Press Release No. 08/54

Press Release No. 08/54

An International Monetary Fund (IMF) staff mission led by Mr.Gabriel Lopetegui, Deputy Division Chief in the Western Hemisphere Department, today issued the following statement in Guatemala City:

"An IMF mission visited Guatemala during March 3-14 to hold the 2008 Article IV discussions with Guatemala, to review economic developments and the authorities' policy plans. The mission met with Finance Minister Juan Alberto Fuentes Knight, Central Bank Governor Maria Antonieta de Bonilla, Superintendent of Banks Edgar Barquin, members of the monetary board, other senior public sector officials, and representatives of the private sector, banks, and social organizations.

"Despite tensions in the financial sector in late 2006 and early 2007, macroeconomic stability has been maintained and GDP growth accelerated to 5.7 percent last year, the highest in recent years. Inflation increased to 8¾ percent, partly fueled by external factors (higher oil and food prices) that have also affected the region. The fiscal deficit and public debt remain low, the resolution of two failed banks has almost been completed, and international reserves remain at historically high levels.

"Looking ahead, the macroeconomic outlook is generally favorable, although downside risks from a deceleration in the U.S. economy will need to be carefully monitored. The mission welcomed the authorities' plan to move forward with a long-awaited tax reform that, along with recent progress on tax administration, would help finance higher expenditure on essential public goods. The mission supported actions to increase efficiency and transparency of fiscal expenditure, including the focusing of electricity subsidies on poorer consumers and various measures to better control budget execution. The mission welcomed extensive work on improving the banking legal framework and made a number of recommendations to eliminate obstacles to supervision, bring key regulations closer to international best practices, and strengthen the resolution framework. With inflation presently above the central bank's target, the mission recommended continued action by the monetary authorities to contain second round effects on inflation from higher commodity prices and more exchange rate flexibility to enhance monetary policy, reduce incentives to dollarization, and facilitate adjustment to external shocks.

"The mission's recommendations are summarized in a brief concluding statement that was left with the authorities. The mission will be preparing a report that will be considered by the IMF's Executive Board in May 2008."