IMF Executive Board Completes First Review Under Guatemala’s Stand-By Arrangement

This paper discusses key findings of the First Review Under the Stand-By Arrangement for Guatemala. The fiscal deficit is increasing owing to a sharp decline in revenues, associated with the contraction in imports and domestic demand. The policy interest rate has been cut. All quantitative performance criteria through June have been met. Inflation has fallen below the consultation band set in the program, triggering a consultation with IMF staff. Fiscal policy needs to continue striking a balance between avoiding a procyclical stance and maintaining debt sustainability.

Abstract

This paper discusses key findings of the First Review Under the Stand-By Arrangement for Guatemala. The fiscal deficit is increasing owing to a sharp decline in revenues, associated with the contraction in imports and domestic demand. The policy interest rate has been cut. All quantitative performance criteria through June have been met. Inflation has fallen below the consultation band set in the program, triggering a consultation with IMF staff. Fiscal policy needs to continue striking a balance between avoiding a procyclical stance and maintaining debt sustainability.

IMF Executive Board Completes First Review Under Guatemala’s Stand-By Arrangement

The Executive Board of the International Monetary Fund today completed the first review of Guatemala’s economic performance under the 18-month Stand-By Arrangement. The arrangement, in the amount of SDR 630.6 million (about US$1 billion) was approved in April 22, 2009 (see Press Release No. 09/142).

With completion of the review, a total of SDR 462.4 million (about US$734 million) will be available for drawing. The Guatemalan authorities intend to continue treating the arrangement as precautionary.

The authorities’ economic program for 2009–10, supported by the current arrangement, aims at mitigating the impact of the global crisis. The strategy is centered on four pillars: a moderate fiscal stimulus to support domestic demand; a monetary policy focused on meeting the inflation target and a flexible exchange rate to facilitate economic adjustment; a strengthening of financial sector policies to increase banking sector resilience and enhance its safety net and resolution procedures; and a refocusing of public expenditures toward social spending and public investment.

Following the Executive Board discussion on Guatemala, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, issued the following statement:

“After a solid economic performance in recent years, the Guatemalan economy is being negatively affected by the global crisis. Economic growth is slowing owing to lower domestic and external demand, reflected in lower exports, remittances, tourism receipts and capital inflows. The authorities are to be commended for their strong program implementation in a difficult environment, and for responding appropriately to the economic slowdown.

“Fiscal policy is striking a balance between supporting demand and maintaining fiscal sustainability. With revenues falling due to lower imports and weak domestic demand, the fiscal deficit target in the program has been revised upward in 2009 and 2010 as the authorities’ aim at protecting spending on social programs.

“Rekindling the fiscal reform agenda is essential to preserve sustainable debt dynamics. Revenue-enhancing reforms are at the core of a strategy to address social and infrastructure needs, enhance the capacity to adopt countercyclical policies, and boost confidence in the authorities’ capacity to stabilize the public debt-to-GDP ratio at moderate levels. Given the withdrawal of the indirect tax reform from Congress, the plan to pursue a revenue reform is welcome. In addition, curtailing tax exemptions, including those associated with the law on free trade zones, will be key to safeguard fiscal revenue and ensure a level playing field.

“The gradual easing of the monetary policy stance has balanced the goals of supporting demand and avoiding disorderly exchange rate movements. Monetary policy has scope to support domestic demand as long as inflation remains subdued and there are no external pressures. Exchange rate flexibility has facilitated the adjustment of the economy to the external shock and should be preserved, while safeguarding international reserves.

“The financial system has weathered the economic slowdown well, and the authorities are committed to moving ahead with banking sector reforms. Congressional approval and a decisive implementation of the proposed amendments to the banking law will reduce risks from offshore operations and connected lending, enhance the enforcement powers of the superintendency of banks, and improve bank resolution procedures.” Mr. Portugal said.

Guatemala: First Review Under the Stand-By Arrangement and Requests for Modification of Performance Criterion and Consultation Clause: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guatemala
Author: International Monetary Fund