Guatemala: Staff Concluding Statement of the 2023 Article IV Mission

Mission Concluding Statement

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Guatemala: Staff Concluding Statement of the 2023 Article IV Mission

March 14, 2023

Washington, DC: An International Monetary Fund (IMF) mission, led by Ms. Maria A. Oliva, visited Guatemala City during February 28-March 13 for the 2023 Article IV consultation. At the end of the visit, the mission issued the following statement:

Guatemala should continue to build on the achievements made in economic policy. The Guatemalan economy continued to show resilience in 2022, with growth exceeding its potential. Macroeconomic and financial stability was preserved despite an unfavorable global context—trading partners’ growth slowing down, prices surging, and global monetary conditions tightening. Large remittance inflows and vibrant bank credit to the private sector have played an important role in sustaining solid private consumption. Also, large levels of international reserves persist. Stability was also the result of prudent monetary and fiscal policies.

Inflationary pressures in Guatemala continued to add complexity to the policy mix design in the short and medium term. Even though at the onset the main determinants of the pickup in inflation were external factors, second round-effects and demand and supply pressures have been gaining ground and contributing to increase inflation. In this context, the Bank of Guatemala policy rate increases have played an important role in anchoring medium-term expectations. Nevertheless, it is important to stress the need to further strengthen the operationalization of the inflation targeting framework and ensure swift action to accelerate the implementation of the pro-growth structural agenda. Addressing gaps in infrastructure, education, and health, improving governance, and the fight against corruption remain of the first order. Reforms are not only needed to attract foreign direct investment, but to secure a sustainable and inclusive growth.

Guatemala’s prudent macroeconomic policy record has been paying off

Guatemala’s prudent macroeconomic policies—reflected in low fiscal deficits, low debt-to-GDP ratio, a stable currency, and large international reserves—have helped shelter the economy from the challenging global environment and the tightening of global financial conditions. After a strong rebound in 2021, Guatemala’s 2022 growth moderated, and in 2023, growth will decelerate further to 3.4 percent, close to potential growth. A strong external position, with a positive current account and currently dominated by large remittance inflows, also fueled robust domestic consumption. The recovery of the labor market to above pre-pandemic levels and new foreign direct investment projects are also positive signs of strength. These conditions have been widely recognized in the international community, with a recent credit rating upgrade and low sovereign debt spreads.

However, inflationary pressures and uncertainty will continue to pose challenges on the horizon. Inflation is not yet on a declining trend, even though the trend should be expected to revert soon. Imported inflation has been the largest component of headline inflation, but domestic factors (demand and supply pressures and so-called second-round effects) have been gaining steam, forcing the Bank of Guatemala to tighten its stance further in the past months. Easing price pressures will require a reversal of the still widely accommodative stance in the economy.

The outlook is expected to remain broadly positive, but risks are in the downside. Guatemala’s exposure to the U.S. economy and reliance on large remittance inflows make it vulnerable to a sharper U.S. economic slowdown, particularly to the U.S. labor market outlook, even though remittances have proven resilient in past episodes. A significant decline in remittance inflows would have material effects on the most vulnerable. An economic policy response would then be required to provide insurance to the most vulnerable households.

Other risk scenarios, common to various economies, would include, among others: a de-anchoring of inflation expectations, natural disasters, and high commodity price volatility, causing discomfort among the most vulnerable .

Challenging times for monetary policy open new opportunities for further strengthening the framework and practices in monetary operations.

The unanimous decisions to hike the policy rate in the past months send a strong message from the Bank of Guatemala in the resolve to fight Inflation consistent with its Inflation Targeting (IT) framework. The decline in U.S. inflation and base effects kicking in from April 2023 will help tame pressures. However, continued monetary policy efforts will be required. To support Banguat's efforts, the mission proposed a mix of technical measures related to the monetary and operational framework. The gradual transfer of market risk management to the private sector will support the foreign exchange rate's role as a shock absorber. Other urgent measures to help the Bank of Guatemala further improve the effectiveness of monetary policy include the recapitalization of the Bank of Guatemala and the development of hedging tools for the private sector to manage foreign exchange volatility, however, remain.

A renewed opportunity to strengthen public finances and the spending agenda

In 2022, tax administration reform efforts (customs, tax administration enforcement, and digitalization) started to pay off, with an estimated tax collection outturn of 12.1 percent of GDP. These are the proper steps to address the country's investment needs—i.e., social programs, infrastructure, and education and health spending, among others. The continuity of the Superintendence of Tax Administration management team played an important role in achieving these outcomes. The reappointment of these posts should draw on an effort result-based assessment to achieve the medium-term strategic objectives towards properly planning the multi-annual budget. For example, a good understanding of factors limiting VAT collection and streamlining tax exemptions should help further increase the revenue-to-GDP ratio. But a much-needed structural increase in tax collection—necessary to attain the country's development targets— will require renewing past efforts to develop the bases for a comprehensive fiscal reform that supports closing of social and investment gaps, within the framework of a medium-term, multi-year, and pro-growth fiscal budget.

