic institutions). - Progress on implementing the 2014 FSAP update recommendations is encouraging: - Steps taken to strengthen regulatory and supervisory frameworks, set up committees on macro-prudential issues and crisis management, and develop a safety net and resolution framework for financial cooperatives and microfinancial institutions. - Further efforts needed: improve consolidated supervision of financial conglomerates; adjust legal framework to international standards; appoint national lead supervisors; create a regional council for financial stability; step up ring-fencing of on-shore banks from off-shore bank operations. ### Achieving higher long-term inclusive growth - Need to better articulate a long-term strategy to raise growth and make it more inclusive. Constraints: low productivity, low human and physical capital, high poverty and inequality (AN). - Agreed policy actions include: - Raising government spending on security, the judicial system, infrastructure, education, health, and social assistance, which requires raising government revenues. Assess trade-offs between growth and social objectives when evaluating spending instruments. - Increasing access to education, investment in infrastructure and information technology to raise labor force participation (LFP), including for women. - Improving provision of childcare and expanding conditional cash transfers targeting education of indigenous girls to help narrow gender labor market gaps. - Improving efficiency and targeting of social assistance programs; recent initiatives to reform a food support program, improve control of beneficiaries, and strengthen coordination among ministries are positive. - Facilitating regional and international integration through infrastructure improvements (regional highways, ports, airports), harmonizing IT and customs transit procedures, making trade rules and taxes more consistent across the region, and further integrating services and factor markets. Plans to implement a customs union with Honduras and El Salvador noted as important. - Strengthening competition policies, including adoption of pending competition law. - Promoting rural development via improved access to irrigation, financing, and technical assistance in agriculture (Box 2). - Financial deepening to support long-run growth: - Guatemala’s financial development exceeds the level implied by macroeconomic fundamentals but market development is low by regional standards. - Actions to help market development: adopt securities market law; continue dematerialization of securities; standardize government securities; adopt public debt law to facilitate concentration of government debt into a smaller number of large volume issues. - Strengthen property and ownership rights, improve legal system efficiency, reduce corruption, and improve corporate governance to facilitate financial deepening. *Source: IMF staff report excerpt (content unit _cr16281).* ### 28. Recent progress in financial inclusion is encouraging, but continued follow-through on ### 28. Recent progress in financial inclusion is encouraging, but continued follow-through on the government initiatives is needed. ### Financial inclusion: current status and gaps - Guatemala has a wide network of access points: 37 branches and 36 ATMs per 100,000 adults, outpacing LAC averages of 24 branches and 25 ATMs. - Use of financial services is low: - 41 percent of adults have a bank account (47 percent in LAC). - 60 percent of SMEs have a bank account (90 percent in LAC). - Regulation and enabling infrastructure lag: absence of a formal comprehensive financial inclusion strategy, under-developed credit reporting systems, weak regulation of electronic payments, and other regulatory shortcomings. - Fundamental constraints affecting inclusion: income level, education level (in particular among women), shadow economy size, and the rule of law. - Country-specific indicators highlighted: - Firms with access to credit measured as percent of firms with a bank loan/line of credit (Guatemala among lower performers within peers). - Collateral needed for a loan: Guatemala shows moderate collateral requirements relative to peers. - Interest rate spread and intermediation costs: Guatemala displays nontrivial intermediation costs. ### Box 5 — Financial Inclusion, Growth, and Inequality: key findings from model simulations - The model considers 3 types of financial market constraints: 1. Entry (participation) costs: high documentation requirements for opening, maintaining, and closing accounts and other barriers including red tape and the need for informal guarantors. 2. Borrowing constraints: determined by collateral requirements. 3. Intermediation (monitoring) costs: result from information asymmetries and limited bank competition. - Simulation outcomes: - Reduction in entry costs, borrowing costs, or intermediation costs generates improvements in growth. - Easing borrowing and intermediation constraints could increase inequality: with already moderate levels of collateral and borrowing costs, benefits would accrue mostly to productive and wealthy entrepreneurs. - Reducing entry costs would both raise growth and reduce inequality by enabling higher access for productive firms at the bottom of the distribution. - Policy implication: Given the high degree of inequality in Guatemala, priority should be placed on reducing entry costs first. ### Recent regulatory initiatives and near-term measures - Recent initiatives include: - Adoption of the microfinance law. - Regulation