We would like to thank the Staff for a concise and helpful report. Our Authorities broadly agree with the Staff’s assessment and recommendations. Performance under the Stand-By arrangement continues to be satisfactory; all end-December 2009 and end-March 2010 quantitative performance criteria were met. The targets for net international reserves and the overall deficit of the central government were met by a wide margin, government deposits at the central bank were above the indicative target for end-March, and annual inflation as of end-March 2010 remained within the inner consultation band. In addition, the two structural benchmarks for end-December 2009 (on banks’ liquidity and foreign currency risk management) were met.

Recent Developments and Outlook. Economic activity in 2009 was hit by the global crisis, but a gradual recovery is now under way. Although during 2009 real GDP grew only 0.6 percent, this performance was better than in other countries in the region as moderate countercyclical fiscal and monetary policies helped mitigate the effects of the economic slowdown and protect the poorest segments of the population, while trying to preserve macroeconomic and financial stability. For 2010, short-term indicators suggest economic activity is picking up; imports, exports and tax revenues are rising, and net private capital flows are increasing. In that context, our Authorities expect that economic growth in 2010 would be within a range of 1.7 percent to 2.5 percent.

Notwithstanding, as some of you may be aware, after being affected by the Pacaya volcano on May 27 (nearly 60 miles around the volcano were covered with volcanic sand), Guatemala was hit by tropical storm Agatha two days after, causing not only important human losses, but also serious destruction of basic infrastructure. The Government, as well as a team of experts from ECLAC, IDB, IMF and the World Bank will be evaluating economic damages. However, given that Central Bank’s baseline scenario is close to the upper limit of the mentioned range (2.5 percent), the Authorities estimate that in spite of Agatha’s effects real GDP growth for 2010 would fall within the estimated range.

Fiscal Policy. Our Authorities remain committed to begin fiscal consolidation in 2010 in order to create fiscal space and maintaining sustainable public debt dynamics. They are keeping the target for the fiscal deficit of the central government for end-2010 in line with 3.1 percent of GDP, which is consistent with a gradual withdrawal of the fiscal stimulus delivered in 2009. The deficit of the consolidated public sector is expected to reach 2.6 percent of GDP and will be financed with loans from multilaterals and the issuance of treasury bonds. The ECLAC/IDB/IMF/World Bank report is expected to provide a clearer picture of economic prospects in general. In that sense, our fiscal authorities do not envisage significant impacts on tax revenues. Although spending in the affected areas will be increased, the government intends to cover this by reallocating budget expenses; therefore, total expenditure will rise only to the extent that those additional expenditures may not be covered by the reallocation. As staff has mentioned, our Authorities will consider further reviews to the spending plan once the assessment of damages is completed, and they share the staff’s view that public debt dynamics will remain broadly consistent with current projections. Despite these new challenges, our fiscal authorities remain firmly committed to maintaining medium-term fiscal sustainability and will persist in seeking Congress support for revenue measures.

Monetary and Exchange Rate Policy. The Monetary Board has kept the policy interest rate unchanged at 4.5 percent since September 2009. Inflation in early 2010 increased mainly owing to one-off increases in food prices and electricity (associated to the draught and the increase in international oil prices); therefore, we do not see important underlying inflationary pressures. Our Authorities project annual inflation in 2010 to be around the upper limit of the target band set by the Monetary Board (between 4 - 6 percent), concordant with the quarterly consultation band set under the arrangement. Moreover, monetary policy will continue to be aimed at complying with the inflation target and the monetary authorities stand ready to adjust the policy rate as needed. In the context of a flexible exchange rate regime, intervention in the FX market will remain intended to smooth out excessive volatility, while permitting movements driven by fundamentals.

Financial Sector. The financial system has been resilient to the global crisis and remained well capitalized and liquid. The regulatory framework has been strengthened further. In April, Authorities started to implement new regulations on liquidity and foreign currency credit risk management (structural benchmarks under the program). Moreover, the gradual approach to ensure the full provisioning of nonperforming loans by 2011 has been implemented ahead of schedule. Our Authorities remain committed to work closely with Congress to obtain approval for the amendments to the banking legislation, which are a key priority of their strategy to further strengthen the regulatory and supervisory framework.

Structural Advances. In April, Congress approved the law on Private-Public Partnerships, which represents a consistent and comprehensive framework to improve the provision of public services and goods (particularly basic infrastructure), while allowing the use of fiscal resources for social spending.

Statistical Issues. Our Authorities share Staff’s view related to further improving the balance of payments statistics, including the reduction of errors and omissions, which in 2009 represented 2.1 percent of GDP. In that context, the Central Bank has been working to increase survey response from enterprises involved in external transactions (including FDI). Those efforts, among others, would reduce the magnitude of errors and omissions to about 0.5 percent of GDP starting this year (Staff report, Table 2).

In light of the performance under the arrangement, our Authorities request completion of the third review under the Stand-By Arrangement. They continue treating the arrangement as precautionary and their commitment to the program remains strong.

Finally, our Authorities believe that the ongoing policies are adequate to meet the objectives of their economic program, which have been effectively supported by the Stand-By Arrangement with the Fund.