Summary:KEY ISSUES
Context. Guatemala’s economy has performed solidly since the 2008–09 crisis. Output has converged
to potential, inflation is under control, and macroeconomic policies remain prudent. However, risks
to the outlook are tilted downwards, while buffers are modest and space for counter-cyclical
policies is thin. Long-term inclusive growth is constrained by low investment in physical and human
capital, institutional weaknesses, and lack of security.
Near-term policies are broadly appropriate. With the output gap closed, the broadly neutral fiscal
stance is adequate. The monetary stance is slightly expansionary, but inflation is at the bottom of
the target range. The authorities should stand ready to tighten monetary policy if inflationary
pressures re-emerge.
Fiscal sustainability should be enhanced over the medium term. Though the debt-to- GDP ratio
remains moderate, the ability to implement counter-cyclical fiscal policies is limited, not least
by Guatemala’s high government debt-to-revenue ratio. Debt stabilization requires moderate
tightening of the budgetary stance over the medium term. The emphasis should be on revenue
mobilization, given the overall low level of spending. Consolidating gains from the 2012 tax
reform, which has so far proved disappointing, will be critical.
Efforts to upgrade the monetary and exchange policy framework should continue. Anchoring low and
stable inflation will require measures to bolster monetary policy transmission, including by
expanding exchange rate flexibility. This should provide an additional shock absorber and reduce
incentives for dollarization. It would also establish the inflation target as the undisputed
primary objective of the central bank.
Further strengthening of the financial system is necessary. The 2014 FSAP update found that
Guatemala has made significant progress in financial regulation and that the banking system appears
to be generally sound. However, efforts are still needed to improve consolidated supervision and
the regulation of off-shore banks. The time is also ripe for a phased move to Basel III standards.
Structural reforms are vital to achieving long-term inclusive growth. Paving the way towards high,
inclusive growth will depend upon raising the low tax-to-GDP ratio to support
priority public spending, thereby addressing critical social and developmental needs.
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