of mobile financial services. - Ongoing efforts to develop a national financial inclusion strategy. - Promotion of financial education. - Measures under consideration: - Introduction of simplified bank accounts for low-income customers. - Other measures aimed at reducing entry costs to raise financial inclusion, stimulate growth, and reduce inequality. - Longer-term measures once entry barriers are reduced: - Examine financial institutions’ lending practices and credit concentration limits. - Facilitate development of credit bureaus. - Promote greater bank competition. - Lower information costs and collateral requirements to boost growth. ### Broader staff appraisal: macro and structural policy recommendations (paragraphs 29–36) - Economic performance and outlook: - The economy weathered the 2015 political crisis well; growth remained robust in 2015 supported by low oil prices and strong remittances. - Exchange rate stable and inflation within the central bank’s target range; these trends are expected to continue in the medium term with GDP growing at potential and inflation within the target range. - Current account deficit projected to increase only gradually; downside risks from global uncertainties and domestic policy constraints. - Fiscal policy: - A higher fiscal deficit could be justified on structural and social grounds. - With the output gap closed, the current broadly neutral fiscal stance is reasonable, but a fiscal relaxation to bring the overall deficit to around 2 percent of GDP may be justified temporarily to maintain capital and social spending and implement the anti-corruption reform agenda. - Any temporary increase in the deficit should be accompanied by efforts to raise the revenue-GDP ratio. - Structural objective: gradually increase fiscal revenues to at least 15 percent of GDP to meet social, security and infrastructure needs and support long-term growth. - Required actions: improvements in tax administration and a revamp of the tax policy framework, including through an increase in tax rates; present tax reform within a comprehensive reform strategy to secure public support; improve fiscal transparency and efficiency on the expenditure side. - Monetary policy and central bank: - Monetary policy should be attuned to signs of an increase in inflation; core inflation remains below target, inflation expectations well-anchored. - Central bank should be ready to increase the policy rate promptly if inflationary pressures intensify. - Recommendation for transition to full-fledged inflation targeting. - Additional measures: increase exchange rate flexibility, discourage dollarization, cover past and current operational losses of the Central Bank in the short term and recapitalize the Central Bank in the longer term, and develop capital markets to strengthen monetary transmission. - External position and competitiveness: - Guatemala's external position is moderately stronger than the level consistent with medium term fundamentals and desirable policy settings; a lower-than-desirable fiscal deficit accounts for most of the identified policy gap. - Measures to mitigate the competitiveness gap: reduce crime and corruption, invest in education and infrastructure, strengthen legal protection, and deepen the financial system. - Financial system resilience and supervision: - The financial system appears sound but vulnerabilities include moderately high credit dollarization, fast-growing foreign bank liabilities, and exposure to sovereign debt. - The system has not been materially affected by the loss of correspondent banking relationships. - Continue efforts to strengthen risk-based AML/CFT supervision and align the framework with FATF standards; this complements efforts to combat crime and corruption. - Continue implementation of the 2014 FSAP update and regional cluster surveillance recommendations, including strengthening capital and liquidity buffers and enhancing consolidated supervision of financial conglomerates. - Structural reforms for inclusive growth: - Increase the size and efficiency of social assistance programs; raise public expenditures on education, infrastructure, and security. - Improve childcare and support to indigenous women to raise female labor force participation. - Continue progress on regional and international integration, strengthen competition policies, and adopt measures to support financial deepening and inclusion. - Articulate an overarching long-term growth and social strategy to garner public support for reforms. *International Monetary Fund staff appraisal (excerpt).* ### 37. It is recommended that the next Article IV consultation be held on the standard 12- ### _cr16281 - 37. It is recommended that the next Article IV consultation be held on the standard 12- ### Recommendation - It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Macroeconomic outlook and key indicators (selected) - Real GDP (annual percentage change): 2012: 3.0; 2013: 3.7; 2014: 4.2; 2015: 4.1; 2016: 3.8; 2017: 3.7; 2018: 3.8. - Consumer prices (end of period): 2012: 3.4; 2013: 4.4; 2014: 2.9; 2015: 3.1; 2016: 4.0; 2017: 4.0; 2018: 4.0 (percent). - Output gap (% of GDP): 2012: -0.6; 2013: -0.4; 2014: 0.0; 2015: 0.0; 2016: 0.1; 2017: 0.1; 2018: 0.1. ### External sector and balance of payments (selected) - Current account balance (in percent of GDP): 2012: -2.6; 2013: -2.5; 2014: -2.1; 2015: -0.3; 2016: -0.5; 2017: -0.7; 2018: -1.0. - Trade balance (goods, percent of GDP): 2012: -11.4; 2013: -11.5; 2014: -10.3; 2015: -8.7; 2016: -8.6; 