On May 25, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Guatemala.
Underpinned by a solid macroeconomic framework, the economy has endured significant political tensions since 2015. Supporting broad macroeconomic stability, a sound monetary policy management has helped keep inflation expectations firmly anchored. Fiscal deficits have remained at decade lows on the back of low debt tolerance and inadequate budgetary execution, partly a result of anti-corruption efforts. Terms of trade gains and an upsurge in remittances inflows moved the current account into a sizable surplus. The financial system is sound and well-regulated while vulnerabilities seem manageable.
Growth performance nevertheless falls shorts of the rates needed to achieve Guatemala’s aspirations to meaningfully lift the living standards of its citizens. Income per capita over the past decade has grown at an average rate of 1.1 percent, a rate that is insufficient to meaningfully reduce Guatemala’s high levels of poverty (currently at 60 percent of the population). Over the past two years, growth slowed to 2.8 percent in 2017, down from 4.1 percent in 2015. The slowdown has been broad-based, evident in employment, private consumption, and investment.
Near-term growth prospects remain subdued, at 3.2 percent in 2018 and 3.6 percent in 2019. Better U.S. growth, accommodative monetary conditions, and some support from pent-up government spending will support the growth pick-up. However, the fiscal impulse will remain moderate and key reforms that could help attract private investment are likely to be held back until after the presidential elections next year. In all, the economy is expected to operate with spare capacity over the near-term and inflation to fall below the mid-point of the central bank’s target band. The external position is projected to return to a modest deficit by 2021, driven by a partial normalization of the remittance and terms of trade positive shocks. Risks to the outlook are tilted to the downside. Domestic risks include an under-execution of budget spending and a delay in judiciary decisions that allow the resumption of operations of a large mining company. External risks include worsening global financial conditions and a step-up in the anti-immigration efforts by the U.S. government.
Executive Board Assessment[2]
They commended Guatemala for maintaining a solid record of macroeconomic stability and resilience, supported by prudent economic management. This has allowed the country to withstand economic shocks and politically difficult circumstances. Guatemala’s near-term growth has been good, although poverty levels remain high. Directors noted that a modest recovery can be expected with accommodative monetary conditions, recovery in budgetary spending from low levels and higher growth in the U.S. To guard against downside risks in the near term and foster growth over the medium term, Directors called for greater macroeconomic policy support for the economy. In addition, structural reforms are essential to sustain higher growth, help attract private investment, make growth more inclusive and reduce poverty.
Directors generally encouraged the authorities to adopt a supplementary budget that raises spending limits and supports near term growth, with a particular focus on raising social and capital spending. A stronger effort is also needed to increase spending execution and flexibility. Directors emphasized that inadequate budgetary revenues constrain the government’s ability to invest in physical and human capital. In this context, Directors called for an integral fiscal reform encompassing better tax administration and tax policy changes. They underlined that strong governance is critical to durably raise investment and support revenue mobilization.
Directors commended the authorities for keeping inflation expectations firmly anchored over the last several years. Directors considered that the central bank could remain open to lowering the policy rate if the contribution of fiscal policy to growth falls short of expectations, activity indicators have not strengthened by mid-year and inflation risks remain on the downside. Directors acknowledged the central bank’s efforts to gradually widen the band before exchange rate intervention is triggered and called for continuing efforts to increase exchange rate flexibility to buffer against shocks. They also underlined the need for continued efforts to improve monetary transmission, including through a reduction in financial dollarization and development of domestic capital markets.
Directors welcomed the soundness of the financial sector. Nevertheless, there remains a need to further develop macroprudential policies and move toward Basel III standards, implement consolidated supervision, reinforce bank resolution, and strengthen the AML/CFT framework.
Directors called for continued efforts to raise living standards. Lifting investment and achieving the Sustainable Development Goals are important to capitalize on the demographic dividend that is expected over the next two decades. Directors encouraged efforts to expand social protection programs and combat informality to improve social outcomes.
Directors stressed the importance of improving the business climate, including through pro competition reforms and by reducing the uncertainty weighing on extractive industries. Directors welcomed ongoing efforts to fight corruption, including measures to restore confidence in public procurement and to promote government transparency and accountability. Directors encouraged the authorities to strengthen judicial effectiveness and reinforce the asset disclosure regime for public officials.
