IMF Executive Board Completes Second Review Under Stand-By Arrangement with Guatemala

The staff report on Guatemala’s 2009 Article IV Consultation and Second Review under the Stand-By Arrangement, and Requests for Modification of Performance Criterion and Consultation Clause are presented. There are signs that the Guatemalan economy is starting to recover. Real GDP growth and inflation are picking up, imports have begun to grow, and net private capital flows have stabilized. Real GDP growth is likely to remain low and inflation subdued. Over the medium term, economic growth is expected to be weaker than prior to the global crisis, and inflation to stabilize at trading partners’ levels.

Abstract

The staff report on Guatemala’s 2009 Article IV Consultation and Second Review under the Stand-By Arrangement, and Requests for Modification of Performance Criterion and Consultation Clause are presented. There are signs that the Guatemalan economy is starting to recover. Real GDP growth and inflation are picking up, imports have begun to grow, and net private capital flows have stabilized. Real GDP growth is likely to remain low and inflation subdued. Over the medium term, economic growth is expected to be weaker than prior to the global crisis, and inflation to stabilize at trading partners’ levels.

The Executive Board of the International Monetary Fund (IMF) on December 16th completed the second review of Guatemala’s economic performance under a program supported by an 18-month Stand-By Arrangement (SBA). The Guatemalan authorities intend to continue treating the arrangement as precautionary.

The arrangement, in the amount of SDR 630.6 million (about US$986 million) was approved on April 22, 2009 (see Press Release No. 09/142). With completion of the review, a total of SDR 504.48 million (about US$789 million) is available for drawing.

The Executive Board also approved a modification of a performance criterion and the inflation consultation clause. In particular, the overall fiscal deficit for end-March 2010 was revised upwards to provide room for spending to support the incipient recovery and the inflation consultation band was adjusted downwards in view of the benign inflation outlook. As risks to the program have declined, program reviews will now take place on a semiannual basis instead of on a quarterly schedule, while maintaining quarterly performance criteria.

Following the Executive Board’s discussion on Guatemala, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

“The Guatemalan economy is beginning to recover from the global crisis and growth is expected to be higher than the regional average. The authorities’ prudent policies have helped maintain macroeconomic stability and mitigate the effects of the economic slowdown. These include moderately counter-cyclical monetary and fiscal policies, exchange rate flexibility, reorientation of expenditures toward social and infrastructure spending, and strengthening of financial sector supervision and regulation. Continued steadfast implementation of this program will help preserve confidence and further increase the economy’s resilience to potential shocks.

In the near term, fiscal policy is expected to continue to strike a balance between supporting domestic demand and safeguarding debt sustainability. Approval of a law to finance the government’s expenditure plans for 2010 would help avoid delaying necessary outlays. Over the medium term, it will be critical to boost growth by addressing weaknesses in education, health, security, and infrastructure. Financing the needed increase in public investment and social spending requires a comprehensive revenue-enhancing reform.

The authorities have eased the monetary policy stance prudently, helping to avoid disorderly exchange rate movements. It is important to remain vigilant, adjusting the policy rate as needed. Further development of public and private securities markets and enhancement of monetary operations would help strengthen the interest rate channel of monetary policy transmission. The authorities remain committed to maintaining a flexible exchange rate.

Important progress has been made in strengthening financial sector supervision and regulation, but additional efforts are still needed to complete the reform agenda. Priorities include Congressional approval and implementation of the proposed amendments to the banking law, and enforcement of the regulations on liquidity and foreign credit management in early 2010,” Mr. Portugal said.

Guatemala: 2009 Article IV Consultation and Second Review Under the Stand-By Arrangement, and Requests for Modification of Performance Criterion and Consultation Clause—Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Guatemala
Author: International Monetary Fund