2017: -9.2; 2018: -9.4. - Exports (percent of GDP): 2012: 20.0; 2013: 18.9; 2014: 18.7; 2015: 17.0; 2016: 16.8; 2017: 17.1; 2018: 16.9. - Imports (percent of GDP): 2012: -31.4; 2013: -30.4; 2014: -29.0; 2015: -25.7; 2016: -25.4; 2017: -26.3; 2018: -26.4. - Remittances (percent of GDP): 2012: 9.8; 2013: 9.7; 2014: 9.7; 2015: 10.1; 2016: 10.3; 2017: 10.5; 2018: 10.6. - Current account balance (USD millions): 2012: -1,310; 2013: -1,351; 2014: -1,230; 2015: -202; 2016: -332; 2017: -528; 2018: -733. - Capital and financial account (percent of GDP): 2012: 4.5; 2013: 4.9; 2014: 3.1; 2015: 1.7; 2016: 1.1; 2017: 0.7; 2018: 1.0. - Net International Reserves (stock in millions of U.S. dollars): 2012: 6,197; 2013: 6,433; 2014: 6,587; 2015: 7,077; 2016: 7,498; 2017: 7,498; 2018: 7,498. - NIR in months of next-year NFGS imports: 2012: 3.9; 2013: 3.9; 2014: 4.1; 2015: 4.2; 2016: 4.1; 2017: 3.8; 2018: 3.6. ### Fiscal stance and public finances (selected) - Central Government revenues (percent of GDP): 2012: 11.6; 2013: 11.6; 2014: 11.5; 2015: 10.8; 2016: 10.6; 2017: 11.0; 2018: 11.1. - Central Government expenditures (percent of GDP): 2012: 14.0; 2013: 13.8; 2014: 13.4; 2015: 12.3; 2016: 12.2; 2017: 12.6; 2018: 12.7. - Central Government overall balance (percent of GDP): 2012: -2.4; 2013: -2.1; 2014: -1.9; 2015: -1.4; 2016: -1.6; 2017: -1.6; 2018: -1.6. - Primary balance (percent of GDP): 2012: -0.9; 2013: -0.6; 2014: -0.4; 2015: 0.1; 2016: -0.1; 2017: -0.1; 2018: -0.1. - Central Government debt (percent of GDP): 2012: 24.3; 2013: 24.6; 2014: 24.3; 2015: 24.2; 2016: 24.1; 2017: 24.3; 2018: 24.3. - External debt (percent of GDP): 2012: 12.4; 2013: 12.9; 2014: 11.6; 2015: 11.6; 2016: 12.1; 2017: 12.0; 2018: 11.8. - Domestic debt (percent of GDP): 2012: 11.9; 2013: 11.7; 2014: 12.6; 2015: 12.6; 2016: 12.0; 2017: 12.3; 2018: 12.5. - Consolidated nonfinancial public sector overall balance (percent of GDP): 2012: -2.0; 2013: -1.7; 2014: -1.5; 2015: -1.2; 2016: -1.4; 2017: -1.4; 2018: -1.4. ### Medium-term framework (selected projections) - Real GDP (annual percentage change, 2019–2021 projections): 2019: 3.8; 2020: 3.9; 2021: 4.0. - Gross domestic investment (percent of GDP): 2019: 13.9; 2020: 14.0; 2021: 14.0. - Gross national saving (percent of GDP): 2019: 12.7; 2020: 12.5; 2021: 12.3. - Current account balance (percent of GDP, 2019–2021): 2019: -1.2; 2020: -1.4; 2021: -1.7. - Net international reserves (millions of US$): 2019: 7,498; 2020: 7,499; 2021: 7,499. - Nominal GDP (in billions of U.S. dollars): 2019: 82.0; 2020: 87.5; 2021: 93.3. ### Balance of payments (USD levels, selected) - Exports, f.o.b. (USD millions): 2012: 10,103; 2013: 10,183; 2014: 10,992; 2015: 10,831; 2016: 11,525; 2017: 12,351; 2018: 13,001. - Imports, f.o.b. (USD millions): 2012: -15,838; 2013: -16,359; 2014: -17,056; 2015: -16,380; 2016: -17,399; 2017: -18,972; 2018: -20,240. - Trade balance (goods, USD millions): 2012: -5,735; 2013: -6,176; 2014: -6,064; 2015: -5,549; 2016: -5,875; 2017: -6,621; 2018: -7,239. - Current transfers (net, USD millions): 2012: 5,645; 2013: 6,113; 2014: 6,445; 2015: 7,079; 2016: 7,624; 2017: 8,366; 2018: 8,957. ### Monetary sector and banking (selected) - Bank of Guatemala net international reserves (in millions of U.S. dollars): 2012: 48,921; 2013: 50,515; 2014: 50,031; 2015: 54,155; 2016: 58,778; 2017: 59,430; 2018: 60,131. - Currency in circulation (in millions of quetzales): 2012: 21,161; 2013: 22,373; 2014: 24,134; 2015: 27,148; 2016: 29,749; 2017: 32,290; 2018: 34,849. - Credit to the private sector (in millions of quetzales): 2012: 125,176; 2013: 140,159; 2014: 152,455; 2015: 172,036; 2016: 190,100; 2017: 211,961; 2018: 234,635. - M2 (percent of GDP, memorandum): 2012: 39.3; 2013: 40.4; 2014: 40.4; 2015: 41.1; 2016: 41.4; 2017: 42.5; 2018: 43.0. - Monetary aggregate M2 (percent change): 2012: 9.8; 2013: 9.0; 2014: 8.7; 2015: 9.4; 2016: 9.1; 2017: 10.1; 2018: 9.1. ### Financial soundness and external vulnerability (selected) - Nonperforming loans to total gross loans (on-shore banks): 2007: 2.1; 2008: 2.2; 2009: 2.7; 2010: 2.1; 2011: 1.6; 2012: 1.3; 2013: 1.2; 2014: 1.3; 2015: 1.4 (percent). - Regulatory capital to risk-weighted assets (on-shore banks): 2007: 13.8; 2008: 13.5; 2009: 15.4; 2010: 15.2; 2011: 15.3; 2012: 14.7; 2013: 14.8; 2014: 14.6; 2015: 14.1 (percent). - Total external debt (percent of GDP): 2012: 27.4; 2013: 27.5; 2014: 28.1; 2015: 29.1; 2016: 30.0; 2017: 29.7; 2018: 27.9. - Net international reserves (in months of next-year's imports of goods and nonfactor services): 2012: 3.7; 2013: 3.8; 2014: 3.9; 2015: 3.9; 2016: 4.1; 2017: 4.2; 2018: 4.1. - NIR (in percent of M2, selected): 2012: 31.6; 2013: 31.6; 2014: 29.9; 2015: 27.3; 2016: 27.0; 2017: 26.8; 2018: 24.6. *Source: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Summary assessment - Staff’s preferred EBA-lite current account (CA) methodology suggests a CA gap of about 2 percent of GDP, implying moderate undervaluation of the real effective exchange rate (REER) of 7 percent. - Based on this, staff concludes that Guatemala’s external position is moderately stronger than implied by fundamentals and desirable policy settings. - The identified policy gap is driven mostly by a lower-than-desirable fiscal deficit. ### REER and current account dynamics (2000–2015) - Since 2000, the CPI-based REER has appreciated by 66 percent while the trade balance has improved. - The NEER remained relatively stable, implying the REER appreciation was largely driven by the inflation differential with trading