May 28, 2024
An International Monetary Fund (IMF) mission, led by Ms. Maria A. Oliva, visited Guatemala City during May 13-23 for the 2024 Article IV consultation. At the end of the visit, the mission issued the following statement:
The Guatemalan economy continues to show remarkable stability and soundness thanks to a legacy of prudent monetary and fiscal policies- with the inflation rate on target, ample international reserves, contained fiscal deficits, and a low public debt/GDP ratio that continues to fall. In line with the country’s goals, the administration needs to advance in the structural reform agenda. The implementation of urgent reforms in the areas of infrastructure, human capital investment, and governance cannot wait if it is to support the country’s productive sectors and secure higher sustained and inclusive growth.
Macroeconomic policy will require structural reforms to continue to support economic growth and increase it in the medium term.
- Growth moderated in 2023 to 3.5 percent and is expected to remain at that level in 2024. Despite some inflationary pressures in the coming months, inflation is expected to remain within the bands at the end of this and next year. The exchange rate remained relatively stable. The current account is expected to remain in surplus, but to gradually decline with higher imports as the administration’s fiscal agenda is being implemented. Credit market development opportunities and ample liquidity in the markets help explain the double-digit growth in bank credit to the private sector. Slowing exports and limited foreign investment underscore the urgent need for reforms.
- The country’s outlook remains favorable, with risks skewed to the downside. Guatemala’s dependence on remittances conditions the robustness of private consumption to the U.S. Hispanic labor market conditions, with greater impact on the most vulnerable population. This dependence makes Guatemala’s monetary and exchange rate policies more complex and costly. Other risks to the economy would include the lack of progress in the economic agenda, with economic growth below potential and the possible resurgence of social unrest. Increased volatility in commodity prices and the scourge of natural disasters or major cyber-attacks are other risks on the horizon. Successful execution of the administration’s structural reform agenda could lead to higher inclusive and sustainable growth potential.
A renewed opportunity to strengthen spending and its quality, as well as the culture of public management.
- Guatemala needs more tax collection if it wants to continue advancing on the road to development. The efforts to strengthen the tax administration that have been made over the years have been bearing fruit, but they will require greater impetus if the country’s development challenges are to be faced. We recognize the efforts of the tax authorities, but at the same time it needs to be acknowledged that revenues are among the lowest in the world. Realistically, with tax revenue collection below 13 percent of GDP (11.7 percent in 2023), it will be difficult to address the country’s urgent needs (e.g., infrastructure, education, health, and malnutrition) without increasing debt. The mission has advocated in favor of ensuring continuity in tax management, approving legal protections for public servants in the fulfillment of their mandate, as well as improving the communication with taxpayers. A structural increase in tax collection-very necessary to achieve sustainable growth goals consistent with the investment grade discussion-will require comprehensive tax reform in the future. Public outreach will help strengthen the importance of tax compliance and of passing a tax reform that finances an agenda of quality spending.
- The mission stressed the importance of making progress in the execution of capital spending, based on the quality, efficiency, and transparency criteria, in line with the vision advanced by the administration. Spending execution will require a multi-year agenda of strategic transformation projects for the country, with a clear timeline for objectives and realistic tax revenue projections. In efforts to increase infrastructure investment and show results, the mission emphasized the importance of sharing with the public concrete and detailed action plans of the various ministries (e.g., Ministry of Communication, Infrastructure and Housing, Ministries of Education and Health) to guide expectations and sustain support. Institutional strengthening, with greater transparency, efficiency, and quality of spending, are some of the areas of focus and on which the IMF is assisting with technical assistance.
- Aware of the imperative need to reduce gaps in the country, the team supports temporary fiscal deficits that exceed two percent, if linked to an action plan of well-designed and clear investments in the areas of infrastructure, education, health, and social programs to address child malnutrition and poverty. Guatemala’s debt-to-GDP ratio is low and projected to be sustainable under the administration’s expansionary fiscal policy. With financing costs on the rise, the mission recommends developing the domestic capital market – developing the secondary debt market and yield curve and communicating with investors-in order to ensure more competitive market conditions over time, including for the private sector.
Higher growth and absorption of capital flows into the country requires gradual strengthening of the monetary and exchange rate policy frameworks.
- Changes in the leading interest policy rate should continue to be data driven. Anticipated downward adjustments to the leading interest rate, which could require subsequent upward corrections, could de-anchor inflation expectations and jeopardize the credibility of the monetary authority. At this juncture, it is important for the Central Bank to move forward with reforms that will strengthen the effectiveness of the policy rate by strengthening the monetary policy transmission mechanisms. With improvements in liquidity provision, the interbank market should be able to manage liquidity asymmetries that may arise in the system. Under an expansive fiscal policy scenario, consistency in monetary, exchange rate, and fiscal policies will play a particularly important role. In addition, it is important to continue advancing in the development of foreign exchange and hedging, debt, and financial markets that allow the private sector to manage market risks, as well as to provide instruments for climate risk management. The mission continues to advocate for a solvent Central Bank that is able to conduct monetary liquidity management and maintain price stability, as well as continue addressing challenges ahead.
An inclusive financial sector guided by prudential principles could further support the development of Guatemala.
- The Guatemalan banking sector remains liquid and profitable and shows resilience to shocks. The approval of the credit regulations of the Superintendency of Banks, as well as the follow-up on their implementation and effectiveness, is a step forward in strengthening the sector. The mission reiterates the need to approve a new Banking Law (which updates the 2002 Law on Banks and Financial Groups)aligned with international standards of regulatory, supervisory, and crisis management practices. The law needs to also provide supervisory authorities with the necessary tools to monitor risks and vulnerabilities that could affect Guatemala’s financial system, as well as to be able to respond, if necessary. The mission also emphasized the importance of communicating with the markets through risk assessment publications and the publication of bank balance sheets using international accounting standards.
Steady progress in the implementation of reforms would improve the investment climate.
- A good competition law that includes investment aspects, an infrastructure and ports laws, the revision of the Public Private Partnerships (PPP) and Free Trade Zone laws, as well as the civil servants and procurement reforms are essential for the economy to take off. Also, to improve legal certainty consistent with international best practices, the mission urges the approval of internal practices and structures in the legislation process such as the review of draft legal texts by specialized teams and the unification of criteria in the application of legislation in court.
- Greater competitiveness of the economy would require an active policy in favor of the formal labor market, greater digitalization and innovation, and a clear gender strategy, among others. The implementation of the goals established in the 2024-2027 financial inclusion strategy will help reduce social gaps.
- Measures to strengthen governance include the publication of a national anti-corruption plan and medium-term strategy to combat impunity with a timetable for implementation and measurement indicators. The approval of legislation aligning Guatemala’s anti-money laundering law with Financial Action Task Force (GAFI/FATF) standards cannot wait longer, given the evaluation based on effective compliance of the Law by 2027.
The mission wishes to thank the Guatemalan authorities for their cooperation and openness in the exchanges throughout our visit and wishes them every success in their efforts to move the country towards an inclusive and sustainable growth that provides answers to all Guatemalans.