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Guatemala: Selected Economic and Social Indicators |
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I. Social and Demographic Indicators |
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Population 2018 (millions) |
17 |
Gini index (2014) |
49 |
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Percentage of indigenous population (2016) |
41 |
Life expectancy at birth (2016) |
72 |
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Population below the poverty line (Percent, 2014) |
59 |
Adult illiteracy rate (2015) |
21 |
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Rank in UNDP development index (2016; of 188) |
125 |
GDP per capita (US$, 2016) |
4,155 |
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II. Economic Indicators |
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Est. |
Projections |
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2014 |
2015 |
2016 |
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2017 |
2018 |
2019 |
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Income and Prices |
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Real GDP |
4.2 |
4.1 |
3.1 |
|
2.8 |
3.2 |
3.6 |
|
|
Consumer prices (end of period) |
2.9 |
3.1 |
4.2 |
|
5.7 |
4.2 |
3.5 |
|
|
Monetary Sector |
|
|
|
|
|
|
|
|
|
M2 |
8.7 |
9.4 |
6.6 |
|
8.4 |
8.6 |
7.4 |
|
|
Credit to the private sector |
8.8 |
12.8 |
5.9 |
|
3.8 |
7.5 |
8.5 |
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Saving and Investment |
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|
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Gross domestic investment |
13.7 |
13.6 |
12.9 |
|
12.1 |
11.8 |
11.7 |
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Private sector |
12.0 |
12.3 |
11.7 |
|
11.0 |
10.7 |
10.5 |
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Public sector |
1.7 |
1.3 |
1.2 |
|
1.1 |
1.1 |
1.2 |
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Gross national saving |
11.6 |
13.5 |
14.4 |
|
13.6 |
13.0 |
12.4 |
|
|
Private sector |
11.4 |
13.4 |
14.1 |
|
13.6 |
13.1 |
12.7 |
|
|
Public sector |
0.2 |
0.1 |
0.3 |
|
0.0 |
-0.1 |
-0.3 |
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External saving |
2.1 |
0.2 |
-1.5 |
|
-1.5 |
-1.1 |
-0.7 |
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External Sector |
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Current account balance |
-2.1 |
-0.2 |
1.5 |
|
1.5 |
1.1 |
0.7 |
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Trade balance (goods) |
-10.3 |
-8.7 |
-7.6 |
|
-8.0 |
-8.2 |
-8.3 |
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Exports |
18.7 |
17.0 |
15.4 |
|
14.9 |
14.8 |
15.0 |
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Imports |
29.0 |
25.7 |
23.0 |
|
22.9 |
23.0 |
23.3 |
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Of which: oil & lubricants |
5.6 |
3.6 |
3.1 |
|
3.5 |
3.8 |
3.8 |
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of which repayment of arrears |
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|
|
|
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Other (net) |
8.2 |
8.6 |
9.0 |
|
9.5 |
9.3 |
9.0 |
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Of which: remittances |
9.7 |
10.1 |
10.7 |
|
11.2 |
11.0 |
10.8 |
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Capital account balance |
0.0 |
0.0 |
0.0 |
|
0.0 |
0.0 |
0.0 |
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Financial account balance (Net lending (+)) |
-2.9 |
-0.9 |
0.5 |
|
1.0 |
1.1 |
0.7 |
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Of which: FDI, net |
-2.2 |
-1.7 |
-1.6 |
|
-1.3 |
-1.3 |
-1.3 |
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Errors and omissions |
-0.8 |
-0.7 |
-1.0 |
|
-0.6 |
0.0 |
0.0 |
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Change in reserves assets (Increase (+)) |
0.1 |
0.7 |
2.0 |
|
3.4 |
0.6 |
0.0 |
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Net International Reserves |
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(Stock in months of next-year NFGS imports) |
4.0 |
4.5 |
4.9 |
|
5.7 |
5.5 |
5.2 |
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(Stock over short-term debt on residual maturity) |
1.6 |
1.6 |
1.8 |
|
2.2 |
2.1 |
1.9 |
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Public Finances |
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|
|
|
|
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Central Government |
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|
|
|
|
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|
|
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Revenues |
11.5 |
10.8 |
11.0 |
|
10.8 |
10.9 |
10.9 |
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Expenditures |
13.4 |
12.3 |
12.1 |
|
12.1 |
12.3 |
12.6 |
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Current |
10.5 |
10.1 |
10.0 |
|
9.9 |
10.0 |
10.2 |
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Capital |
2.9 |
2.2 |
2.1 |
|
2.2 |
2.2 |
2.4 |
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Primary balance |
-0.4 |
0.1 |
0.4 |
|
0.1 |
0.0 |
-0.2 |
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Overall balance |
-1.9 |
-1.4 |
-1.1 |
|
-1.3 |
-1.4 |
-1.7 |
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Financing of the central government balance |
1.9 |
1.4 |
1.1 |
|
1.3 |
1.4 |
1.7 |
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Net external financing |
0.0 |
0.7 |
0.8 |
|
0.2 |
0.1 |
-0.2 |
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Net domestic financing |
1.8 |
0.7 |
0.3 |
|
1.2 |
1.6 |
1.9 |
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Of which: use of government deposits |
0.0 |
-0.1 |
-0.5 |
|
-0.1 |
-0.1 |
0.0 |
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Rest of Nonfinancial Public Sector Balance |
0.4 |
0.2 |
0.2 |
|
0.2 |
0.2 |
0.2 |
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Combined Nonfinancial Public Sector |
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|
|
|
|
|
|
|
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Primary balance |
0.0 |
0.3 |
0.6 |
|
0.3 |
0.2 |
0.0 |
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Overall balance |
-1.5 |
-1.2 |
-0.9 |
|
-1.1 |
-1.2 |
-1.5 |
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Central Government Debt |
24.3 |
24.2 |
24.5 |
|
24.7 |
24.8 |
25.1 |
|
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External |
11.6 |
11.6 |
12.0 |
|
12.6 |
12.4 |
12.4 |
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Domestic 1/ |
12.6 |
12.6 |
12.6 |
|
12.1 |
12.4 |
12.7 |
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Memorandum Items: |
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GDP (US$ billions) |
58.7 |
63.8 |
68.7 |
|
74.6 |
81.1 |
86.3 |
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Output gap (% of GDP) |
0.1 |
0.7 |
0.3 |
|
-0.2 |
-0.4 |
-0.2 |
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Sources: Bank of Guatemala; Ministry of Finance; and IMF staff estimates and projections. 1/ Does not include recapitalization of obligations to the central bank. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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