partners (in particular the US). - IMF FSGM model attribution: about ½ of the long-run REER appreciation since 2000 could be attributed to significant inflows of remittances. - Relative productivity increases likely mitigated competitiveness losses, as evidenced by a relatively small loss in market share and an improvement in the trade balance. ### The 2015 shock and short-term effects - Between 2014 and 2015: - The CA deficit shrank by 1.8 percentage points of GDP, driven by strong remittances and low international oil prices. - The REER appreciated by 10 percentage points, with remittances’ contribution estimated at ¼ of the total appreciation. - The non-oil trade balance deteriorated by 0.5 percent of GDP. - The non-oil and non-remittances CA deteriorated by 0.7 percent of GDP. - Staff views this abrupt CA movement as at least partly temporary, reflecting incomplete adjustment to a large external shock. ### External position, reserves, and liabilities - Net IIP in 2015: negative 22 percent of GDP. - FDI comprises about 45 percent of total external liabilities. - Net international reserves at end-2015: - 4.2 months of imports. - 148 percent of the composite ARA EM metric. - (Composite ARA EM metric recommended range is 100-150 percent.) - Staff projects little further reserve accumulation going forward, consistent with the authorities' commitment to maintain exchange rate flexibility, implying a reduction in the reserves-to-imports ratio over time. - Policy note: move towards greater exchange rate flexibility is welcome, but authorities should remain vigilant to ensure continued reserve adequacy. ### EBA-lite and alternative methodology results - EBA-lite CA methodology (CA regression) results: - CA gap: 2 percent of GDP. - Implied REER undervaluation: 7 percent. - Model interpretation: a relatively young population, low income level, and high remittances would warrant a higher-than-observed current account deficit; policy contribution to the gap is almost entirely from the fiscal deficit. - EBA-lite External Sustainability (ES) methodology: - Compares projected medium-term CA with level that stabilizes NFA (currently at negative 30 percent of GDP) at the regional weighted average of negative 55 percent percent of GDP. - Also suggests a CA gap of 2 percentage points of GDP and a 7 percent REER undervaluation. - EBA-lite REER Index methodology (REER index regression): - Suggests an overvaluation of 17 percent. - No adjustment made for the 2015 shock here, because a permanent positive terms-of-trade shock can be expected to leave the REER more appreciated. - EBA CA methodology: - Suggests a moderate undervaluation of 6 percent. - Additional numerical points from staff analysis: - The EBA and EBA-lite CA gaps with respect to the 2015 CA balance would be 3 and 3.2 percent of GDP respectively. - For the EBA-lite CA method, the actual CA was adjusted to reflect the abrupt ToT shock by taking the medium-term CA projection of -1.7 percent of GDP as a reference. - Staff judgment: given low negative IIP, high remittances, and methodological limitations of the REER index model for countries undergoing large adjustments, the EBA-lite CA methodology better represents Guatemala’s country-specific circumstances. ### Structural competitiveness and policy priorities - Competitiveness trends and indicators: - Between 2000 and 2015, Guatemala’s share in global trade decreased by more than 10 percent; other emerging markets (excluding China and Asian Tigers) experienced a similar loss. - World Economic Forum Global Competitiveness Report 2015–16 rank: 78th out of 140 countries (improved from 86th in 2013–14). - Ease of Doing Business Index 2016 rank: 81st out of 189 countries (unchanged from 2014; down from 79th in 2013). - Key problematic areas: protecting minority investors, enforcing contracts, resolving insolvency. - Identified structural weaknesses: - Crime and corruption. - Excessive government bureaucracy. - Inadequate infrastructure and human capital. - Shallow financial system that may encourage precautionary savings. - Weak legal environment that can deter investment expansion in response to permanent external shocks. - Policy recommendations to improve competitiveness and shock adjustment: - Reduce crime and corruption. - Invest in education and infrastructure. - Strengthen legal protection and contract enforcement. - Deepen the financial system to reduce precautionary savings and facilitate investment. - Address fiscal weakness to close the identified policy contribution to the CA gap. - Maintain vigilant reserve management while pursuing exchange rate flexibility. *Source: Annex I. External Sector Assessment, IMF staff estimates and analysis as presented in the provided content.