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International Monetary Fund. Western Hemisphere Dept.

1. COVID-19 came at a time of macroeconomic stability and firming growth. Guatemala proved the steadiest economy in Latin America post-GFC (with an average growth of 3½ percent) and economic momentum was strong pre-pandemic. Robust remittances, soaring investor confidence upon the inauguration of Giammattei’s administration (January 2020) and accommodative fiscal and monetary policies supported growth while keeping inflation expectations firmly anchored. The external position remained strong and the banking system liquid and well capitalized.

Mario Pessoa, Andrew Okello, Artur Swistak, Muyangwa Muyangwa, Virginia Alonso-Albarran, and Vincent de Paul Koukpaizan
The value-added tax (VAT) has the potential to generate significant government revenue. Despite its intrinsic self-enforcement capacity, many tax administrations find it challenging to refund excess input credits, which is critical to a well-functioning VAT system. Improperly functioning VAT refund practices can have profound implications for fiscal policy and management, including inaccurate deficit measurement, spending overruns, poor budget credibility, impaired treasury operations, and arrears accumulation.This note addresses the following issues: (1) What are VAT refunds and why should they be managed properly? (2) What practices should be put in place (in tax policy, tax administration, budget and treasury management, debt, and fiscal statistics) to help manage key aspects of VAT refunds? For a refund mechanism to be credible, the tax administration must ensure that it is equipped with the strategies, processes, and abilities needed to identify VAT refund fraud. It must also be prepared to act quickly to combat such fraud/schemes.
Mr. Ricardo Fenochietto and Juan Carlos Benitez
This paper analyses and compares two different groups of tools, the first to encourage the use of invoices (or payment systems) and the second to refund the VAT to low-income individuals. The analysis contributes to the existing literature by providing a clear characterization between these two groups of tools that are too often misunderstood and offers clear guidance to policymakers on the benefits and pitfalls of them based on available empirical studies and novel data analysis. Briefly, the first group includes a set of regressive and distortive tools (such as, allowing deducting the VAT paid on personal consumption from the PIT and reducing the VAT rate for using electronic means of payments or registration), while the second group includes tools that are less distortionary and improve income distribution (tax credits and VAT rate reduction targeted only at low-income individuals). This paper also finds that allowing the deduction of personal consumption against the PIT’s taxable base (i) did not impact positively the VAT revenue in Guatemala and (ii) worsens the income distribution in Ecuador.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper estimates potential output growth and the output gap for Guatemala. Potential output growth averaged 4.4 percent just before the global financial crisis but has since declined to 3.75 percent owing to lower capital accumulation and total factor productivity (TFP) growth. It is estimated at 3.8 percent in 2016, and the output gap has virtually closed. Potential growth is expected to reach 4 percent in the medium term owing to the expected improvements in TFP growth. Policies should also prioritize mobilizing domestic savings to invest and build a higher capital stock.
International Monetary Fund. Middle East and Central Asia Dept.

This Selected Issues paper estimates both Guatemala’s potential output and output gap using a wide range of econometric techniques. The analysis suggests that Guatemala’s potential output growth is about 3.5 percent for the whole sample period and that the output gap is almost closed. Results are highly robust among different methodologies. Among the methods used, several well-known time series filters and two different estimations of a state-space model are included. Additionally, a test for structural breaks in the series of potential GDP is presented. All methodologies conclude that the output gap at the end of 2012 is almost closed at -0.2 percent of potential GDP.

Stephanie Medina Cas, Mr. Alejandro Carrion-Menendez, and Ms. Florencia Frantischek
Several Central American (CADR) central banks with independent monetary policies have adopted policy interest rates as their main instrument to signal their monetary policy stances, often in the context of adopting or transitioning to inflation targeting regimes. This paper finds that the interest-rate transmission mechanism, or the pass-through of the policy rate to market rates, is generally weaker and slower in CADR than in the LA6, the countries selected as benchmarks. A variety of potential factors behind this finding are examined, including the degrees of financial dollarization, exchange rate flexibility, bank concentration, financial sector development, and fiscal dominance. Through panel data analysis, the study suggests that the transmission mechanism can be strengthened by increasing exchange rate flexibility, and, over time, by adopting measures towards reducing financial dollarization, developing the financial sector, and reducing bank concentration.
International Monetary Fund
The natural disasters that hit the country recently caused human losses and had a negative impact on the economy; however, they did not deviate the economic recovery path. Currently, growth in exports and imports is accelerating, remittances are recovering, and international reserves are well above end-2009 levels. The authorities have recently adopted regulations on liquidity and foreign currency credit risk management and have made further progress toward full provisioning of nonperforming loans. Finally, the IMF-supported program has also contributed to the achievement of their economic program goals.
International Monetary Fund

This paper discusses a request from the Guatemalan authorities for an 18-month Stand-By Arrangement (SBA) with total access of SDR 630.6 million (about US$951 million). Guatemala has a strong track record of macroeconomic stability. The economy is open and hence vulnerable to external shocks. The authorities have taken a number of upfront measures to mitigate the impact of the external shock and preserve macroeconomic stability. The program will support the authorities’ policies and provide insurance against significant downside risks.

International Monetary Fund
This paper discusses a request from the Guatemalan authorities for an 18-month Stand-By Arrangement (SBA) with total access of SDR 630.6 million (about US$951 million). Guatemala has a strong track record of macroeconomic stability. The economy is open and hence vulnerable to external shocks. The authorities have taken a number of upfront measures to mitigate the impact of the external shock and preserve macroeconomic stability. The program will support the authorities’ policies and provide insurance against significant downside risks.
International Monetary Fund

This paper examines Guatemala’s Request for a Stand-By Arrangement (SBA). The authorities are requesting a 12-month SBA in an amount equivalent to SDR 84 million (40 percent of quota) to support an economic program aimed at reducing the fiscal deficit and restructuring the financial system, while sustaining higher outlays on social and basic infrastructure as called for by the Peace Accords. The program assumes an acceleration of real GDP growth to 2.25 percent and a reduction in inflation to a 4–6 percent range.