Further strengthening the country’s spending efforts, and ensure high quality of spending, requires sound medium-term planning. The multi-year planning should ensure consistency with the medium-term revenue and debt projections against the medium-term spending needed to attain the authorities’ economic development goals. The strategy Guatemala no se detiene is a good step in planning medium-term. However, closing existing gaps, implementing a transformative infrastructure plan that incorporates resilience to natural shocks in the design, and avoids further implementation delays, will require more effort. A strategic vision, implemented gradually, will be required to ensure connectivity throughout the country and abroad, fostering the country’s competitive edge. For instance, the budget should be flexible enough to allow for a multi-year ambitious infrastructure investment agenda that is consistent with the medium-term targets set. Also, the budget should also link national, subnational, and sectoral planning. Project appraisal procurement should be simplified in line with the size of the project to reduce implementation gaps. Portfolio management and implementation with clear timelines and specific delivery targets, would help fast-track projects. Also, the procedures around PPP investments need to be streamlined. A PIMA/C-PIMA (starting late May 2023) is geared towards identifying gaps in the investment governance framework with a view to increasing high-quality investments and achieving sustainable, inclusive development.

Guatemala’s debt-to-GDP ratio is low, and the country’s risk premium has remained stable and low. The development of the secondary debt markets and completion of the yield curve would not only further help secure low-risk, lower-rates financing but also facilitate private sector access to external financing at lower rates. The latter is particularly relevant to the efforts of Guatemala’s private sector to expand further.

The financial sector has proven to be resilient and could further support Guatemala’s development

Guatemala’s banking sector has proven to be resilient to shocks. An inter-bank market that needs a further development, and the high levels of informality in the economy are some of the limiting factors. The launching of a new digital bank is a step forward. The mission advised the passing of the 2002 Banking Law and Financial Groups reform, aligning regulatory and supervisory practices to international standards, to equipping the authorities with up-to-date tools to monitor risks and vulnerabilities affecting Guatemala’s financial system, and responding if needed. Also, the publication of the Financial Stability Report would provide a tool to communicate with market participants. Banks’ disclosure of their balance sheet and financial statements using international accounting standards would also help lower some of the costs of borrowing abroad.

Guatemala’s financial sector should further deepen, with the insurance sector playing a role in managing climate-related risks. Focus on sustainable investments, resilient to climate risks, would also be key to minimizing reconstruction costs, if needed, and open opportunities to areas that are affected by climate events.

Time for renewed efforts to advance the structural reform agenda, strengthen institutions, and improve the investment climate

Guatemala is at a critical juncture. The country has strong fundamentals thanks to its track record of conducting prudent policies over many years. Also, the Guatemalan authorities have made important strides in reinvigorating opportunities for the private sector. The approval of the leasing and insolvency laws, the law to simplify requirements and administrative procedures, and the law encouraging foreign investment are some examples. The approval of draft laws on civil service reform and infrastructure is also urgent. More is needed, however, if the country is to gear up toward a higher-growth path that is more equitable and sustainable.

A higher potential growth path would require:

Continue adopting measures to expand the formal labor market further, strengthen productivity, and attract investment by widening access to technology and innovation, investing in human capital, and reducing regulatory uncertainty.

Scaling up efforts to improve governance and legal certainty and guarantee responsible and independent anti-corruption institutions, is essential for enhancing the business climate and attracting more investment. The approval of legislation on Anti-Money Laundering and combating the financing of terrorism that brings Guatemala in line with international standards and ensuring its effective implementation is particularly urgent.

The mission would like to thank the Guatemalan authorities for their cooperation and frank discussions throughout our visit.