* ### Annex IV. External Debt Sustainability Analysis ### Annex IV. External Debt Sustainability Analysis ### Projections and key debt indicators - Baseline: External debt (percent of GDP) - 2011: 27.5 - 2012: 28.1 - 2013: 29.1 - 2014: 30.0 - 2015: 29.7 - 2016: 27.9 - 2017: 25.8 - 2018: 23.7 - 2019: 21.7 - 2020: 20.0 - 2021: 18.3 - Change in external debt (percent of GDP) - 2011: 0.1 - 2012: 0.7 - 2013: 1.0 - 2014: 0.9 - 2015: -0.3 - 2016: -1.9 - 2017: -2.0 - 2018: -2.1 - 2019: -2.0 - 2020: -1.7 - 2021: -1.7 - Residual, incl. change in gross foreign assets (2-3) (percent of GDP) - 2011: 2.4 - 2012: 2.0 - 2013: 2.6 - 2014: 3.4 - 2015: 3.5 - 2016: 0.5 - 2017: 0.1 - 2018: -0.2 - 2019: -0.3 - 2020: -0.3 - 2021: -0.2 - External debt-to-exports ratio (in percent) - 2011: 102.4 - 2012: 112.6 - 2013: 123.0 - 2014: 127.5 - 2015: 139.3 - 2016: 132.7 - 2017: 122.3 - 2018: 113.1 - 2019: 103.9 - 2020: 97.5 - 2021: 90.2 ### Identified external debt-creating flows and components - Identified external debt-creating flows (percent of GDP) - 2011: -2.4 - 2012: -1.3 - 2013: -1.6 - 2014: -2.5 - 2015: -3.8 - 2016: -2.4 - 2017: -2.1 - 2018: -1.9 - 2019: -1.7 - 2020: -1.4 - 2021: -1.5 - Current account deficit, excluding interest payments (percent of GDP) - 2011: 2.3 - 2012: 1.5 - 2013: 1.4 - 2014: 1.0 - 2015: -0.8 - 2016: -0.8 - 2017: -0.6 - 2018: -0.3 - 2019: 0.0 - 2020: 0.3 - 2021: 0.7 - Deficit in balance of goods and services (percent of GDP) - 2011: -64.3 - 2012: -61.2 - 2013: -59.0 - 2014: -57.5 - 2015: -51.5 - 2016: -50.8 - 2017: -51.7 - 2018: -51.5 - 2019: -51.6 - 2020: -50.9 - 2021: -50.6 - Exports (percent of GDP) - 2011: 26.8 - 2012: 25.0 - 2013: 23.7 - 2014: 23.6 - 2015: 21.3 - 2016: 21.0 - 2017: 21.1 - 2018: 21.0 - 2019: 20.9 - 2020: 20.5 - 2021: 20.3 - Imports (percent of GDP) - 2011: -37.5 - 2012: -36.2 - 2013: -35.3 - 2014: -34.0 - 2015: -30.2 - 2016: -29.8 - 2017: -30.6 - 2018: -30.6 - 2019: -30.6 - 2020: -30.4 - 2021: -30.3 - Net non-debt creating capital inflows (negative, percent of GDP) - 2011: -2.1 - 2012: -2.4 - 2013: -2.3 - 2014: -2.2 - 2015: -1.7 - 2016: -1.8 - 2017: -1.9 - 2018: -2.0 - 2019: -2.0 - 2020: -2.1 - 2021: -2.5 ### Automatic debt dynamics components - Automatic debt dynamics (percent of GDP) - 2011: -2.6 - 2012: -0.4 - 2013: -0.7 - 2014: -1.3 - 2015: -1.3 - 2016: 0.2 - 2017: 0.3 - 2018: 0.3 - 2019: 0.4 - 2020: 0.3 - 2021: 0.3 - Contribution from nominal interest rate (percent of GDP) - 2011: 1.1 - 2012: 1.1 - 2013: 1.1 - 2014: 1.1 - 2015: 1.1 - 2016: 1.3 - 2017: 1.3 - 2018: 1.3 - 2019: 1.2 - 2020: 1.1 - 2021: 1.0 - Contribution from real GDP growth (percent of GDP) - 2011: -1.0 - 2012: -0.8 - 2013: -1.0 - 2014: -1.1 - 2015: -1.1 - 2016: -1.0 - 2017: -1.0 - 2018: -0.9 - 2019: -0.8 - 2020: -0.8 - 2021: -0.8 - Contribution from price and exchange rate changes (percent of GDP) - 2011: -2.6 - 2012: -0.7 - 2013: -0.8 - 2014: -1.3 - 2015: -1.2 - 2016: (data truncated in source) ### Gross external financing need - Gross external financing need (in billions of US dollars) - 2011: 4.4 - 2012: 4.4 - 2013: 4.8 - 2014: 4.7 - 2015: 4.3 - 2016: 4.6 - 2017: 4.6 - 2018: 4.5 - 2019: 4.4 - 2020: 4.3 - 2021: 4.3 - Gross external financing need (in percent of GDP) - 2011: 9.2 - 2012: 8.7 - 2013: 9.0 - 2014: 8.0 - 2015: 6.7 - 2016: (data truncated in source) ### Scenario with key variables at their historical averages - Scenario projections (external debt in percent of GDP) - 2016: 27.9 - 2017: 26.6 - 2018: 25.2 - 2019: 23.9 - 2020: 22.5 - 2021: 21.2 - Debt-stabilizing non-interest current account (long-run) (percent of GDP) - Debt-stabilizing non-interest current account: -2.7 ### Key macroeconomic assumptions underlying baseline (selected) - Real GDP growth (in percent) - Historical average and projections listed include: 4.2; 3.0; 3.7; 4.2; 4.1; 3.8; 1.6; 3.8; 3.7; 3.8; 3.8; 3.9; 4.0 (as presented in the table) - GDP deflator in US dollars (change in percent) - 10.7; 2.7; 3.1; 4.7; 4.3; 5.0; 4.3; 3.4; 1.5; 2.7; 2.9; 2.7; 2.6 (as presented) - Nominal external interest rate (in percent) - 4.5; 4.1; 4.1; 4.3; 4.0; 4.8; 0.8; 4.6; 5.0; 5.2; 5.4; 5.4; 5.4 (as presented) - Growth of exports (US dollar terms, in percent) - 18.4; -1.5; 1.3; 8.4; -1.7; 7.6; 8.7; 5.6; 6.0; 5.7; 6.6; 4.6; 5.6 (as presented) - Growth of imports (US dollar terms, in percent) - 18.3; 2.1; 4.2; 5.0; -3.4; 6.3; 11.5; 5.9; 7.9; 6.7; 6.9; 5.8; 6.5 (as presented) - Current account balance, excluding interest payments (percent of GDP) - -2.3; -1.5; -1.4; -1.0; 0.8; -1.3; 1.8; 0.8; 0.6; 0.3; 0.0; -0.3; -0.7 (as presented) - Net non-debt creating capital inflows (percent of GDP) - 2.1; 2.4; 2.3; 2.2; 1.7; 2.0; 0.3; 1.8; 1.9; 2.0; 2.0; 2.1; 2.5 (as presented) ### Stress tests and bound tests - The figure labeled "Guatemala: External Debt Sustainability, Bound Tests" presents: - Baseline and shocks including: interest-rate shock (permanent one-half standard deviation), current account shock, combined shock, real depreciation shock (one-time real depreciation of 30 percent occurs in 2010), and growth shock. - Notes: Individual shocks are permanent one-half standard deviation shocks; historical scenarios use ten-year historical averages and project five years ahead; combined shocks include permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. ### Policy recommendations and macro-critical structural reform areas (from IMF–World Bank coordination) - Fiscal Policy - Short-term priorities: arresting revenue decline, increasing transparency and efficiency of fiscal spending. - Long-term priority: raising the level of revenue and expenditure while prioritizing expenditure composition. - Note: Rising demographic pressures could pose longer-term budget challenges if unaddressed. - Revenue mobilization - Guatemala has a revenue-to-GDP ratio described as "among the lowest in the world." - The 2012 tax reform yielded less additional revenue than anticipated due to implementation problems and legal challenges. - Recent work (World Bank, IMF, IADB, U.S. Treasury) to assist new administration to arrest revenue decline and develop long-term strategy for tax and customs administration (SAT). - Key priorities: implement SAT reform strategy and revamp the tax policy framework. - Government spending: level, efficiency, and transparency - Objectives: raise level of spending, improve efficiency and