Press Release No. <a name="P17_75"></a>05/257

The following statement was issued on November 18 in Ciudad de Guatemala by Mr. Mario Garza, Deputy Division Chief in the Western Hemisphere Department of the International Monetary Fund (IMF):

"An IMF mission visited Guatemala during November 9-17 for discussions on recent economic developments and the outlook for 2006. The mission met with Finance Minister Ms. Maria Antonieta de Bonilla, the Central Bank President Mr. Lizardo Sosa, and other senior officials.

"The economy has performed well in 2005, despite high world oil prices and the damage from tropical storm Stan last month. Real GDP is expected to grow by some 3¼ percent this year, and the official reserves of the central bank have risen sharply, boosted by strong remittances and capital inflows. These results reflect sound macroeconomic policies, anchored on a fiscal stance that maintains public debt at a low level. Inflation will likely exceed the target for this year, due to continued high oil prices. However, the central bank has been stepping up its policy interest rate to prevent inflationary pressures from becoming entrenched.

"The mission welcomed the government's reconstruction plan launched last week. The plan is designed to help the poor and indigenous groups, which were hardest hit by Stan, and repair damaged infrastructure. The plan will also provide a basis for the support of the international community. The impact of Stan on the productive base appears likely to be limited and short-lived.

"For 2006, the mission supports the government's goals of consolidating macroeconomic stability and fostering economic growth. In this context, the mission welcomed the central bank's commitment to bring down inflation to the target range of 4-6 percent. The overall fiscal deficit for 2006 will have to rise moderately to give room to reconstruction projects, while also providing scope for priority social spending. The authorities will remain vigilant to ensure that the fiscal stance is consistent with available financing and therefore lowering inflationary pressures, and also with safeguarding the external position of the economy in the face of continued high oil prices.

"Guatemala faces the major challenge of improving social conditions and reducing poverty. To address this challenge, a consensus needs to be built on a broader tax reform that would support higher social spending, and put the Millennium Development Goals within reach. The mission supported the legislation proposed to congress to reduce tax evasion and ensure more equitable enforcement, and welcomed recent reforms to strengthen transparency and accountability of the public finances. These efforts should contribute to the needed consensus on a broader tax reform.

"The mission agreed with the authorities that Guatemala and the countries in the region should avoid a competitive bidding for foreign investment by granting fiscal incentives, since this would weaken the fiscal position in all countries.

"The IMF will continue a close dialogue with the authorities as they proceed with the implementation of their economic program. The next Article IV consultation with Guatemala is scheduled to take place in mid-2006."