			Est.	Projections
	2020	2021	2022	2023	2024	2025	2026	2027	2028
	(Annual percentage change, unless otherwise specified)
Income and Prices
Real GDP	-1.8	8.0	4.0	3.4	3.5	3.6	3.7	3.8	3.9
Consumer prices (average)	3.2	4.3	6.9	7.4	5.5	4.4	4.0	4.0	4.0
Consumer prices (end of period)	4.8	3.1	9.2	6.4	5.0	4.0	4.0	4.0	4.0

Money and Credit
M2	18.9	11.6	11.6	11.3	8.5	7.6	7.3	7.4	7.4
Credit to the private sector	6.4	12.7	16.0	14.0	7.0	7.5	7.5	8.0	8.0
	(Percent of GDP, unless otherwise specified)
Saving and Investment
Gross domestic investment	12.8	17.9	14.1	13.8	13.8	14.2	14.2	14.4	14.7
Private sector	12.2	15.7	13.0	12.8	12.8	13.0	13.0	13.2	13.5
Public sector	1.3	1.0	1.1	1.1	1.1	1.2	1.2	1.2	1.2
Gross national saving	17.7	20.4	16.0	15.7	15.4	15.6	15.4	15.3	15.1
Private sector	20.2	19.8	16.1	15.8	15.6	15.8	15.7	15.6	15.4
Public sector	-2.4	0.6	-0.1	-0.1	-0.2	-0.3	-0.3	-0.3	-0.3
External saving	-4.9	-2.5	-1.8	-1.9	-1.6	-1.4	-1.2	-0.9	-0.4

External Sector
Current account balance	4.9	2.5	1.8	1.9	1.6	1.4	1.2	0.9	0.4
Trade balance (goods)	-8.1	-12.6	-14.8	-13.8	-13.6	-13.1	-12.8	-12.6	-12.5
Exports	13.0	14.3	15.3	14.2	13.3	12.7	12.3	11.8	11.4
Imports	21.2	26.8	30.0	28.1	26.9	25.9	25.1	24.4	23.9
Of which: oil & lubricants	3.1	5.2	6.7	5.6	5.2	4.8	4.6	4.4	4.2
Trade balance (services)	-0.3	-1.5	-1.6	-1.4	-1.1	-1.1	-1.1	-1.1	-1.1
Other (net)	13.4	16.6	18.2	17.2	16.3	15.7	15.1	14.6	14.0
Of which: remittances	14.6	17.6	19.2	18.4	17.4	16.8	16.3	15.7	15.2
Capital account balance	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Financial account balance (Net lending (+))	4.2	2.3	1.2	1.9	1.6	1.4	1.2	0.9	0.4
Of which: FDI, net	-1.0	-3.8	-1.3	-1.4	-1.4	-1.4	-1.4	-1.4	-1.4
Errors and omissions	0.0	-0.2	-0.6	0.0	0.0	0.0	0.0	0.0	0.0
Change in reserve assets (Increase (+))	4.1	3.2	0.0	0.5	0.9	0.8	0.8	0.7	0.7

Net International Reserves
Stock in months of next-year NFGS imports	8.0	7.5	7.0	6.9	7.0	7.1	6.7	7.0	…
Stock over short-term debt on residual maturity	3.5	3.5	4.0	3.9	4.0	3.8	3.9	4.0	…

Central Government Finances
Revenues	10.7	12.2	12.8	12.3	12.2	12.1	12.0	11.9	11.8
Expenditures	15.6	13.4	14.6	14.0	14.0	14.0	13.9	13.8	13.8
Current	12.6	11.0	12.0	11.5	11.5	11.4	11.2	11.1	11.1
Capital	3.0	2.3	2.5	2.4	2.5	2.6	2.7	2.7	2.7
Primary balance	-3.2	0.5	0.0	-0.1	-0.2	-0.3	-0.3	-0.3	-0.3
Overall balance	-4.9	-1.2	-1.7	-1.7	-1.8	-1.9	-2.0	-2.0	-2.0

Financing of the central government balance	4.9	1.2	1.7	1.7	1.8	1.9	2.0	2.0	2.0
Net external financing	-0.3	0.8	0.0	0.7	0.5	0.4	0.4	0.5	0.3
Net domestic financing	2.5	0.4	1.7	1.0	1.3	1.5	1.6	1.5	1.6

Central Government Debt	31.5	30.4	30.1	28.6	28.1	27.9	27.7	27.6	27.5
External	13.5	12.7	13.0	12.9	12.4	12.0	11.6	11.3	10.8
Domestic¹	18.0	17.7	17.1	15.8	15.7	15.9	16.2	16.4	16.7

Memorandum items
GDP (US$ billions)	77.6	87.0	93.7	102.3	111.0	119.5	128.2	137.7	148.0
Output gap (% of GDP)	-3.1	0.4	0.1	0.0	0.0	0.0	0.0	0.1	0.1
Sources: Bank of Guatemala; Ministry of Finance; and Fund staff estimates and projections.
¹ Does not include recapitalization of obligations to the central bank.

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Mission Concluding Statement

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Guatemala: Staff Concluding Statement of the 2023 Article IV Mission

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IMF Communications Department

MEDIA RELATIONS

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