Abstract
The Guatemalan economy is recovering faster than anticipated during the previous program review. The economic outlook has improved since the second program review. The fiscal deficit in 2010 will decline somewhat. There was agreement that a comprehensive tax reform remains the key medium-term challenge. There was agreement that monetary policy should remain vigilant. There has been progress in advancing financial sector reforms, but key elements of the reform agenda are pending. The near-term outlook has improved since the second program review, and downside risks have declined further.
1. This statement summarizes information that has become available since the issuance of the Staff Report. The new information does not alter the thrust of the staff appraisal.
2. Economic activity continues to recover and inflation remains moderate. The monthly index of economic activity (IMAE) increased by 0.3 percent in March (m/m seasonally-adjusted), taking the 12-month growth rate of the index to 2.5 percent. Also, in May, the consumer price index fell by 0.1 percent, bringing the 12-month inflation rate to 3.5 percent (3.8 percent in April). External trade flows and remittances continue to recover.
3. Natural disasters hit Guatemala in late May, causing losses of human lives and damaging public infrastructure and agriculture. On May 27, the eruption of a volcano near Guatemala City disrupted transportation and compromised air quality. On May 29-30, a powerful tropical storm hit the coast, causing at least 170 deaths and sending some 90 thousand people to shelters. In addition, 18 major bridges collapsed and considerable damage was inflicted to public roads, water systems, and agricultural crops. The government has requested assistance from the Economic Commission for Latin America and the Caribbean (ECLAC), the World Bank, and the Interamerican Development Bank to assess the economic impact of the storm. Although preliminary estimates are only expected by end-June, staff’s sense, based on past similar episodes, is that this natural disaster will not derail the program or affect the economic outlook materially.
4. Despite the tragedy, the authorities intend to adhere closely to the fiscal deficit for 2010 proposed in the letter of intent (3.1 percent of GDP for the central government). While the storm is not expected to have major effects on tax collections, spending on the affected areas will have to increase. To this effect, the government plans to reallocate and prioritize budgeted spending to the extent possible. The authorities will consider further revisions to the spending plan once the assessment of the damage becomes firmer; however, it is expected that public debt dynamics will remain broadly in line with the projections in the staff report.