composition, and raise transparency to achieve social and structural objectives and make growth more inclusive. - Pension reform - A parametric pension reform will be required in the longer run to bring the pension system to a sustainable footing. - Monetary policy framework - Strengthen monetary framework, including improving the monetary transmission mechanism, to enhance effectiveness of monetary policy. - Financial sector issues - Guatemala is well placed to apply key Basel III components and complies with most of Basel I framework, but needs further work: - Continue implementation of risk-based AML/CFT supervision. - Strengthen bank resolution framework. - Fortify capital buffers. - Enhance consolidated supervision of financial conglomerates. - Strengthen legal and regulatory frameworks for financial deepening and inclusion. - Approve securities market law and dematerialize government bonds market. - Adopt national strategy for financial inclusion and reduce entry costs to stimulate inclusion, growth, and reduce inequality. ### Division of labor between IMF and World Bank; technical assistance and implementation - Division of labor highlights - Fiscal policy: IMF leads on overall fiscal strategy; IMF and World Bank coordinate on macro-fiscal issues and debt sustainability analysis. - Revenue mobilization: IMF provides technical assistance on tax administration and tax policy; CAPTAC-DR supports implementation. World Bank provides on-the-ground implementation support and prepares a large lending operation to support medium-term institutional development in tax administration. - Government spending: IMF defines overall spending envelope; World Bank advises on composition, efficiency, and financing of programs; World Bank completed a Public Expenditure Review in 2013 and is preparing a Development Policy Loan expected in late 2016. - Monetary policy framework: IMF provides policy recommendations and technical assistance, including macro-prudential policy and monetary transmission improvements. - Financial sector stability: IMF and World Bank coordinate follow-up on 2014 FSAP recommendations and assistance to meet 2012 FATF standards and implement risk-based AML/CFT supervision. - Requests for information between teams - IMF requests to be kept informed of progress in macro-critical structural reform areas when milestones are reached (and at least semi-annually). - World Bank requests to be kept informed of the Fund’s assessments of macroeconomic policies and prospects, including updates of the Fund’s macroeconomic framework and progress in macro-critical structural reform areas. - Technical assistance (selected summary 2011–16) - FAD/CAPTAC: revenue administration missions (2011–2016), fiscal transparency evaluation (2016), revenue forecasting, debt management strategy, treasury single account support, customs administration. - MCM/CAPTAC: strengthening central bank models, developing yield curve, improving liquidity forecasting, monetary policy transmission modeling, debt management, stress testing models, enhancing monetary operations (2011–2016). - STA/CAPTAC: national accounts statistics, producer price index, export and import price indices, balance of payments statistics and IIP (2011–2017). *Prepared by Valentina Flamini; information drawn from Annex IV and associated staff text in the provided content.* ### 1. IMF Work ### 1. IMF Work ### Program and Technical Assistance - Program including CAPTAC-DR; Staff visit November 2016; 2017 Article IV consultation April 2017 June 2017. - Technical Assistance areas: - Enhancing public expenditure management and control of arrears - Strengthening risk management and ex-post controls, particularly for tax and customs administration - Regional customs harmonization - Review of the legal and regulatory PPP framework - Strengthening and improving treasury management - Strengthening fiscal risks management - Development of liquidity risk management models and stress testing methodology for the banking system - Extending risk-based supervision methodology to insurance sector - Harmonization of regional financial statistics - Strengthening balance of payments statistics - Enhancing monetary operations - Extending and reviewing the Central Bank macroeconomic structural model - Strengthening Central Bank macromodeling including for fiscal sustainability analysis - Timing noted: April 2017 (two entries). ### Relations with the World Bank - Summary table (financial relations, in million U.S. dollars): - Project Name: GT Enhancing MSME Productivity Project (closing on June 30, 2016) - Total loan: 7 - Undisbursed through FY16: 2.4 - Projected disbursements in FY16: 0 ### Relations with the Inter-American Development Bank (IADB) - Country strategy and focus: - IADB country strategy for Guatemala for 2012–2016 approved on December 2012; priorities: (i) fiscal and municipal management, (ii) social protection, (ii) peaceful coexistence and citizen security; and rural development areas (iv) productive development, (v) health, and (vi) transportation. - Crosscutting areas: climate change adaptation and mitigation, natural disaster impact mitigation, indigenous peoples and gender; and regional integration. - IADB working on design of a new country strategy for 2016-2020. - IADB participated in donor collaboration on SAT reform and IMF technical assistance on fiscal transparency. - Portfolio as of June 2016: - Approved sovereign-guaranteed loans under execution: US$654.2 million - Undisbursed balance: US$408.8 million - Existing sovereign guaranteed portfolio focuses on: (i) education; (ii) energy; (iii) water and sanitation; (iv) health; (v) competitiveness and international trade; (vi) security and justice; (vii) infrastructure; (viii) environment; and (ix) municipal strengthening. - Pipeline for 2016 (public sector): US$440 million across three projects: - Fiscal management: US$30 million - Modernization and administration of Justice: US$60 million - Regional integration: US$100 million - Policy-Based-Loan related to improving the efficiency and effectiveness of tax collection and increasing transparency on the financial sector: US$250 million - Loan Transaction (In millions of U.S. dollars) - Disbursement: 2012: 134.7; 2013: 311.9; 2014: 80.5; 2015: 296.8; 2016(p): 62.5 - Repayments: 2012: 89.8; 2013: 115.2; 2014: 130.2; 2015: 147.2; 2016(p): 148.5 - Net Lending: 2012: 44.9; 2013: 196.7; 2014: -49.7; 2015: 149.6; 2016(p): -86 - Subscriptions and Contributions: 2012: 6.3; 2013: 2.0; 2014: 2.0; 2015: 2.0; 2016(p): 2.0 - Interest and Charges: 2012: 72.2; 2013: 79.6; 2014: 78.5; 2015: 76.3; 2016(p): 88.5 - Net Cash Flow: 2012: -33.6; 2013: 115.1; 2014: -130.2; 2015: 71.4; 2016(p): -176.5 - Source: Inter-American Development Bank. Note: (p) projected as of June 2016. - IADB Sovereign Guaranteed Loan Portfolio as of June 2016 (In millions of U.S. dollars) - Municipal Strengthening: Approved 3.2; Undisbursed 2.9 - Competitiveness and International Trade: Approved 49.0; Undisbursed 26.5 - Security and Justice: Approved 30.0; Undisbursed 20.8 - Environment: Approved 52.0; Undisbursed 6.2 - Water and Sanitation: Approved 50.0; Undisbursed 48.0 - Energy: Approved 55.0; Undisbursed 55.0 - Infrastructure: Approved 30.0; Undisbursed 13.7 - Health: Approved 85.0; Undisbursed 26.5 - Education: Approved 300.0; Undisbursed 209.3 - Total: Approved 654.2; Undisbursed 408.8 - Source: Inter-American Development Bank. ### Statistical Issues (As of July 1, 2016) - Assessment of Data Adequacy for Surveillance: - General: Data provision has some shortcomings, but is broadly adequate for surveillance. - National accounts: - In 2010, the Bank of Guatemala (Banguat) began publishing quarterly national accounts statistics consistent with the SNA 1993, with 2001 as the base year. - A new monthly index of economic activity (IMAE) consistent with the quarterly and annual accounts is disseminated on a regular basis since June, 2013. - Banguat has started the national accounts rebasing process that will be completed in 2017 and disseminated in December 2018, with 2013 as the new base year. - Consumer prices and unemployment: - In 2011, the consumer price index was re-based to December, 2010, and the index weights were updated to reflect changes in the consumption basket since the base 2000 index. - Unemployment is estimated only on an biannual basis. - Government finance statistics: - Revenue, expenditure, and financing statistics for social security agencies, local governments, and nonfinancial public enterprises are not reported, hindering calculation of a consolidated operations statement and balance sheet for the nonfinancial public sector. - Coverage and periodicity of data on central government financing and debt is adequate. - Monetary and financial statistics: - Reported on a regular monthly basis to STA using the standardized report forms (SRFs) for the central bank, other depository corporations, and other financial corporations (OFCs). - OFCs comprise insurance companies, warehouses and exchange houses. - Monetary data exclude credit card companies, securities dealers, other financial intermediaries, and other financial auxiliaries. - Financial sector surveillance: - Authorities report monthly all 12 core financial soundness indicators (FSIs) and 10 (out of 13) of the encouraged set for the deposit taking sector. - Authorities are working to expand FSI coverage of the OFCs sector. - External sector statistics: - Significant progress on prerequisites for data quality and methodological soundness. - Legislation obligating the private sector to provide information to Banguat for statistical purposes is pending; this affects response rate to balance of payments surveys and limits availability of required information. - On dissemination of external sector statistics, Guatemala has: 1. migrated to the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6); 2. disseminated the Reserves Data Template; 3. disseminated comprehensive inward/outward data on the Coordinated Direct Investment Survey (CDIS); and 4. provided total external debt statistics by sector on the World Bank’s website. - Data Standards and Quality: - Guatemala participates in the enhanced General Data Dissemination System (e-GDDS) and meets nearly all of the recommended periodicity and timeliness recommendations of the e-GDDS. - A data ROSC was completed on October 28, 2004. - Table of Common Indicators Required for Surveillance (selected observations and reporting frequencies) - Exchange Rates: Date of latest observation: May 2016; Date received: 6/8/2016; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: May 2016; 6/8/2016; M; M; M - Reserve/ Base Money: May 2016; 6/21/2016; W; W; W - Broad Money: May 2016; 6/21/2016; W; W; W - Central Bank Balance Sheet: May 2016; 6/21/2016; D; D; D - Consolidated Balance Sheet of the Banking System: May 2016; 6/21/2016; M; M; M - Interest Rates: Jun, 27. 