Press Release No. <a name="P16_75"></a>05/33

The following statement was issued today in Guatemala City by a staff mission from the International Monetary Fund (IMF):

"An IMF mission visited Guatemala City during February 4-17 for discussions with the Guatemalan authorities on the 2005 Article IV consultation. The discussions covered recent economic and financial developments and the government's economic program, including the Vamos Guatemala plan, which is focused on boosting competitiveness and growth and advancing the social agenda. The mission will present its findings to Fund management upon its return to Washington. It is expected that the Executive Board will complete the review of the Guatemalan economy in early April.

"The mission found that economic performance improved in 2004, with a moderate recovery of growth and a significant strengthening of the external position. Real GDP is estimated to have grown by 2¾ percent, and international reserves rose to record levels, boosted by strong remittances and capital inflows. At the same time, inflation drifted upward to over 9 percent, reflecting higher oil prices and relatively easy monetary conditions.

"The new government that took office in January 2004 adopted the 1996 Peace Accords and their ambitious economic and social goals as the platform for the government's policy agenda. Early actions have aimed at addressing corruption; reducing the size of the military; and strengthening the public finances. The budget deficit was reduced sharply in 2004 as non-priority spending was curtailed and steps were taken to avoid a prospective fall in revenue, including through a comprehensive program for tax administration. These actions have provided strong signals of the government's policy intentions and have served to bolster market confidence, which has been underpinned also by Guatemala's low public debt, a much strengthened banking system, the incipient economic recovery, and a favorable external environment. This conjuncture provides a unique opportunity for the government to push ahead with its reform agenda and address widespread poverty, difficult social conditions, and governance problems.

"The government's program rests on three main pillars: macroeconomic stability; financial sector strengthening; and structural reforms to boost growth and reduce poverty. The budget deficit will be limited to 1.8 percent of GDP in 2005, and reduced to 1.5 percent thereafter as additional fiscal resources are mobilized. These additional fiscal resources will provide for a significant rise in public investment and social spending to jump-start the process toward attaining the Peace Accords' objectives and Millennium Development Goals. To support the achievement of these objectives, the government is seeking to build consensus on national priorities and on mobilizing the resources to fund them.

"Monetary policy will be geared to reducing inflation to the 4-6 percent range. The central bank remains committed to a flexible exchange rate policy, and will intervene in the foreign exchange market only to avoid excessive exchange rate volatility. Henceforth such interventions will be made in accordance with the rules-based and transparent mechanism introduced last month.

"The Guatemalan financial system has been strengthened considerably in recent years. Prudential norms have been tightened under the new legal and regulatory framework adopted in 2002; bank supervision has been strengthened; and the offshore banks have been brought into the regulatory framework. The reform process is continuing, and steps will be taken to address the persistent losses of the state mortgage bank (CHN).

"The government's structural reform program (Vamos Guatemala) is focused on improving competitiveness, economic growth, and social conditions. A key goal is to foster a business climate characterized by transparency, the rule of law, and good governance, with the campaign against corruption being a core element of the government's strategy. The government is seeking early ratification of CAFTA to help underpin the economic recovery, and additional resources are being allocated to health, education, and public security to boost medium-term growth prospects. Tied in with this is the social component of the program (Guate Solidária), which calls for promoting sustainable economic activity in partnership with the private sector, and the authorities are redoubling the development effort in municipalities with the highest incidence of poverty.

"Fund staff will continue a close dialogue and technical cooperation with the authorities as they proceed with the implementation of their economic program."