We would like to thank the Staff for a helpful and well-written report. The Guatemalan Authorities broadly agree with the Staff’s assessment. Under the Stand-By Arrangement, all end-June quantitative performance criteria were met. The Authorities want to stress that they continue treating the arrangement as precautionary and they are strongly committed to their economic program.

The global turmoil has had negative impact in most small economies, Guatemala has not been the exception. We are enduring the consequences of, on the one hand, the deterioration in global trade, and on the other, the sharp economic downturn in most of the developed world. The channels through which these imbalances are affecting the Guatemalan economy are: i) lower exports; ii) reduction in tourism receipts; iii) decline in remittances; iv) slowdown in private capital flows; and v) large contraction in imports that impacts fiscal revenues hard. In spite of these developments, the long track record of accomplishment on fiscal and monetary discipline that, along with the implementation of important structural reforms, have contributed to maintain macroeconomic stability. Economic growth is projected to be around 0.4 percent in 2009 and inflation is expected to decline sharply.

To help mitigate the adverse effects of the global crisis my authorities will continue implementing their economic program, which aims at maintaining price stability and giving a countercyclical role to fiscal policy. A key priority for the authorities is to offset the effect of the current crisis on the most vulnerable sectors of the population and to continue with the mid-term effort to reduce poverty. To attend extreme poverty, emphasis has been placed on the government program of conditional cash transfers. The program, Mi familia progresa, aims at ensuring that poor children attend school and visit health centers regularly. In 2009, this program expects to cover around 500,000 families with a total budget of US$150 million.

With fiscal revenues declining more sharply than originally envisaged, the target for fiscal deficit of the consolidated public sector has raised to 3.0 percent of GDP in 2009 and 2.6 percent of GDP in 2010. The authorities believe that the revised fiscal targets strike an appropriate balance between providing a necessary stimulus to domestic demand and preserving social spending, while also keeping public debt dynamics manageable.

The revised fiscal deficit for 2009 and 2010 will be partly financed from external sources, mostly multilateral institutions. The authorities’ financing strategy foresees that net domestic debt placements and use of government deposits at the central bank will be higher than anticipated.

In response to the downside risks to inflation and lower economic activity, monetary policy actions have been prudent in order to maintain macroeconomic stability. Monetary policy interest rate has been reduced by 275 basis points since end-2008, to 4.50 percent. Inflation is expected to be about 1.5 percent by end-2009 and about 4.0 percent by end-2010, thus the revised quarterly consultation bands for CPI inflation under the program are consistent with these projections. The Monetary Board’s intention is to continue managing the policy rate as needed to meet the inflation target, and the central bank remains committed to its flexible exchange rate regime. Intervention in the FX market will remain geared at smoothing out excessive volatility.

The Guatemalan financial system has been resilient to the external shocks. Several reasons come to mind: a) there were no “toxic” asset holdings in the system, b) the low reliance of banks on external credit, c) the higher capital cushions built since late 2005, and d) the measures that authorities took as the crisis unfolded, including liquidity support, intensifying banking supervision and restoring provisioning requirements. The Authorities are committed to further strengthening the regulatory framework, including concluding the design of regulations on banks’ liquidity management and foreign currency credit risk by end-December 2009, with their implementation beginning in the fist quarter of 2010. In addition, they will continue to work closely with Congress to ensure prompt approval of the amendments to the banking legislation, which are crucial to strengthen regulation and supervision and to enhance the current bank resolution framework.

There are two issues that my authorities wish to stress with regard to the evaluation of the risks to the program in the staff report. First, they do not share the view that a potential deterioration of economic conditions in one specific neighboring country poses risks. In their view on the current global economic environment, potential deterioration could stem from many other reasons. Second, my authorities want to emphasize that it was not the lack of political support which caused the withdrawal of the tax reform from Congress but the consideration that many loopholes were being introduced to it, making it ineffective. Thus the Ministry of Finance expects to work closely with Congress to enact a revenue reform to help ensure a gradual recovery of tax collections from 2010 onwards based on a new initiative.

The Authorities believe that the ongoing policies are adequate to meet the objectives of their economic program.