2014; 7/3/2014; W; W; W - Consumer Price Index: May 2016; 6/7/2016; M; M; M - Revenue, Expenditure, Balance and Composition of Financing 3/- Central Government: December 2015; 5/27/2016; M; M; M - Revenue, Expenditure, Balance and Composition of Financing 4/- General Government: N/A; N/A; N/A - Stocks of Central Government and Central Government-Guaranteed Debt 5/: March. 2014; 6/4/2014; M; M; M - External Current Account Balance: Q4/2015; 4/12/2016; Q; Q; Q - Exports and Imports of Goods and Services: Q4/2015; 4/2/2016; Q; Q; Q - GDP/GNP: Q4/2015; 5/6/2016; Q; Q; Q - Gross External Debt: Q4/2013; 3/30/2014; Q; Q; Q - International Investment Position: Q4/2015; 4/1/2016; Q; Q; Q - Notes: - 1/ Includes reserve assets pledged or otherwise encumbered as well as net derivative positions. - 2/ Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. - 3/ Foreign, domestic bank, and domestic nonbank financing. - 4/ The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. Provision of this data is hampered by lack of capacity while ongoing efforts, including the recently requested TA advice from the Fund on fiscal transparency, are made to strengthen it. - 5/ Including currency and maturity composition. - 6/ Includes external gross financial asset and liability positions vis-à-vis nonresidents. - 7/ Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA). ### Past Fund Staff Recommendations and Implementation (2014 Article IV) - Fiscal Policy recommendations and implementation: - Recommendation: Efforts to address implementation setbacks to the 2012 tax reform are urgently needed, notably by strengthening taxpayer compliance, particularly in customs. Improve tax and customs administration. - Recommendation: Debt-to-GDP ratio should be stabilized; would require a permanent improvement in the primary balance of about ½ percent of GDP. - Recommendation: Reduce tax expenditures estimated at 8 percent of GDP, and align VAT rates with those prevailing in the region. - Implementation notes: - The reform of the SAT is a matter of first priority for the new administration. Measures considered or in process: (i) adoption of the new SAT law; strengthening of pro-integrity measures; strengthening customs; control of large taxpayers; improvements in VAT administration. - Central government primary balance improved by ½ percent of GDP in 2015 amid sharp expenditure cuts in the face of revenue shortfall during the political crisis. The primary deficit is expected to deteriorate only slightly in the medium term. Under the current policies, central government debt is sustainable. - After a methodological review in the calculation of tax expenditures, the estimate was reduced to 2.6 percent of GDP. New authorities are undertaking a review of the tax system in consultation with the IMF technical assistance team. - Monetary Policy and Financial Sector recommendations and implementation: - Recommendation: Further deepen monetary policy transmission, including through gradual enhancement of XR flexibility to help de-dollarize credit. Develop domestic securities markets; finalize and enact draft capital markets law. - Recommendation: 2014 FSAP update: strengthen consolidated supervision and supervision of financial entities that pose material risks to conglomerates; tighten definitions of related parties; step up ring-fencing of on-shore banks with respect to off-shore banks; gradual introduction of Basel III standards. - Implementation notes: - Improvements in monetary transmission to credit and repo interest rates have been made. - Authorities took measures to reduce dollarization: introduction of differential risk weights and gradual elimination of exemptions on mortgage loans and loans to the electricity sector. - Capital markets law has not been approved by Congress yet. - Authorities plan to introduce corporate governance and market risk regulations and to move towards Basel III in 2017-2019. - Progress is still slow on improving consolidated supervision of financial conglomerates, tightening definitions of related parties, and stepping up ring-fencing of on-shore banks with respect to off-shore banks. - Exchange Rate Policy recommendation and implementation: - Recommendation: Step up efforts to de-dollarize credit, mainly by allowing the XR to fluctuate to force agents to internalize FX risks and promote hedging. - Implementation: - On January 1, 2016, the authorities increased the fluctuation margin for interventions in the foreign exchange market from 0.70 to 0.75 percent of the five-day moving average of the exchange rate. Interventions have been conducted according to the rule. - Structural Policies recommendation and implementation: - Recommendation: Higher social spending to reduce poverty and build skilled labor force; structural reforms to improve business climate, reduce anti-competitive practices, limit influence of vested interests, and combat crime; greater regional integration through customs union completion, harmonization of trade rules, and further integration of services and factor markets. - Implementation notes: - Little progress on poverty reduction; some past progress reversed. - No substantial improvement in competitiveness indicators yet. - Ongoing fight against corruption and efforts to improve fiscal transparency are steps in the right direction. - Some progress on regional integration, including implementation of the customs union with Honduras. - Tighter regional integration would require further harmonization of trade rules and taxes as well as further integration of services and factor markets. *Source: _cr16281 - 1. IMF Work* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16281.pdf_